International project financing

Mark Bull from Illumine Middle East FZE examines sourcing and applying project financing.

With apologies to Randy Newman, here is the fundamental reason why Dubai and the Middle East region needs to improve the way that it sources and applies project financing. The following excerpt is from a song about Karl Marx called ‘The World Isn’t Fair’:

“See Karl the world isn’t fair, it isn’t and never will be, they tried out your plan, it brought misery instead, if you could have seen how they worked it you would be glad you were dead, just like I’m glad I’m living in the land of the free, where the rich just get richer and the poor you never ever have to see; it would depress us Karl because we care that the world, still, isn’t fair.”

Herewith is a checklist of some key due diligence issues for reference and use by the interested reader:

The project sponsor(s)

Who are they, what are the ownership interests in the project company, what is their financial status? What will each project sponsor contribute to the project in terms of equity, development experience, construction and start-up expertise, technology, operating abilities, host government experience?

What limited recourse liability does each project sponsor have? Are they creditworthy? Is credit enhancement necessary to support the creditworthiness of the sponsor(s) such as a letter of credit or a bank payment guarantee? What restrictions, if any, do the laws of the host country place on equity ownership of the project?

The project site

What is the terrain on which the site will be developed? What is the terrain of access roads, fuel storage areas and other important elements of the project?

The infrastructure (existing and needed)

What is the existing and needed infrastructure necessary to access the site? What is the condition and weight tolerance of roads, road shoulders, intersections and bridges? What is the quality and quantity of water at the project site for construction and operation?

Political considerations

What is the regulatory framework under which the project must operate? What is the host country’s ability to provide guarantees for a project financing? Are special agreements necessary to provide a stable environment for a project financing?

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How do trade alliances and relationships of the host country affect the project? How do the public and private sectors interact in the economy?

Legal and regulatory considerations

What are the specific laws and regulations applicable to the project? What governmental approvals, permits, licences, concessions, filings and other governmental actions are required for the project and each of the project participants?

Sensitivity analysis

Are all assumptions used in the preparation of the construction budget and financial projections reasonable – including, but not limited to, those relating to interest rates, foreign exchange, inflation, fuel price inflation, raw material price escalation and de-escalation, the construction schedule and maintenance schedule?

Construction (period support by project sponsors)

What are the funding commitments of each of the sponsors during the project construction period? What events trigger the funding obligations? Are the events consistently defined in the financing documents? If a construction cost overrun occurs, what are the funding obligations of the project sponsors?

Potential sources of cost overruns

Have the construction costs been verified by a truly independent and impartial consultant? How reliable is the cost estimation? What assumptions have been made in determining the construction period budget?

The construction contract

What is excluded from the firm price? Are the performance guarantees acceptable? Is the force majeure provision integrated with the other project contracts?