international project financeinternational project finance project finance.pdf · • floating...
TRANSCRIPT
International Project FinanceInternational Project Finance
Catherine DoylePartner, McMillan LLP
Risk and rewardRisk and reward
• Under the right circumstances international project• Under the right circumstances, international project finance can be very lucrative.
• But it is also comes with risks – some of them significant – not present in domestic projects.
• Risks should be anticipated, considered and managedmanaged.
2
Topics to be reviewedTopics to be reviewed
• Participating in overseas procurementsp g p
• Dealing with foreign lenders and foreign investors
• Dealing with general cross-border project financing risksfinancing risks
• Construction risk, taxation risk, currency risk, interest rate risk and commodity risk
3
Topics to be reviewed (cont’d)Topics to be reviewed (cont d)
• Considering key funding sourcesg y g
• Addressing social and political roadblocks, including national partner risk
Managing project political risk• Managing project political risk
• Dealing with infrastructure supply riskDealing with infrastructure supply risk
4
Participating in overseas procurementsParticipating in overseas procurements
Things to consider:Things to consider:
• Host (procuring) country governments may take formal or i f l t f l l biddinformal measures to favour local bidders.
• These measures may be subject to international trade agreements (e.g., NAFTA, WTO).
• The host country’s business culture may differ greatly from Canada’s.
• Bribery and other corrupt practices may be common or expected.y p p y p• Compliance issues with respect to Canadian and foreign laws.
5
Participating in overseas procurementsParticipating in overseas procurements
Things to consider:
• Expertise and resources may not be as plentiful in the host country as they are domestically, and technology may bevastly different.
• Language and cultural barriers may have to be overcome.g g y
• It might be wise to consider assembling teams of advisorsand partners in the host countryand partners in the host country.• e.g., retaining legal counsel in the host country.
6
Dealing with foreign lendersDealing with foreign lenders• Project lenders have become more risk-averse since the
fi i l i i d thi b i ll t f f ifinancial crisis, and this may be especially true for foreign lenders.
H t t l d b bl illi t id• Host country lenders may be unable or unwilling to provide sufficient financing.
• It may be necessary to assemble a local or international syndicate.
• Language and cultural barriers may cause problems.
R l t l l l ( ll t l di t l ti )• Relevant local laws (e.g., collateral, dispute resolution) should be canvassed.
7
Dealing with foreign investorsDealing with foreign investors
• Consider the nature of the capital markets and the securities laws of the host country.
• Cultivate relationships in the host country.p y
• Consider whether you may not wish certain host country residents to invest in your projectresidents to invest in your project.
• e.g., prospective investors may be current or future competitors.
• Again language and cultural barriers may be challenging• Again, language and cultural barriers may be challenging.
8
Dealing with cross-border financing risksDealing with cross-border financing risks
• Construction risk• Delays can occur for many reasons (e.g., force majeure events).• Construction capacity may be constrained• Labour legislation may be differentLabour legislation may be different
• Taxation risk• Examples of taxes possibly payable: income tax withholding tax• Examples of taxes possibly payable: income tax, withholding tax,
stamp tax, consumption/value-added tax and branch profits tax.• Double taxation treaties may be in effect.• It is essential to obtain competent advice on the domestic andIt is essential to obtain competent advice on the domestic and
foreign tax implications of a project.
9
Currency riskCurrency risk• The main areas of foreign currency risk:
1. Unavailability of foreign currency2. Inability to transfer currency abroad3. Currency devaluation due to foreign exchange rate fluctuations
• Some currency risk may be due to political action or instability in the host country.
• Consider methods of minimizing this risk.• e.g., require consistency of currency when contracting; enter into hedges
and other derivatives; obtain political risk insuranceand other derivatives; obtain political risk insurance.
10
Interest rate riskInterest rate risk
• Floating interest rates are common in international project finance, but fixed rates are generally desirable to lock in project returns.
• Consider the possible effects of interest rate fluctuations and the project’s capacity to handle them.
• Consider methods of minimizing this risk.• e.g., enter into interest rate swaps and other hedges; seek fixed-rate loans
from export credit agencies or multilaterals.
11
Commodity risk
Prices of project inp ts and o tp ts can fl ct ate
Commodity risk
• Prices of project inputs and outputs can fluctuate dramatically.
• It is important to perform a detailed analysis of the project’s• It is important to perform a detailed analysis of the project s commodity risk exposure.
• Consider methods of minimizing this risk• Consider methods of minimizing this risk.• e.g., enter into commodity swaps or other hedges; enter into long-term
supply contracts with ability to renegotiate terms.
12
Key funding sources
Consider the traditional so rces of international project
Key funding sources
• Consider the traditional sources of international project finance:
• Commercial lenders• Bond markets• Equity investors• Lease financing
• Consider alternative financing structures• Export Credit Agencies• Multilateral Credit Agencies
13
Key funding sources
E port Credit Agencies
Key funding sources
• Export Credit Agencies:• Organized and funded by a single country’s government.• Concentrate on providing coverage for political risks abroad.• Examples: Export Development Canada (EDC); US Export-Import Bank p p p ( ) p p
(USExim).
• Multilateral Agencies:• Funded by multiple governments and organizations• Funded by multiple governments and organizations.• Also tend to concentrate on providing coverage for political risks abroad.• Examples: International Finance Corporation (IFC); Mulitlateral
Investment Guarantee Agency (MIGA); both are associated with World Bank GroupBank Group.
14
Addressing social and political roadblocks
• Legal system risk and national partner risk
Addressing social and political roadblocks
g y p• The host country laws and economy may be unfamiliar and
unpredictable.• The host country’s legal system and government may be difficult to
maneuver.• Analyze host country laws and consider retaining counsel in the host
country.• Consider the stability of the host country’s economy.• Consider risk of prolonged procurements and possibility for protractedConsider risk of prolonged procurements and possibility for protracted
litigation in respect of project issues.
• Environmental riskE i l l i d d d i i h il i• Environmental regulations, standards and activism may heavily impact project development and operation.
• Determine how best to allocate risk, consider retaining counsel.
15
Managing project political risk
Political risks are risks gro nded in decisions made or actions
Managing project political risk
• Political risks are risks grounded in decisions made or actions taken by the host country’s government, or in force majeureevents with political undertones.
• Examples of political risks:• Restrictions on foreign currency • Civil unrest• War and terrorist attack• Expropriation• Governmental contract repudiation and frustration
16
Managing project political risk
It is essential to consider the likelihood of political risk in a
Managing project political risk
• It is essential to consider the likelihood of political risk in a host country impacting your specific project.
• Examples of methods of dealing with political risk:• Examples of methods of dealing with political risk:• Public or private insurance• Seeking host country legislative approval or seeking other governmental
protections• Forging strong relationships with government officials and other
important figures (without resorting to corruption)• Involving host country lenders, investors, suppliers and others• Consider the protective capacity of bilateral investment treaties (BITs)
17
Dealing with infrastructure supply risk
Things to consider
Dealing with infrastructure supply risk
Things to consider:
• A competing project could emerge.Government becoming a competitor may be especially problematic• Government becoming a competitor may be especially problematic.
• Nationalization or expropriation may occur.
• Consider how best to allocate these risks, including by obtaining insurance coverage, where appropriate.
18
Conclusion
There are risks niq e to engaging in international project
Conclusion
• There are risks unique to engaging in international project finance.
• Think through these risks obtain competent professional• Think through these risks, obtain competent professional advice and plan ahead.
19
Questions?
20
