Projecting growth

SETTING UP PROJECTS AROUND THE WORLD IS EXCITING WORK AND LAWYERS MUST BE VERSATILE TO DEAL WITH UNEXPECTED PROBLEMS.

PAULA ROHAN HEARS CALLS FOR INDUSTRY MODEL AGREEMENTSDo you ever get the feeling that the project you are working on is jinxed? Geoff Haley sometimes does.As chairman of the International Project Finance Association (IPFA) and consultant to KLegal, KPMGs associated law firm, the project finance solicitor has acted on deals ranging from the Channel Tunnel to a current scheme in Jordan involving a gas pipeline.

All of them have been plagued with problems, including deaths on site, strikes, and delays.

But Mr Haleys headaches came to a head when a deal involving the Thames Barrier already held up by every conceivable problem suffered a maritime hit-and-run in its final stages.

A ship crashed into the structure and then failed to stop, leaving Mr Haley and the parties involved chasing the captain to Spain before they could put in a claim for compensation.It is all in a days work for a project finance lawyer, and the Citys specialists are not faring too badly.

Last month, they beat all the top US firms in American Lawyer magazines project finance league table, in terms of the size, number and value of the deals they are helping to complete.It is hardly surprising that English and Welsh solicitors are leading the way, with the private finance initiative (PFI) used as a model of good practice throughout the world.For solicitors have helped create an industry that works through private firms setting up a company specifically with the aim of building or improving public infrastructure, then doing the round of lenders to collect the capital to fund the scheme.

The public authority then effectively rents the building, road, track or whatever.Mr Haley says: The loan is up for repayment once the project is complete and starts earning money, with the cashflow generated having to satisfy the debt and the dividend on the equity.Project finance is now a massive growth industry and the reason for this is two-fold, Slaughter and Mays head of project finance, Martin Roberts, explains.

Project finance is used by major companies to protect themselves against risk.

For example, say a company like Shell wanted to build something in Thailand and borrowed the money.

If Thailand then got into serious political difficulties, as it has done in the past, Shell would be insulated against that.

On a project basis, if theyve raised 75%, then it will be the banks that are at risk of losing that, and not the company.The arrangement also has global appeal for governments, because if private companies provide the cash for public sector projects, they do not have the assets on their balance sheets.

This can lead to a reduction in public borrowing and, in theory, lower taxes.

Clifford Chance projects partner Tim Soutar says that since it departed from the oil and coal industries from which it originated, project finance has developed into all things to all men, a concept being applied in ever-diversified manners.

No two projects are the same, he explains.You could be doing two power projects using the same technology and even with the same people building them.

However, you would have two jurisdictions where the local problems are different, the sponsors would have different concerns, and there would be different financing techniques.Because of this, a lawyer working in the field needs to master a number of disciplines and become a jack of all trades.

A deal will involve negotiation, drafting, knowledge of the law, the ability to work as part of a team and the ability to stay awake, Peter Finlay, senior project finance partner at US firm White & Case, says.

You also have to be good at problem solving and finding solutions to things that look like they are brick walls.Inevitably, it is not always plain sailing.

Having spent more than two years working on a deal for an oil pipeline in Chad and Cameroon, Mr Soutar agrees with Mr Haley that project finance carries an element of Murphys Law.

It is a common occurrence to find that years of work are crumbling around you, and you have to go out and find the solutions, he says.If things can go wrong, they will go wrong.

And the longer the problem takes to solve, the more opportunity there is for something else to go wrong, and for someone else to put a spanner in the works.Moreover, project finance is never a quick process, often taking several years, Mr Finlay says.

They take a long time to put together.

They have various parts, and go in ebbs and flows.

Sometimes there are periods of real craziness, and at others it is less frenetic.

What you need is someone on the team with a good overview who can anticipate the issues that are likely to cause delay its like marshalling an army into play.

Having said that, the work is challenging and usually satisfying.

As the concept spreads into developing countries, those involved in a project can witness how it can have a huge impact on the people living in the region.Mr Soutar worked on the deal for a power plant in the Philippines after a period of political upheaval, which left lenders reluctant to fund any public projects.

The people living there had been having blackouts for hours each day, and were putting on emergency generators, he says.

You could see a huge cloud of black smoke over Manila as they kicked in.

It was difficult, but we managed to get a small project going, and within a relatively short period of time that problem was solved.

It also gave a big economic kick-start to the area.

I can look back now and think: I played a small part in that.However, different countries often have their own way of doing things, which can affect everything from industrial relations to health and safety.

Lawyers find they often have to think creatively, or just accept the alien practises.

We worked on a project for two new power stations in Malaysia, and their views are different to ours, Mr Roberts says.

Their idea of scaffolding is bamboo poles held together with raffia tape.

Im not criticising its just the way they are.

With all the problems that arise, it is lucky for the lawyers that they all know how the others tick, Mr Roberts says.

Most of the work is taken on by the same firms.

There are about ten or so of the larger firms in the UK all the usual suspects and about a dozen American ones.

We all tend to know each other, and that makes life easier.

It is just as well they are all on the same wavelength, as it is up to the lawyers to deal with the complex structure of the contracts that will govern the arrangements, in the face of a near-complete absence of standardised agreements.

Mr Haley would like to see an end to this, which is why the IPFA is pushing for a model agreement to be used globally in project finance.

In a lot of areas there are a lot of variants, he says.

If we had something similar to the international construction contract, which is used as a base document around the world, it would cut down on the negotiation time and reduce the bidding costs.

It might be a good time for the industry to streamline its costs and procedures.

With fewer commercial banks actively pursuing the market recently, Mr Soutar says that the industry is at a crossroads.

There are a whole host of pressures driving people to make these projects simpler, but this flies in the face of what practitioners say is their experience, he says.

There is increasing pressure in terms of fees and expectations.

It could be that people will start turning around and saying: This process is all too long, too expensive.

Lets put it all back on the balance sheet.With the world economy possibly beginning to take a downward turn, project finance lawyers will be hoping that the finance element which is so crucial to their practice area does not begin to dry up.