Structuring and Implementation of the Project

Abstract

A typical structure for project finance is a special purpose vehicle (SPV) structure. The Special Purpose Vehicle is structured in the form of contractual agreements with different stakeholders. There will be shareholder agreement and loan agreement, offtake contracts, direct agreements and security agreements with different parties. Sponsors choose project finance with non-recourse provisions basically to insulate themselves from risk of failure of project which would have an effect on their debt repayment capacity. Structuring the project vehicle can take different forms like joint venture, partnership, limited partnership or limited company structure. Joint venture is a common form of project financing vehicle observed in oil and gas projects. Joint Ventures and limited company structure are the most common form of project financing structures used. A joint venture is a contractual arrangement between different companies to engage in a business activity. The joint venture partners will bring in their expertise to the project along with funds for the project costs. One of the partner may have the overall responsibility to manage or operate the project. Partnerships are similar to joint ventures Limited partners provide project capital for a project. In a special purpose vehicle structure, the SPV is established exclusively for the purpose of the project. The terms on which the SPV is structured would be set out in the shareholder’s agreement. The joint venture or the SPV established depend on a number of legal, tax, accounting and regulatory issues. The lenders to the SPV will have no recourse to the sponsors other than guarantees given by the sponsors. In real sense, the sponsors exposure to the project is limited to the value of the equity or subordinated debt which they had contributed to the project. Project finance is also known as off balance sheet financing. The sponsors don’t show the liabilities in the balance sheet, instead it appears in the footnote. The use of joint venture can result in significant tax advantages in some jurisdictions. The form of special purpose vehicle would be attractive when different sponsors require to fund their investment in the project in different ways. The sponsors have multiple functions with different aspects such as specifying technical aspects, negotiating with lenders, suppliers and off takers, making arrangements for consents and permits. Sponsors will also have to carry out tasks such as appointment of financial, technical, insurance, environmental and legal advisers to the project.