Roundtable: Project Finance 2011
Sebastián Sáenz de Santa María -
Philip Fletcher -
Michael Stoneham -
The International Who's Who of Project Finance Lawyers brought together three of the leading practitioners in the world to discuss key issues facing lawyers today.
Participants
PHILIP FLETCHER
Milbank Tweed Hadley & McCloy LLP
England
Uría Menéndez
Spain
Brodies LLP
Scotland
PUBLIC PRIVATE PARTNERSHIPS
Who’s Who Legal: Many of the lawyers we spoke to noted that an increasing amount of the big projects in their jurisdiction were coming to fruition thanks to the use of public private partnerships (PPPs). To what extent has the PPP model influenced the volume of work where you are?
Sebastián Sáenz de Santa María: Public private partnerships have been used widely by the central and regional governments in Spain in the last eight years for the financing of very important infrastructures.
Since the enactment of the public concessions law in 2003 the necessary legal framework was established for the implementation of these kinds of financing instruments.
Due to recent budgetary constraints and the increasing lack of private finance, the amount of works in development has been reduced considerably, although PPPs are still the preferred means of financing infrastructure construction works.
Michael Stoneham: PPP has been a strong market across the UK for over a decade, but the pipeline of deals has dried to a trickle over the last couple of years as lenders cope with liquidity and capital constraints and governments scale back their capital spending plans to accommodate debt reduction policies.
In Scotland, the PPP model has developed an NPDO variant, which in effect caps equity returns, as a method of responding to some public criticism of excessive private sector profits made from some of the early deals. The new Scottish government is committed to financing a new programme of PPP, partly funded out of revenue expenditure, but the focus has also been on finding new, innovative ways of financing social infrastructure, which in some cases means a departure from the normal project finance model.
The US model of tax increment financing, for example, is being piloted in four pathfinders in Scotland under existing legal powers, and England is in the course of introducing legislation to enable a similar exercise.
The creation of the National Housing Trust Initiative in Scotland is another milestone that is enabling the funding of affordable housing and is supported by an explicit government guarantee for the financial exposure of the public sector bodies involved.
And traditional direct procurement by government remains a favourite method in some areas, most notably in the cases of the new Forth Crossing – the largest infrastructure project in Scotland for a long while – and a large hospital development currently under way in Glasgow.
So the market is developing beyond the project finance norms in response to funding pressures and the role of the Scottish Futures Trust is pivotal in ensuring there is a coherent and deliverable programme re-established to meet the identified demand for new assets over coming years.
DEVELOPING SECTORS
Who’s Who Legal: Energy projects – both in fossil fuels and renewables – continue to dominate the projects marketplace according to our sources. To what extent is this true in your jurisdiction? Have any other industries seen an increase in projects activity in the past year?
Phillip Fletcher: The world needs energy, and it needs to improve the efficiency of, and reduce the emissions from, its existing sources. Energy projects – ranging from oil and gas extraction and transportation, to power generation and transmission – have long been, and remain, among the key drivers of project finance activity across the globe.
Although the absolute number of such projects may be limited, the scale of many of these projects is enormous and they are often located in remote places or incorporate innovative (but unproven) technologies.
Large, innovative projects often require complex finance plans, involving multiple tranches of debt. As a result, energy projects tend to be challenging, and are the kind of deals that projects lawyers relish.
Sebastián Sáenz de Santa María: Spain has been in recent years particularly active in the field of the renewable energy projects, and has become one of the leading countries in the development of renewable energy resources, cogeneration and waste technologies.
The main boost for this expansion was the special economic regime enjoyed by environmentally friendly energies, such as solar photovoltaic plants and solar thermoelectric and wind farms, which offer very attractive levels of remuneration, with guaranteed feed-in tariffs and premium on top of the market electricity price, for special regime generation installations as opposed to ordinary generation installations.
However, in order to reduce the tariff deficit of the electricity system that was being impacted by the cost of funding the special regime remuneration, certain changes in the legislation were enacted at the end of 2010, mainly consisting of a substantial cut of feed-in tariffs for new projects (tariffs of facilities that have already been commissioned were not affected or curtailed) and operating hours remunerated under the special regime were limited.
This change of legislation has lowered the development activity of renewable energy projects in Spain (especially solar photovoltaic plants). However, based on their experience and technological skills acquired in recent years both Spanish sponsors and lenders have been able to successfully develop and invest in renewable energy projects in foreign jurisdictions.
Michael Stoneham: Energy projects in the UK have certainly filled the gap left by the quiet PPP market over the last two years.
Current activity is mainly focused on delivering onshore wind farm projects, together with some hydro, biomass, solar and waste to energy schemes. These tend to be smaller sized projects which test the project finance model in terms of complexity and cost. There could have been more delivered, but for the continuing difficulties of obtaining planning consent and the restricted number of lenders presently supporting the market.
The scaling up required to address renewable energy targets involves creating much larger projects to deliver offshore wind and nuclear and an efficient interconnector grid to allow export and import of power more easily, as well as investment in finding the right technology to deliver substantial wave and tidal power projects in the next five to 10 years. And a looming UK energy gap means investment is needed in conventional power plants, together with carbon capture and storage facilities.
There is no doubt that present policies are driving the creation of a new green industry, which will partly be funded through project finance. Much has been said about the funding gap for these projects, and at a UK-level the proposed Green Investment Bank will be tasked with finding a solution. But of more immediate concern is the proposed EMR - energy market reform - which is all about establishing a stable supported market that can be financed long-term. It will take most of this year and beyond to get through this process, and hopefully the end result will be some element of certainty on supported future payment streams.
EMERGING MARKETS
Who’s Who Legal: Emerging countries such as China and India are expected to be the key drivers of growth in the global construction and infrastructure development markets for the remainder of the decade while formerly strong jurisdictions in Europe and the US recover more slowly from the global financial crisis. To what extent has your work over the past year been focused on emerging markets?
Phillip Fletcher:Activity has remained robust in select sectors in the US and Europe, including renewables, telecoms and infrastructure. However, there is no doubt that we have been heavily focused on work in the emerging markets over the last several years. Although demand in such countries as India and China has stimulated the need for natural resource projects across the globe, many of these projects have taken place in the resource rich regions of South East Asia, Africa, the Middle East and Latin America.
Sebastián Sáenz de Santa María: We have experienced an increasing level of work in emerging markets. In particular Latin American jurisdictions such as Brazil and Mexico have proved to offer good opportunities to Spanish clients (both sponsors and lenders) in the renewable energy and the infrastructure fields and continue to do so. In our experience, having a permanent presence in these jurisdictions has become crucial to be able to provide legal services to Spanish clients competitively as they have a high demand for knowledge of the local market in these jurisdictions. Eastern Europe has also been an active market for Spanish investors in past years, and India and China have become very attractive to Spanish infrastructure investors.
FIRM ISSUES
Who’s Who Legal: The total number of lawyers featured in this year’s edition has increased, but the overall market share of the leading international law firms we feature has fallen as smaller, less established firms gain broader recognition for their projects work. Are larger, multinational law firms losing out under the current market conditions? And are these conditions more favourable for smaller law firms?
Phillip Fletcher: The use of project finance techniques is growing across the globe. Host states are recognising that bringing to bear the economic benefit of debt leverage together with the discipline and transparency of contractually based procurement procedures can be of value as they seek to balance their growing economies while maintaining public sector budget discipline. Thus, the opportunities for projects lawyers overall is increasing, especially for those based in countries (such as India and Brazil) whose domestic financial markets are robust enough to fund most large projects. However, the largest deals, which combine a range of financing sources drawn from multiple sources, remain the purview of the international, multi-disciplinary law firms. Those firms are adept at weaving together financing involving commercial banks, export credit agencies, multilateral agencies, capital markets and, in some cases, Islamic tranches. The number of firms able to do so remains limited.
Michael Stoneham: It is certainly the case that the largest projects, wherever situated, tend to be best delivered by the biggest and most internationally focused law firms, rather than by good, independent, local firms. There are a number of reasons for this, not least the breadth of expertise and depth of resource that is frequently needed to deliver them.
In mature markets such as the UK, however, there has been a use of project finance techniques in mid-market and even community-level schemes where the opportunities for smaller law firms are much greater.