2009

SAH

Final Paper, Class on International Strategic

Commercial Transactions taught by Mark

Vecchio, Columbia Law School

12/7/2009

Infrastructure Financing in Emerging Markets:

Negotiations in the Post-Enron Era

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Summary

I. Introduction: Infrastructure in the Global Economy

II. Infrastructure and Development in Emerging Markets

Trends

Financing methods

III. Legal Strategies for Infrastructure Financing in Emerging Markets

Specific Features

Remedies

IV. Enron or the Stumbling Blocks of the Project Finance Technique

The Enron cases

Consequences

V. Regulatory Schemes Adopted in the Aftermath of Enron

The Sarbanes-Oxley Act

The Equator Principles

The Basel II Regulation

VI. Conclusion: Current Trends and the Effects of the Financial Crisis on Infrastructure

Financings in Emerging Markets

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Introduction: Infrastructure in the Global Economy

In its public statement of November 30th, 2009, 28 months after its creation, the long

arm of the Dubai government for construction and infrastructure development, Dubai World,

publicly announced that it would not pay its $3.5 billion loan by the December deadline and

asked its creditors for a grace period on its $59 billion debt. On the following day, oil prices

tented by 7 % and the Dow Jones Industrial Average fell 1.7 %, followed by the S&P 500 listing

of the 500 biggest publicly-held companies in the United States. As the company decided to lay

off 90 % of its employees, the credit rating agency Standard & Poor downgraded Dubai

investment companies to its junk category, as neither the Dubai government nor the United

Arab Emirates are believed to be willing to infuse money in a close future for the recovery of

those financial institutions1. In fact, it seems that the infrastructures developed for tourism,

entertainment resorts and housing facilities have finally turned out to be more a burden than a

tool for the takeoff of the emirate. Moreover, one need to question the whole model of

development set up by the emirates, which put project finance and infrastructure construction

at the core of their growth strategy. Indeed, critics had long warned against the Gulf real estate

bubble. In the middle of the desert, the Babylonian dreams of a few visionary emirs have

progressively been concretized, Dubaï Marina, the Islands, the new Metro, the Hotel Palm

Jumeïra, Burj Al Arab & Sheikh Zayed Road, the American University; the rise of the grandiose

called for respect and fear at the same time. Meanwhile, the hundreds of new void sky-

scrapers just remained a façade for hardly hidden vanities; it is therefore no surprise if the

shock eventually came as expected.

In fact, studies tend to show that infrastructure construction has effects on the long-

term growth and on GDP per capita in the host country, with rates of return up to 100 % in

excess per annum2. Nonetheless, different factors come into play, such as the type of

infrastructure – investments in transportation, telecommunication and electricity have clear

1 Nathan Becker, The Wall Street Journal, « S&P cuts Six Dubai entities to “Junk”», December 3

rd, 2009.

2 David Canning and Peter Pedroni, “Infrastructure and Long Run Economic Growth”, Center for Analytic

Economics, Cornell University, July 1999.

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positive effects on economic growth (Esterly and Rebelo, 1993) – or the level of infrastructure

expenses in the aggregate production function of the particular host country (Canning and

Pedroni, 1999). Thus, prices for infrastructure capital vary widely from one country to another

and government investment can sometimes be inefficient, especially in emerging countries

(Pritchett 1996). As numerous studies show, a substantive part of the leverage effect actually

depends on the model used to design the financing of the infrastructure project and on the

general frame in which it is developed (Barro, 1990).

In such a context, the issue of law and contract negotiation for the purpose of

infrastructure development is quintessential. In fact, I became particularly interested by the

issue of contract negotiation in emerging markets as I was researching into the development of

infrastructure funds in Sub-Saharan Africa. I had myself noticed an increasing number of such

funds as I lived in Ghana and wondered how they worked and according to which mechanism

they were gaining momentum throughout the continent. Researching into this field, I

discovered that such funds often had a much broader geographical base and that they were

often developing projects simultaneously on different continents, so as to diversify their

portfolio of investments and alleviate their systematic risk – this observation is all the more

accurate since the financial crisis, with the shortage of funding abilities and the increased risk

of financial defaults. Yet, such projects still generally have the same mechanisms and often

encounter the same problems in all emerging markets, where the rule-of-law is often an

aspiration more than an actual realization and where government default is a constant threat.

This is why I chose to describe the difficulties that the Enron Company encountered

throughout the design of its different project financings to try and draw lessons from its

failures. Indeed, the case of the notorious Texan company constitutes a perfect illustration of

the challenges faced by international companies in emerging markets. More, it even paved the

way for numerous regulatory laws aimed at improving the practice of project financings in such

contexts. Sure, we cannot determine with certainty that the fraudulent activities of Enron’s

management were directly linked to its difficulties to raise cash flow on the field. Yet the Enron

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scandal fostered a series of new behavior and practices in project finance that are crucial to

analyze.

For the purpose of our analysis, we will consider “emerging markets” as countries that

fall as under the low- and middle-income category in the World Bank’s country classification.

Nonetheless, we will particularly focus on countries like India, China, Russia, South Africa, Brazil

or Bolivia, heads of the list in terms of infrastructure investments3. By “infrastructure”, we

understand both economic (electricity, telecommunications, transportation and water) and

social (education, hospitals, prisons and government information technology) infrastructure

types, but we will focus on energy infrastructure and more particularly on gas-related

infrastructure investments, as our Enron case studies will mainly illustrate our point4.

In Part I of our paper, we will study the different solutions available for infrastructure

financing in emerging countries. First, we will discuss the advantages and drawbacks linked to

the two traditional methods of public financing on the one side and private (corporate)

financing on the other side. Second, we will analyze the consequences of the vague of

liberalization that occurred in the financing of emerging markets’ infrastructure since the

beginning of the 1990’s.

In Part II, we will determine how the specific context of emerging markets is

approached, to what particular legal challenges it exposes project financiers and the solutions

that are usually used to overcome them.

In Part III, we will go through the different difficulties that Enron Corporation had to

face, analyze them through the prism of project finance and study how they influenced

companies’ practices in the field.

3 Neil Roger, Recent trends in Private Participation Infrastructure, Public Policy for the Private Sector, WB Note No.

196, Sept. 99. 4 More, the topic of energy infrastructure is particularly interesting because of its political and geopolitical

implications. For example, the fall of President Suharto in Indonesia is intimately related to the power project disputes in the country, as his family was involved in 14 national power projects. (The Future of IPPs, Indon.Com. Newsl, December 19

th, 2000.)

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In Part IV, we will see what regulatory schemes have been adopted in the aftermath of

Enron and how they changed the face of infrastructure finance and its legal management.

In Part V, we will conclude by presenting an overview of the current trends at stake in

infrastructure financings and the challenges posed by the current financial crisis.

1. INFRASTRUCTURE AND DEVELOPMENT

1.1. TRENDS

“The hundreds of billions of dollars that will be invested in infrastructure sectors in

coming decades represent a challenge and an opportunity for the global economy”, state Berg,

Pollitt and Tsuji5. Indeed, the need for infrastructure in emerging countries is enormous.

According to JP Morgan Emerging Markets Infrastructure Equity Fund, $21.7 trillion will be

spent in the sector in the next decade, thus representing more than 70 % of worldwide growth

opportunities, with China planning to build 37 new airports by 2020, Russia intending to

acquire 20,000 kilometers of new railway lines by 2030 and India needing 100,000 megawatts

of additional power capacity by 20126. In fact, since the beginning of the 1990’s, a vague of

liberalization spread out through the world economies, and in emerging countries especially

under the pressure of multinational donors and the international financial organizations like

the IMF and the World Bank. As a consequence, those countries welcomed nearly $755 billion

in more than 2,400 public-private partnerships (PPPs) in infrastructure7. The potential is thus

enormous, all the more since the phenomenon of urbanization spreads throughout the world

at a gigantic path: according to UN Habitat, two thirds of humanity will be living in towns and

cities by 2030.8

5 Sanford V. Berg, Michael G. Pollitt, Masatsugu Tsuji, Private Initiatives in Infrastructure: priorities, incentives and

performance, 2008. 6 www.jpmorganequityfunds.com

7 PPI Database, www.worldbank.org.

8 UN Habitat, Housing Finance Mechanisms in Zimbabwe, The Human Settlements Finance Systems Series, Nairobi,

2009.

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Different financial institutions operate on the field, like Macquarie Bank Ltd., Carlyle

Group or the infrastructure funds of Goldman Sachs and JP Morgan, together with construction

companies like Suez, Veolia, Telefonica, France Telecom and Deutsche Telecom. Most of those

companies have departments specialized on infrastructure investment in emerging markets (JP

Morgan, BT Global Telecom, Invesco Powershares etc.). In the last years, we have even

observed the development of many new local investors, involved either in funding like AIG

Africa Fund Infrastructure Fund or in direct construction activities9.

1.2. FINANCING TECHNIQUES

The classic way to finance infrastructure is public financing, through taxes and public

finances. In emerging countries, where both the tax base and public resources are restricted,

infrastructure financings were usually made either through loans contracted within bilateral

agreements, for example with national development agencies, or through loans contracted

with multilateral financial organizations like the World Bank or the regional development banks.

This type of financing still represents a majority of the infrastructure financings realized today.

Another way is traditional corporate finance. One calculates the net present value of a

project to see if it is more likely to bring about profitable cash flows.

The third way is public-private partnerships. Project finance has emerged a long time

ago. The Suez Canal or the railways built for the Far West were already working on such a

technique of syndicating loans and expecting future project earnings to finance the project

itself and reimburse its equity partners. Yet PPPs have given a big impulse on project finance

since the technique has been spread out to many more projects and involve much more actors

than before.

9 Stephan von Klaudy, Apurva Sanghi, Georgina Dellacha, Emerging Market Investors and Operators: a New Breed

of Infrastructure Investors, PPIAF Documents, Working Papers No.7

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We can distinguish PPPs according to three types of contractual arrangements, the first

one based on a concessionary partnership, the second one on a non-concessionary relation,

and the third one being based on private finance.

In the concessive partnership, the legal structure varies according to the project or the

country’s specific laws. In this system, Public authorities commit to the private partner the

responsibility and the risks of the investments and commercial operations for the duration of

the concession. Users are charged, and public authorities give subsidies if necessary (in case of

limitation of the price paid by users, as in the transport sector for example). The private partner

in charge of operating the infrastructure supports the commercial risks and the contract length

is established to the amortization of investments made by the private partner.

Differently, the non-concessive partnership is especially adapted to complex projects,

enabling the public authority to contract with a consortium bringing together all the

competences necessary to all the aspects of the project. In this system, public authority

entrusts the private partner with the construction, maintenance, operation and financing of

the infrastructure over the contract’s length. The infrastructure, according to the contract,

must remain in good state when handed over to the public authority. The private partner does

not support the commercial risk. The contract’s length is often linked to the level of annual rent

that the public authority is ready to pay.

The third way, called the Private Finance Initiative (PFI), is developed by the public

authority but the public and private sectors join to design, build or refurbish, finance and

operate (DBFO) new or improved facilities and services to the general public. Thus, the private

sector provider, chosen after a competitive bid, holds a DBFO contract for facilities such as

hospitals, schools, and roads through a Special Purpose Vehicle (SPV). Over a typical period of

25 to 30 years, the private sector provider is paid an agreed monthly or unitary fee by the

relevant public entity for the use of the asset, which at that time is owned by the PFI provider.

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This and other income enables the repayment of the senior debt over the concession length.

Asset ownership usually returns to the public body at the end of the concession.

Public-private partnerships have raised much criticism, especially in the sector of

water10. Sure, they have certain advantages. Indeed, on the one hand, advocators of the PPPs

praise their effect on efficiency. For them, project managers have better incentives to improve

quality and cost efficiency under this system, and this cost-effectiveness can be effectively

measured. Many writers also consider that PPPs allow better economic analyses, more precise

financial structures and more accurate demand forecasts and construction cost projections11.

More, PPPs are deemed to offer a better mitigation of the risks since they allow the

participation of many more actors than in the classic financing methods. Nonetheless, many of

those positive analyses have been made under the funding of institutions like the World Bank

or governmental development banks. On can easily understand how analyses issued by those

institutions can be biased, since the very basis of their activity is precisely to incent to

liberalization and since much of their revenues during the last decade come from the public-

private partnerships in which they participated.

However, criticism against the PPPs mainly comes from the fact that they often induce

higher unitary costs. Indeed, since contracts often include partial indexation of the local

currency on the dollar, fluctuations or in some cases devaluation lead to price appraisal. In

Manille12: for example, the PPP set up in the water sector provoked up to a 300 % increase in

the liter price. In Guatemala13, it led to a 100 % increase. In each case, the change triggers

conflicts with the population: the French group Suez finally had to withdraw from Manille and

President Jorge Serrano finally had to flee Guatemala after declaring martial law and

threatening in vain to dissolve Congress. As a matter of fact, since the 2000 Cochabamba Water

10

P.M. Coupry, « Controverse sur la privatisation de l’eau dans les pays du Sud », www.novethic.com, March 2005. 11

PPP Club Medafrique, http://info.worldbank.org/etools/PPPI-Portal/2008PPPI/doc/08Presentations/Day4%20Session3%20pr5.pdf. 12

P.M. Coupry, « Controverse sur la privatisation de l’eau dans les pays du Sud », www.novethic.com, March 2005. 13

Daphne Wysham and Jim Vallette, Chronology of Enron’s Empire, Sustainable Energy and Economy Network, April 2002.

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Wars in Bolivia which showed that water privatization was a failure and a highly unpopular

policy, 24 countries have regained control over their public water system14. Other critics state

that the selection process of the concessionaires is often opaque and that emerging countries

have inappropriate legislation and public regulators to welcome such financing structures.

Finally, some analysts rather deplore that PPPs have mobilized insufficient finance for the

requirements of urban infrastructure in the emerging countries15.

Yet, to sum up this debate, the keys for the success of a public-private partnership in an

emerging market is the fact that the regulatory rules are clear and that the risks, commercial,

technological or political, are effectively mitigated with crafter incentive systems. If the role of

each party is clearly determined, opportunistic behavior by government and private parties can

be reduced and problems like the ones that arose in the Enron cases can be avoided.

2. LEGAL STRATEGIES FOR INFRASTRUCTURE FINANCINGS IN EMERGING MARKETS

2.1. SPECIFIC FEATURES

The advantages of financing infrastructure projects in the context of emerging markets

are numerous. First, they allow long-term and steady cash flows for the operators in charge,

hence the fact that they are particularly attractive to pension and insurance funds. More, the

niche of infrastructure investment is less vulnerable to obsolescence or to competitive threats

coming from changing technologies. Finally, cash flows tend to be predictable because demand

for infrastructure, especially power, water and transportation, grows steadily to the GDP rate.

Yet a series of legal threats can potentially hamper the project. Indeed, the two main

issues of infrastructure financing in emerging markets are the ones of stability and

predictability of the contracts. Henceforth, such transactions are often highly expensive in

14

World Bank, Public-Private Infrastructure Advisory Facility: Public-Private Partnerships for Urban Water Utilities: A Review of Experiences in Developing Countries, by Philippe Marin, 2009. 15

Annez P., “Urban Infrastructure Finance from Private Operators: What have we learned from recent experience?”, World Bank Policy Research Working Paper 4045, November 2006.

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order to reflect the complexity of risk allocation, and since they often induce higher returns so

as to compensate risk assessment. Indeed, the risk of failure is higher in emerging markets than

in more industrialized economies. To illustrate this fact, 48 infrastructure projects out of 2500

which reached financial closure have been cancelled from 1990 to 2001; all of them were

located in emerging markets16.

The differences that distinguish the emerging market approach from the one in more

industrialized countries are of five kinds. First, emerging markets are often characterized by

incomplete legislative systems. Often, they lack precise environmental laws and developed

legislative systems to deal with foreign lenders and equity investors on subjects like ownership,

taxation or repatriation of profits. Many jurisdictions like Nigeria, China, Vietnam, or Latin

American countries adopted such schemes in the mid 90’s, even if some authors question the

completeness of their provisions (Malinasky, 2006), but still many states have not adopted any

such regulations yet17. Second, the economic security of the parties is often not fully ensured.

This is all the more accurate since a vast majority of the citizens of those countries do not have

the means to afford the foreseen price. Frederic Marty witnesses that toll roads installed in

such countries often bring about a decrease in the traffic rate (Marty, 2007). Third, the lack of

political security induces higher insurance costs and higher equity or debt rates. Fourth,

Hoffman notes that emerging countries are often characterized by centralized infrastructure

systems with no competition culture and where inefficiencies are more likely to be witnessed.

Fifth, on a financial level, projects implemented in emerging countries must be financed in hard

currencies, US dollars, Euros, or Japanese yen. Yet the project revenues will be earned in local

currency, which poses threats on the conversion and on stability, and which obliges to have

recourse to alternative mechanisms to pay for the imported products, i.e. constructors or

equipment suppliers18.

16

Clive Harris et al., Infrastructure Projects, A review of canceled private projects, Public Policy for the Private Sector, World Bank, Note No. 252, Jan. 2003. 17

Laura A. Malinasky, “Rebuilding with Broken Tools: Build-Operate-Transfer Law in Vietnam”, 14 Berkeley Journal of International Law 438, 1996. 18

Peter Rigby, “Emerging Market Infrastructure”, Global Project Finance Yearbook 2007.

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For all those reasons, the risk of renegotiation is extremely high. It is actually a threat

for every long-term contract, since any renegotiation process carries the risk that one of the

parties will act in an opportunistic way and hold up the other party (Scott, 200819). The Dabhol

Power Project case herein exposed is a good example of this situation. Indeed, for project

owners, the need for immediate and constant cash flows lessens their weight in the

negotiation. On the contrary, for host countries, renegotiation might have advantages. For

example, it could allow to circumvent the negative effects of a financial crisis – yet, on the long-

term, such a behavior causes uncertainty about the host government’s abilities to contract and

impedes its credibility before other current or potential parties.

2.2. REMEDIES

To avoid those risks, transactional lawyers have different tools. The easiest way is to

rely on government guarantees to cover payment and convertibility. Yet, this does not

constitute a long-term solution, since such guarantees only have a short-term and limited value.

In the case of Malaysia and Thailand, the governments did not even provide guarantees. Thus,

as we will study herein, other alternatives include securitization of project cash flows through

bonds or mixes between project and corporate finance.

3. ENRON OR THE STUMBLING BLOCKS OF THE PROJECT FINANCE TECHNIQUE

3.1. THE ENRON CASES

Much has been said about the Enron case; the issues of false accounting and

shareholder manipulation have been widely discussed. Yet, Enron has also marked its time

19

Clayton P. Gillette and Robert E. Scott, The Political Economy of International Sales Law, International Review of Law and Economics, September 2005.

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because of the recurrent mistakes that its executives made while dealing with several

infrastructure financings either in India or in Bolivia. To recall the facts, Enron Corporation was

a company created in 1985 from the merger of Natural Gas Company and Houston Natural Gas

and incorporated in Houston, Texas. Its field of activity encompassed more than 30 different

domains, its activities ranging from electricity and natural gas to paper, petrochemicals,

telecommunications, media, shipping and investment commodities. This sprawling company,

divided in more than 7 business units, possessed altogether 38 electric power plants located in

a variety of countries throughout the world (USA, UK, Panama, Guatemala, Nicaragua, Puerto

Rico, Dominican Republic, Brazil, Poland, Italy, Turkey, China, Philippines, India), 11 pipelines

(USA, Columbia, Argentina, Brazil, Bolivia), 3 electric distributors (USA, Brazil, Venezuela), 6

natural gas industries (Puerto Rico, Jamaica, Brazil, Venezuela, South Korea), 3 paper-related

businesses (USA and Canada), plus companies including an exploration company incorporated

in the US, a manufacturer of electronic devices located in Venezuela and a manufacturer of

wind power turbines based in the USA, Spain, Portugal and Germany.

Although Enron was praised by Fortune Magazine for six consecutive years until 2001,

listed among the “100 Best Companies to work for in America” and named “America’s Most

Innovative Company”, the downfall came at top speed. In 2000, Enron claimed $101 billion in

revenues. A year later, in August 2001, the first report was issued to reveal the scandal 20. On

December 2nd, 2001, the company filed for the 3rd largest Chapter 11 bankruptcy in the history

of world finance, after those of Worldcom and Lehman Brothers; it is now a unit of Warren

Buffet’s Mid-American Energy Holding Corporation.

Enron has sadly illustrated the pitfalls of project finance on recurrent occasions, first

because of its method of accounting and its heavily criticized method of fostering off-balance-

sheet partnerships (1), second because of its lack of due diligence and the case of the Cuiaba

Pipeline (2), and third because of its renegotiation problems with the Indian State of

Maharashtra and the case of the Dabhol Power Project (3).

20

Daniel Scotto, “All Stressed up and no place to go”, August 2001.

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1. Accounting Procedures, Insider Trading and the Method of Off-Balance-Sheet Partnerships

For the MD of Citigroup Jonathan Lindenberg and the MD of the Carlyle Group Barry

Gold, Enron’s techniques had not much to do with classic project finance, which is not based on

off-balance-sheet partnerships but on more consistent risk-shifting mechanisms and

counterparty creditworthiness. Yet Enron used and even misused this traditional and angelic

vision of project finance to cook it its own way. In fact, Enron primarily used the method for

taxation contained in Internal Revenue Code Section 475 and called the “mark-to-market”

accounting technique, or fair value accounting, which is part of the US Generally Accepted

Accounting Practices (GAAP) since the early 1990s. The idea is that the value of the instrument

is based on its current market price, as opposed to “over-the-counter” (OTC) technique based

on calculations intrinsic to the financial contracts signed between the buyer and the seller.

Since most of its profits and revenue were the results of deals with special purpose entities

created as off-shore entities, Enron’s debts and losses were not reported in its financial

statements and anticipated future revenues were tabulated as if currently real21. For instance,

The Washington Post revealed that Enron accountants recorded a $65 million profit for the

Cuiaba gas pipeline before it actually came into service22. This behavior was the first and direct

cause for the fall of investors’ confidence in the company and its immediate cataclysm.

Yet the “smartest guys in the room” did not stop there23. With the intention of saving

their skin and yet in a final move to dig their own grave, Enron’s executives committed the last-

minute crime of “insider trading”.

The false profits had been registered under Chief Financial Officer Andrew Fastow and

CEO and Chief Operating Officer Jeffrey Skilling. As a result, on August 2000, Enron’s stock

value reached $90, the highest point of its whole history. Enron executives began to sell their

stocks; as they sold, prices began to drop. In August 2001, they reached $42, and fell to $15 in

December. In the meanwhile, investors were recurrently told that the stock would continue to

21

The accounting firm Arthur Andersen, responsible for Enron’s accounting, was dissolved in December 2001 for false accounting and found guilty of obstruction of justice in 2002 for destroying documents related to the Enron audit. 22

James V. Grimaldi, “Enron Pipeline Leaves a Scar on South America”, The Washington Post, May 6th

, 2006. 23

Bethany McLean and Peter Elkind, Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron, Penguin Books, London, 2003.

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rise up. CEO Kenneth Lay made particularly noisy interventions to defend its company. At the

time, Executive Paula Rieker, for example, had bought 18,380 shares for $15.51 each. She sold

them in July 2001 for $49.77, while she knew that the company was on a downward curve. Lay

himself sold $90 million worth of stock in August. On November 28th, 2001, between 10 am and

10.20 am, his wife sold 5000,000 shares for a value of $1,2 million. On this same day, at 10.30

am, Enron’s stock was worth a few cents and thousands of equity stockholders were left over

on the gambling table.

Under Section 16 of the 1934 Securities Act, insider trading is heavily punished. Indeed,

a series of trials followed the bankruptcy up to 2006, when the company was bought back by

Warren Buffet. The affair constituted the foundation stone and the most well-know

manifestation of Enron’s unpleasant financial aftertastes. But this only came as the final step of

a long walk through several misled project financings throughout the world, which might be

themselves at the very origin of the catastrophe.

2. The Problem of Due Diligence and the Case of the Cuiaba Pipeline

The case of Enron in Cuiaba is especially illustrative. The Cuiaba Gas Pipeline was a 630

km installation to be built from Rio San Miguel (Bolivia) to Cuiaba (Brazil) for a concessionary

contract of 40 years. The initial cost was of $475 million, which had to be financed by the

governments of Brazil, Bolivia, Germany and the United States, especially thanks to a $200

million loan from the Overseas Private Investment Corporation (OPIC). The construction began

in June 1999. Nonetheless, since the beginning, the project was heavily criticized by different

local groups and international organizations united behind WWF and Amazon Watch because it

crossed the protected ecosystems of the Chiquano Dry Forest and the Pantanal Wetlands, two

“primary tropical forests” deemed to be protected under international law24. As a substitute,

Enron offered a US $20 million fund to five conservation groups and proposed to implement an

indigenous people’s development program. Demonstrations ensued as the public opinion

24

www.amazonwatch.org

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considered to have been fooled. At the height of the protest, the project was stopped for 3

months; the delay stretched for 3 years in total and costs finally soared up to $750 million.

3.The Problem of Renegotiation and the Case of the Dabhol Power Project

The pitfalls of Enron in India are also very illustrative. At the beginning of the 90’s,

Enron planned to create a terminal end in Dabhol, India, for the HBJ gas pipeline built between

Turkmenistan and India (New Delhi). The idea was to access the seaports of South Korea and

Japan, the largest consumer of natural gas in the world. On June 20th, 1992, a Memorandum of

Understanding was signed between Enron and the Indian State of Maharashtra for a total cost

of US $3 billion. Although the document was not legally binding, it already raised much

criticism because of its haste, as it was signed after a three days visit of Enron executives in

India, and because of the lack of bidding competition and hence transparency in the process.

The Maharashtra government itself, in its 1995 Report of the Cabinet Sub-Committee to Review

the Dabhol Power Project, and even the World Bank, deemed the Memorandum too much in

favor of Enron. Indeed, the pre-contractual arrangement was based on high prices, no audit

was planned to verify their adequacy to the actual cost of production and its evolution over

time, and the State was obligated to pay for electricity on a regular basis, even if it was not

actually available and even if the Dabhol Corporation was not itself bound to a minimum fuel

delivery. Furthermore, no date was given to indicate the beginning of the 20-year contract.

Despite all those problems, the Indian Central Electricity Authority (CEA) gave a

“provisional clearance” in 1993. Under the Indian Electricity Supply Act, a statutory clearance is

needed to allow the foreign direct investment. Nonetheless, the State of Maharashtra took this

decision as final and immediately signed a Power Purchase Agreement with Enron, thus

engaging itself to pay an annual $220 million fee for 20 years. In the meanwhile, the State of

Maharashtra and the central government both signed a twelve-year counter-guarantee, each

time assorted with an immunity waiver25. The $1.87 billion project was to be based on 5 loans

provided by Indian financial institutions including Bank of India, commercial banks including 25

The disposition was designed to pass on the effects of rupee devaluation and rises in international petroleum prices.

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ABN AMRO, Crédit Suisse, Citibank, Bank of America, Crédit Lyonnais, and governmental

institutions including OPIC and the Japanese government. To carry the project’s debt, a Special

Purpose Vehicle (SPV) was set up: the Dabhol Power Corporation. The entity was instituted as a

100 % foreign-owned private limited liability company incorporated in India by Enron (80%),

Bechtel Enterprise Holdings (10%) and General Electric Capital Structured Finance Group (10 %)

and controlled through partner companies based in the tax haven of Mauritius.

Treated as highly confidential, the contracts were not publicized and even refused to

disclosure before local organizations and opponents of the project. Voices began to rise that

Enron had paid $20 million as “educational gifts” and accused the company of bribery, which

has obviously never been assessed yet. More, the agreement had been signed in the midst of

local elections in Maharashtra which had opposed the party in power, the Congress Party, to

the Alliance partners, including Janata Dal and the Peasants and Workers Party, which both had

a severe anti-foreign investment agenda. The whole Dabhol project became a meeting point

for opponents to the regime, local organizations, NGOs, social workers and environmentalists.

In May 1995, riots exploded. They were severely brought into line by the police. Human Rights

Watch and Amnesty International charged the security forces guarding the site for human

rights abuses and Enron for complicity; later on, they added charges against human rights

abuses including land resettlement, lack of compensation to affected fisherman and lack of

pollution control measures. Enron became a symbol of anti-imperialist contestation in India. In

August 3rd, 1995, for fear of retaliation, the state of Maharashtra ordered the project to be

altered. Enron had already invested $300 million in the construction of the site. The project

was suspended for five months, as Enron could not restart construction until the 25 law suits

brought by workers’ unions and environmentalists against the project were solved before the

Indian courts. Furthermore, costs rose to $3 billion and the affair gave them extremely negative

public exposure, thus increasing their future reputational risks.

The project was finally achieved in January 1996. Yet, during the first year of its

operation, the Maharashtra State Electricity Board (MSEB) refused to honor its $220 million

18 | P a g e

annual payment, while bound by the take-off contract that had been signed. Meanwhile, a

change of power had occurred and the Alliance partners got the majority in the Maharashtra

state over the Congress Party. They invoked excessive prices26 and accused the former

government of having badly negotiated the contract.

Enron consequently decided to renegotiate the Power Purchase Agreement27. On

February 23rd, 1996, to preserve the contract, they offered to cut off the price of power by 20 %

and the capital costs from $2.8 billion to $2.5 billion. More, they increased Dabhol’s output

from 2,015 megawatts to 2,184 megawatts and offered the Maharashtra State a 30 % equity

interest in the Dabhol project, for a value of $137 million. Enron’s share dropped to 50 % –

ceteris paribus – while GE Capital and Bechtel Enterprises kept their 10 % interest. In May 1999,

the MSEB finally refused to pay. A series of black-outs paralyzed the region and the plant was

finally silenced for 6 years. It is now the property of the Qatar based company Ratnagiri Gas

and Power Private Limited since 200528.

The lessons that we can draw from this case are threefold. First, the whole process was

established in a very harmful haste. Enron did not proceed to due diligence on all aspects of the

project. On the contrary, it entered into an agreement in a context surrounded by lack of

transparency. No competitive bidding had been undertaken prior to the implementation of the

project, and not enough attention had been given to the set up, including local opinion groups

and balance of interests. Second, the lack of equity in the transaction process has had severe

consequences on the future of the contract. Indeed, the Maharashtra State had to spend half

of its entire annual budget for the payment of the Dabhol project. By fixing up a price above

the level of reasonableness, Enron created an unbearable situation that incited local officials to

opportunistic behavior. Third, the case also raised the issue of renegotiation in project

26

According to the government, the price of Enron’s power was double than the price of power bought to other suppliers in the state (Tony Allison, “Enron’s eight-year power struggle in India”, www.atimes.com). 27

They didn’t use the $28 million Letter of Credit guarantee given by Canara Bank as an immediate remedy to MSEB’s default. 28

They started operation in May 2006 but also encountered a series of problems because of lack of operational maintenance abilities and lack of supply.

19 | P a g e

financings. Indeed, financiers feared that a dangerous message would be sent to emerging

countries29, as this behavior paved the way for justification of sovereign default.

Thus, this case is a perfect illustration that transactional lawyers should really rely on

ex-ante rules to make public entities abide by the provisions of the contract in the pure

tradition of the pacta sunt servanda theory, according to which agreements must be kept. For

ex-post resolutions are often deemed to fail.

In fact, for some authors (Hoffman, 2007), Enron was just a victim of a poorly planned

governmental strategy. For others (Kantor, 2001), it just illustrated the fact that arbitrability is

often a fiction30. Indeed, in this case, analysts agree on the fact that litigation would have

destroyed the project, as it is a low and difficult process. As a matter of fact, Enron could also

have used the $23 million Letter of Credit provided by the Canara Bank, but this recourse

would only have served as a temporary solution. Some observers also deplore the fact that the

Clinton administration failed to condemn the Maharashtra State for its behavior31.

Yet, as a matter of fact, collusion between Enron, the World Bank and the American

government has also been pointed at by some journalists32. Indeed, different cases have been

revealed which question the relationships between the three institutions. In 1981, President

Ronald Reagan announced that its administration would support the World Bank provided that

policy prescriptions would focus on privatization and deregulation of oil, gas and power

markets. In India, for example, the World Bank pressured the Indian government in 1991 to

deregulate, especially in the petroleum field, and open up to foreign direct investment. One

year later, Enron contracts with the Indian local State. In the year 2001, Enron’s CEO published

an article in The Financial Times warning the State of Maharashtra that the United States would

stop foreign aid if they were to expropriate the project. In Columbia, the World Bank

29

Scott L. Hoffman, Law and Business of International Project Finance, Cambridge University Press, October 2007. 30

Mark Kantor, International Project Finance and Arbitration with Public Sector Entities: When is Arbitrability a Fiction?, 24 Fordham Int’l L.J. 1122, 1125 (2001). 31

Danielle Mazzini, Stable International Contracts in Emerging Markets: an Endangered Species?, 15 Boston University International Law Journal 343, 1997. 32

Daphne Wisham and Jim Vallette, id.

20 | P a g e

successively issued a $30 million and a $35 million loan, in 1994 and 1996, to the Promigas

Pipeline Project where Enron was the operator. In 1999, Columbia President Andres Pastrana

meets with Texas Governor George Bush and Enron executives to discuss privatization of the

industry. In the Dominican Republic, Enron acquired a 50 % ownership of a power plant

financed by the World Bank in 1995. In the meanwhile, the World Bank delivers a loan to the

Dominican government provided that they liberalize their power sector. In 2000, World Bank

insist that the Dominican Republic should fully privatize its power distribution sector to benefit

from additional loans. In June 2001, the US Embassy of India defends Enron against charges of

fraud in the country. In December 2001, the trials finally reveal that the price at which the

Dominican public assets had been sold during the market privatization was about $1 billion

lower than the actual value. Without surprise, the auditing company responsible for the

valuation of the Dominican public assets was a local subsidiary of Arthur Andersen. In Panama

finally, the International Financial Corporation (IFC) pressures the government to privatize its

power sector in 1998, and one year later Enron becomes the main shareholder of the Bahias

Las Minas power plant. The bidding process was soon followed by charges of fraud in the

power purchase process. In fact, throughout the 90’s, OPIC received $3 billion from Enron, thus

making the energy company be its number one business partner. Enron even fought in the

congressional corridors for the maintaining of the institution that some congressmen deemed

unnecessary. In February 2006, OPIC cancelled the $200 million loan it had granted Enron for

the Cuiaba pipeline. But the institution is still marred by the long relationship that it enjoyed

with Enron and the “scar”33 it left on the South American soil.

3.2. CONSEQUENCES

Besides the fact that the Houston Astros Baseball Club is no longer called the Enron

Field but the Minute Maid Park, the Enron case has had drastic consequences both on financial

regulations and on project finance practices themselves. Immediately after the scandal

33

James V. Grimaldi, Id.

21 | P a g e

exposure, several power companies decided to cancel their projects and sell their related

assets. For fear of accusation, to force transparency and to reassure investors, they transferred

many of their off-balance-sheet financings to their internal budget expenditures. Since the

scandal, several companies have even made public vows not to use any off-balance-sheet

structures and a constant effort has been done to delineate the difference between legitimate

nonrecourse debt and the former Enron structures.

Interviews with different CEOs34 and specialized lawyers35 right after the bankruptcy all

confirm: project financiers generally feared a backlash on their capacity to attract investors and

all fostered increased transparency and financial disclosure.36 Mr. Gold, from the Carlyle Group,

even talks of an era of “conservatism”: he witnesses that conference room discussions aimed

at drafting prospectuses for project finance deals are now focused on both the need to

communicate about earnings and the desire to execute a clear and straight-forward strategy.

On the one hand indeed, the discourse changed considerably. Deeper attention is now

given to project legitimization. Thus, the creation of Special Purpose Vehicles (SPVs) is

specifically analyzed; project sponsors together with their bankers and lawyers make special

effort to explain the purpose of the entity and to show how it is exclusively focused on the

achievement of the project itself. Similarly, the origin of the companies’ cash-flows is highly

detailed and every change in the off-balance sheet arrangements is expressly justified.

On the other hand, risk ratios for project financings skyrocketed in the aftermath of

Enron as a result of the change in investors’ perceptions. For Davis37, “emerging-market IPP

(Independent Power Producers) projects began to seem more like a danger than an

opportunity.” As a consequence, the pace of project financings themselves drastically slowed

34

Jacob Worenklein, from US Power Generating Company. 35

Dino Barajas, from Hastings, Janovsky and Walker LLP. 36

Henry A. Davis, “How Enron has affected Project Finance”, The Journal of Structured Finance, Vol. 8, Spring 2002. 37

Henry Davis, Id.

22 | P a g e

down (Fabozzi, 2006)38, while counterpart credit-risk and project legitimization talks gained

momentum in the transactions deals.

Moreover, the Enron case has also affected the way security interests are dealt with

(Feldman, Harris, 2003). As Harris explains, “Enron’s alleged tendency to set its own rules for

making gas, electricity, and others raised some interesting questions about collateral and

security.” Historically, security in power plants was established by mere contracts. Today,

counterparty arrangements and security in physical assets has become a prerequisite for the

settlement of negotiations. In particular, the nature of the liens and collaterals at stake has

become more important in the deals.

3.3. LESSONS FOR LEGAL MANAGEMENT IN EMERGING COUNTRIES

Lessons to be drawn for legal management of infrastructure financings in emerging

markets both concern ethics and dispute resolution practices.

As far as ethics are concerned, transactional lawyers involved in project financings

should pay meticulous attention to due diligence. This includes compliance reviews of the

project contextual anchorage both on the environmental and social levels. In complement,

documents should be more widely disclosed and with increased transparency (Fabozzi, 2006).

The Enron case is also a good revelator of the challenge of dispute resolution within

project financings. In fact, many projects in the power sector are forced into suspension or

renegotiation. Over the last decade for example, 27 IPPs were obligated to suspend or

renegotiate their contracts in Indonesia39. Similarly, in Pakistan, 19 projects under construction

38

Franck J. Fabozzi, Henry A. Davis, Moorad Choudhry, Introduction to Structured Finance, Fabozzi Series, 2006. 39

The Future of Independent Power Producers, Indon.Com.Newsl., December 19th

, 2000.

23 | P a g e

were harassed or cancelled by the government.40 Observers and practitioners advise different

strategies.

To avoid the breach of contract, different devices are recommended. First, the deal

should be structured so as to compel the involvement of other public actors besides the host

State. In addition, central governments should give direct assurances to the governmental

organizations backing the infrastructure project; if project owners deal with federate states,

they should always require that the federal government be an underwriter to the contractor

(Kantor, 2003). Another possibility is to expand the use of standby letters of credit. Those

should be of significant weight so as to matter in the negotiations and they should be located

as much as possible outside of the realm of the local jurisdiction, so as to be more efficiently

enforceable (Id.). Different clauses can also be foreseen. Thus, Danielle Mazzini suggests the

use of stabilization clauses (to prevent future events from altering the deal), revision clauses

(to force renegotiation of the deal in case future events occur, for example in the case of price

increases in construction costs), unilateral change clauses (for minor contractual provisions

that do not alter the contract in its entirety), change clauses (to force renegotiation if events

have created imbalance between the parties), and termination for cause clauses (to list

breaches that could justify default and termination of the contract, excluding lower than

expected profits).

As for the potential answers to unilateral cancellations of infrastructure financing deals,

the Enron case brings back into question the two everlasting recourses of litigation and

arbitration. As we saw in the Dabhol project, litigation as a dispute resolution for project

financings is not an easy way out, since it is often a quick process. In fact, the Enron executives

could for example have relied on the U.S. Foreign Sovereign Immunities Act (FSIA) to try and

find an issue before their home jurisdictions. Indeed, under Section 1605, public entities can

waive their sovereign immunity either explicitly (through treaty or contract) or implicitly (if

they agree on arbitration), as it was the case in the Dabhol Power Project. In order for the US 40

Hill, A military Coup doesn’t change the fact that Pakistan is under Contract to pay Western Power Producers for Electricity it can’t afford, Project Finance, November 1999.

24 | P a g e

courts to have jurisdiction, two requirements are needed: the object of litigation must be a

“commercial activity” (Texas Trading, Janini v. Kuwait University, Walter Fuller) and it must

have a “direct effect” in the United States (Republic of Argentina v. Weltover, United World

Trade Inc. v. Mangyshlakneft Oil Production Ass’n). As analysts show it, those two requirements

would have been met in the Dabhol case since the weight of Enron was of significant impact on

the US economy41.

But often, neither is arbitration a quicker alternative to litigation. For Kantor, it is even a

“fiction”42, since the project financier is often trapped if he did not foresee strong enough ex-

ante contractual mechanisms to remedy to the payment default (Kantor, 2001). For instance,

Enron executives did not beneficiate from a MIGA assurance. Indeed, Paragraph 1.43 of MIGA’s

Regulations foresee that an assurance can be obtained to compensate against lack of recourse

from judicial or arbitral proceedings and in cases where their financial decision could not be

enforced or when they did not render a decision within a reasonable amount of time. Yet this

assurance is very expensive and not always assured but after a lengthy and uncertain process.

In fact, to obtain it, the assured party first needs to demonstrate that the project company’s

payment default on its covered loan was directly caused by breach of contract on the part of

the host State. Then, it must provide an arbitral award to support that determination prior to

making payment under the guarantee. In other terms, the process takes time and it does not

always cover the total expenditures that the assured party has to face because of the default.

In fact, for Richard N. Dean, Partner lawyer for Baker and McKenzie LLP in Washington

D.C. and specialist of financial transactions in emerging countries and more particularly in

Russia43, the ultimate solution and often the sole recourse in case of payment defaults in such

contexts is “relationships”. Since the rule-of-law is often unstable, his advice for transactional

lawyers is to learn how to rely on relationships to renegotiate the deals and solve the issues.

41

Danielle Mazzini, Id. 42

Mark Kantor, « International Project Finance and Arbitration with Public Sector Entities: When is Arbitrability a Fiction ?”, 24 Fordham International Law Journal, 1122, 2000-2001. 43

Interview with Richard N. Dean, November 30th

, 2009.

25 | P a g e

4. REGULATORY SCHEMES ADOPTED IN THE AFTERMATH OF ENRON

For Feldman, the CEO of Andrews Kurth, the opacity that surrounded the Enron cases

revealed the inefficiency of the financial regulation mechanisms44. Thus, in the aftermath of

Enron, a series of regulatory schemes was adopted to overcome the threats posed by the

scandal and streamline a system which had proved its deficiencies. In particular, three

important rules were set up: the Sarbanes-Oxley Act in 2002, the Equator Principles in 2003

and the Basel II Accord in 2004.

4.1. THE SARBANES-OXLEY ACT

The Sarbanes-Oxley Act was enacted on July 30th, 2002. Its aim was to get more

effective control on the companies’ financial statements. Its 11 titles apply to all the public

companies registered in the United States, thus excluding all privately held companies. They

aim in particular at punishing accounting fraud and refusal to disclose elements and at

expanding CEOs’ responsibilities as regards the accuracy of their companies’ financial

statements. Section 404 notably provides that the company’s internal accounting should be the

object of a detailed annual examination. If the enactment of the act has been highly praised by

many analysts for its efficiency and its positive effects on financial regulations, it is also

criticized by many companies for its cost, especially for minor companies which have fewer

resources to devote to compliance costs. Indeed, according to the American Shareholders

Association, regulatory costs increased from 4.8 % to 9.9 % of the market capitalization rate. As

a consequence, many companies have then decided to go private: the International Strategy

and Investment Group show that 191 public companies have decided to change their

registration strategies right after the enactment of the Act.

44

Feldman, Interview by Harris, 2003.

26 | P a g e

4.2. THE EQUATOR PRINCIPLES

The Equator Principles were launched in June 2003 and extended in July 2006. They

were developed by a group of commercial banks led by Citigroup, ABN AMRO, Barclays and

West LB right in the aftermath of Enron to alleviate the negative externalities that the scandal

had on their project finance activities45. The purpose is to issue a number of environmental and

social standards for the design of project financings. In consultation with project sponsors,

project engineers, and non-governmental organizations (NGOs), 67 financial institutions have

decided to comply with those rules by November 2009.

The Equator Principles only concern all new project financings of total capital costs of

US$ 10 million or more, as provided by the 2006 extension. The Principles have also been

extended to expansions or upgrades of existing facilities and to project finance advisory

activities: from then on, member institutions commit to inform their clients about the

Principles and request from them the explicit intention to adhere to the rules. In order to do so,

projects are graded according to the significance of their social and/or environmental impact,

from A (significant impacts), to B (limited impacts) and C (minimal or no impacts). Then,

different actions should be undertaken and documents handled, including social and

environmental assessments for all projects categorized A or B, covenants, actions plans and

agreements between banks and their clients on how to mitigate and monitor the risks,

evidence of consultation with stakeholders, NGOs and project affected groups, annual

disclosure reports. In addition, applicable social and environmental standards should be listed

(use of renewable natural resources, protection of human health, cultural properties,

biodiversity, including endangered species and sensitive ecosystems, use of dangerous

substances, fire prevention, life safety, land acquisition and land use, involuntary settlement,

impacts on indigenous people and communities, etc.) and a grievance mechanism has to be

foreseen. Finally, an independent review, from an independent expert, should also be issued to

the financial institution.

45

www.equator-principles.com

27 | P a g e

Nonetheless, the Equator Principles have been criticized for several reasons. First, some

observers have raised concern over their integrity. Some of them point at the highly

controversial case of the Baku-Tbilisi-Ceyhan pipeline in the Caspian See, connecting Azerbaijan,

Georgia and Turkey. In this case, 8 financial institutions registered as members of the Equator

Principles list decided to finance the project in 2004, together with the IFC, despite an NGO

assessment alleging 127 breaches of the Principles. They answered that their independent

consultant had confirmed the fact that the Principles were respected. Similarly, some NGOs

deplore the fact that one of the Equator Principles members, the Dutch ABN AMRO bank, is the

most climate-unfriendly bank in the Netherlands, producing 1% of the total annual worldwide

CO2 emissions. Others criticize the existence of free-riders and opportunistic members, the

lack of enforceability of the Principles or the fact that banks might lobby the IFC to weaken the

standards46. To answer those attacks, many banks publish summaries of their actions in favor

of the Equator Principles and the list of projects that they refused because of noncompliance47.

4.3. THE BASEL II ACCORD

The last regulation adopted in the aftermath of Enron was the Basel II Accord. Published in

June 2004, it was adopted between 2008 and 2009 by most of the world jurisdictions and their

credit institutions. Its purpose is to have international standards to determine the minimal

capital and credit requirements necessary for the involvement of the credit institution in the

project financings. The Accord was adopted after a series of deliberations from central and

commercial banks united under the so-called Basel Committee on Banking Supervision. Those

standards should be determined according to internal ratings including the credit volume of the

bank issuing the loan. The idea is to ensure greater stability of the international financial

system and avoid the occurrence of credit crunch situations. According to Freshfields law firm,

project finance transactions are now structured in order to minimize the regulatory capital

46

William Baue, “Are the Equator Principles Sincere or Spin?”, Sustainability Investment News, June 4th

, 2004.

47 www.equator-principles.com

28 | P a g e

requirements of the loan. For them, “this may become more and more of a focus in

negotiations.”48 As a consequence, banks have the incentive to use numerous sources of

financing so as to broaden the number of participants and get greater leverage effect.

5. CONCLUSION: CURRENT TRENDS AND THE EFFECTS OF THE FINANCIAL CRISIS

ON INFRASTRUCTURE FINANCINGS IN EMERGING MARKETS

Studying the Enron cases, that is to say not only the famous case of false accounting and

insider trading but also the less famous issues of the company’s pitfalls in India or Bolivia, is

particularly interesting for different reasons. For Enron revealed several deficiencies in the

sphere of project finance and the way it was approached.

First, different mechanisms such as the mark-to-market accounting method or the off-

balance-sheet financial strategy turned out to be misleading for investors: regulatory schemes

were thus foreseen to remedy to the lack of legislation in the matter.

Second, Enron showed that the lack of analysis of the contextual elements interacting

with the project could result in quagmires for the parties. This finding also contributed to

elaborating new rules.

Third, the cases finally illustrate the difficulty of renegotiation of those long-term

project financings; the risk of hold-up is so high than serious ex-ante mechanisms should be

foreseen to avoid reliance on mere ex-post relationships.

On a practical standpoint, project financiers usually drew two lessons from Enron. First,

they insist on transparency and disclosure. As a result, the project contextual analysis and the

48 Freshfields Bruckhaus Deringer, Basel II: Capital Management Strategies for Project Finance Loans, Briefing,

February 2007.

29 | P a g e

due diligence processes gain more and more importance in the work of the transactional

lawyer in charge of supervision on such projects. Furthermore, the new systems of regulation

to comply with, i.e. the Sarbanes-Oxley Act, the Equator Principles, and the Basel II Regulation,

even if their efficiency is still to be improved, give a new framework to legal management in

this field.

Second, project financiers began to give increased scrutiny to governmental actors and

partners in emerging markets. As a consequence, projects’ security and collateral have become

key elements of the negotiations. More, since there is higher risk, structuring the deal means

involving a bigger number of actors and financiers so as to ensure a better mitigation. This is all

the more relevant since financial moroseness spread onto the markets, and since the current

scarcity of funding has drastically shortened the number of project financings worldwide.

Yet, to go further and understand the current evolutions, different trends need to be

witnessed in the planet of project finance. Since the skepticism that followed the Californian

crisis of 2000-2001, the general context is one of deregulation and privatization. As a result and

because of the financial crisis, the higher scarcity of funding resources and the decrease in risk

tolerance, companies have stopped their expansion to new industries and locations and rather

stay focus on less risky domains, i.e. either by focusing on more industrialized countries or by

broadening their geographical scope so as to diversify their portfolio. Now, to invest in

emerging markets, they require much more support from sponsors, multilateral agencies,

export credit agencies and insurance companies, especially since the Russian default of 1998

and the Brazilian devaluation of 1999. In the specific case of insurance, for instance, companies

increasingly use targeted risk coverage instead of the traditional general insurances49. More,

they actually use securitization more extensively. In particular, observers witness the growing

use of bonds and the broadening of the base of institutional investors, which leads to a growth

in the credit-rated project debt50. Finally, there is more and more a blending of project and

corporate finance to mitigate the risk.

49

The Future of Project Finance: The Crisis in Perspective, London, Ed. By Rod Morrison, Thomson Reuters, 2009. 50

Davide Tocchi, “The Impact of the Financial Crisis on Project Finance”, Thesis, Bocconi Business School, 2009.

30 | P a g e

But the doldrums of the world economy do not sound the death knell of project finance.

Quite the contrary, new tools and strategies can be imagined, as we saw, to leverage its effects.

For the main quality of project finance is precisely to provide flexible and case-by-case

solutions. In the sector of infrastructure financings for emerging countries in particular, it

appears as very suitable to answer the numerous needs of growing populations. Jeffrey Sachs51

noted that the focus on infrastructure, both social and economical, could be one way towards

the “end of poverty”; the genuine Keynesian method of the New Deal had effectively put new

life into the post-1929 world. Today, Dubai the anthill has record employment rates of 97.4 %

and a GDP per capita of $40,400 (CIA World, 2008): when infrastructures have structured the

superstructure, or when the post-Enron era is one of the rise and fall of empires. As there’s

hope…

51

Jeffrey Sachs, The End of Poverty: Economic Possibilities for Our Future, Penguin Press, 2005.

31 | P a g e

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Davide Tocchi, « The Impact of the Financial Crisis on Project Finance”, Thesis, Bocconi Business School,

2009.

Franck J. Fabozzi, Henry A. Davis, Moorad Choudhry, Introduction to Structured Finance, Fabozzi Series,

2006.

Freshfields Bruckhaus Deringer, Basel II: Capital Management Strategies for Project Finance Loans,

Briefing, February 2007.

Hill, “A military Coup doesn’t change the fact that Pakistan is under Contract to pay Western Power

Producers for Electricity it can’t afford”, Project Finance, November 1999.

Martin Stuart-Smith, “Private Financing and Infrastructure Provision in Emerging Markets”, 26 Law and

Policy of International Business, 987, 1994-1995.

Scott L. Hoffman, Law and Business of International Project Finance, Cambridge University Press,

October 2007.

The Future of Project Finance: The Crisis in Perspective, London, Ed. By Rod Morrison, Thomson Reuters,

2009.

William Baue, “Are the Equator Principles Sincere or Spin?”, Sustainability Investment News, June 4th,

2004.

On Enron

Bethany McLean and Peter Elkind, Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of

Enron, Penguin Books, London, 2003.

Daphne Wysham and Jim Vallette, Chronology of Enron’s Empire, Sustainable Energy and Economy

Network, April 2002.

Henry A. Davis, “How Enron has affected Project Finance”, The Journal of Structured Finance, Vol. 8,

Spring 2002.

James V. Grimaldi, “Enron Pipeline Leaves a Scar on South America”, The Washington Post, May 6th,

2006.

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On emerging markets

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Private Sector, World Bank, Note No. 252, Jan. 2003.

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Annez P., “Urban Infrastructure Finance from Private Operators: What have we learned from recent

experience?”, World Bank Policy Research Working Paper 4045, November 2006.

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Economics, Cornell University, July 1999.

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Economy, 98, 1990.

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Clayton P. Gillette and Robert E. Scott, The Political Economy of International Sales Law, International

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International Law Journal 1064, 2000-2001.

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Arbitrability a Fiction ?”, 24 Fordham International Law Journal, 1122, 2000-2001.

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