International Project Finance

International Project Finance
Catherine Doyle
Partner, McMillan LLP
Risk and reward

Under the right circumstances,
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
managed.
managed
Topics to be reviewed
Participating
p
g in overseas p
procurements
Dealing with foreign lenders and foreign investors
Dealing with general cross-border project

financing risks
Construction risk, taxation risk, currency risk, interest rate risk

and commodity risk
Topics to be reviewed (cont

(contd)
d)
Considering
g key
y funding
g sources
Addressing social and political roadblocks,

including national partner risk
Managing project political risk
Dealing with infrastructure supply risk
Participating in overseas procurements

Things to consider:
Host (procuring) country governments may take formal or

i f
informal
l measures tto ffavour local
l
l bidd
bidders.
These measures may be subject to international trade agreements

(e.g., NAFTA, WTO).
The host countrys business culture may differ greatly from

Canadas.
Briberyy and other corrupt

p p
practices may
y be common or expected.
p
Compliance issues with respect to Canadian and foreign laws.
Participating 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 be
vastly different.
g g and cultural barriers may

y have to be overcome.
Language
It might be wise to consider assembling teams of advisors

and partners in the host country
country.
e.g., retaining legal counsel in the host country.
Dealing with foreign lenders
Project lenders have become more risk-averse since the

fi
financial
i l crisis,
i i and
d thi
this may b
be especially
i ll ttrue ffor fforeign
i
lenders.
Hostt country
H
t lenders
l d
may b
be unable
bl or unwilling
illi tto provide
id
sufficient financing.
It may be necessary to assemble a local or international syndicate.
Language and cultural barriers may cause problems.
Relevant
R
l
t local
l
l laws
l
(e.g.,
(
collateral,
ll t l di
dispute
t resolution)
l ti )
should be canvassed.
Dealing with foreign investors
Consider the nature of the capital markets and the securities

laws of the host country.
p in the host country.

y
Cultivate relationships
Consider whether you may not wish certain host country

residents to invest in your project
project.
e.g., prospective investors may be current or future competitors.
Again language and cultural barriers may be challenging

Again,
challenging.
Dealing 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 different
Taxation risk
Examples of taxes possibly payable: income tax
tax, withholding tax
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 and
foreign tax implications of a project.
Currency risk
The main areas of foreign currency risk:

1.
2.
3.
Unavailability of foreign currency

Inability to transfer currency abroad
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 insurance
insurance.
10
Interest 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

projects capacity to handle them.
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 inputs

inp ts and outputs
o tp ts can fluctuate
fl ct ate
dramatically.
It is important to perform a detailed analysis of the projects

project s
commodity risk exposure.

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

sources
rces 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

Export
Agencies:
Organized and funded by a single countrys government.

Concentrate on providing coverage for political risks abroad.
p
Export
p Development
p
Canada ((EDC);
) US Export-Import
p
p Bank
Examples:
(USExim).
Multilateral Agencies:
Funded by multiple governments and organizations

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 Group.
Group
14
Addressing social and political roadblocks
Legal
g system
y
risk and national p
partner risk
The host country laws and economy may be unfamiliar and

unpredictable.
The host countrys 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 countrys economy.
Consider risk of prolonged procurements and possibility for protracted
litigation in respect of project issues.
Environmental risk
Environmental
E
i
l regulations,
l i
standards
d d and
d activism
i i
may h
heavily
il iimpact
project development and operation.
Determine how best to allocate risk, consider retaining counsel.
15
Political risks are risks gro

grounded
nded in decisions made or actions
taken by the host countrys government, or in force majeure
events with political undertones.
Examples of political risks:
Restrictions on foreign currency

Civil unrest
War and terrorist attack
Expropriation
Governmental contract repudiation and frustration
16
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:
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:
consider
A competing project could emerge.
Government becoming a competitor may be especially problematic

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 unique

niq e to engaging in international project
finance.
Think through these risks,

risks obtain competent professional
advice and plan ahead.
19
Questions?
20
McMillan LLP
Catherine J. Doyle
catherine.doyle@mcmillan.ca
21

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International Project Finance

Risk and reward

Dealing with foreign lenders and foreign investors

Dealing with general cross-border project

Construction risk, taxation risk, currency risk, interest rate risk

Topics to be reviewed (cont

Addressing social and political roadblocks,

Managing project political risk

Dealing with infrastructure supply risk

Participating in overseas procurements

Host (procuring) country governments may take formal or

These measures may be subject to international trade agreements

The host countrys business culture may differ greatly from

Briberyy and other corrupt

Participating in overseas procurements

Expertise and resources may not be as plentiful in the host

g g and cultural barriers may

It might be wise to consider assembling teams of advisors

e.g., retaining legal counsel in the host country.

Dealing with foreign lenders

Project lenders have become more risk-averse since the

It may be necessary to assemble a local or international syndicate.

Language and cultural barriers may cause problems.

Dealing with foreign investors

Consider the nature of the capital markets and the securities

p in the host country.

Consider whether you may not wish certain host country

e.g., prospective investors may be current or future competitors.

Again language and cultural barriers may be challenging

Dealing with cross-border financing risks

The main areas of foreign currency risk:

Unavailability of foreign currency

Some currency risk may be due to political action or instability in

Consider methods of minimizing this risk.

e.g., require consistency of currency when contracting; enter into hedges

Interest rate risk

Floating interest rates are common in international project

Consider the possible effects of interest rate fluctuations and the

Consider methods of minimizing this risk.

Prices of project inputs

It is important to perform a detailed analysis of the projects

Consider methods of minimizing this risk.

Key funding sources

Consider the traditional so

Consider alternative financing structures

Export Credit Agencies

Key funding sources

E port Credit Agencies

Organized and funded by a single countrys government.

Funded by multiple governments and organizations

Addressing social and political roadblocks

The host country laws and economy may be unfamiliar and

Managing project political risk

Political risks are risks gro

Examples of political risks:

Restrictions on foreign currency

Managing project political risk

It is essential to consider the likelihood of political risk in a