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Projects and
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Editor
Júlio César Bueno
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Projects and
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The Projects and Construction Review

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Projects and
Construction
Review
Seventh Edition
Editor
Júlio César Bueno
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Acknowledgements
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ii
CONTENTS
PREFACE�� vi
Júlio César Bueno
Chapter 1 INTERNATIONAL PROJECT FINANCE��1

Phillip Fletcher and Andrew Pendleton
Chapter 2 DISPUTE RESOLUTION IN CONSTRUCTION PROJECTS��12

Robert S Peckar and Denis Serkin
Chapter 3 RELATIONSHIP CONTRACTING��23

Owen Hayford
Chapter 4 ARGENTINA��31
Pedro Nicholson
Chapter 5 AUSTRALIA��41
Matt Bradbury, David Gilham, Kristen Podagiel, Ren Niemann, Tim Hanmore, Hayden
Bentley, Liam Davis and James Arklay
Chapter 6 BELGIUM��57
Rony Vermeersch, Olivia de Lovinfosse and Mitch Windsor
Chapter 7 BRAZIL��69
Júlio César Bueno
Chapter 8 CHINA��90
Zhu Maoyuan and Zhang Jiong
Chapter 9 COLOMBIA��111
Carlos Umaña, Rodolfo Gutierrez and Rafael Bernal
Chapter 10 DENMARK��127
Peter Wengler-Jørgensen and Maygan Mike Lundgaarde
iii
Contents
Chapter 11 FRANCE��140
Paul Lignières, Mark Barges, Darko Adamovic and Marianna Frison-Roche
Chapter 12 INDIA��150
Sunil Seth and Vasanth Rajasekaran
Chapter 13 IRELAND��162
Conor Owens, Michael Kennedy and Fergal Ruane
Chapter 14 JAPAN��176
Tetsuya Itoh, Reiji Takahashi, Kenichi Yamamoto and Tetsuro Motoyoshi
Chapter 15 PORTUGAL��187
Manuel Protásio, Teresa Empis Falcão and Frederico Quintela
Chapter 16 QATAR��201
Andrew Jones, Zaher Nammour and Sarah Sage
Chapter 17 SAUDI ARABIA��214

Abdulrahman M Hammad
Chapter 18 SPAIN��226
José Guardo, José María Barrios, Alejandro León and Juan Ignacio Guillén
Chapter 19 SWITZERLAND��238
Thomas Mueller-Tschumi and Francis Nordmann
Chapter 20 THAILAND��248
Chaipat Kamchadduskorn
Chapter 21 UNITED KINGDOM��264

David Brynmor Thomas and Hannah McCarthy
Chapter 22 UNITED STATES��277

Carolina Walther-Meade, Karen Wong, Henry Scott and Miguel Duran
Chapter 23 URUGUAY��298
Beatriz Spiess
Chapter 24 UZBEKISTAN��310
Shukhratjon Yunusov, Ulugbek Abdullaev and Diyora Abdurakhmanova
iv
Contents
Chapter 25 VIETNAM��321
Nguyen Trung Nam
Appendix 1 ABOUT THE AUTHORS��335

Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS��355
v
PREFACE
La meilleure façon d’être actuel, disait mon frère Daniel Villey, est de résister et de réagir contre les
vices de son époque. Michel Villey, Critique de la pensée juridique modern (Paris: Dalloz, 1976).
This book has been structured following years of debates and lectures promoted by the
International Construction Law Committee of the International Bar Association (ICP),
the International Academy of Construction Lawyers (IACL), the Royal Institution of
Chartered Surveyors (RICS), the Chartered Institute of Arbitrators (CIArb), the Society of
Construction Law (SCL), the Dispute Resolution Board Foundation (DRBF), the American
Bar Association’s Forum on the Construction Industry (ABA), the American College of
Construction Lawyers (ACCL), the Canadian College of Construction Lawyers (CCCL)
and the International Construction Lawyers Association (ICLA). All of these institutions
and associations have dedicated themselves to promoting an in-depth analysis of the most
important issues related to projects and construction law practice and I thank their leaders
and members for their important support in the preparation of this book.
Project financing and construction law are highly specialised areas of legal practice.
They are intrinsically functional and pragmatic and require the combination of a multitasking
group of professionals – owners, contractors, bankers, insurers, brokers, architects, engineers,
geologists, surveyors, public authorities and lawyers – each bringing their own knowledge
and perspective to the table.
I am glad to say that we have a contribution from yet another new jurisdiction in
this year’s edition: Uzbekistan. Although there is an increased perception that project
financing and construction law are global issues, the local flavour offered by leading experts
in 22 countries has shown us that to understand the world we must first make sense of what
happens locally; to further advance our understanding of the law we must resist the modern
view (and vice?) that all that matters is global and what is regional is of no importance. Many
thanks to all the authors and their law firms who graciously agreed to participate.
Finally, I dedicate this seventh edition of The Projects and Construction Review to
SCL International, a worldwide federation or alliance of national or regional Society of
Construction Law (SCL) organisations that aim to foster the academic and practical legal
vii
Preface
aspects of the construction industry. We celebrate the success of SCL International’s Biennial
Conference in São Paulo in September 2016, but also the upcoming conferences in New
Delhi (2017) and Chicago (2018). I thank the leaders of SCL International for all their
support in the organisation of these events.
Júlio César Bueno

Pinheiro Neto Advogados
São Paulo
July 2017
viii
Chapter 1
INTERNATIONAL
PROJECT FINANCE
Phillip Fletcher and Andrew Pendleton1
As the population of the world continues to grow, global consumer demand for a full range
of products increases commensurately, notwithstanding the storm of other macro-economic
events and forces at play. The foundations for satisfying this demand are built in the oil and
gas, natural resources, petrochemicals, telecommunications, transportation and power sectors.
Recent oil and other commodity price volatility – brought about in part by a confluence of
the slowdown in the Chinese economy, political disruptions in Russia, the Middle East and
elsewhere, and an extraordinary expansion in oil and gas production as a result of fracking
and shale technology – may give investors and developers cause for reflection, at least in the
short term, but large-scale investment remains very much necessary across a broad spectrum
of industries on an ongoing basis. Neither governments nor private sources on their own can
meet that need in full. To be successful, investment projects have to amass funding and other
commitments from a combination of public and private sector participants, and involve
increasingly sophisticated financing arrangements.
As the speed of development accelerates, the scale of individual projects has had to
keep pace. At the same time, uncertainty of supply has driven exploration for resources to
more remote locations, often requiring innovative technology, and the cost of extracting and
processing resources has therefore risen. The development of ‘mega projects’ has exacerbated
the competition for funding. The result? Ever larger financings occurring at a time when
traditional commercial bank sources continue to face market and regulatory constraints. As
any successful sponsor must call on a widening variety of finance sources, there is a continuing
need for lawyers capable of structuring the most innovative and complex transactions.
Before examining the role of project finance (and project finance lawyers) in this
context, it is useful to consider the more basic question of what we actually mean by the term
‘project finance’.
I WHAT IS PROJECT FINANCE?

In essence, project finance is simply a form of secured lending involving intricate (but
balanced) risk allocation arrangements, and much of the legal expertise is drawn from the
discipline of banking. Transactions are characterised by lenders extending credit – often, very
large amounts – to newly formed, thinly capitalised companies whose principal assets at the
time of closing consist of little more than collections of contracts, licences and ambitious
plans: hence the focus on prudent legal analysis.
1 Phillip Fletcher is a partner and Andrew Pendleton is a senior associate at Milbank, Tweed, Hadley &
McCloy LLP.
1
International Project Finance
To reduce the discipline to its constituent parts is, however, to miss the magic – or
alchemy if you prefer – of project finance: the conversion of an assortment of paper assets
into a viable economic undertaking. The process is akin to creating an economic ‘ecosystem’
in which inputs are sourced and processed, and outputs are sold and consumed, with
the resultant revenues allocated carefully to predetermined uses, all pursuant to contracts
generally entered into before the project has even been constructed.
Project financing has evolved significantly since it emerged in its modern incarnation in
the 1980s. Then, it was a tool used principally by commercial banks to finance the construction
of natural gas extraction projects and power plants, largely in North America and Europe.
Even when projects were financed in the southern hemisphere, lenders and sponsors were
generally based in (or near) London, New York or Tokyo. In recent years, this concentration
has diluted, with the increased pressure on traditional sources of credit (which is likely to be
amplified by the application of the Basel III standards) providing an opportunity, and a need,
for commercial lenders across Asia, the Middle East and Latin America, together with export
credit agencies, multilateral development organisations and (for stronger projects) the capital
markets, to plug the resultant gap. Similarly, more geographically diverse sponsors are now
driving the development of projects, in some cases to provide their home markets with access
to natural resources and, in others, because they are often able to supply equipment and
skilled labour at competitive prices.
In virtually all regions of the world, concerns over climate change are leading to
investment both in low carbon power and in energy efficiency. In some countries, such as the
United Kingdom, Finland, the UAE and Turkey, this involves a renewed focus on nuclear
power, but elsewhere, such as in Japan and Germany, reactions to the Fukushima Daiichi
nuclear disaster are driving other types of power arrangements, with resulting demand for
new gas pipeline and liquefied natural gas supply arrangements. Meanwhile, ever-increasing
urbanisation globally necessitates investment in utilities as well as infrastructure. In recent
years, economic growth has been particularly rapid in Brazil, India and China, leading to
demand for a broad range of commodities, goods and services. Significant investment has
also been seen over recent years in the CIVETS group (Colombia, Indonesia, Vietnam,
Egypt, Turkey and South Africa) and other emerging economies. As has been the case
throughout history, emerging markets will frequently, of course, face cyclical variances in
growth and shorter-term, event-driven, volatility. Although these disruptions to stability and
economic growth are inevitable, the long-term outlook for at least many emerging markets
remains strong. Moreover, as the more established economies of North America and Europe
come out of recession, and as US industry continues to benefit from the ‘shale revolution’ in
domestic natural gas prices, one can anticipate that focus will turn again to addressing their
long-postponed infrastructure needs, thereby offsetting disruptions in the emerging markets.
II THE ROLE OF A PROJECT FINANCE LAWYER

Since the nature of project financing is document-intensive, project finance lawyers play
a key role in managing the process of closing deals. This entails the identification of key risks,
securing consensus among the interested parties on how they are best mitigated and then
properly reflecting what has been agreed in the underlying documentation.
With the expansion of project finance into new industries and regions, the attendant
legal issues have become increasingly complex and the prediction of potential difficulties
correspondingly more challenging. Ever-shifting market standards, coupled with the absence
2
of standard form documentation for projects, contribute variety. The result of this is a need
for project finance lawyers with a real understanding of the borrower’s business (including
its susceptibility to a range of external risks – be they political, geological, economic,
meteorological or anything else) and the practical detail of all aspects of the underlying
project, from the security of feedstock and fuel supply to the liquidity and volatility of offtake
markets to the ecological and social impact of the project on the environment in which
it operates.
Even after the relevant financing and project documentation has been executed, the
parties must sustain relationships and address problems through economic, political and legal
change. No matter how extensive or well-drafted the legal documentation, virtually every
project encounters technical or commercial problems over its life, and the solutions must fit
within the agreed legal framework. Two parties can have a legitimate disagreement over the
meaning or effect of a few of the words contained within a mountain of documents governing
their relationships (whether simply because they have different perspectives and interests or
because they have different recollections of why things were phrased as they were). Moreover,
issues not contemplated at the time of signing (and not addressed in the documentation)
can and do arise, often necessitating creative solutions to balance conflicting interests. The
underlying economics of a project may also change when, for example, market volatility
proves more extreme than originally anticipated. The secret to minimising the frequency with
which any project encounters problems is a careful initial assessment of the most salient risks
and a sensible approach to mitigating them.
III RISK ASSESSMENT AND ALLOCATION

Thoughtful lawyers will consider the technical, political and legal risks of an individual
project before they negotiate how contentious issues should be treated. This requires degrees
of familiarity with a number of different disciplines, including civil procedure, contract,
property, trust, tort, equity and conflicts of laws, and with a range of financial instruments,
from commercial bank loans and conventional capital markets instruments, through domestic
government-funded loans and export credit and multilateral agency loans and guarantees, to
a host of shariah-compliant financing structures. Using this expertise, a project finance lawyer
can help the parties structure their project and its financing (and negotiate the implementing
contractual documentation) in a way that is likely to be sufficiently robust to withstand
long-term volatility.
Although many risks can be structured, contracted or insured away, projects, as with
other commercial endeavours, are exposed to many events and circumstances that may
adversely affect their economic performance, stability and even viability. In considering these
matters, the lawyer will need to liaise with myriad specialist advisers, take guidance from the
lenders (and sometimes the project’s sponsors) and work closely with local lawyers in relevant
jurisdictions – efforts that will usually culminate in the production of a comprehensive due
diligence report that pulls together the key risk assessments, often presenting them with an
accompanying commentary that includes ideas (drawn from past experience) for possible
solutions to any problems identified.
At the inception of a project, there will, inevitably, be differing views on both the
likelihood of future adverse events and their potential impact. An essential element of the
lawyer’s role in helping the parties to assess a project involves the analysis of the potential
risks associated with the project, the way in which those risks have been allocated among the
3
parties and the extent to which that allocation is appropriate in the circumstances (having
regard to, but without slavishly following, precedents set in comparable circumstances). This
assessment may depend on whether the most material risks have been allocated sensibly to
parties able to bear them under contracts that will withstand legal challenge. For example,
construction risk is often allocated to engineering and equipment manufacturing firms under
market-tested contractual forms featuring detailed testing and liquidated damages regimes;
supply and offtake risk is generally managed through a range of firm capacity contracts, ‘take
or pay’-style commitments or mere supply or purchase undertakings with limited quantity or
price commitments. Which of these many options makes sense in any particular context is
often the key to determining the ‘bankability’ of a particular project.
The risk profile of a project will itself have a number of consequences in relation to
the structuring of the project company’s overall debt and equity arrangements. For example,
power-generation projects are often awarded to sponsors by utilities or governments (who
generally lower the generator’s risk profile by guaranteeing to purchase both the project’s power
capacity and actual generation) through a competitive tendering process and are structured
to ensure the lowest electricity tariffs possible. This is achieved because the lower-risk profile
allows lenders to accept a higher leverage ratio and relatively low debt service coverage ratios,
and agree to both longer maturities and lower margins. These features serve to offset the
effects of the lower tariff and so preserve healthy equity returns for the sponsors. At the same
time, however, low debt service coverage ratios and higher gearing mean that the ability of
these projects to absorb the risk of increased costs or reduced revenues is limited, with the
result that the parties will focus more attention on the risk allocation effected through the
project contracts.
Many other projects are designed to produce products or commodities, such as oil, gas
and other minerals, sold on global markets where, for well-positioned companies that are able
to access global markets, profit levels may be significant. The sponsors may then be prepared
to fund the project with a greater proportion of equity in exchange for increased contractual
flexibility in the management of the business. As a result, the approach to risk adopted in
various project contracts is often less comprehensive than in other projects, the consequence
of this being that the lenders to such projects are likely to require more robust overall project
economics in mitigation.
IV ENVIRONMENTAL AND SOCIAL ISSUES

The construction and operation of a project will have an environmental and social impact on
the project’s locale. Lenders will generally require, at a minimum, that the project company
undertakes to comply with all applicable domestic environmental and social laws and
regulations. Credit institutions financing a project may also require compliance with World
Bank or similar standards, including the voluntary set of guidelines known as the Equator
Principles, not only to insulate the project from the risk of penalties and other sanctions, but
also to preserve the lenders’ reputations. Among other things, those standards require the
development of, and compliance with, an agreed environmental and social management plan.
The principal areas of focus include labour and working conditions, pollution prevention
and abatement, community health, safety and security, biodiversity conservation, sustainable
natural resource management, and protection of indigenous peoples and cultural heritage.
Virtually every large-scale project seeking access to the financial markets will therefore need
to evidence a high level of environmental and social compliance.
4
V THE CONCERNS OF SECURED CREDITORS

The willingness of a lender to extend credit to a project is likely to depend on the degree
of comfort it takes from the viability of the underlying security ‘package’. Lenders focus
particular attention on whether local law recognises the rights of secured creditors and
whether their claims will be dealt with equitably in circumstances where the project company
becomes insolvent.
Not all countries have express insolvency regimes, and those that do often have very
different approaches when it comes to balancing the interests of debtors and creditors (and
in particular secured lenders).
One of the principal reasons that a lender takes security over a borrower’s asset is to ensure
that, if its loan is not repaid when due, it will be entitled to require the sale of the underlying
asset and the application of the resulting proceeds in repayment of the loan (to the exclusion
of the borrower’s unsecured creditors). It is likely, however, that the process of enforcing
security will be expensive, disruptive to the operation of the project, time-consuming and
uncertain in outcome. In practice, therefore, enforcement of security is something of a last
resort. In the context of project finance, it is probably correct to say that the more practical
reason for a lender taking security is to maximise the strength of its bargaining position as
against other interested parties (notably the project’s trade creditors, the host government and
the project company’s shareholders). The fact that the lender is entitled to enforce its security
(with limited obligations to share the benefits of the enforcement with others) ultimately
means that holding security puts it in the best possible position from which to negotiate
suitable restructuring arrangements for the project.
Whether a security interest has been validly created and whether it has priority over
competing interests are questions that are, in most instances, governed by the law in which
the charged assets are located. While the bulk of a project company’s assets will for these
purposes be located in the jurisdiction of the project, its bank accounts and receivables may
well be located elsewhere, as may its shares (or the shares of its holding company).
There are often problems with taking security in jurisdictions where there are no clear
procedures for the creation and perfection of security (such as registration or filing) or where
the enforceability of ‘step-in’ rights granted to the lenders is uncertain. The location and
nature of the asset may also be such that the efficacy of the security is uncertain, orbiting
satellites and undersea pipelines being particular cases in point. Uncertainty may also arise
where the law of the jurisdiction in which the asset is located lacks uniformity. Where
the cost of filing or registering security is significant, sponsors may regard the creation of
security (particularly in jurisdictions with little experience of complex financings) as unduly
burdensome and argue that the practical value of the security does not warrant the related
expense. Although in some cases it may be possible to negotiate exemptions from the rules
giving rise to these costs in the underlying concession agreement or enabling legislation,
the extent of the security granted will be a matter for negotiation between the lenders and
the sponsors.
The efficacy and enforceability of security interests are also likely to be affected by
the relevant insolvency regime. Whether the court, trustee in bankruptcy or administrator
(or equivalent officer) is bound by a grant of security (or is able to prevent or delay its
enforcement) must be assessed in light of the applicable insolvency law (or, where the charged
assets are located in a number of jurisdictions, the insolvency laws of all those jurisdictions).
Insolvency laws vary significantly, from those that readily recognise the rights of secured
parties to take possession or force a sale of charged assets, to those that permit debtors to
5
retain possession of its assets pending a court approved plan of reorganisation, to those that
provide very little guidance as to how the courts would treat the rights of a creditor relative
to an insolvent debtor.
VI HOST COUNTRY RISK FACTORS

i Location
The one feature of a project that no amount of structuring can avoid is its location. The
political, judicial, economic and social stability of the country in which a project is situated
will generally be of some concern to both investors and lenders. At the extreme, structuring
a deal in an active conflict zone is likely to be challenging (at best). However, there is much
that can be done to mitigate the levels of political risk encountered in most countries, and
in a case where a project’s lenders and investors have particular concerns as to the stability
of the host state, they may be able to address their concerns through political risk insurance
and credit support.
When a project is located in an impoverished or developing country, the lenders and
investors to the project will often seek to mitigate the resulting risks through the involvement
of multilateral and other public sector lending institutions whose participation may act as
a deterrent to adverse interference by the host government for fear of cutting off access to
international credit sources. Where this is the case, these institutions will seek to confirm that
the project satisfies their specific development and other policy mandates. For example, they
may need to determine that the project benefits the local population and not just a limited
number of well-positioned investors and government officials. To accomplish this, they may
require that diligence be undertaken to confirm the absence of inappropriate payments
related to the award of the project’s licences and concessions. They may also seek clarity on
how the host government will invest the tax and other revenues derived from the project.
ii Corporate governance
Because host governments often require that project companies be established under local
law, investors will wish to pay particular attention to how that law affects the governance
of the project company. Crucially for investors, the project company’s ability to distribute
the project’s surplus funds to its shareholders must not be unduly constrained by corporate
law and local accounting practices. Foreign investors who participate in the equity alongside
local investors will wish to be certain that their rights in relation to the control of the project
company will be respected. Lenders will also need to assess the degree of flexibility that local
law allows in such matters, not least because, in the worst-case scenario, they may need to
replace the original investors in the project.
iii Regulation and authorisations

The construction and operation of a project generally requires the project company to obtain
a broad range of permits and consents in relation to matters ranging from environmental
and social impact to land use, health and safety and industrial regulation. The analysis of the
risks arising from the need for permits turns, in the first instance, on the identification of
the consents that will be required and ensuring that they have been issued (or will be issued
in the ordinary course without undue expense, delay or conditionality) and that any permit
conditions can be complied with. Also important in this context are the related questions of
6
whether an enforcement by a secured lender of its security interests in relation to the project
will (or could) trigger a revocation of a permit and whether a person to whom the lender sells
the project on an enforcement of its security would be entitled to the benefit of the permits.
Many projects operate in regulated industries that require ongoing compliance with
detailed laws and regulations. The vast majority of countries, whatever their level of economic
and political development, impose regulatory oversight on, at least, their public utilities
(power, water and telecommunications) and infrastructure sectors, and may also extend
regulatory oversight to their natural resource sectors. Regulation can encompass a licensing
regime, under which permission to operate is granted to specified companies or classes of
companies and may (and often does) extend further to dictate the manner in which a project
company is to operate and, in many cases, the prices it may charge for its services or output.
The manner in which regulation is imposed can vary significantly. For most projects, the
analysis of the regulatory environment involves two basic areas of investigation: to determine
the rights that are granted to, and the obligations that are imposed on, the project company;
and to assess the risks associated with the introduction (over the life of the project) of changes
to the regulatory regime that could operate to the detriment of the project company, its
investors or its lenders.
iv Taxation
All projects are subject to some form of taxation, and the tax regime will generally have
a significant impact on the project’s economics. The project company is likely to be subject
to corporate taxes, often calculated on the basis of the profits that it generates. It may also
be required to account for value added or sales taxes. In some cases, it may be obliged to
pay royalties to the host government calculated on the gross value of its sales or of raw
materials that it uses in its production processes. Stamp taxes, registration taxes and notarial
fees may also be payable. The laws of the host state may also require the project company
to make withholdings on account of tax on interest and dividend payments it makes to
overseas lenders and shareholders. Where interest payments made by a project company to
its lenders attract withholding tax, the project company will usually be required to gross up
the payments to the lenders so that they receive the amount of interest that they would have
received in the absence of the withholding tax. In such cases, it is likely that some degree of
relief from the effects of the withholding requirement will be available under an applicable
double taxation treaty or the domestic tax laws of the country in which the investors or
lenders are situated, with the result that the financing documentation will be structured to
minimise the impact of the withholdings regime.
v Duties and trade restrictions

Whenever goods or individuals cross a border, they will be subject to the laws of both the
country they are leaving and the country they are entering. Key concerns include the project
company’s ability to import into the host state key goods, equipment and raw materials
and to employ expatriate managers, engineers and labour. Although customs restrictions are
often limited to the imposition of simple import duties, in some cases they extend to an
absolute prohibition on imports. Likewise, immigration laws usually permit the employment
of qualified expatriates on a limited basis, but they are likely to prohibit the employment
of expatriates without particular skills or qualifications and to require the training and
employment of local nationals. In some cases, the project company may find that restrictions
7
apply on the export of its output, either generally or to specific destinations. The project
company may, however, be able to negotiate exceptions to import, immigration and
export restrictions.
vi Legal certainty and change in law

Countries with well-developed laws and an established and independent judiciary are often
more attractive jurisdictions for investment than countries with little clarity as to their
laws or certainty as to their application. Concerns over legal and regulatory certainty are
perhaps more acute in relation to projects operating in regulated industries or those that
have significant social or environmental impact, but the concern is common to all projects,
wherever located. Newly independent countries, in particular, may seek to address this
through regional harmonisation of disparate legal systems on the basis that so doing provides
a means to attract foreign direct investment, eliminate barriers to cross-border trade and
provide a platform that improves their chances of competing more effectively on the world
stage. Although jurisdictions with more developed legal regimes and stable judiciaries may
afford investors with a somewhat higher degree of legal certainty, investors in any jurisdiction
have to acknowledge that it may not always be possible to predict how specific problems or
conflicts will be resolved in practice.
Project finance loans are generally repaid over decades. Notwithstanding whether
initial certainty may be achieved as a result of the assessment of the host country’s laws,
these laws are likely to change during the life of the project; it is an accepted prerogative of
sovereign states to change their domestic laws on a largely unfettered basis. For example,
public policy may evolve as governments change; where regime change is frequent and policy
objectives vary widely, public policy will itself be volatile. Governments may also impose
increased environmental compliance requirements on companies that operate within their
borders to comply with new treaties and similar obligations (or even simply to improve their
reputations). As their economies develop, host governments may be able to extract more
favourable terms from new investors, and they may find it tempting to seek to renegotiate
agreements reached earlier.
In circumstances where there is significant uncertainty as to the stability of the legal
or regulatory regime, specific commitments from host governments may be enshrined in
national law through some form of enabling legislation, thereby allowing greater certainty
that the relevant commitments will have precedence over competing and often inconsistent
laws and regulations. In other cases, it may be appropriate for the host state to enter into
direct contractual undertakings with the project company (and, in some cases, its principal
investors, including its lenders) for the purpose of providing appropriate investor protections.
Governmental commitments vary from legally binding undertakings, the breach of
which will entitle the project company (or its investors) to damages or other specifically
agreed levels of compensation, to ‘comfort letters’ that afford little, if any, certainty of
remedy. A host government might also seek reciprocal undertakings from the project
company, including commitments to (1) provide adequate service during the term of the
agreement; (2) observe relevant safety and environmental standards; (3) sell its output at
reasonable prices; and (4) particularly where the project company is under an obligation
to transfer its assets to the host state at the end of the concession period, carry out prudent
maintenance and repairs so that at the end of the concession period the state (or the applicable
state-owned entity) will acquire a fully operational project. Breach by the project company
of such reciprocal undertakings will invariably give rise to specific penalties, including those
8
involving forfeiture of its concession rights or termination of supply and offtake contracts
with relevant government bodies. Ideally, these agreements should include provisions that
recognise the role of lenders (including an entitlement to receive express notice of defaults
on the part of the project company and cure and ‘step-in’ rights), but in cases where it is not
possible to ensure the inclusion of such provisions, it is important that the agreements do not
contain terms (such as prohibitions on assignments by way of security and change of control
termination rights that could be triggered by an enforcement of security) that are likely to
operate to the detriment of the lenders.
VII GOVERNING LAW ISSUES

Although most contracts describe the terms of a transaction reasonably clearly, the manner
in which contracts will be interpreted or enforced is likely to differ (sometimes significantly)
from one jurisdiction to another. The project finance lawyer’s analysis in this context will
involve an examination of (1) the effectiveness of the choice of the law of a particular
jurisdiction to govern the various project agreements; (2) the extent to which contracts
governed by the law so chosen are legal, valid, binding and enforceable; and (3) the choice
of the forum for the determination of disputes arising from the transaction (including the
extent to which judgments or arbitral awards that emanate from that forum will be enforced
in other relevant jurisdictions).
The knowledge that the transaction is governed by the law of a familiar jurisdiction can
be a source of significant comfort to investors and lenders. In the case of finance documents,
this most frequently entails an election between English law and New York law. A preference
of one over the other is not as substantive as it might appear. Each has well-developed case
law providing clarity in relation to the way in which the law is likely to be applied in any
given circumstance, and the material elements of each that are relevant to the enforceability
of customary finance documents are broadly similar. However, lenders may have strong views
in this area, particularly based on familiarity with customary forms and terminology.
In contrast, the choice of law can have particular significance in relation to a range
of commercial contracts. For instance, parties may find it attractive that Article 2 of the
Uniform Commercial Code as in effect in the state of New York allows key price terms in
contracts for the sale of goods and certain commodities to be left open for resolution by
future agreement among the parties (in the absence of which through resolution by a court).
In contrast (subject to various exceptions), English law may find that such a contract fails
for uncertainty.
In some circumstances, there is no real choice of law. Conflict of law principles, such
as the doctrine of lex situs (i.e., the rule that the law applicable to proprietary aspects of
an asset – whether tangible or intangible – is the law of the jurisdiction where the asset is
situated), will very often dictate which law is to be applied for specific purposes (notably
the transfer of title to, and the creation of security interests in, the assets). Although there
may be no particular legal theory that stipulates that project contracts giving rise to personal
claims (rather than proprietary interests) should be governed by the law of the jurisdiction
in which the project is located, it is often a requirement of the host government that its own
domestic law be specified as the governing law of such contracts (and in particular those with
national agencies).
Not all contracts are in all respects enforceable in accordance with their terms. There
will often be mandatory provisions of law that override the terms of the contract. Many
9
countries have civil or similar codes whose provisions will apply to a contract notwithstanding
its express terms. Public policy considerations in a particular jurisdiction may also invalidate
a provision in a contract that would be fully effective under the law of another jurisdiction.
Legal uncertainty is likely to be more pronounced when the country in which the project is
located has no tradition of reported case law (making it more difficult to establish how the
rules are applied by the domestic courts in practice) or no system of judicial precedent, or
where domestic law prohibits fundamental aspects of the transaction (a notable instance of
this being obligations to pay interest being rendered unenforceable in some jurisdictions by
virtue of general principles of shariah law).
VIII CHOICE OF FORUM ISSUES

The selection of a forum for the hearing of disputes in connection with a project may also
have important implications. Pertinent questions in this context include:
a Will the forum be neutral in its decision-making?
b Will the chosen forum apply the law specified by the parties in the contract?
c Will the outcome differ if it does not?
d What evidential or procedural rules apply in the forum if the contract is silent in
relation to such matters?
e Does the position change if the contract stipulates that hearings should be conducted
on the basis of particular evidential or procedural rules?
f Will judgments or arbitral awards be enforced in the home jurisdictions of the parties
to the dispute?
When considering the choice of forum, another important question is whether the dispute
should be the subject of judicial or arbitration proceedings. There are obvious advantages to
using the courts of a country with long histories of case law and a binding (and comprehensible)
precedent system, and established procedural laws and unbiased judicial oversight are things
that provide comfort to sponsors and lenders alike. In many jurisdictions, the courts can
compel parties to disclose facts or documents and may be able to order interim relief, such as
injunctions that prevent a party from moving assets out of the jurisdiction. Further, because
arbitration is a product of contract, only parties that have specifically consented to the
arbitration of a dispute can be compelled to proceed in that forum.
On the other hand, the speed and privacy of an arbitral process can be a significant
benefit to some or all of the parties, and a specially designated arbitrator may well be better
equipped to address complex technical issues than a judge with more general skills. Moreover,
an arbitral award will, in some instances, be more likely than a judgment to be recognised
and enforced in the home jurisdiction of the party against whom it is made without there
being a review on the merits of the dispute. International treaty arrangements, such as the
1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the
New York Convention), call for Member States to give effect to arbitral awards made in other
Member States. However, there are often sufficient exceptions to even treaty-based rules that
mean that awards can be reopened when they are being enforced.
Governmental entities may also be immune from proceedings before the courts of the
host state or of other states (or both). Their assets may also be immune from the normal
processes that apply in relation to the enforcement of judgments and arbitral awards, with
the result that a successful judicial or arbitration proceeding can prove to be a distinctly
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hollow victory. This immunity is widely acknowledged as a matter of international law, but
there may be exceptions to its application. For example, a state entity acting in a commercial
capacity may not benefit from immunity from suit or even enforcement against assets used
in a commercial capacity, and under the law of many countries it is possible for a state entity
to waive its rights to immunity.
IX CLOSING THE DEAL

The principal role of project finance lawyers, once they have identified and analysed the various
risks applicable to the project, is to mitigate those risks so far as practical by documentation
in the context of the negotiating leverage of the parties. This requires a combination of skills:
the ability to negotiate artfully and effectively and the ability to draft sensitively (among
other things, being able to retain a view of the bigger picture when crafting the detail and
understanding which points really matter).
Project finance lenders will expect to manage the risks that they face through the credit
documentation. There is no doubt that project finance loan agreements are characterised by
a wider range of conditions precedent, representations, undertakings and events of default
than other extensions of credit. Although lenders will be persuaded that these help minimise
risk, sponsors may consider them to be unwarranted intrusions on their management
capabilities and discretion. Finding a way to balance these competing perspectives is perhaps
an additional aspect of the alchemy of project finance.
Project finance lawyers must also organise the documentation process and ensure that
each of the parties understands sufficiently the issues in question. Closing a project finance
transaction is often as much about process management as legal analysis and drafting. With
assets, sponsors, lenders and their respective advisers based in a broad range of countries and
time zones, organisational challenges can be significant. Managing the logistics of complex
negotiations across the globe requires a mastery of communications technology. Although
English is the dominant language of project finance, it can also be a significant hindrance to
the closing of a deal if the lawyers responsible for orchestrating the closing are not conversant
in at least some of the native languages of the key project participants.
The ability of international counsel to communicate with local counsel in a broad range
of jurisdictions is absolutely crucial to an international transaction. Local lawyers who have
trained at international firms will often be adept at conveying legal issues in terms that are
readily understood by their international counterparts. However, guidance from books such
as this is of particular value in ensuring that all of the lawyers on all sides of the transaction
have a common view as to the key legal issues that must be considered by the parties.
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Chapter 2
DISPUTE RESOLUTION IN
CONSTRUCTION PROJECTS
Robert S Peckar and Denis Serkin1
Disputes are as integral to the construction process as the preparation of plans and the
placement of concrete. However, most industry participants yearn for the reduction – if
not the elimination – of project disputes. They correctly argue that disputes disrupt and
often irrevocably poison the good working relationships between project participants that
are essential to project success. Furthermore, disputes take on a life of their own and usually
result in further exacerbation of the underlying project problems, themselves causing delays
and costs. Certainly, the dispute resolution processes involve expenditure and diversion of
valuable company resources – attention, time and cost. Disputes are part and parcel of many
major international projects and, as a result, on some of these projects the parties actually
include allocations in their budget for this eventuality. The question then becomes how
does one prepare for the eventual dispute, but, more importantly, how does one control the
resolution of disputes and protect the best interests of the project?
I CONSTRUCTION DISPUTES IN DOMESTIC AND INTERNATIONAL

PROJECTS
Complications are a normal, everyday component of the construction process; indeed, it is
the constant challenge of diverse problems on construction projects that makes the process
as exciting as it is. The people who lead projects tend to be smart, tough, demanding and
self-confident. The problem is that each party has such a person in charge and the inevitable
confrontations between these titans, much more often than not, significantly complicate any
possibility of reaching an amicable resolution.
Resolving disputes at the project level typically prevents negative impacts on both
schedule and budget. When disagreements escalate from ‘problem’ to ‘claim’ and then to
‘dispute’ status, those potentially valuable project-level benefits are lost to processes that have
little to do with the construction process and tend to take on a life of their own.
On an international project, where the strong people who represent their companies
come from different cultures, speak different languages and consider contractual issues
against the backdrop of different legal systems, the challenge to work through problems to
solution at the project or even at the executive level is challenging, but critically important.
1 Robert S Peckar is a founding partner and Denis Serkin is a partner at Peckar & Abramson PC.
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Dispute Resolution in Construction Projects
II SOLVING PROBLEMS AT THE PROJECT LEVEL

The best place and time to resolve claims or even potential claims is at the project level.
However, given the typically strong personalities involved, disagreements among them can
often be difficult to resolve.
On projects where the parties fail to regularly engage in constructive and pragmatic
discussions and thereby resolve issues at the field level whenever they arise, unsolved
problems tend to quickly accumulate in substantial numbers. The larger the number and
value of unresolved problems, the greater the amount of money in dispute, the more difficult
it becomes for the parties to resolve matters amicably without a formal dispute resolution
process. Hence, it is extremely important to construct a well-thought-out dispute resolution
mechanism that will, if necessary, effectively, quickly and economically resolve disputes while
permitting the parties an opportunity to cool down and reassess.
III THE ROLE OF ALTERNATIVE DISPUTE RESOLUTION IN EARLY

PROBLEM-SOLVING AND DISPUTE AVOIDANCE
Fortunately, the participants in international construction projects are typically sophisticated
and not afraid to use the various dispute resolution techniques that have proved to be effective
in achieving an early solution to problems – processes that are timely, cost-effective and
provide added value. These processes fall within the moniker of ‘ADR’ (alternative dispute
resolution). The ‘alternative’ in ADR refers to alternatives to arbitration and litigation. These
processes may occur as early as during pre-construction, and may occur as late as the eleventh
hour before formal hearings are held in arbitration or court. To address concerns of cost and
efficiency, most of the national and international arbitral bodies have adopted expedited
resolution processes for both small and large projects. The key is to understand the many
available options and properly match them to the specifics of a particular project.
IV THE GROWTH OF ADR

It is true of many industries, but especially of construction, that anyone legitimately
involved in major domestic and international projects has, at least once, participated in an
extensive and costly dispute resolution process. This is especially so in the international arena.
The mandatory resolution of disputes in the employers’ national courts or in arbitration
administered by local arbitration providers of the employers is often not a preferable venue
to resolve the open issues. In some jurisdictions, proceedings in the local courts can be very
costly and may take on a life of their own. Therefore, one would expect the rise in the use of
ADR processes around the world. Sadly, while ADR is being used more often each year, in
many jurisdictions it has not even broken through the surface.
The use of arbitration rather than local litigation is growing. The International
Chamber of Commerce’s (ICC) International Court of Arbitration announced that in 2016 it
administered the highest number of new cases in its existence – a growth of 17 per cent
from 2015. The new matters involved over 3,000 parties from 137 countries. ICC noted
a significant increase in the number of parties from Latin America (15 per cent increase),
Asia (22 per cent increase) and Africa (50 per cent increase). Following an extensive outreach
programme, the Permanent Court of Arbitration at The Hague saw its caseload grow by
7 per cent in 2016.
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Mindful of the rising demand, in November 2016, in addition to introducing its

expedited rules, ICC also unveiled a range of new administrative services that its employees
can and will provide to help with arbitral proceedings. Some of the new services include
helping organise transparent proceedings, as well as setting up the actual hearing itself.
However, for the following ADR mechanisms – which have reliably obviated the need
for litigation or arbitration – although the growth in jurisdictions accustomed to their use
continues to increase, local acceptance continues to lag.
V ADR MECHANISMS
i Partnering
Despite its name, ‘partnering’ does not create an economic or legal partnership among
the project participants. Rather, it is a process led by a trained neutral facilitator in which
the representatives of project participants (e.g., the employer, the main contractor, the
professional design team) gather together for a day or perhaps more with their counterparts to
create personal relationships and understandings that should result in collegiality and dispute
avoidance, notwithstanding the different responsibilities and risks that each has in the project.
Although partnering was born in the United States, it is a process with enormous potential on
international projects where culture, language, personal history, business conduct and other
essential differences can lead to disharmony.
The parties will typically adopt a project ‘treaty’ or ‘credo’ in which they express their
dedication to the goals they set to work together in the best interests of the project and to
avoid disputes. That document is signed by each of the participants and posted in their
project and regular offices. There have even been circumstances when a partnering ‘logo’
has been adopted. From a practical perspective, the best value and results are achieved
where participants meet on a regular basis to review past and current project issues. These
meetings, if properly guided, will result in increased collaborative effort and camaraderie
among the participants. Ultimately, success is measured by issues resolved or discussed and
prepared for future resolution. An added value of partnering is the end-of‑project review and
lessons-learned evaluation to improve future processes.
The process of partnering should result in fewer disputes when properly carried out
(with a trained professional facilitator). There is anecdotal evidence of partnering being
utilised on complex major projects that were closed out without a single dispute. There are
also examples where this process was not conducted in a serious way and little benefit was
gained. For the international project, partnering’s potential value is clear.
ii The decision-tree analysis

Whether the result of partnering or otherwise, each project should benefit from the
establishment of a ‘decision tree’ in which the key project participants set out the names of
their decision-makers at project level, project executive level, company executive level and
then the chief executive officer of the company, on the understanding that resolution of
problems should be made at the lowest possible level. In the absence of such resolution within
a stated time, however, the problem-solving responsibility shifts upwards to the next level for
a stated time until it reaches the level of the company CEO. This process has enjoyed success
for a number of reasons:
a decision-makers at each level are identified at the beginning of the project;
14
b decision-makers at each level tend to get to know each other before they are confronted
with a problem to solve;
c decision-makers at each level are reluctant to see problems go to a higher level as many
such situations could reflect poorly on their performance;
d the mere imposition of time limits at each level assures focused prompt attention rather
than deferral to a later time (which often leads to no resolution at all);
e the successful resolution of problems becomes part of each participant’s responsibility,
rather than the creation of claims as a measure of success; and
f the successful resolution builds upon itself and creates an atmosphere of success that
benefits the project.
iii Alliancing
Alliancing is the delivery method pursuant to which the diverse key parties to a project
create a project team from among their best people with the most important experience and
challenge that team to operate with the singular purpose of on-time, on-budget completion
of a quality project. It has its genesis in Australia and has enjoyed some success there and in
other parts of the world. While project participants can readily see advantages to participating
in an alliance, it requires a major leap of faith on the part of the employer as the traditional
separation of responsibilities with their attendant contractual protections must yield to the
more collaborative model in which greater trust must be placed in the alliance team to achieve
quality performance at the best cost based upon the best interests of the project. While there
will likely be a project budget that may not be exceeded, the team members are not limited
to fixed-price contracts for their work and the project budget will be utilised by the team
members as they decide collaboratively. Thus, the selection of the alliance team members is
perhaps the most important decision that the employer can make as they must not only bring
leading technical expertise to the table, but they must be capable of working effectively in
this collaborative team arrangement, placing the interests of the team and the project ahead
of what would normally be their own interests.
Because of the nature of the contract between the project employer and the alliance
team, and because of the collaborative relationships that must be formed by the team members
to work together to achieve the project goals, this model encourages the resolution of any and
all disputes among the project participants in a prompt and business-like fashion, rather than
through the customary dispute avoidance and dispute resolution techniques relied upon by
parties in traditional contractual relationships. This result is enhanced by the presence of an
alliance leadership team with each participant represented by a senior representative and the
inclusion of the employer’s senior representative as well. While alliancing is not yet a standard
practice with clearly defined parameters, one parameter that has been used with success is
the requirement that decisions among these senior representatives must be unanimous –
a feature that, of course, places the interests of the project, rather than those of particular
team members, at the very core of all discussions and (with unanimity) places aside blame for
issues in favour of solutions. Disagreements, even acknowledged mistakes, are solved, and not
placed into a dispute resolution context.
iv Dispute review boards

The use of dispute review boards (DRBs) has become more prevalent. Indeed, in some of the
more complex projects where there are multiple layers of significant legal exposure, more than
one DRB may be in place, dealing with specific contractual relationships.
15
The DRB model can be whatever the parties want it to be. However, a typical model
would look something like the following:
a Two parties each select a member of the DRB who may be independent and neutral
(independence and neutrality are preferred, even for the party-appointed members).
b Those two appointed parties select a third who must be independent and neutral.
c The DRB will meet either at the call of either party, or periodically, to hear and resolve
disputes between the parties that the parties have not resolved themselves. For best
results it is preferable to keep the DRB members apprised of project developments
through regular, planned updates and, if possible, site visits.
d The DRB ‘hearing’ is usually informal and may or may not include attorneys; the
purpose of the hearing is for the DRB panel to understand the dispute sufficiently to
render a decision.
e The DRB will promptly render a decision. That decision will be binding on the
conduct of the parties while the project is under construction, but not binding upon
their legal rights. In other words, if the DRB directs the employer to pay the contractor
additional compensation for claimed extra work, the employer must do so; however, at
the conclusion of the project, the employer may assert that it had no legal obligation to
make that payment and seek reimbursement from the contractor. Experience indicates
that few project participants challenge DRB decisions at the end of the project simply
because there have been no unresolved disputes, and the incentive to go to arbitration
or litigation, with all the accompanying disruption and expense, is far less attractive
under those circumstances. Additionally, if the DRB functions as it should, its decision
is likely to be respected by the parties.
f The parties can also ask the DRB to issue advisory opinions to engender project‑level
negotiation and resolution.
The use of DRBs has become so prevalent that the Dispute Review Board Foundation – an
organisation to promote the use of DRBs and advance the technique and quality of DRBs
– was formed. It has published a practices and procedures manual, and holds conferences
and seminars, maintains a database of members who offer their services for DRBs and offers
counsel to those employers who might consider this dispute avoidance technique.
v Planned early negotiation

Planned early negotiation (PEN) is unique in that the parties agree to negotiate at the outset
instead of focusing on contentious resolution. This approach is atypical because offering to
negotiate at an early state of a dispute is traditionally considered a sign of weakness. Parties
committed to PEN agree to forgo the typical posturing and instead agree to focus on early case
assessment, business concerns, costs and time, and ways to resolve disputes (i.e., mediation,
a neutral or a conciliator). To avoid derailing the process, the parties are best served by
entering an agreement to negotiate that should set forth the parties’ desire to negotiate and
the steps and mechanisms the parties will utilise to achieve that goal. Key to a successful PEN
process is the parties’ understanding of their respective positions as well as a joint effort to
identify potential third-party claims and similar other obstacles to a negotiated resolution.
vi Mediation
Mediation is an extremely valuable process, which, while not adjudicative, is basically an
enhanced negotiation aided by a neutral facilitator known as the ‘mediator’. The mediator
16
assists the parties in their negotiation and helps them achieve resolution and closure. The
key advantage of mediation is that the process focuses on finding a practical resolution of
a dispute as opposed to adjudicating the parties’ contentions and rights.
Unless agreed otherwise by the parties, a mediator makes no rulings and has no power to
command that the parties act in a particular way. The process is voluntary and, when properly
established, is completely confidential so that what is said by the parties during the process
is not allowed to be repeated in arbitration or litigation. Often mediation is designated as
a prerequisite to arbitration to provide a non-contentious resolution mechanism before the
parties harden their positions.
With the soaring costs of litigation, even in arbitral forums, mediation is becoming
more important as parties seek to avoid contentious dispute resolution when possible. In
2014, the American Bar Association (ABA) Section of Dispute Resolution and ICC both
made substantial efforts to promote mediation. The ABA held meetings and conferences
around the world bringing together international practitioners, government officials and
mediation and arbitration professionals to discuss and further encourage mediation in the
international setting. Early returns show that parties are slowly starting to utilise mediation
services offered by the various dispute resolution organisations.
For its part, ICC renamed its ‘Amicable Dispute Resolution Rules’ to ‘Mediation Rules’,
and issued Mediation Guidance Notes, which, as the name suggests, ‘provide guidance on
issues that deserve attention when choosing and organising mediations’.
The new mediation rules complement the 2012 revision to ICC’s arbitration rules
that encourage arbitrators to help parties always consider different settlement scenarios. The
Mediation Guidance Notes continue this trend and encourage arbitrators to actively guide
the parties towards non-contentious resolution of disputes.
In the international construction world, the fact that parties speak different languages
and bring different cultural attitudes and prejudices (particularly as to the obvious need for
a commitment to compromise) adds to that scepticism as one or more parties refuse to believe
that a mediator not from their country and culture can lead them fairly through a negotiation
process; many reject mediation because they refuse to accept that what they tell the mediator
in confidence will remain in confidence. Another factor to consider when agreeing to
mediation is the good faith of the parties participating in the process. Because of mediation’s
non-binding nature, the parties are not pressured to be fully prepared, as in arbitration or
DRB proceedings. Hence, it is especially important that parties mediate, and prepare for
mediation, in good faith to avoid the scenario where one of the participants chooses to treat
mediation as a mere formality and not as an opportunity to resolve the dispute.
vii Ad hoc ADR

An ad hoc arbitration is a creation of the participating parties. It can be modelled on and
follow the rules and procedures of a particular ADR organisation, such as ICC, but without
that body’s actual administration and oversight – or the participants may choose their own
script. For example, the parties may determine the number of arbitrators and the process
for appointing the arbitrators, as well as the conduct and procedure of the arbitration, by
looking to a particular organisation’s rules and procedures. The immediate, and most obvious
benefit of the ad hoc process is the lack of a – generally substantial – filing fee and the
subsequent maintenance fees. Naturally, this process places a heavy burden on the project
participants to adequately describe the ADR mechanism in such a way so that the locale,
the composition or identity of the tribunal, the applicable law and procedures, as well as the
17
method for negotiation of arbitration fees, are adequately encapsulated in the underlying
contract documents. The ad hoc approach places a significant burden on the arbitrator, and
to some extent the parties, to make sure that the proceeding is timely and adequately and
thoroughly administered – functions usually handled by an ADR organisation’s professional
staff. To that end, in February 2017, the Chartered Institute of Arbitrators (London) issued
recommended ad hoc arbitrator guidelines to address the drafting of the ad hoc agreement
itself, as well as other considerations such as costs, confidentiality and bias.
VI CONCILIATION
Conciliation is an ADR mechanism whereby the parties retain the services of a conciliator.
The conciliator, unlike a mediator, will typically work with parties individually in an attempt
to frame relevant issues and come up with a list of ranked, desired outcomes to be reconciled
in a negotiated settlement agreement. Typically the parties never meet face to face, which
can be helpful in an industry such as international construction, which is dominated by
strong personalities.
VII NEUTRAL EVALUATION

As the name suggests, the parties can retain the services of a neutral evaluator, either
independently or through one of the several international ADR organisations, to evaluate
their dispute. Typically, this permits the parties to quickly exchange their claims and backup
materials without fully committing to a contentious proceeding. Normally, the neutral will
evaluate the parties’ positions and issue either a binding decision with an explanation or
a non-binding report that can serve as a framework for a negotiated settlement. Alternatively,
a neutral could also be tasked with evaluating the parties’ position before providing
a recommended course of action that is least disruptive to the project and the parties’
relationship. Using a neutral is especially beneficial on construction projects where long-term
cooperation between participants is especially important. As with any ADR method, it is
important to make sure that the proceeding and any generated report are kept in confidence.
VIII ARBITRATION
The preceding sections have addressed methods designed to avoid the necessity of submitting
a mature dispute to a finder of fact, be that an arbitrator or a judge. All the foregoing methods
have in common the ability of the project participants to control the resolution of problems
without yielding that control and authority to the ultimate adjudication of a binding award or
judicial edict. However, there are some circumstances that, for a vast variety of reasons, must
turn to an arbitrator or judge for resolution. There is little point to discussing litigation in the
international construction context here as treatises have been written about litigation in each
jurisdiction. However, there are some observations that should be made about international
arbitration of construction disputes.
The complexities of international arbitration continue to expand as contracting
practices change. In this ever-developing global world of construction, many international
arbitration proceedings are faced with challenges that in some respects can make the process
more complicated, time-consuming and expensive than had been the case in past decades.
There are many reasons for this, which include the following:
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a Many project teams now comprise parties from around the globe, not only regional
participants. It would not be unusual for engineering and design to be performed by
a team of, say, US, French or British designers together with designers in the country
where the project is being built, while construction is led by a consortium of Spanish,
French, Brazilian, Italian, Chinese, Korean, Japanese, US or other lead contractors with
subcontractors also coming from diverse countries.
b Because of the variety of languages and experience brought by companies from
around the globe, it is not unusual for contracts to be some form of the International
Federation of Consulting Engineers contract (known as FIDIC), but modified by local
practice and local legal perspectives. Contractual choice-of-law clauses may designate
a jurisdiction that may have as one of its prime virtues the fact that it is not the law of
any of the participating parties. Thus, for example, it is not unusual to read ‘New York’
as the choice of law when none of the project participants is from the United States,
no less New York state. It is also not unusual for project participants to have little more
than a very generic understanding of what ‘New York law’ or the law of any other
designated jurisdiction really means in the context of disputes that may arise until they
are at the point of facing arbitration. The designation of locales for hearings that are
not home to any of the project participants or the law of arbitration may not have been
considered by the parties when the designation was made. Indeed, it is not unusual for
those locales to be different from the jurisdiction of the national law of the choice-of-
law clause. However, recently, not in a construction context, the German courts have
held that an arbitration clause providing for a place of arbitration outside the EU is void
if one of the parties is based in the EU, the activity is mainly related to EU and there is
a risk that the arbitral tribunal will disregard mandatory EU law. It is important to note
that at least one court found that a non-EU choice-of-law clause is proof that there is
a risk that the tribunal may disregard mandatory EU law. It bears noting that while this
is a recent development, at this time limited to Germany, and the cases to date do not
involve construction-related disputes, unless successfully appealed (possibly violative
of the New York Arbitration Convention), it is probably only a matter of time before
a ‘New York law’ clause may invalidate an EU project-related arbitration agreement.
Hence, it is very important to consider local laws when drafting and negotiating an
ADR clause.
c Many arbitration clauses are customised by the parties and may include party-appointed
arbitrators with no reference to their independence or neutrality; schedules for
the hearing process that bear no resemblance to reality; and references to standard
arbitration rules (such as those of ICC, International Centre for Dispute Resolution
(ICDR), London Court of International Arbitration, China International Economic
and Trade Arbitration Commission and the many other providers of arbitration
throughout the world) but with customised clauses inconsistent with those rules, which
create ambiguity or confusion as to how the process will indeed work.
d The variety of nationalities participating in the project team among whom the disputes
arise is accompanied by very different perspectives on the arbitration process and the
role of lawyers in that process can result in the creation of complex procedural and
substantive issues that interfere with the efficiency of the arbitration process.
e Arbitrators who may be selected may know nothing of the law of the choice-of-law
jurisdiction and may not speak the ‘language’ (both the idiom and the culture) of the
other arbitrators, much less the participants.
19
f Although it could be argued that the development of document management through

electronic databases, and software that can sort and facilitate analysis of documents and
other electronic communications, aids the fair resolution of project disputes, it can also
be convincingly argued that this development has added to the complexity of arbitration
as some parties seek to engage in large-scale ‘document’ and ‘communication’ discovery
within the arbitration process, and other parties passionately resist such discovery.
This confrontation over discovery is understandable in the international context,
particularly as practitioners from common law countries tend to be far more accepting
of discovery in arbitration while those from civil law countries consider broad discovery
invasive and unacceptable in arbitration. When emails are included in the scope of
what a party seeks to obtain from the other, the volume and associated costs of the
electronic data that could be exchanged and then analysed can result in very substantial
expense and the consumption of many months of discovery, all of which is part of the
debate over this issue. This issue tends to be one of the challenging complexities facing
project arbitration.
Starting in January 2016, in an effort to provide more transparency, among other things,
ICC started publishing on its website the names and nationalities of arbitrators engaged on
its cases. This trend toward greater transparency is likely to continue at ICC and other arbitral
associations. In December 2016, Canada and, in April 2017, Switzerland ratified the United
Nations Convention on Transparency in Treaty-based Investor–State Arbitration; a number
of other countries have signed this treaty, including Iraq in February 2017, but have not yet
ratified it. This trend is likely to continue as the curtain is slowly lifted on the often-secretive
arbitration process. In the long term, the drive to transparency should also shed additional
light on arbitrator ethics and qualifications – hopefully, removing doubts about the validity
of the arbitral process and reducing arbitrator challenges.
In November 2016, ICC released its expedited procedure rules. These rules automatically
apply to any dispute valued at less than US$2 million and, claimant beware, most expedited
disputes will be resolved by a single arbitrator, even if the underlying arbitration agreement
requires otherwise. Moreover, in line with ICC’s January 2016 efficiency amendments,
expedited arbitrations will have to be completed in six months.
In what is becoming a growing trend, in March 2017, the Canadian province of
Ontario enacted legislation adopting a new international arbitration law, which, among other
things, adopted the New York Convention on the Recognition and Enforcement of Foreign
Arbitral Awards. In the United States, the state of New Jersey became the tenth US state to
pass legislation permitting creation of international arbitration or mediation centres within
the state, in an effort to make it yet another place international actors can go to resolve
their disputes.
Of particular interest in 2017, and beyond, will be the impact of Brexit on London’s
position as a highly preferred venue for international arbitration.
Clearly, the nature of international construction arbitration has not in itself become
a more complex process, but rather it reflects the increased complexity of global construction
projects and the differences brought to the table by parties from different nationalities and
different legal systems. Thus, the need for the parties and their legal counsel to reflect on
the challenges specified above – as well as others that may be more specific to the particular
project and its participants – is key to creating an arbitration process that can be efficient,
effective and responsive, and one that will credibly resolve their disputes.
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Furthermore, perhaps the time has come for greater standardisation of international
construction dispute arbitration, with a single arbitration provider taking the lead in
developing well thought-out rules, procedures and administration that will respond to the
new model of the truly international project.
IX COSTS AND CONFIDENTIALITY

There are several considerations that must be taken into account before utilising mediation
and arbitration to resolve project disputes. An agreement to arbitrate by its very nature is
a contract; this means that the parties can agree and define the terms of the arbitration or
mediation proceeding beforehand.
To conduct mediation or use DRBs, the parties must retain – and pay – a neutral or
several neutrals, depending on the contract agreement and the size of the dispute, and retain
lawyers and experts in most cases. While that cost can be significant, it is generally lower than
the costs associated with formal legal processes before the courts. More important, however,
is the ‘value added’ by those processes when they successfully resolve disputes in a timely
manner that benefits the project and helps avoid the true ‘costs’ of formal dispute resolution
in the courts, which go beyond fees, and may include an adversarial relationship between the
parties as the project progresses, which in turn may lead to yet more disputes.
Arbitration, while known as an ADR process, is a substitute for litigation with many
benefits. Cost savings, however, may or may not be among them depending upon the manner
in which the arbitration is administered by the sponsoring organisation (e.g., ICC or the
ICDR), or by the conduct of the parties and their lawyers. Notwithstanding that fact, the
parties do have the advantage of being able to control these costs through their contracts. The
parties can agree to limit the number of hearings, witnesses and neutrals, and – especially –
the extent of discovery. Similarly, a contractual provision can be negotiated to determine,
based on the size of the dispute, how the aforementioned factors will be addressed.
Another issue to consider when engaging in ADR is confidentiality. While in many
jurisdictions the record of court proceedings may be obtained by a third party, because of the
contractual nature of ADR, the parties can provide that the proceeding will be confidential.
The extent of confidentiality could range from an agreement that the proceeding will not be
recorded in any way, to destruction of exhibits and documents exchanged after conclusion
of the hearings, to a full-blown confidentiality agreement binding all parties including any
neutrals. Depending on the nature of the dispute, potential benefits of true confidentiality
are numerous, especially where trade secrets, pricing information and other proprietary data
are involved.
X INTEGRATED PROJECT DELIVERY SYSTEMS AND BUILDING

INFORMATION MODELLING
The use of integrated project delivery systems, where project designs, data and other
information previously segregated among the various project team members in a manner
consistent with their contractual responsibilities and rights are now shared through a secure
website, is considered by many to be a revolution in the industry likely to reduce disputes
simply by reason of increased communication and collaboration among those team members.
Similarly, the use of building information modelling, where team members collaborate by
inputting designs and information traditionally communicated through shop drawings into
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a common database resulting in three-dimensional renditions and analyses of those locations

where elements are in conflict with each other, is also expected to reduce disputes significantly.
Notwithstanding the virtues attributed to these developments, the legal landscape in terms
of contractual and other legal responsibilities among the project participants when there is
a disagreement is largely untested in the courts and arbitration. When an employer elects to
pay for the use of such systems, with the goal of increasing collaboration and reducing or
eliminating disputes, the benefits of using an ADR process when problems and disagreements
are encountered seem all but self-evident.
XI THE ROLE OF CONSTRUCTION LAWYERS

When it is clear to a project team member that arbitration or litigation must be commenced,
there is no doubt in that party’s mind of the need to retain and be represented by legal counsel.
However, this timing hardly presents that party with the best value that can be achieved with
legal counsel: that best value occurs when legal counsel is part of the team from the very
beginning of the project, as a guide through the various options and processes set out in this
chapter, while also guiding the client with regard to the appropriate protections provided by
contractual and legal rights, so that the client is positioned to obtain the relief to which it is
entitled. Much is said and written about the unhappiness of the construction industry with
the costs associated with legal processes and thus with their lawyers; however, the simple
reality is that sound legal advice from qualified construction lawyers who are familiar with all
these processes and who share with their clients a passion for successful construction projects
is the least expensive and best use of construction lawyers.
XII CONCLUSION
As stated early on in this chapter, problems on construction projects should not automatically
develop into claims and disputes. Methods are available to assist the project team avoid this
escalation from solvable problems to formal dispute resolution processes. These methods
allow the participants, indeed with the aid of their attorneys, to maximise the opportunities
to solve problems efficiently from the first days of the project, to build on those solutions to
establish problem-solving as the norm for the project, and to focus more of their efforts on
the achievement of a successful project rather than successful arbitration or litigation.
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Chapter 3
RELATIONSHIP CONTRACTING
Owen Hayford 1
The zero-sum mentality – ‘your gain is my loss’ – that traditionally characterises the
construction industry is counterproductive. The notion that profit is made at the other party’s
expense is structurally enshrined in the conventional construction contract and generates
a variety of inefficiencies. The routine of parties pouring time and money into the defence of
their respective contractual positions creates an undesirable state of affairs for all concerned.
Even where the parties are on relatively good terms, project management costs will include,
for instance, full and detailed documentation in case of a later dispute. Where problems do
arise, they will be dealt with by allocating blame, rather than through a collaborative search
for solutions. As differences of opinion escalate into disputes, positions harden and become
entrenched. A culture of defensiveness is then ingrained into the conduct of pre-contractual
negotiations, which become an exercise in the parties transferring as much risk as they can
to the other.
Moreover, the conventional construction contract is not an instrument that facilitates
successful outcomes. The traditional fixed-price remuneration method sets the interests of
owner and contractor in fundamental opposition. This perpetuates an adversarial environment
that causes the overall quality of the project delivery to suffer. Design work is not a matter
of exploring the best solution for the client’s purposes, but rather minimising the cost of
providing a conforming solution, in pursuit of profit. The typical contractual mechanisms,
such as liquidated damages and performance security, provide only negative incentives to
perform and at most will ensure compliance with the minimum contractual requirements.
As such, there is little in a traditional contract to incentivise outstanding performance. Many
industry participants have come to the conclusion therefore that innovations in contract
drafting that seek to address this state of affairs must do more than merely reallocate risk
within the existing adversarial structure. What is required is a radical reassessment of the
nature of the relationship between owner and contractor.
From this reasoning, the concept of ‘relationship contracting’ has developed. The
expression embraces a wide and flexible range of approaches to managing the owner–
contractor relationship, based on the recognition that there can be a mutual benefit in
a cooperative relationship between owner and contractor. If the owner contractually commits
to share the benefits it receives from outstanding performance by the contractor, the contract
can financially motivate the contractor to achieve such outcomes, even if the contractor needs
to expend more money and effort to do so. This is often expressed as the establishment of
a win-win scenarios.
1 Owen Hayford is a partner at Clayton Utz. This chapter updates an earlier version prepared by Professor
Doug Jones AO.
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Relationship Contracting
There are various emanations of relationship contracting, but this chapter will focus
on three contemporary approaches: alliancing, the managing contractor and the delivery
partner model.
I ALLIANCING
Alliancing represents the high-water mark of relationship contracting in respect of the design
and construction of new infrastructure. An alliance is a collaborative structure where the parties
share risks (rather than allocate them) and work together to deliver agreed project outcomes.
The best way of understanding alliancing principles is to look first at the pure alliance
to identify its key features, and then to move from this starting point to identify and explore
several variations of the model.
Alliance contracts, in their purest form, depart from traditional contracting strategies
in three fundamental respects.
i Risk and remuneration regime

First, alliance contracts fundamentally alter the remuneration arrangements and risk allocation
found in traditional contracts, by replacing the lump-sum price with a performance-based
remuneration regime that seeks to closely align the commercial interests of the parties, by
embracing a ‘we all win or we all lose’ mentality. The remuneration of each non-owner
participant (NOP) essentially comprises three limbs:
a limb 1 – the reimbursement of the contractor’s direct costs on a 100 per cent
open-book basis;
b limb 2 – a fee to cover the profit and contribution to corporate overheads they would
expect to receive for business-as-usual outcomes; and
c limb 3 – a gainshare or painshare regime where the rewards of outstanding performance
and the pain of poor performance are shared among the owner and the other
alliance participants.
The gainshare or painshare regime is built around the project outcomes that will deliver value
to the owner. Typically these will include a target outturn cost (TOC), a target completion
date and quality measures. Other key performance indicators (KPIs) such as environmental
or safety outcomes and satisfaction of community expectations may also be included,
depending on what creates value for the owner.
If the project achieves a better than business-as-usual outcome against a KPI this will
result in a gainshare payment from the owner to the NOPs. Conversely, if the outcome
against a KPI is worse than business-as-usual, it will result in a painshare payment from
the NOP to the owner. A share of any cost underruns is usually added to the maximum
potential gainshare payment. The maximum potential painshare payment of each NOP is
usually capped at an amount equal to its fee
At first sight, the requirement for the owner to pay all the costs incurred by the NOPs
– regardless of whether the project comes in over or under the TOC – might seem to suggest
the owner solely bears the risk of increased or unforeseen costs. However, the risk is in fact
shared as any cost overruns will cause the actual outturn cost to exceed the TOC, thereby
reducing the gainshare payment or increasing the painshare liability, and hence reducing the
profit derived by the NOPs.
24
ii No blame
The second key feature of pure alliance contracting is the ‘no-blame’ regime. Each party
agrees that it will have no right to bring any legal claims against any of the other participants
in the alliance, except in the very limited circumstance of a wilful default. By preventing the
parties from recovering loss through making claims against one another, the commercial
interests of each party are best served by assisting one another to solve the problem in the
way that will maximise the performance of the project against the agreed KPIs, regardless of
who is at fault. This principle also encourages the NOPs to take sensible risks in the pursuit
of outstanding performance, without fear of being sued if they get it wrong – their downside
is usually capped at the loss of their fee.
iii Unanimous decision-making

The third key feature of pure alliance contracting is the requirement for most, if not all,
decisions regarding the project to be made by way of unanimous agreement between the
owner and all of the other alliance participants. The requirement of unanimity fosters
a culture of compromise throughout the project as well as a creative and collaborative search
for solutions, as stalemates resulting in inaction will adversely affect the gainshare entitlements
and painshare obligations of the NOPs.
As with any contractual model, there are always variations. For example, there are many
alliances that do not fully embrace the no-blame concept, or that allow decisions to be made
other than by way of unanimous agreement, for reasons that are discussed below. These
‘impure’ alliances have come to be referred to as hybrid alliances.
It is important to recognise, however, that these hybrid alliance are no less valid than
a pure alliance model. They simply reflect the fact that there is no one-size-fits-all option
when it comes to contracting strategies. What is important is that the parties understand the
nature and the limitations of the particular contracting model that they are adopting.
Alliancing can be applied to a single project or longer-term programmes covering a series
of projects. Alliancing principles can also be applied to the operating and maintenance phases
of a project or programme.
II THE MANAGING CONTRACTOR

The managing contractor is an innovative structure that shares some of its characteristics with
‘design and construct’ (D&C) contracts and others with the agency relationships seen in the
construction and project management models discussed below.
The model originated in Australia and has been used extensively by the Australian
Department of Defence as well as a variety of private-sector owners. The managing contractor
is essentially a D&C contractor who is responsible for the delivery of the project from
feasibility right through to the commissioning stage. The arrangement usually involves the
owner entering into one contract for design and construction with the managing contractor,
who then subcontracts out all of its design and construction obligations arising out of the
primary contract.
This differs from the construction or project manager model where the owner contracts
with a manager to provide management services only, and then contracts directly with each
of the D&C contractors. Under the managing contractor model, the owner has a single
25
contractual link with the managing contractor. A managing contractor is thus a ‘contractor’
in the true sense of the word as its contractual responsibility is to actually deliver the project,
not simply to manage its delivery.
Although many modern D&C contractors also tend to subcontract out many of their
obligations, the managing contractor can be distinguished from the more common lump-sum
D&C contractor in two key aspects: role and risk.
i Role
Although the contractual structure of this model imbues the managing contractor with the
responsibility for delivering the project, its key role is project management. Accordingly, the
managing contractor usually subcontracts out all of its design and construction obligations.
In this event, the only services carried out by the managing contractor itself, using its own
in-house resources, are the management and advice services provided throughout the project,
and also the provision of on-site preliminaries such as hoarding, plant and sheds.
Although the practical difference between a managing contractor and a D&C
contractor may not be immediately evident since both tend to subcontract out most of their
obligations, rather than use in-house resources, the divergence lies in the degree of control
that an owner retains over the selection of subcontractors. While a D&C contractor has
autonomy to appoint subcontractors of its choosing, a managing contractor must undertake
subcontracting in close consultation with the owner, who will retain the ultimate authority to
approve or reject tenderers. This right is consistent with the obligation falling upon the owner
to reimburse the managing contractor for costs incurred in the design and construction.
Another important difference between a managing contractor and a D&C contractor is
that the former will often provide more extensive project management and advice services to the
owner throughout the course of the project. This collaborative approach between contractor
and owner is consistent with the non-adversarial principles of relationship contracting. To
identify the instances of collaboration throughout a project, it is necessary to explain the
process by which a project is delivered where an owner decides to use a managing contractor.
The project would normally proceed as follows. First, the owner invites tenders from
potential contractors for management services and defined common site facilities. Once
a successful tenderer has been chosen as managing contractor, it will coordinate the feasibility
stage of the project, including hiring any consultants required and providing advice to the
owner where needed. If the project does not progress past the feasibility stage, the contract
may be terminated.
The next stage is the design phase; this will be carried out by the managing contractor,
from design brief through to detailed documentation. Throughout this process, the managing
contractor will consult closely with the owner, who has the final say as to all decisions made.
First, the managing contractor will prepare a design brief that must be approved by the
owner. Once this has taken place, tenders for the design subcontract will be invited. Although
the managing contractor can recommend a candidate, once again, the final decision is subject
to the owner’s approval. When the successful tenderer has completed the design, this must
again be approved by the owner before construction can begin. This procedure differs from
a turnkey arrangement, under which the owner minimises its involvement in the design
phase to avoid diluting the contractor’s design liability and affecting any warranty for fitness
for purpose.
During the construction phase, the managing contractor has a variety of responsibilities.
These will include:
26
a advising on the appropriate contract strategy for each package;

b managing the tender process and award of packages;
c engaging subcontractors to execute the construction work;
d programming and timetabling the construction work;
e supervising the construction to ensure it accords with design specifications;
f managing and administering the subcontract;
g instituting a system of cost control;
h managing community relations; and
i managing industrial relations on the project.
Consistent with the collaborative philosophy of relationship contracting, the process of

selecting construction subcontractors is performed by the managing contractor in close
consultation with the owner. Again, the owner exercises significant control over the decision
through its right to finally approve a nominated candidate; this procedure is identical to that
used in the selection of a design contractor.
The final stage of the project in which the managing contractor is involved is the
commissioning phase. During this phase, the contractor coordinates the handover of the
project and rectifies any defects that become apparent during the defects liability period.
ii Risk
The other feature distinguishing the managing contractor from a D&C contractor is the risk
it bears. The managing contractor is exposed to lower risks in terms of both cost and time
than a lump-sum D&C contractor.
In respect of cost, while a D&C contractor normally receives lump-sum remuneration,
a managing contractor is remunerated on the basis of a combination of lump-sum and
reimbursable components. Consequently, the D&C contract places the risk of cost overruns
on the contractor while the managing contractor is relieved of much of the cost risk. The
lump-sum component is designed to pay for management services and site facilities, and
allows the contractor to extract a profit. In contrast, monies paid by the managing contractor
to D&C subcontractors and consultants are reimbursable by the owner. This ‘cost-plus’ form
of remuneration therefore shifts all of the project cost risks, except those for management
services and site facilities, onto the owner. Some degree of limitation does exist upon the
contractor’s right to reimbursement to ensure that the managing contractor is not reimbursed
for any costs incurred unreasonably. Costs incurred from unauthorised variations, rectification
of defects, breaches of contract or wrongful acts by the managing contractor that give rise to
liability to third parties will be excluded from the reimbursement regime.
Time-delay risk is often also borne by the owner. The managing contractor will only
have a ‘soft’ time for completion obligation in the sense that it will be required only to
use its ‘best endeavours’ to achieve a target date. If this is not met there are no liquidated
damages payable. This risk profile is beneficial in that it eases overt commercial tensions with
the owner. However, because the contractor is paid a fixed lump sum for its management
services, it is clearly in its own commercial interest to achieve completion as early as possible
so as to preserve margins. Thus, timely completion is achieved not through an adversarial
owner–contractor relationship enforced through the threat of damages claims but instead
through the alignment of commercial interests of both parties.
The managing contractor model allows for early involvement of the contractor in the
project, with close collaboration throughout. This means that the owner is able to achieve
27
completion of the project in the manner it desires, using a spread of industry involvement
and expertise but without the need for high-level management commitment. The owner can
share some of the risks associated with a major construction project with a contractor and
can achieve maximum flexibility in determining the elements to be included in a project and
the design of those elements. At the same time, it provides the owner with the management
expertise of a contractor organisation to assist and advise upon the design and construction
of the project while planning for and remaining within a target time and cost for delivery of
the project.
III THE DELIVERY PARTNER MODEL

The delivery partner procurement model is a recent emanation of relationship contracting
that combines elements of the managing contractor, alliancing and engineering, procurement
and construction management (EPCM) models. The delivery partner model enables a client
to supplement its internal project management capabilities by engaging one or more delivery
partners to assist the client with project planning, programming, design management and
construction management services.
By engaging this expertise, the client is able, with the assistance of its delivery partners,
to adopt a ‘sophisticated-client’ procurement strategy involving direct engagement of suppliers
and subcontractors, as opposed to engaging a major contractor to manage this process. This
can result in significant cost savings and other benefits for the client.
The remuneration regime for the delivery partners is similar to the three-limb
remuneration model for alliance contracting, with reimbursement of actual costs; a fixed
fee covering profit and contribution to corporate overheads; and a gainshare or painshare
payment. As with alliancing, better than business-as-usual project outcomes (measured
against pre-agreed KPIs) will result in a gainshare payment from the client to the delivery
partners, and poor outcomes will result in a painshare payment by the delivery partners to the
client. Again, the maximum potential painshare payment is usually capped at the amount of
the limb-two fee, or a significant portion of it.
Unlike alliancing but similar to the managing contractor model, the delivery partners
are precluded from performing design and construction services, which must be competitively
tendered (unless the client specifically agrees otherwise). The client retains control or
significant input over the appointment of suppliers and subcontractors, and engages them
directly (or the delivery partner, acting as the agent of the client, engages them). In the
event a supplier or subcontractor fails to perform its contractual obligations, the client’s
remedy is against the relevant supplier or subcontractor. If the performance of the supplier or
subcontractor affects the project’s performance against the KPIs, the gainshare or painshare
payment will also be affected.
The model has been employed successfully in the context of publicly funded
infrastructure projects and was first used by the UK government in the construction of
infrastructure for the London Olympic Games, where the complexity of the project and
time-critical date for completion meant a more traditional delivery model was considered
unsuitable. A delivery partner enabled the Olympic Delivery Authority (ODA) to acquire the
necessary expertise where the ODA did not have the time to find and engage personnel of the
required calibre to meet the time requirements. A wide range of infrastructure was required:
28
key Olympic venues such as the velodrome, aquatics centre, media centre and Olympic
village, as well as 2km of new sewers and 265km of ducts for new utilities. The project was
ultimately a success, being delivered three months early and under budget.
Since then, the delivery partner model has received attention in Australia as a potential
delivery method for government infrastructure projects and is currently being used to
deliver the Woolgoolga to Ballina Pacific Highway Upgrade (W2B) – currently Australia’s
largest regional infrastructure project. Like the London Olympic venues, the W2B project is
a time-critical major project involving the duplication of approximately 155km of the Pacific
Highway to a four-lane divided road at an estimated construction cost of A$4.36 billion.
The delivery partner model was chosen for the W2B project because it avoided the
need for Roads and Maritime Services (RMS) to procure and deliver five separate packages
of works sequentially. RMS’s business-as-usual procurement models and internal resources
would have necessitated the works being divided into five packages, which could be procured
and delivered sequentially. It was considered that aggregating the works into a smaller
number of larger packages would have resulted in a small field of potential tenderers and
sub-optimal competition.
By adopting the delivery partner model, RMS expects, with the assistance of its delivery
partners (Laing O’Rourke and WSP Parsons Brinkerhoff), to achieve significant time and
cost savings through repackaging the works and tendering packages on a trade or activity
basis, responding to a logical sequencing of work across the entire project, unconstrained
by package boundaries. Essentially, with the assistance of its delivery partners, RMS has
been able to implement the sort of sophisticated-client procurement strategy that a major
tier-one contractor would implement, without having to first engage such a contractor under
a traditional D&C contract and pay the associated risk premium that such a contractor
would build into its fixed contract price for the management of the procurement and
integration risks.
The associated downside of this model, of course, is less cost and time certainty at the
time the client contractually commits to the project. The client ultimately bears these risks
without the protection that a traditional D&C contract with a tier-one contractor would
provide. This risk is mitigated, however, by the model’s alliance style gainshare–painshare
regime, which financially motivates the delivery partners to help the client manage these risks
effectively. The margin paid to the delivery partners for their services is also less than what
would have been charged by a tier-one contractor for wrapping the delivery risks, on account
of the lower level of risk borne by the delivery partners.
The delivery partner model is in its early years and it remains to be seen whether the
model will gain broad acceptance in Australia. A more extensive and defensible analysis of
the model and its potential uses and shortfalls will only be possible after the model has been
more widely used.
That said, it seems well suited to major infrastructure projects where the client wishes to
achieve time and cost outcomes that cannot be achieved via traditional procurement models,
and is prepared to embrace and manage integration and other risks to achieve these outcomes,
with the assistance of capable delivery partners.
29
IV CONCLUSION
The various emanations of relationship contracting provide an alternative to the traditional
construction contract that is worthy of consideration. By seeking to align the interests of the
parties and develop a culture of collaboration to replace one of conflict, a contract arrangement
can have the potential to deliver real commercial benefits for major project procurement.
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Chapter 4
ARGENTINA
Pedro Nicholson1
I INTRODUCTION
Since Mauricio Macri’s appointment as President of Argentina on December 2015, the
country has become increasingly appealing for foreign investors. However, because of the
previous crisis, Argentine project finance – and the relative lack thereof compared with
other Latin American countries – cannot be understood without at least a cursory glance at
its history.
When President Fernando de la Rúa took office in 1999, Argentina was mired in
a recession marked by economic stagnation. By 2001, with investor confidence plummeting
and money flowing out of the country, the Argentine public sensed the worst, which led to
a run on the banks. People began draining their bank accounts, hurriedly converting pesos
into US dollars and sending the money abroad. Panicked, the government responded with
the corralito in December 2001, a series of measures that effectively froze bank accounts
for a period of about a year. Initially, withdrawals were capped at a scant US$250 per
week. An enraged public took to the streets in a grand cacerolazo, first banging pots and
pans in protest and later escalating to property damage, targeting banks and large foreign
corporations. President Fernando de la Rúa was forced to flee the capital in a helicopter on
21 December 2001, and, after a series of three different presidents failed to calm the crisis,
Néstor Kirchner took office in May 2003.
In the meantime, the Law of Convertibility, which pegged the peso to the US dollar
one-to-one, was abandoned, and the government declared that all bank accounts held in
dollars would be converted to pesos at an official rate. The peso experienced a large devaluation
as a result, rapidly depreciating to an exchange rate of four pesos to every US dollar from the
previous one-to-one ratio. Inflation, too, swelled to alarming rates. But the devaluation of
the peso had a positive economic effect as well: Argentine exports suddenly became cheap
and competitive abroad; foreign currency reserves recovered; and Argentina was able to pay
off its full debt to the International Monetary Fund in 2006. Argentina’s GDP grew robustly,
increasing annually between 8.5 per cent and 9.2 per cent from 2003 to 2007.
The global recession of 2008 left its mark, however. When Néstor Kirchner’s wife,
Cristina Fernández de Kirchner, took office in December 2007, growth was strong. By
October 2008, the government had resorted to nationalising US$30 billion of private
pension funds administered by the Retirement and Pension Fund Administration (AFJP)
1 Pedro Nicholson is a partner at Estudio Beccar Varela.
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to avert another economic disaster, establishing the National Pension Funds Administration
Authority (ANSES) in its place. These funds have since been used to finance select project
finance transactions chosen for their bare-faced political capital.
The economy grew at a rate of around 8 per cent in the final years of the past decade,
although after mid-2012 the Argentine economy slowly entered a recession, caused mainly
by investors’ lack of confidence about the direction in which the political situation was taking
the country, mainly as a result of the foreign exchange restrictions in force and the seeming
lack of respect for the rule of law by the government then in power. During the first years
of the current decade, the Argentine economy has plunged into a recession that has affected
most sectors of the economy.
As mentioned above, following Mauricio Macri’s election, some sectors are now really
optimistic about the future. A couple of the measures adopted after the new president took
office explain this optimism: mainly the elimination of the foreign exchange restrictions and
negotiations with the holdouts of the outstanding public external debt (with whom, after
15 years of open fighting, Argentina has finally reached an agreement). These measures,
together with an expected tighter rule of law in the national economy, have generated an
optimistic atmosphere in the Argentine market, and the country is expected to receive
a flood of new investment in the coming years as a result of the confidence restored by the
new government. The return to a trustable market economy after a decade of populism is
contributing further to this positive mood.
Along with the current scenario of great optimism, it is important to highlight the
fact that in August 2015 a new Unified Civil and Commercial Code entered into force in
Argentina, which superseded the Civil and Commercial codes in force in the country for
the past 150 years. As little time has passed since the implementation of this new Code, its
impact is yet to be assessed.
II THE YEAR IN REVIEW

In 2016, the Argentine energy sector received a boost from the national government, and
showed improvement in comparison with previous years. In the renewable energy sector
in particular, the national government tendered various construction projects, focusing
especially on solar and wind energy generators, with 29 projects allocated and providing
a total of 1,143MW.
The Macri administration implemented policies fostering mining development as soon
as it took office. The mining sector celebrated the removal of the mineral export duties that
were charged on companies exporting minerals, in ranges from 5 per cent to 10 per cent
of the profits arising from mineral sales. The new administration showed a commitment to
respect the existing ‘rules of the game’, which enabled the development of mining activity
during the nineties – mainly Law No. 24,196 (the Mining Investment Law (MIL)). The MIL
has established benefits for mining companies registered in the Mining Secretariat’s Mining
Investors Registry, including:
a a 30-year tax freeze effective from the filing of the project’s bankable feasibility study;
b the right to deduct from the income tax statement 100 per cent of the amounts invested
in prospecting, research, mineral and metallurgical tests, and other works aimed at
determining the technical and economic feasibility of the project;
c accelerated depreciation of investments made on infrastructure, transportation,
construction of plant and equipment for the infrastructure necessary for mining activity;
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d exemption from paying income taxes derived from mine profits and mining rights,
used as payment for the subscription of shares of registered beneficiary companies; and
e limits on applicable percentage of royalties (applicable cap: 3 per cent ‘mine mouth’).
The industry is thus optimistic about the change of administration and the favourable
political winds promoting mining activity.
Law No. 26,737 dated 30 December 2011 (known as the Rural Land Law) regulates
and limits the purchase of rural real estate by foreign nationals. While this law does not affect
any acquired rights as of the date of enactment and only applies to any future acquisitions or
sales of land, it may affect future mining and energy projects. It sets out the following limits
on foreign ownership or possession of land:
a in general, a limit of 15 per cent of foreign ownership or possession of rural land in the
national territory. Persons and entities of the same foreign country may only comprise
30 per cent of said 15 per cent quota;
b each foreign owner or possessor may only hold a total of 1,000 hectares of land, within
said limited percentages and depending on the specific jurisdiction (i.e., this area may
be somewhat larger or smaller); and
c foreign nationals may not own any land that includes permanent and important bodies
of water, or any land located in a border security zone.
In 2016, Decree 820/16 was enacted by the government, which relaxed slightly the limitations
on the purchase of rural real estate by foreign nationals. Further amendments to the Rural
Land Law are expected to follow.
In June 2016, Law No. 27,260, the Tax Amnesty Law, was enacted. The purpose of this
law was to bring to the country funds belonging to physical persons or companies domiciled,
resident or incorporated in Argentina as of 31 December 2015.
These persons were allowed to voluntarily declare their possession (in Argentina or
abroad) of national or foreign currency, real estate property and other assets such as shares,
rights as beneficiaries of trusts, and any kinds of financial instruments or securities (such as
bonds), among others. The term in which to declare these funds started with the enactment
of the Tax Amnesty Law and expired on 31 March 2017. Section 41 of the Tax Amnesty Law
established a special a tax to be paid for each of the assets declared.
Section 42 of the Tax Amnesty Law further established that the aforementioned tax
would not be applicable if the funds or assets were used for: (1) the acquisition of bonds
issued by the federal state or (2) the acquisition of or subscription to quotas in investment
funds whose purpose was investment in instruments for the financing of infrastructure,
productive investment, real estate, renewable energies, small and medium-sized companies,
mortgages, development of regional economy projects and other projects related to the real
economy. The funds should be invested in said instruments for at least a five-year term from
when they were acquired or the subscription made.
The enactment of the Tax Amnesty Law and the tax benefits granted to real estate
funds created a suitable environment for real estate investment in Argentina and for the
development of this sector. In fact, several real estate funds were filed with the Argentine
Securities and Exchange Commission during 2016.
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III RISK ALLOCATION AND MANAGEMENT

As mentioned in the introduction, the Argentine project finance sector is no stranger to financial
and political risks. Once beset by military dictatorships, Argentina has had a democratically
elected government since 1983, and has adhered to a system of representative democracy
ever since. Politically, Argentina has been rather stable the past few decades; economically,
it has experienced both surging growth and daunting setbacks. So while political risks are
minor, Argentina’s recent economic history has left a legacy of regulations that continue to
dramatically affect project finance and construction contracts.
The most salient example arose as part of the Law of Convertibility: a prohibition on
indexation of contracts and payments. A valuable tool used by private parties to manage
changes in price levels, indexation involves writing into a contract an upward adjustment of
nominal payments based on standardised inflation rates. In 1991, however, the government
prohibited indexed contracts, including all manner of currency updates, cost variations, and
debt restatements. Although the prohibition on indexation was specifically promulgated in
tandem with the Law of Convertibility, the prohibition on indexation inexplicably remained
even after the Law was scrapped in 2002.
With inflation safely ensconced in the Argentine financial landscape, the architects
of project finance and construction contracts have become creative with legally permissible
methods to stem rising costs notwithstanding this prohibition. The most frequently used
methods include price escalations and a combination of fixed and variable prices. For
example, a three-year lease may provide for a fixed increase in rent each subsequent year, such
as US$100 for the first year, US$125 for the second, and US$155 for the third. While this
may well seem like indexation, Argentine courts have confirmed that these price escalations
do not run afoul of the law. In addition, investments in construction projects often involve
a combination of fixed down payments and subsequent instalments that vary in cost based
on the expense of construction materials.
Indeed, because of the prohibition on indexation, gradual inflation is difficult to
compensate for in construction contracts except in the manners described above. The next
question becomes whether force majeure clauses can be invoked in cases of hyperinflation.
While no legal codes exist to that effect, the answer is almost certainly no. In Argentina,
force majeure clauses are permissible, but their applicability is limited to situations in which
the events are extraordinary and unpredictable. In Argentina’s case, hyperinflation is not
an extraordinary occurrence; it has happened several times before, and could undoubtedly
happen again. As a result, the majority view is that an inflation crisis – even a crisis of
hyperinflation – constitutes an expected phenomenon that does not merit the exercise of
a force majeure clause. The message here is clear: inflation is a foreseeable evil for Argentinians,
and prudent parties ought to invoke other measures to manage the risk.
IV SECURITY AND COLLATERAL

Similarly to elsewhere in the world, security interests in Argentina can be obtained through
pledges and security assignments, and be ensconced in trusts or tucked into mortgages.
When it comes to pledges, Argentina has a two-tiered system of ordinary and registered
pledges. The ordinary pledge functions as one would expect: the debtor physically transfers
the pledged property into the possession of the creditor or into the custody of a third party.
Unlike the previous Argentine Civil Code, which required the creditor to sell the asset in
a court-administered auction, disclaiming self-help remedies to foreclose on a pledge, the new
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Unified Civil and Commercial Code does not require necessarily a court-ordered foreclosure
procedure, since it enables the parties to agree on the creditor keeping the pledged property if
a default occurs, as well as on a private sale of the asset. If nothing is specified in the contract,
the creditor can choose from any of the possibilities foreseen in the Code.
When a security interest takes the form of a registered pledge, the debtor retains
possession of the property instead of transferring it to the creditor. As Law 12,962 describes,
that pledge must be filed with the Registry of Pledges, through either a public deed or
an authenticated private instrument, before the pledge becomes enforceable against third
parties. When that act of registration occurs, the creditor must also decide whether the pledge
will be ‘fixed’ or ‘floating’. If the pledge is fixed, then the registration only encompasses
the particular asset and nothing more. In contrast, if the pledge is floating, the creditor
captures any changes the asset may undergo while it is registered and any additional assets
that derive from those changes. The choice between a fixed and registered pledge has another
consequence: jurisdiction. If a fixed pledge is chosen, the assets fall under the jurisdiction of
the Registry of Pledges where they are located. In contract, floating pledges fall under the
jurisdictional wing of the Registry of Pledges located where the debtor is domiciled.
Trusts, security assignments, and mortgages round out the various forms of security
interests. Crucially, when property is placed in a trust, the secured assets are protected from the
prying fingers of a debtor’s other creditors. Argentina expressly regulated trusts in 1995 with
the enactment of Trust Law 24,441, imbuing trusts with one key quality: limited liability
for the trustee. Moreover, the Trust Law also establishes that trust property will be treated
separately from property belonging to either the trustee or trustor. Largely because of these
two protections, trusts have become a popular component of project finance transactions in
Argentina since the Trust Law was enacted.
Notwithstanding, the new Unified Civil and Commercial Code has amended
a high percentage of the legislation applicable for international transactions, including the
above-mentioned Law. However, the key matters of this Law remain unchanged. Security
assignments share some characteristics with trusts, but differ in that assigned assets are
generally limited to rights or credits. Trusts are free from this limitation, and can encompass
most forms of assets, including moveable property and real estate. Mortgages, for their part,
grant security interests over real estate, ships and aircraft, and usually secure the principal
amount plus accrued interest. Created by means of a notarised deed, a mortgage only becomes
valid in relation to third parties once it is registered with the Public Real Estate Registry in the
jurisdiction in which the property lies.
Indeed, registration is obligatory to ensure the validity of most security interests.
Mortgages and registered pledges must be catalogued – and fees paid – which are calculated
on the basis of the total value of the secured asset. Certain descriptions must also be included.
When registering mortgages, the value of the collateral security must be specified in the
deed; if that step is overlooked the entire mortgage risks being invalidated in accordance
with Section 2,189 of the Unified Civil and Commercial Code. Similarly, the value of the
collateral must also be noted when registering a pledge, in addition to information regarding
the applicable interest rate and the method of repayment. Finally, when executing a mortgage,
notary public fees must of course be paid as well.
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V BONDS AND INSURANCE

In accordance with the Public Works Law, contractors are required to deposit 1 per cent of
the total cost of the project to submit their proposal and must maintain their tender within
the time limit set out for this tender. Pursuant to this law, the deposit may be instrumented
by one of the following types: cash, certified cheque, public debt securities issued by the
federal or provincial governments, bank guarantee, surety insurance, or demand note.
Surety insurance may be used both in public and private contracting and can take
different forms, such as: (1) bid bond, which ensures the bidder on a contract will enter
into the contract and furnish the required payment and performance bonds if awarded the
contract; (2) performance bond, which ensures the contract will be completed in accordance
with the terms and conditions of the contract; (3) down payment or collection, which ensures
that the policyholder will use the advance payments received for the material supply; or (4)
funds for reparation orders.
VI ENFORCEMENT OF SECURITY AND BANKRUPTCY PROCEEDINGS

The process of foreclosing on a pledge differs depending on whether the pledge is ordinary
or registered. As mentioned above, the new Unified Civil and Commercial Code does not
require necessarily a court-ordered foreclosure procedure for ordinary pledges, since it enables
the parties to agree that the creditor will keep the pledged property if a default occurs, as
well as on a private sale of the asset. If nothing is specified in the contract, the creditor can
choose from any of the possibilities foreseen in the Code. Instead, if the pledge is registered,
the foreclosure process varies in accordance with whether the secured party is classified as
a ‘financial entity’ under the Financial Entities Law 21,626, as decreed by the Central Bank.
If the secured party does not fall under the mantle of financial entity, then the lender must
pursue a judicial foreclosure proceeding similar to that described below for mortgages. If the
lender is a financial entity, then the court’s presence is circumscribed.
Mortgages are foreclosed through either summary proceedings in court that end with
the public auction of the property, or a speedier, more simplified process in which the creditor
can assume a greater role. In the traditional judicial proceedings, the property is sold to the
highest bidder at auction (the lender is permitted to bid on the property as well), as long as
the debtor does not offer any successful defences. After the sale, the proceeds are deposited
in a bank under court order, and the creditor’s claim is satisfied from these proceeds. This
traditional foreclosure process can take anywhere from one to two years from start to finish.
If a debtor is insolvent, the procedures differ yet again depending on whether it decides
to pursue a judicial reorganisation or a bankruptcy proceeding. The reorganisation procedure
can only be instigated by the individual or corporate debtor in question, who must file
a petition for relief under the Bankruptcy Law together with evidence of both its inability
to satisfy debts – and ability to reorganise. Once this petition has been filed, all claims by
unsecured creditors are in effect stayed, although creditors may proceed with claims related
to mortgages and pledges if and only if they give notice to the bankruptcy court. That is
to say, the creditor will have to request admittance of his or her credit and collateral to the
relevant court.
Bankruptcy proceedings, on the other hand, can be commenced either voluntarily by
the debtor or involuntarily by his or her creditors. In contrast to the reorganisation process,
the debtor is not allowed to manage its own assets; a trustee is appointed as administrator in
its place. All creditors – including preferred creditors – must submit evidence of their claims
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to the debtor’s trustee. Certain creditors do retain an advantage, however, when it comes
time to distribute the debtor’s assets. Creditors with a lien over a particular secured asset are
granted a special preference by law, which entitles them to priority over the proceeds from the
sale of that asset. In addition, Section 239 of the Argentine Bankruptcy Law provides for the
subordination of debt, with the result that senior creditors will be paid before subordinated
lenders. It is important to note, however, that lenders will not incur liabilities if project assets
are foreclosed upon.
VII SOCIO-ENVIRONMENTAL ISSUES

Beyond the litany of usual permits needed for a particular building project, Argentina has
one licensing requirement that applies specifically to foreign citizens and companies. That is
to say, foreign nationals who wish to acquire land in a ‘border security zone’ must seek special
permission from the National Commission of Security Zones to complete their purchase.
Generally speaking, these zones encompass land that lies within 150 kilometres of Argentina’s
borders, or within 50 kilometres of the sea. This permission is typically granted within about
six months. It is worth noting, however, that local companies controlled by foreign nationals
are deemed to be ‘foreign companies’ for the purposes of this legislation, in contrast to
standard corporate legislation. Moreover, this licensing requirement applies even if a foreign
company decides to acquire shares in a local company that already holds land in a security
zone; if management of the local company shifts into foreign hands, permission from the
National Commission of Security Zones must be granted before the transaction can proceed.
With the amendment of the Constitution in 1994, environmental legislation, and
sanctions for environmental violations, have increased in tandem. As stated in Section 41 of
the Argentine Constitution: ‘All inhabitants are entitled to the right to a healthy and balanced
environment fit for human development [. . .] and shall have the duty to preserve it.’
Furthermore, the Constitution requires that a person or company who damages the
environment has the ‘obligation to repair it according to law’. If a person believes that his
or her environmental rights are being infringed, he or she can file a Section 43 summary
proceeding, called an amparo, for immediate injunctive relief. Environmental legislation
exists not only at the federal level in Argentina, but at the provincial level as well. At a federal
level, Congress has the power to set forth minimum standards legislation for the protection
of the environment, which is applicable throughout the country. Conversely, the provinces
may establish supplementary legislation to these minimum standards either by enacting more
stringent regulations or by passing their own environmental regulations in areas in which the
federal government has not established such minimum standards.
Certain environmental legislation specifically prescribes criminal penalties for
environmental transgressions (e.g., the National Hazardous Wastes Law No. 24,051 and the
Buenos Aires Special Wastes Law No. 11,720 hold representatives of companies liable for
environmental damages caused by the activities of their companies, to the extent of their
participation in the action). Further, some courts have invoked Section 200 of the Criminal
Code regarding crimes against public health to sanction people who release hazardous
substances into the environment. Otherwise, administrative sanctions, injunctive relief or
civil penalties usually accompany environmental offences.
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VIII PPP AND OTHER PUBLIC PROCUREMENT METHODS

PPPs have not been as popular in Argentina as in other Latin American countries. However,
in 2016, Law No. 27,328 was passed, establishing the terms and conditions for PPPs in
Argentina. Furthermore, in February 2017, Decree 118/2017 was enacted, implementing
Law No. 27,328. Both the Law and the Decree regulate PPPs in Argentina, and frame what is
expected to be a significant flow of investment in infrastructure in our country in the coming
years. The good news is that the lack of infrastructure investment here over the past 15 years
means almost everything is yet to be done, and the country is setting out the rules for it, with
a view to protecting the interests of both the state and the private parties involved.
The selection regime often produces a win-win situation for both government and
private actors. The state has a potentially wide range of projects to choose from, while at the
same time avoiding the cost and effort involved in designing and assessing projects itself. The
private actor, on the other hand, can count on a transparent and competitive bidding process.
Indeed, the federal government is not alone in recognising the benefits of such a framework;
provincial governments have also established private initiative schemes for the solicitation
and selection of private proposals for public infrastructure projects.
IX FOREIGN INVESTMENT AND CROSS-BORDER ISSUES

According to the Argentine General Companies Law No. 19,550, foreign companies may only
engage in ‘isolated’ activities in Argentina if they are not registered in the country. Although
an exact definition of ‘isolated’ is not provided by the law, a project finance transaction would
likely not fall under its scope. Thus, to perform regular activities in Argentina, the foreign
company has to register either a branch or a local subsidiary. If it fails to do so – and carries
out ‘regular’ activities nonetheless – the company assumes the risk that its activities will be
unenforceable and its representative held jointly liable. Therefore, it is advisable that project
finance transactions be organised locally.
The most convenient forms of legal entities for foreign investors include the stock
corporation, limited liability company and the branch. Whereas the first two forms limit
the liability of the shareholders with respect to third parties, when the entity is organised
as a branch, the foreign parent company can be held liable for its activities. Consequently,
project companies are usually organised as a stock corporation, both to limit liability and
invoke the favourable tax treatment of corporations.
With the exception of investments in certain sectors, including rural land, energy and
broadcasting, foreign investors are granted the same rights under the Argentine Constitution
as local investors, and may invest in any economic or productive activity. In terms of taxation,
foreign investors are also treated largely the same as locals: they, too, must pay federal, state
and municipal taxes, although dividend payments are immune from taxation. But there exists
one salient difference: profits from the sale of shares in an Argentine company are not taxed
as income if the seller is a non-resident investor.
From 2007 onwards, many foreign exchange restrictions were set concerning
the entrance of funds into the country and their transfer abroad. Fortunately, since
December 2015 these restrictions, which limited foreign investment in Argentina, have been
relaxed by the new government.
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X DISPUTE RESOLUTION
Argentine courts do not jealously guard their jurisdictional power. Parties to a contract can
choose to submit to the jurisdiction of a foreign court as long as there exists some connection
to the chosen jurisdiction and the dispute is pecuniary. There is an exception to this openness,
however: Argentine courts claim exclusive jurisdiction over debtors domiciled in the country.
If the debtor’s domicile is abroad, insolvency proceedings in Argentine courts will only touch
those assets held in the country.
As regards the choice of law, contractual parties are generally free to choose which
laws will govern their agreements. The major caveat is that foreign law will not be accepted
if it flouts Argentine public policy. As a consequence, disputes involving bankruptcy, tax,
criminal, and labour laws will be governed by the Argentine public policy laws corresponding
to those areas. Specifically, Argentine law also governs rights and legal actions related to real
estate and moveable property located permanently in the country.
Foreign judgments and arbitral awards, for their part, are enforceable in Argentina,
either in accordance with international treaties or the National Code of Civil and Commercial
Procedure (CPCCN). If a country has signed a treaty with Argentina regarding foreign
judgments, those procedures will prevail; if not, the CPCCN will apply in federal court.
(Each province has its own rules for enforcement of foreign judgments in its local courts.)
Article 517 of the CPCCN sets out several requirements that a foreign judgment must meet
for it to be enforced in Argentina. The judgment must have been issued by a competent
court, as determined by Argentine law; be final and valid in the foreign jurisdiction, and
later authenticated according to Argentine law; and cannot conflict with Argentine public
policy law, nor with a prior or contemporaneous judgment in Argentine courts. Finally, the
defendant must have enjoyed due process of law, including a proper summons and a chance
to defend itself.
Once all those prerequisites are fulfilled, a number of procedural requirements must
also be satisfied before enforcement can occur. The petitioner must file a statement proving
that the aforementioned legal requirements are satisfied; all documents in a foreign language
must be translated into Spanish by a translator registered in Argentina; a copy of the foreign
judgment must be notarised and filed with the appropriate Argentine court; and all pertinent
documents must be authenticated by the Argentine consulate located in the foreign court’s
jurisdiction. Finally, a 3 per cent court tax will have to be paid upon enforcement.
The enforcement of foreign arbitral decisions follows the same framework. As long as
both the legal and procedural steps are fulfilled, the foreign arbitral award will be accepted
by Argentine courts. If a treaty applies, however, its procedural and substantive requirements
take precedence. Notably, Argentina has been bound by the United Nations Convention on
the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention)
since 1988.
XI OUTLOOK AND CONCLUSIONS

This chapter should be taken as a mere outline of the project finance landscape in Argentina.
While the legal framework does not differ much from other Latin American countries,
decisions regarding investments in public works have been unusually politicised in Argentina
of late. Given Argentina’s political climate under previous governments in recent years, PPPs
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were not pursued unless they suited a political end. This has started to change with the
policies being implemented by the government that came to power in December 2015 (see
Section VIII, supra).
In this context, project finance investments should increase in the coming years as
infrastructure needs grow, and mining and energy technology advances. Future projects are
liable to involve not only the creation of new structures, but the maintenance of existing
structures as well. Although, as explained, the business environment has not been very
encouraging for investors (foreign or local) in recent years, this is expected to change shortly,
as the government that took office in December 2015 has already taken relevant measures that
have led to a marked optimism in the business community that the country will return to the
international markets and that there shall be significantly more project finance investments
in the near future.
Last but not least, it is important to take into account the fact that the impact of the
new Unified Civil and Commercial Code, which came in force in August 2015 in Argentina,
is yet to be ascertained.
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Chapter 5
AUSTRALIA
Matt Bradbury, David Gilham, Kristen Podagiel, Ren Niemann, Tim Hanmore,
Hayden Bentley, Liam Davis and James Arklay1
I INTRODUCTION
Australia is a dynamic and commodity-rich nation, whose wealth of natural resources has
historically created the opportunity for domestic and international corporations to embark
upon major infrastructure and construction projects. For the past decade, the country’s
approach to infrastructure development has been centred on access to commodities for
export. However, Australia’s economy is one that is in transition; as a number of the major
project works relating to mining and gas developments achieve completion, commercial
construction and significant federal, state and local government urban transport projects in
the metropolitan centres are coming online.
This rebalancing brings opportunities for the construction sector to shift its focus
towards infrastructure such as road, rail and telecommunications projects, which, in recent
years, have not attracted the investment required to cater for increased population growth.
By 2031, more than 30 million people will call Australia home. All levels of government
are therefore playing catch-up and across the country, a number of multibillion-dollar
nation-shaping projects are currently being undertaken, predominantly relating to urban
congestion and national and regional connectivity. These include large metro and light rail
projects in the capital cities, the rollout of the National Broadband Network (NBN) and
improved airport and port access, including for new freight links.
Australia has a sophisticated legal and regulatory framework in place to govern such
projects and their proponents. It remains a jurisdiction in which projects can be completed
with minimal sovereign risk and is therefore an attractive destination for foreign investment.
Any discussion about Australia’s legal and regulatory landscape must be prefaced with
an explanation of its status as a federation. Australia consists of six states (Queensland,
New South Wales, Victoria, South Australia, Western Australia and Tasmania) and two
self-governing territories (the Australian Capital Territory and the Northern Territory). Each
state and territory has its own legislative, judicial and executive arms of government. There
are three levels of government present in Australia: federal, state and local.
The federal government’s legislative powers are constrained by the Australian Constitution
and include subjects as diverse as corporations, defence, taxation, telecommunications,
immigration, foreign affairs and trade. The state governments have unfettered legislative
1 Matt Bradbury, David Gilham, Kristen Podagiel, Ren Niemenn, Tim Hanmore and Hayden Bentley are
partners, and Liam Davis and James Arklay are senior associates at McCullough Robertson.
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Australia
jurisdiction, subject to the qualification that federal legislation will prevail over state legislation
to the extent of any inconsistencies. Local governments are primarily responsible for planning
and development and the provision of local services to communities.
Australia has a common law system, which it inherited from the United Kingdom.
Each Australian state and territory has its own courts, appeals from which may be heard in
the High Court of Australia. In addition, Australia has federal courts that hear matters arising
under federal laws.

The past year saw significant government and private funding being invested into social and
transport projects. Light rail (trams), which was once Australia’s most popular form of public
transport until the car, is now back in vogue as the Australian and various state governments
try to move personal vehicles off roads in the central business districts (CBDs) and people
onto efficient public transport. Projects currently under construction include the major
extension of the A$2 billion Sydney network through the CBD and to the eastern suburbs,
the first stage of the A$700 million Canberra Capital Metro and the extension of the Gold
Coast Rapid Transit system to Helensvale (A$420 million). Brisbane City Council also has
recently committed to a metro line linking various commercial hubs around the CBD.
Rail construction as a whole has seen a revival, with significant projects aimed at
creating increased connectivity between capital cities and outer suburbs, such as the 12.6km
Moreton Bay Rail Link in Queensland and, of course, Australia’s largest public transport
project – the A$8.3 billion Sydney Metro, which involves the underground construction of
rail line spanning 75 kilometres. Construction started on the A$2 billion Forrestfield to Perth
rail link, which will connect Forrestfield to the city, opening up Perth’s eastern suburbs to the
rail network for the first time. Market testing has begun on a new key piece of national freight
infrastructure – the Melbourne to Brisbane Inland Railway via central-west New South Wales
and Toowoomba.
With this focus on rail, it is easy to forget that Australia’s road network has at the same
time received significant funding to deal with increased traffic congestion. WestConnex in
Sydney involves widening and extending the M4 Western Motorway, a new section for the
M5 South Western Motorway and a new bypass of the Sydney CBD connecting the M4 and
M5. These projects will build or upgrade some 33 kilometres of the Sydney motorway network
with an estimated value of A$15 billion. There are also major upgrades of the Pacific Highway
between Sydney and Brisbane taking place. In Melbourne, the A$1.34 billion widening of
the Tullamarine Freeway and Citylink (one of Melbourne’s most heavily used roads, carrying
approximately 210,000 vehicles per day) is expected to be completed in late 2018.
While interest in public–private partnerships (PPP), particularly in the roads sector, is
not what it was five to 10 years ago at the height of the country’s toll road construction in
Sydney, Melbourne and Brisbane, there is still appetite for private investment in government
backed projects. A good example of this is the Australian Capital Territory Courts PPP
Project, which is the Territory’s first PPP project and requires the staged redevelopment of
the Territory’s court facilities while the courts remain in operation. The sponsors will be
responsible for designing, constructing, financing and maintaining the facility for the next
25 years. Other recent PPP projects include Sydney’s Northern Beaches Hospital, Victoria’s
Ravenhall Prison and Queensland’s Toowoomba Second Range Crossing. Local government
authorities are also looking to utilise this delivery model for community projects.
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This theme of connectivity through social infrastructure is one helping to shape the
Australian construction sector. Telecommunications provides an obvious example of this as
the rollout of the NBN continues across the country with more than one million premises
now able to order NBN services. This A$30 billion project is delivering Australia’s first
national wholesale-only, open-access broadband network to all Australians.
Outside government-funded programmes, residential building projects have also
increased, with especially strong growth in multi-unit dwelling construction. This has
resulted in a shift in the location of construction work from the former mining boom
regions of Western Australia and Central Queensland to the metro centres of New South
Wales, Victoria and Queensland. Sydney saw the completion of three major office towers
at Barangaroo, including a mix of commercial, residential and park land extending from
the CBD. The next stage of this development will include the construction of Sydney’s first
six-star hotel and casino. Sydney’s other major urban renewal project, one of the largest in the
world, the Bays, sits just 2 kilometres west of the city and consists of 95 hectares of largely
government-owned land, being transformed into a technology hub and other uses.
Particular mention should be made of Western Sydney, which is a major growth area.
The Australian and New South Wales governments are funding a 10-year, A$3.6 billion road
investment programme for Western Sydney. The Western Sydney Infrastructure Plan will
deliver major road infrastructure upgrades to support an integrated transport solution for
the region and capitalise on the economic benefits from developing the proposed Western
Sydney airport at Badgerys Creek. Western Sydney also has the A$2 billion Parramatta
Square redevelopment.
Another major geographical growth area has been and will continue to be the Northern
Territory. Current major projects include the Darwin luxury hotel development, the Darwin
Port lease, Darwin rectangular sporting facility, Mount Isa to Tennant Creek railway project,
Northern Gas Pipeline, Palmerston Regional Hospital project and Royal Darwin Hospital
Expansion project. The federal government’s A$5 billion loan programme to support
infrastructure projects in northern Australia combined with the Northern Territory White
Paper, which sets out a policy platform for realising the full economic potential of Northern
Australia, also promises to create exciting opportunities for economic development in the
territory. The Northern Territory strategically benefits from physically neighbouring the Asian
economies and is well positioned as a transport and logistics hub for business and tourism.
With the Australian dollar trading lower against the US dollar than in previous years
and Queensland’s second largest city, Gold Coast, preparing to host the 2018 Commonwealth
Games, there has been a revival in the tourism and cultural sectors across Australia. Figures
released by Tourism Accommodation Australia identify 228 hotel projects (34,702 rooms)
under construction, approved for development or in advanced planning stages in the six state
capitals and Darwin.2 It is therefore no surprise that Chinese investment in this area has led
the way. The most impressive examples of this are Dalian Wanda’s redevelopment of Gold
Fields House, Fairfax House and the rugby club at Circular Quay in Sydney into a five-star
hotel tower and mixed-use residential tower, and Wanda Ridong’s Jewel, which will comprise
three towers including a five-star hotel with 170 rooms, more than 500 residential apartments
and high-end retail spaces. Jewel is the first beachfront residential resort to be constructed on
the Gold Coast in more than 30 years. Work will soon start on IHG’s Holiday Inn Sydney
2 Tourism Accommodation Australia press release, ‘Massive new investment in hotel development highlights
sustained strength of Australian tourism’ (15 March 2017).
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Central, which will be a 305-room hotel developed by China’s Linzhu group in the Central
Park precinct at the southern end of the CBD. Nowhere in Australia is tourism helping to
shape the skyline more than in Australia’s ‘new world city’, Brisbane, where Star Entertainment
Group, Far East Consortium (Australia) and Chow Tai Fook Enterprises are facilitating the
delivery of the Queen’s Wharf Brisbane integrated resort development with works under way
since January. The development includes five new premium hotel brands, notably the Ritz
Carlton, and Brisbane’s first six-star hotel. In Melbourne, which is regarded as the sporting
and cultural capital of Australia, we have seen a number of major stadium expansions and
venue developments, including the Melbourne Park redevelopment and the refurbishment
of Rod Laver Arena. North Queenslanders have been waiting decades for a new stadium
in Townsville to host their beloved rugby league games and in April 2017 the contract was
finally awarded for its construction. In Perth, the construction of Perth Stadium and Sports
Precinct continues. Cranes from large building projects are casting shadows across the
skylines of Australia’s capital cities: from the A$1.2 billion Perth New Children’s Hospital to
the A$1.5 billion Sydney International Convention, Exhibition and Entertainment Precinct.
This is not to say that resources projects have completely dried up. In fact, some
of the largest mining projects in the world are under construction or about to start
development in Australia. For example, Adani’s Carmichael Coal project is being constructed
as a 60 million-tonne (product) per annum coal mine, including both underground and
open-cut mining. Coal will be transported to port facilities via a privately owned rail line that
is connected to the existing rail infrastructure.
While the appetite for coal projects has declined, metals and other minerals remain
strong performers. Despite the decline in resources infrastructure development, it is important
to remember that this was based on never-before-seen investment in the sector and with
A$200 billion of committed projects in the pipeline, there is still significant infrastructure
development ahead.
However, in the energy space, the real game changer has been Australia’s shift in
sentiment to renewables, with increased support at both federal and state levels creating
more certainty for industry and greater appetite for investment. The Australian government’s
Renewable Energy Target requires that by 2020 at least 23 per cent of Australia’s electricity
be generated by renewable sources.3 We are even seeing major international resource houses
who have traditionally worked in the coal sector moving into renewable energy. Indian
energy giant Adani, for example, has announced that two solar generation plants will be built
in Australia – one near Moranbah in Central Queensland, and the other on the northern
outskirts of Whyalla in South Australia. Even local governments are dipping their toes into
this exciting area with Sunshine Coast Council implementing a new solar-powered lighting
system. More than 20 major renewable energy projects are already under construction
or will start this year, delivering an unprecedented programme of renewables works in
Australia. These include French developer Neoen fast-tracking the three big solar projects it is
building in NSW – Parkes Solar Farm, Griffith Solar Farm and Dubbo Solar Hub, totalling
as much as 165MW of generating capacity; FRV’s 150MW Lilyvale solar farm – the first
large-scale solar development proposed for Queensland’s Central Highlands region and one
of the largest projects of its kind planned for Australia; and Genex Power’s Kidston Solar
Project, which involves the development of a 50MW solar farm on the site of the historical
3 Australia’s Intended Nationally Determined Contribution to a new Climate Change Agreement

(August 2015).
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Kidston Gold Mine, located approximately 270 kilometres north-west of Townsville in

northern Queensland. South Australia, which has had highly publicised energy reliability
issues, has announced that it will spend A$550 million on new energy projects, including
the construction of a new A$360 million gas-fired power plant, as well as Australia’s largest
battery connected to the grid to store wind and solar energy when demand is high.
It is clear that during the past year Australia’s infrastructure sector has become more
balanced, with a much greater range of projects across roads, rail, health, resources (including
renewables) and commercial and residential building.
III DOCUMENTS AND TRANSACTIONAL STRUCTURES

i Transactional structures
Corporations undertaking projects physically located in Australia would normally utilise
one or more Australian-resident companies as the primary participants in the structure,
particularly for the owners and operators of assets, but also for major contractors involved
in construction.
Where there is a sole project owner, separate Australian subsidiary companies may
be utilised by the project owner to conduct different aspects of the project. For example,
separate subsidiaries may own the project assets, act as a financing vehicle to hold internal
or external debt to fund the project and employ labour. Similarly, in certain projects it is
common to have a separate operator that outsources some or all of the day-to-day operations
to third-party service providers.
The use of separate corporate entities in an onshore Australia group structure may
facilitate the limitation of liability, ring-fence specific risks, simplify project financing and
meet other commercial objectives.
Joint venture structures

Where a project has multiple equity investors, the structure may commercially be referred to
as a ‘joint venture’. A joint venture can encompass a wide range of legal structures.
Joint venture structures can take the form of an incorporated joint venture, which
involves one or more special purpose project companies, the shares in each of which are owned
by multiple equity investors in the same proportions. In such cases, relations between the
shareholders and their conduct would be governed by a contractual shareholders’ agreement.
Under the Australian taxation system, an incorporated joint venture company
or corporate group cannot be treated as a pass-through entity. As a result, the losses and
depreciation of an incorporated joint venture or structure are trapped within the entity or
structure. While a number of Australian states allow for the formation of limited partnerships,
they are taxed at the same rate as corporations (currently 30 per cent).
Unincorporated joint ventures

Where there is a desire for a flow-through of gains, losses and depreciation to underlying
owners, an unincorporated joint venture structure is most often utilised. This is of particular
importance where an investor has other Australian interests and there is a desire to offset
taxable profit, losses and deductions from different projects in which the investor has
an interest.
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Unincorporated joint ventures are particularly common in the mining and oil and
gas industries. The unincorporated joint venture is a commonly understood structure and
is familiar to investors, local advisers and regulatory authorities, as well as to banks and
project financiers.
In mining joint venture structures, each unrelated participant will undertake to
contribute, by way of cash calls, its proportion of the relevant costs of developing and operating
a mine. A separate corporate manager (that is often owned by the participants in the same
proportions as their interest in the joint venture) would normally be appointed to undertake
the day-to-day activities of the project as agent for the participants. Each participant then
takes its share of the output from the mine and, depending on the contractual terms, may
have an ability to deal with it separately. In some cases, though, each participant will appoint
the same sales agent (also often a corporate vehicle owned by the participants in the same
proportions as their interest in the joint venture) to sell its share of the product to third parties.
Under this incorporated joint venture structure, each participant includes in its own tax
calculations its share of the costs and depreciation deductions of the project and separately
accounts for its own proceeds from the sale of the product.
In cases where it is not feasible to take a separate share of the output of the relevant
project (such as projects for the construction of an infrastructure asset where there is a single
revenue stream), an unincorporated joint venture will be considered to be a partnership for
tax purposes and a separate return is required to be lodged on behalf of the joint venture.
However, there is a flow-through of the income or loss from the project if this is the case.
Infrastructure trusts
Another structure commonly used where there are multiple investors in an infrastructure
asset with a positive cash flow and income stream is a fixed unit trust. These trusts facilitate
the distribution of free cash in excess of the taxable income of the project, without immediate
tax consequences for investors where, for example, the tax income is partially sheltered by
depreciation or capital works deductions for infrastructure.
ii Bespoke and standard form contracts

Traditionally, projects within Australia have been undertaken pursuant to standard form
contracts published by Standards Australia. These standard form documents have over time
been heavily amended to reflect the decisions that have been handed down by the courts.
While Australian Standard contracts remain the most commonly utilised agreements
for large commercial projects within Australia, as a result of the increasing involvement of
international engineering-procurement-construction-management (EPCM) contractors on
Australian major projects, the contractual landscape has been modified. There has been an
increased importation of bespoke contracts that reflect the contractual environment of the
EPCM contractors’ home jurisdictions.
International Federation of Consulting Engineers (FIDIC) contracts

Despite a high degree of enthusiasm within the legal profession and industry bodies, the
FIDIC suite of standard form contracts is yet to be fully embraced in Australia. Instead,
FIDIC contracts tend to be utilised by foreign companies engaging in business in Australia
and by Australian-domiciled companies who have had exposure to the contracts as a result
of their involvement in projects overseas. FIDIC contracts are commonly utilised on projects
being undertaken in South East Asia.
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IV RISK ALLOCATION AND MANAGEMENT

i Limitation of liability
Limitation of liability clauses are commonly incorporated into contracts as a method of
managing risk.
Contractors will generally seek to limit their liability by including ‘caps’ in their
contracts both on aggregate liability and on the amount of liquidated damages that may
be levied against them in the event of late completion (the liquidated damages cap being
generally between 5 and 10 per cent of the overall adjusted contract sum).
It is also common for parties to limit their liability in respect of ‘consequential loss’
to avoid becoming exposed to claims for losses such as loss of profits, loss of use, loss of
production and loss of revenue that may result from the way in which they conduct or
administer a project. In the Australian context it is very important to identify the types
of losses that are being excluded rather than use the term ‘consequential loss’, as the legal
meaning of that term is far from settled in the various Australian jurisdictions and does not
correspond to the equivalent meaning under English law. These provisions are particularly
important in the mining and resources sector, because of the extent of the losses that can be
caused by the shutdown of a mine, processing facility or associated rail infrastructure and the
associated loss of production.
V SECURITY AND COLLATERAL

Secured transactions are primarily governed by federal law in Australia; however, for
transactions involving certain rights and industries (for instance, those involving mining
rights) transactions are additionally regulated by state legislation. Legislation between each
state differs, but there are often substantial similarities between each state’s legislation.
i Personal property securities regime

A number of years ago, Australia introduced a personal property securities regime similar
to that already in place in Canada, New Zealand and some parts of the United States. The
regime allows for and in some instances requires the registration of security interests in
personal property. The definition of ‘personal property’ extends essentially to any property
other than land, with some limited exceptions.
The legislation relies on the concepts of attachment and perfection in determining
whether a security interest has been created. For a security interest to be enforceable against the
grantor, the security interest must attach to the personal property being offered as collateral.
Attachment occurs where the secured party is given value, the grantor has a transferable
interest in the collateral and the grantor and secured party enter into a security agreement
or the secured party has possession of the collateral. The interest must ordinarily then be
perfected to allow the secured party to obtain priority against third parties. Perfection can
occur by registration (the most usual method), possession or control (with the concept of
control only being relevant to certain limited assets, such as shares).
Unsurprisingly, the regime affects the structuring of financing arrangements and
investments and the operations of contractors (foreign and national alike) in Australia.
A lender taking security over Australian shares and assets (including income or contracts)
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will need to consider this regime carefully when structuring their lending arrangements in
Australia. However, a wide range of standard contractual arrangements, outside the finance
arena, is also potentially affected by the legislation.
Contracts under which rights to obtain property arise on default (e.g., step-in
rights), supply contracts with retention of title clauses, deferred-payment arrangements,
subcontracting arrangements, equipment hire and leasing arrangements and joint ventures
and shareholder agreements all potentially involve the granting of security interests, which
may necessitate the registration of that interest for it to be enforceable against third parties.
The regime also affects the holder of the legal title to the relevant assets where the holder has
parted with possession of the relevant asset: the owner’s title to that asset can be defeated by
others, for example, by creditors on insolvency, third parties with a registered security interest
in the property and third parties taking free of the owner’s interest.
The personal property securities regime is a relatively new area of law and there is
ongoing debate in Australia as to whether certain interests will (or will not) amount
to ‘security interests’ for the purposes of this regime. This will only be resolved by court
consideration and legislative clarification over time. Until this doubt is resolved, there is an
inherent risk that secured parties who do not adequately protect their security interest under
the personal properties securities regime may lose their interest in the relevant goods to others
who have adequately protected their interest under the regime. In an example of the evolving
jurisprudence in this area, and an illustration of the risks incurred by owners of property who
are leasing or hiring out that property to third parties and who do not adequately protect
their interests in that property under the personal property securities regime, the New South
Wales Court of Appeal4 recently held that the interests of the owner and lessor of four mobile
turbine generator sets had not registered its interest (under the lease arrangements) in those
turbines vested in the lessee of those turbines immediately before the lessee entered into
administration. Accordingly, the lessee (and its secured creditors, who had registered their
security interests over the assets of the lessee) had better title to the turbines than the owner
and lessor.
VI BONDS AND INSURANCE

In the Australian construction industry, security is generally given by contractors and
subcontractors to parties above them in the contractual hierarchy. The Australian Standard
suite of contracts contains provisions that allow for the bilateral granting of security, but this
is rarely seen in practice.
Typically, bank guarantees and, on large-scale projects, performance bonds are given
by contractors and subcontractors to secure the performance of their contractual obligations
(including the rectification of any defective work for an agreed term following the completion
of the project, referred to as the ‘defects liability period’ or ‘maintenance period’).
Such instruments are irrevocable and commonly provided on an unconditional basis
(although they can also be provided with attached conditions), meaning that they are
effectively as good as cash in the hands of the beneficiary and can simply be presented at the
issuing financial institution and converted without first obtaining the consent of the party
who provided them.
4 Power Rental Op Co Australia, LLC v. Forge Group Power Pty Ltd (in liquidation) (receivers and managers
appointed) [2017] NSWCA 8.
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While courts are generally hesitant to restrain a party from having recourse to the security
that they hold, they are prepared to grant injunctions in certain, limited circumstances (such
as fraud, or where an unconscionable attempt is made to have recourse to security that would
cause damage to the reputation of the party who provided it). There have been a number of
recent court decisions considering the issue of security for performance and by extension,
the notion that security requested under a construction contract is regarded as a form of risk
mitigation in the event that there is a dispute at the conclusion of a project.
Although some construction contracts provide for cash retentions to be deducted
from progress payments that are made to contractors and subcontractors, such arrangements
are uncommon on large-scale projects because of the impact that they may have on the
contractor’s cash flow.
In some Australian jurisdictions, legislative provisions have been enacted to restrict
the amount of security that a party to a construction contract may lawfully require another
to provide, as well as the circumstances in which recourse may be had to the security that
is withheld. In NSW, head contractors on projects whose value exceeds A$20 million are
required to establish trust accounts into which retention monies that are withheld from
subcontractors must be deposited.
Under most contracts, a proportion of the withheld retention or security will become
due for release upon the works reaching completion, with the balance becoming due following
the expiry of the defects liability period (assuming that it has not been called upon prior to
this date).

Australia enjoys a stable commercial climate with few significant social issues that are likely
to have an impact on project development. That said, a greater scrutiny of a company’s
social licence to operate continues to drive reform from government and innovation from
companies. This section will detail what businesses involved in projects and construction
may expect at the state and national levels of Australian government, as well as commonly
recognised international standards relevant to project finance.
i Business expectations from state-level government

Throughout Australia, state governments are the primary assessment and approval authority
for new projects. In some circumstances, driven by the location of a project and the nature of
its impacts, further assessment at the federal level may be triggered. That said, efforts continue
to avoid duplication by establishing a ‘one-stop shop’ for environmental assessments.
As part of a routine environmental impact assessment process for a significant
project, independent environmental state government agencies are responsible for assessing
environmental management and third-party stakeholders are invited to comment on the
impacts. This allows landholders and interest groups to have their say on proposals and
developments, adding motivation to ensure that early and effective stakeholder engagement
is in place. In Australia, emissions and renewable energy policy tends to be driven from a state
level, influencing national action. Precipitated by significant energy events such as the major
outages in South Australia and calls from industry for government to address rising costs and
availability issues, state governments have set renewable energy targets and are increasing
their focus on large-scale renewable energy delivery developments.
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With vast renewable resources remaining largely untapped, significant inbound

investment in renewables is occurring, although there remains scope to increase this interest
to meet the state energy targets. Almost all states have now set individual renewable targets
that complement those set at a federal level. This includes 40 per cent by 2025 for Victoria,
50 per cent by 2025 for South Australia and 100 per cent by 2020 for the Australian
Capital Territory. In Queensland, a target of 50 per cent by 2030 is gathering momentum
and support for renewable energy projects is growing. Recent examples of the exercise of
ministerial powers to call in the assessment of renewable energy projects are the Kidston
Solar Project (Phase One) and the Coopers Gap Wind Farm as matters of state economic
and environmental significance. The 50MW Kidston Solar Project is part of a suite of
12 projects attracting A$1 billion in investment, which, once completed, will triple the
amount of electricity produced from solar in Australia. In addition, Coopers Gap Wind Farm
will feature 115 wind turbines with a maximum capacity of 460MW. The A$700 million
project, scheduled for 2020 completion, will support 350 jobs during construction and
create 20 operational positions.
ii Existing framework and new developments at the national level

The federal government has continued to target economic growth programmes particularly
in light of the shifting economy. Under a broad federal mandate to drive innovation, the
government has identified reducing the regulatory burden on industry as a key objective.
Often referred to as a policy of ‘green-tape reduction’, at a federal level there are significant
developments under way whereby the government is aiming to repeal or amend regulation
that might be viewed as stifling these economic growth objectives. Mirroring support at
the state and territory level, the federal renewable energy target for large-scale generation
of 33,000GWh in 2020 will double the amount of large-scale renewable energy being
delivered by the scheme compared with current levels. In addition, the plan will result in
approximately 23.5 per cent of Australia’s electricity generation in 2020 being sourced from
renewable energy projects. Support for this target is directed by the independent Australian
Renewable Energy Agency (ARENA), which coordinates support for renewable energy
technologies from the research and development stage through to commercialisation and
deployment. In addition to marketing renewable energy projects to investors, ARENA
ensures the information and experience gained from its projects is shared throughout the
industry to benefit future projects. As with the state targets, major investment is expected
to realise the targets being set and we expect to see significant international interest in this
sector to help with this movement. In 2017, the federal government kick-started investment
by announcing a A$2 billion expansion of the Snowy Hydro project, which has operated
since 1974.
To complement the focus on strengthening social infrastructure projects across
Australia, the government has developed national guidelines for the delivery of infrastructure
projects to promote cross-government consistency and the use of best practice approaches.
Additionally, the Australian government is seeking to attract further private investment in
public sector infrastructure projects to meet increased demand for infrastructure over the
next decade, with opportunities for both domestic and international companies to invest.
Australia’s unique history and the continued connection of indigenous communities
with parts of the country have led to an important cooperative process whereby traditional
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indigenous owner groups may be afforded a right to negotiate regarding the development of
projects. A mining applicant, for example, is often required to address ‘native title rights and
interests’ in the land before proceeding to production.
iii International standards

Australia also recognises certain international standards. For example, the Equator Principles
are an internationally recognised standard for managing social and environmental risk
management within financial institutions involved in project finance. As in the United States,
while there is no legal requirement to adopt this measure, some major financial institutions
have voluntarily implemented the principles in their internal operations. This includes the
Australian Export Finance and Insurance Corporation and Australia’s four largest banks.
Significantly, in light of the interest in renewables, Australia remains committed to the
2015 Paris Agreement on climate change. Australia has targeted a reduction of emissions
by five percent below 2000 levels by 2020 and a further reduction of 26–28 per cent below
2005 levels by 2030. As noted, significant investment is needed to meet these targets.
Collectively, the laws and standards contribute to a balanced framework that protects
the social and environmental aspects of commercial life in Australia.
VIII PPP FUNDING METHODS

The Council of Australian governments endorsed a National PPP Policy and Guidelines in
2008, which apply to all Australian government agencies. In line with this framework, the
Australian governments will consider a PPP for any project with a capital cost in excess of
A$50 million. This policy framework has been supplemented by individual governments
including Victoria’s Partnerships Victoria, New South Wales’ New South Wales PPP
Guidelines and Queensland’s Project Assessment Framework. Despite the policies, there
remains concern regarding the level of risk transfer to the private sector, the costs incurred in
bidding for PPP projects and the decision of the current Victorian government to cancel the
A$5.3 billion East West Link PPP project several months after the PPP contract had been
signed by the previous Victorian government. On the other hand, in recent years there have
been many international contractors participating in bidding consortia for the major road
and rail infrastructure PPP projects.
Recent positive developments in the funding of PPP projects include the establishment
by the federal government of the Northern Australia Infrastructure Facility to offer up to
A$5 billion in concessional finance to encourage and complement private sector investment
in economic infrastructure for the Northern Territory that otherwise would not be built or
would not be built for some time and the provision by the federal government of a A$2 billion
concessional bridging loan to the New South Wales government to enable it to accelerate the
WestConnex project.

i Foreign investment
As a large, resource-rich country with relatively high demand for capital, Australia relies
heavily on foreign investment to fund significant projects. Foreign investment in Australia is
regulated by the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA), its regulations
and the foreign investment policy. The Australian Federal Treasurer, through the Foreign
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Investment Review Board (FIRB) administers the FATA, its regulations and the foreign
investment policy. The Treasurer is responsible for determining whether or not to allow
certain foreign acquisitions of interests in Australian land, companies (including offshore
companies with Australian assets), trusts, assets or businesses. As a general rule, FIRB must
be notified of all proposed foreign investment activity unless it is below the notification
threshold or a specific exemption applies.
FIRB has the power to prosecute non-compliance and to unwind acquisitions deemed
not to be in the national interest. Where the relevant regulatory process has not been followed,
penalties and even imprisonment may be imposed. In practice, where the acquisition is found
to be contrary to the national interest, the most common consequence, along with penalties,
is a forced divestiture of the assets or restrictive conditions imposed on the ownership of
those assets.
Applications for approval are required to address the national interest considerations,
including national security, competition, Australian government policies (including tax),
the impact on Australian economy and community and the character of the investor.
Foreign government investors (including companies in which foreign governments have
an aggregate interest of 20 per cent or more) face more strenuous FIRB notification and
approval requirements. Foreign investments in certain sensitive sectors (for instance, civil
aviation, banking, shipping, telecommunications and media) also have additional approval
requirements. The FIRB requirements will obviously be relevant for financiers seeking to
take a security interest or enforce their security as the step in by the financier can amount
to an acquisition of an interest requiring prior FIRB approval, unless specifically excluded
by the policy or the FATA (for example, taking or enforcing a security interest is specifically
exempt from the requirement of obtaining FIRB approval in the context of certain genuine
money-lending arrangements).
More lenient screening thresholds apply for certain investors, including investors
from the United States and New Zealand. Higher monetary thresholds are included in
the free trade agreements with China, South Korea and Japan. However, lower monetary
thresholds will still apply in prescribed ‘sensitive sectors’ of Australian industry, such as
media, telecommunications, military-type goods and services, transport and the extraction
of uranium.
Historically, the vast majority of foreign acquisitions have received approval, which
in most cases is obtained within 40 days. However, recent amendments to the FATA and
supporting regulations by the federal government have increased the scrutiny applied to
a proposed investment in Australia, particularly in the residential and agricultural sectors.
Amendments to the FATA that became operative on 1 December 2015 saw an increase to
existing criminal penalties, supplement divestiture orders with civil penalties and the ability
to prosecute third-party advisers such as lawyers or real estate agents who assist in a breach
of the foreign investment rules introduced. The federal government now also charges fees for
foreign investment applications, ranging from A$1,000 to A$100,000 with uncapped fees of
1 per cent of the purchase price being imposed on residential land acquisitions.
Approvals involving foreign government investors (including state-owned enterprises)
are also under increased scrutiny, as are transactions involving agricultural land and water.
Approval time frames in such cases can be significantly longer. Although only a small number
of foreign investment approval requests have been denied in the past, in some cases, conditions
(sometimes onerous) have been attached to approvals to ensure that the investment is not
contrary to the national interest.
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ii Foreign workers
The federal government has recently announced reforms to its employer-sponsored visa
programme to strengthen its integrity with the aim of supporting businesses to address
genuine skill shortages in their workforces; the reforms have yet to come into effect.
A large number of Australian visas permit holders to work in Australia. There are specific
working-visa categories that enable an employer to sponsor temporary foreign workers to
work in Australia for up to four years (depending on the occupation of the foreign worker).
A foreign worker must be employed in an approved occupation and have the skills necessary
to perform that occupation.
The employer may be a business that operates in Australia, or a business that does not
formally operate in Australia but is seeking to establish a business operation in Australia or
fulfil obligations for a contract or other business activity in Australia. Depending on the
type of visa, an employer may be required to register as a business sponsor and demonstrate
a commitment to employing and training locals. In most cases, there is also an obligation
on the employer to ensure equivalent terms and conditions of employment to prevent the
Australian workforce from being undercut, which means that minimum pay thresholds must
be met, and market salary rates be paid to foreign workers.
iii Taxation issues

While there are various taxes and charges at each of Australia’s three levels of government, the
most substantive tax for Australian projects is income tax (including capital gains), which is
levied by the federal government.
Australia-resident companies are subject to a tax rate of 30 per cent of taxable profits.
Similarly, branches or permanent establishments of non-resident companies are taxed at the
same rate.
Where a company pays dividends to a non-resident shareholder from profits that
have been subject to Australian tax, no withholding tax applies. However, if Australian tax
does not apply at the Australian company level, distributions of the profit will be subject to
withholding tax at rates up to 30 per cent but this is normally reduced to 15 per cent or in
some cases 5 per cent or zero under double taxation agreements.
Interest expenses are normally deductible against Australian income, though thin
capitalisation limits apply. Under safe harbour rules, interest-bearing debt to equity can
broadly be in the ratio of up to three to one without denial of interest under the thin
capitalisation rules.
Interest withholding tax normally applies under a rate of 10 per cent, but in some
limited cases this can be reduced to nil for payments to financial institutions in certain
countries under double tax agreements and also for certain offshore debt raisings by
Australian companies.
Australia has a broad-based capital gains tax that applies to the disposal of assets and
entities. In the case of non-residents, however, Australian capital gains tax only applies to the
sales of assets such as Australian permanent establishment business assets, land and mining
tenements and interests in companies where the non-resident and associates have a greater
than 10 per cent interest and the majority underlying value is in Australian land, leases and
mining rights.
Accordingly, non-resident shareholders may generally dispose of interests in Australian
resident companies without Australian capital gains tax where the company is not Australian
‘land rich’ or where the interest in the Australian entity is less than 10 per cent.
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Australia
Other taxes
Various state-based mineral royalties apply to the production and sale of minerals extracted
in relevant state jurisdictions. It has also extended the application of the Petroleum Resource
Rent Tax to onshore oil and gas projects.
Australia has a goods and services tax (GST), which is a broad-based consumption tax
applying at a rate of 10 per cent to most goods, services and supplies. GST does not normally
apply to exported goods. GST is typically passed on and is normally creditable in business-to-
business transactions.
iv Licensing requirements
Within some Australian states and territories, contractors who intend to undertake building
and construction work and engineers who are supervising projects or undertaking design
work are required to be licensed.
The consequences of carrying out unlicensed work can be severe and affect the contractor’s
entitlement to recover payment as well as rendering it liable to prosecution. Accordingly, any
foreign entrant to the Australian construction market should fully investigate whether such
licensing and pre-qualification requirements must be met before embarking on a project.
i Overview
It is a universal maxim that where there are construction projects, disputes will follow. The
Australian construction industry is no exception, given the scale of commercial activity
occurring within the industry at any given time and the innovation that is involved on the
projects under construction. Construction disputes are inherently complex and often turn
on highly technical questions of fact and law. As a result, they are especially prone to being
protracted and costly for the parties involved.
There are a number of forums in which Australian construction, engineering and
infrastructure disputes may be heard and resolved, either finally or on an interim basis. The
primary methods utilised by disputants within the construction industry remain arbitration,
statutory adjudication and litigation. Other forms of alternative dispute resolution are,
however, also available, including expert determination.
For the moment at least, the focus in Australia remains on dispute resolution, rather than
dispute avoidance. Australia has not followed the global trend of embracing dispute avoidance
mechanisms, such as dispute review boards (DRBs), given the perception that they are not cost
effective on projects under a certain monetary value. Nevertheless, DRBs have enjoyed some
support, mainly on large-scale government projects. The proposed new AS11000:2015 General
Conditions of Contract (which are intended to replace AS2124:1992 and AS4000:1997) are
likely to encourage the industry to consider use of a DRB or a facilitation in attempting to
resolve disputes. They provide two options for dispute resolution. Both options require the
parties to first attempt to resolve the dispute by conference but one ends with arbitration
and the second with expert determination, followed by litigation (if the expert determines
an amount is payable to one party in excess of a specified threshold or that no amount is
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Australia
payable). The second option also provides for resolution by a ‘contract facilitation’ or a DRB.
This option is set out in a new proposed AS11001:2015 Dispute Avoidance, Management
and Resolution under Construction Contracts.
This section will focus on the three primary methods by which construction disputes
are resolved in Australia: arbitration, adjudication and litigation.
ii Arbitration
Arbitration as a preferred method of dispute resolution is undergoing a resurgence in
Australia following widespread reform to legislation throughout almost all of its states and
territories. Since 2010, each state and territory (except for the Australian Capital Territory)
has introduced uniform domestic commercial arbitration legislation that essentially enacts
the UNCITRAL Model Law.5 The introduction of the uniform Commercial Arbitration
Acts has simplified Australia’s legislative regime and enabled Australian courts to have
reference to Australian decisions construing the UNCITRAL Model Law in the context of
the International Arbitration Act 1974 (Cth), as well as to overseas decisions that consider
the UNCITRAL Model Law.
Further, for international commercial arbitration in Australia, recent amendments to
the Australian Centre for International Commercial Arbitration Rules address the difficulties
that can arise in multi-party or multi-contract disputes by providing a mechanism by which
an arbitral tribunal can join parties to the arbitration or consolidate multiple arbitrations
occurring under related contracts. This is a particularly useful feature in international
construction disputes, which often involve multiple parties or multiple contracts.
With the adoption of the uniform domestic Commercial Arbitration Acts, which align
with the International Arbitration Act, Australian jurisprudence has been able to demonstrate
that Australia courts adopt a pro-arbitration approach and fulfil their mandatory statutory
obligation to uphold arbitration agreements and arbitral awards
Australia’s united legislative regime has put Australia in an optimum position to
continue to build its reputation as a stable jurisdiction for both domestic and international
commercial arbitration.
iii Adjudication
Since December 2011, every state and territory in Australia had enacted legislation providing
for the interim statutory adjudication of construction disputes (commonly referred to as
‘security of payment legislation’).
Although they differ in content and procedure, the rationale underlying each of the
legislative regimes is to establish a rapid means of securing interim progress payments to
secure cash flow and reduce the instances of insolvency within the industry (which can have
a cascading effect down the contractual chain on a project). Adjudication determinations do
not finally determine the parties’ positions inter se and payments made pursuant to them are
made ‘on account’ only.
Despite its ubiquitous presence within Australia, the security of payment legislation
lacks national uniformity. Instead, the nation’s legislative regimes may roughly be divided
into two categories: the ‘West coast model’, which is intended to operate in a fashion similar
5 United Nations Commission on International Trade Law Model Law on International Commercial
Arbitration (1985), with amendments adopted in 2006.
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Australia
to the Housing Grants, Construction and Regeneration Act 1996 (United Kingdom) and
has been implemented in the Northern Territory and Western Australia, and the ‘East coast
model’, which operates in New South Wales, Queensland, Victoria, Tasmania, the Australian
Capital Territory and South Australia.
iv Litigation
Litigation is acknowledged to be a costly and often protracted process. These characteristics
are only compounded when courts are called upon to determine construction disputes, with
all their attendant complexities. For this reason, and given the availability of comparatively
efficient, confidential and less expensive alternative dispute resolution procedures, litigation
remains an option of last resort by the parties to construction disputes.
While Australia does not have specialist courts in place whose sole function is to hear
and determine construction disputes, certain jurisdictions (such as New South Wales and
Victoria) have specialist case lists to facilitate the management and hearing of construction
litigation. Judges with expertise in construction litigation are appointed to preside over
these lists.
In recent years, legislation has been enacted to improve the case-flow management of
matters that are before the courts.

Australia remains an attractive jurisdiction for both domestic and foreign investment, largely
because of its mining and resources projects, as well as projects involving the construction of
significant public infrastructure.
The key constraints affecting Australian projects remain the availability of a suitable
work force to undertake the projects and the volatility of commodity prices underpinning
project valuations. The ability of international companies to introduce their highly skilled
work force to Australian projects and reduce project operating costs will be critical to the
completion of these projects within budget and on time.
It is expected that the ongoing investment of Chinese and Indian companies in major
Australian projects will continue to fuel the expansion of construction activities. Major
infrastructure spending is under way and increases are forecast. Although the resources sector
remains a dominant component of the Australian economy, other sectors, such as agriculture,
tourism and social infrastructure, are rising to prominence.
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Chapter 6
BELGIUM
Rony Vermeersch, Olivia de Lovinfosse and Mitch Windsor1
I INTRODUCTION
The Belgian projects and construction sector saw the beginning of a recovery in 2016 following
years of post-recession stagnation. A number of significant projects funded by the European
Fund for Strategic Investment (also known as the Juncker Plan) reached financial close in
2016, in a variety of sectors from offshore wind to transport and infrastructure.
The much-awaited publication in September 2016 of Eurostat’s guidelines for the
statistical analysis of public–private partnership (PPP) structures has breathed new life into
PPP financing after the previous year’s retrenchment due to budgetary cuts and uncertainty
over the application of the European accounting rules for PPPs.

There has been an increase in major project approvals in 2016. The Liège tram project finally
received approval from Eurostat in March 2017. Other PPP projects will follow.
Construction work for the new iconic national stadium in Brussels, allowing Brussels
to be the host for the 2020 UEFA European Football Championship opening game, did not
kick off in 2016 as expected. Progress is expected to be made in 2017, although the project
has been beset by unforeseen planning-related delays in Q1 2017.
Labour costs remain high and margins low for contractors, pushing general contractors
to cut back on their own Belgian labour force and work more and more with foreign
subcontractors. To fight social dumping and unfair competition, decisions have been taken
at both national government and EU level and concrete measures are being implemented by
the sector.
In addition, skilled general contractors continue to export their know-how and take up
work where margins are more enticing, such as in Africa and the Middle East.

In the Belgian market the transactional structure in particular depends on whether a public
building project is concerned, with a public entity as principal. Regarding government-funded
1 Rony Vermeersch is a partner, and Olivia de Lovinfosse and Mitch Windsor are junior associates at Stibbe.
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Belgium
infrastructure projects on public property there is a tendency not to transfer property or

(other) rights in rem to investors. However, if specific circumstances so require, granting
rights in rem is possible.
More eagerness to obtain rights in rem can be noted on the part of private investors,
quite often completed by the standard types of security. In project-financed deals, obviously,
the ‘non- or limited recourse’ character of the financing contradicts the need for rights
in rem. Several ownership structures are used, again depending on the particulars of the
project, without there being one particular dominant structure. Hence models such as
build-own-operate-transfer and build-operate-transfer (BOT) – although rarely identified
as such – are all present on the Belgian market, but none of them are viewed as the
market standard.
As regards PPPs, the design-build-finance-maintain (DBFM) model dominates the
Belgian market. This model implies that a private party designs and builds the infrastructure,
maintains it for an agreed period, as the case may be completed with an ‘operate’ component
or facility services, or both, and secures the required financing. In the base scenario, this does
not imply a transfer of property (resembling a BOT). However, a limited number of DBFM
projects do provide rights in rem for the investor, but in such cases the rights in rem serve
either as security or are provided for tax reasons.
ii Documentation
Adopting a PPP project as an example of a complex project-financed transaction in the
Belgian market, the following documents constitute the principal documentation:
a DBFM (or other integrated contract) between the principal and (most often) a special
purpose vehicle (SPV);
b shareholder agreements, and agreements to provide subordinated debt;
c financing agreements, as well as security documents, agreed between the SPV and the
lenders. Often these documents are based on models of the Loan Market Association;
d in relation to subcontractors of the SPV, design agreements (with an architect if legally
required), engineering-procurement-construction (EPC) or other types of construction
contracts and operations and maintenance contracts;
e an interface agreement; and
f a set of direct agreements.
iii Delivery methods and standard forms

The Belgian construction market (both public and private) is still dominated by the ‘classic’
procurement model. An employer contracts a designer, an engineer and – if required – an
architect, arranges funding and appoints a building contractor.
When public contracts for works, services or delivery of goods are concerned, a specific
set of rules is applicable. The Royal Decree of 14 January 2013 provides a detailed set of the
general execution rules (GERs), that is, contractual terms and conditions applicable to all
public contracts for works, services or delivery of goods. A public authority can only deviate
from these rules in specific circumstances.
Nonetheless, in particular in a project finance context where predictability of the
eventual revenue is even more important, the DBFM model is increasingly dominant, and
the GERs do not apply to this model.
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Belgium
Independent use of integrated contracts, such as EPC and design-build, has also
increased. As to international model construction contracts, the FIDIC suite of contracts
is increasingly widespread in Belgium, especially on energy projects (both on and offshore).
Other standard forms have not yet penetrated the market.
Although standard forms of Anglo-Saxon inspiration are being used more frequently,
and provide the comfort of being recognisable to lenders and foreign investors, one should
bear in mind that their application and enforcement will, in particular with respect to notices
and notice periods, not be as strict, literal and rigorous as under common law, but will rather
be tempered by the legal principle of good faith proper to civil law.

i Management of risks
Probably the most important risks in a project finance transaction or a construction contract
are the risks of insolvency of the other party, loss of the infrastructure that is being built, and
risks such as force majeure or ‘hardship’. In a standard construction contract, little is in fact
provided to manage these risks, mostly because Belgian law provides an answer to most legal
issues in this respect.
To limit the risk of insolvency of the counterparty (on top of what is already provided
for in Belgian law), contractors will attempt to be paid in regular tranches or according
to milestones, as close as possible to a ‘cash neutral’ or ‘cash positive’ position. If so
required, contractors will (attempt to) suspend further execution (invoke the exceptio non
adimpleti contractus) until their invoices are paid. Principals, on the other hand, will require
a performance bond, an advance payment bond, a deposit blocked on a bank account or will
withhold a part of the sums due (retention). In public work contracts, contractors should
take into account the negative cash flow that the contract will generate.
The risk of loss of the infrastructure prior to completion is usually borne by the
contractor. The standard method of mitigating this risk, of course, is through appropriate
construction all-risk (CAR) insurance.
There is a lot of variety in the market for managing situations of force majeure or
hardship. Legally speaking, the risk of force majeure is shared among parties. Parties are free,
however, to contractually regulate force majeure as they deem fit. Hardship would normally
be a risk borne by the party affected by it, and may be mitigated somewhat in the case of
public contracts where contractors can often obtain additional time or payments in situations
that would qualify as ‘hardship’. When PPPs are concerned, as the financing of the project
usually depends on the cash flow generated by the project, funders will never accept the
reimbursement of their funds being dependent on chance. Hence, in PPP projects, much
effort is put into identifying all risks relating to the project (sometimes through a risk matrix),
allocating those external risks and clearly defining the contractual consequences in terms of
money and time in the event that the risks occur.
ii Limitation of liability
Under Belgian law, limitations of liability in the construction industry are a gradually
increasing phenomenon.
As to basic ‘liabilities’ relating to a construction contract, the liability for hidden defects
and the decennial liability must be mentioned. In addition, general rules of contractual
responsibility apply.
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Decennial liability under Belgian law, although based on Article 1792 of the Civil
Code, is a contractual liability, relating to the safety and stability of ‘immoveable works’. If
the safety or the stability of these immoveable works is affected or endangered by a defect,
a designer or contractor can be held liable for its consequences for 10 years. One can by no
means limit or contract out of this decennial liability as it is part of Belgian public policy.
Liability for hidden defects on the other hand constitutes an autonomous ground for
(contractual) liability. Contrary to decennial liability, one can contract out of the application
of the ‘liability for hidden defects’. Under Belgian law this liability ends 10 years after
acceptance of the works but it is not uncommon to limit this period, for example, to one or
two years. However, to the extent a hidden defect triggers decennial liability, an exoneration
or limitation of liability for hidden defects will have no effect.
In principle, liability for indirect or consequential losses, or for loss of business or profits,
can validly be limited or excluded by contract (except in the case of decennial liability). Yet,
there are limits to such limitations or exclusions of liability. A party can only limit its liability
as long as this limitation or exoneration does not strip the essential contractual obligations of
‘their contents’. If a clause limiting liability implies that as a result a debtor has no genuine
obligation to perform, the limitation is invalid. To exonerate for gross negligence, explicit
wording must be inserted.
In application of the principle of law referred to as fraus omnia corrumpit, pursuant to
Belgian law it is not possible to exonerate liability for one’s own wilful misconduct. Therefore,
in principle, a clause aiming to exonerate liability for wilful misconduct has no effect.
Exoneration is only permitted for the specific situation of wilful misconduct by employees
of the concerned party.
Although admissible under Belgian law and a token of good practice, liability caps are
not standard practice yet in all construction contracts. For instance, the GERs for public
procurement contracts do not contain any limitations of liability.
As force majeure is a concept enshrined in Belgian contract law, force majeure clauses
are not a necessity in Belgium. Nonetheless, customised force majeure clauses are enforceable
and even customary in more complex transactions (especially where a lender is involved).
The concept of hardship, however – sometimes referred to as application of the clausula
rebus sic stantibus – is not part of general Belgian contract law. Only when public contracts
are concerned can a concept close to hardship be invoked. Hence, particularly in private
contracts, a hardship clause could prove useful.
iii Political risks

In Belgium political difficulties have had little effect on the performance of project finance
or construction projects. As a result, other than standard force majeure provisions relating
to war and civil disturbance, etc., particular arrangements to mitigate political risks are
rarely provided.
Few doubt that in Belgium, in the case of revocation of a contractually valid agreement
or of nationalisation or expropriation, the involved counterparty would be indemnified.
Indeed, contractual and other rights, including those of foreign investors, are well protected
in Belgium.
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Belgium

For ordinary small-scale financing, the funder is usually granted a mortgage on both soil and
structures, to secure at least part of the financing. Mortgages are ranked according to their
date of inscription in a special register. To limit costs relating to a mortgage, sometimes only
a power of attorney is provided in favour of the funder, which allows the funder to unilaterally
obtain a mortgage when this proves necessary. When relevant in view of the specific project,
it is common practice to require rights in rem. Such rights in rem provide economic rights of
property over the assets concerned, and as a result constitute a powerful security.
In other situations it is common to require securities such as a commercial pledge;
a possessory right of pledge entitling the creditor to have the pledged asset sold and be paid
preferentially out of the sale proceeds. A pledge on shares (for instance, of an SPV) or a pledge
on bank accounts is customary.
On 30 May 2013, the Belgian parliament adopted the new Act on security interests
on ‘moveable assets’. This Act significantly changed the legal framework for the creation,
perfection and realisation of security interests on all kinds of moveable assets, whether
tangible or intangible, including receivables. In particular, the Act introduces, in addition to
the traditional possessory pledge, a non-possessory pledge on moveable assets, which will be
subject to registration in a newly created public register. These legal changes aim to modernise,
simplify and make the rules on security interests on moveable assets more coherent.
Parties or lenders sometimes require a parent company guarantee, or – when
contracting with entities created by public authorities – a state guarantee by the concerned
public authorities.
Step-in rights for funders – which allow them to take over rights and obligations – are
also admissible in Belgium. Such rights are contained in most funding agreements, and are
standard practice when direct agreements are concerned.

When standard public works contracts are concerned, performance is secured through
a ‘deposit’ of 5 per cent of the works’ price. In private contracts a variety of mechanisms can
be observed, including the mechanism of withholding part of the price or invoiced amounts
until provisional or final completion.
When project finance is involved, in particular with international elements, it has
become customary to require bank guarantees to secure performance, in addition to parent
company guarantees. In smaller or local transactions, contractors are reluctant to provide
bank guarantees, in particular the ‘on-demand’ type.
The common insurances in a construction context are:
a civil liability insurance, which covers damage to property, life or health of a third party;
b CAR insurance, covering risks that are usually associated with a project in the course
of construction;
c decennial liability insurance, which covers decennial liability (see Section IV.ii,
supra); and
d professional liability insurance, covering contractual liability of the designers involved.
In Belgium currently only architects are under a statutory obligation to carry insurance
for their contractual liability. Decennial liability insurance requires the involvement of
an independent control agency (such as SECO, AIB Vinçotte, Socotec) to sign off to the
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insurance company that the insurance may be granted. As decennial liability insurance
is considered to be expensive by the market, it is not standard practice for all projects.
One is likely to encounter such insurance where project finance is involved or in project
development projects.
VII ENFORCEMENT OF SECURITY AND BANKRUPTCY PROCEEDINGS

Outside the context of a bankruptcy proceeding, a security can only be enforced if a debtor
has failed to meet a payment obligation on its maturity date or any other obligation deemed
essential under the (funding) agreement. The debtor should be given notice (notice of
default) that it must comply with its obligations on the due date. If the debtor is still capable
of meeting its obligations, the creditor should – in writing – allow a reasonable period to
remedy this breach, unless it is sufficiently clear that the debtor is or will no longer be able
to meet them.
A business that is in financial jeopardy, but can still be saved from bankruptcy, can
apply for ‘reorganisation proceedings’. The Belgian version of Chapter 11, the Act of
31 January 2009 on the Continuity of Enterprises, came into effect, introducing a new form
of ‘reorganisation proceedings’. This Act introduced a system to enable enterprises in difficulty
to recover their financial health. It is aimed at sustaining the continuity of businesses as
much as economically possible by making reorganisation more accessible to debtors suffering
financial difficulties and presenting options for recovery.
In Belgium a business must file for bankruptcy if it has permanently ceased its payments
and lost the confidence of its creditors. Only individuals or legal bodies ‘conducting a business’
can be the subject of bankruptcy proceedings. Also, creditors such as lenders can set off the
court proceedings leading to a bankruptcy – declared by the commercial court – and the
nomination of a receiver.
There is a ‘suspect period’, starting when payments ceased, and ending on the
declaration of bankruptcy. Once a request for bankruptcy is filed, all (other) enforcement
measures are suspended.
Once the business has been declared bankrupt, in principle all creditors are equal.
However, if creditors have conflicting rights in relation to the proceeds of a bankruptcy, the
distribution of proceeds is as follows:
a statutory claims: specific preferential rights granted by law to specific classes of creditors
or over specific assets, but limited to those assets. An example is the preferential right
granted to the unpaid seller of machinery. General preferential rights also exist, for
instance regarding workers’ wages, social security contributions and tax;
b secured creditors: creditors holding a mortgage, commercial pledge, retention right,
general business charge, etc.; and
c unsecured creditors, who are treated equally: the net proceeds from the debtor assets are
distributed in proportion to their claim.
VIII SOCIO-ENVIRONMENTAL ISSUES

i Licensing and social dumping
A major distinction should be made between EU nationals and all others in terms of labour.
Nationals of EU Member States enjoy the benefits of free movement of workers within the
EU. All other workers need a work permit to work in Belgium.
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European companies often post employees to another EU country to work there

temporarily. These ‘posted workers’ must be paid at least the minimum wage of the host
country, yet their wages can be lower than the wages of local workers. There is no ‘same pay
for the same work at the same place’.
Posted workers are EU citizens who have an employment contract in their home country,
and are temporarily posted to a host EU country by their employer when their employer
provides a certain service, for example, if a Bulgarian construction company builds a house
in France. Belgium is among the countries receiving the highest number of posted workers.
A number of safeguards are in place to protect the social rights of posted workers,
according to the Posting of Workers Directive (Directive 96/71/EC), adopted in 1996 and in
force since December 1999. Posted workers are subject to the host country’s laws, regulations
or administrative provisions concerning:
a minimum rates of pay (i.e., minimum wage), including overtime rates;
b maximum work periods and minimum rest periods;
c minimum paid annual holidays;
d conditions of hiring out workers, in particular the supply of workers by temporary
employment undertakings;
e health, safety and hygiene at work;
f protective measures in the terms and conditions of employment of pregnant women or
those who have recently given birth, of children and of young people; and
g equal treatment between men and women and other provisions on non-discrimination.
In the construction sector, where the core conditions of employment listed above are laid
down by collective agreements or arbitration awards that have been declared universally
applicable, Member States are also obliged to ensure the application of these conditions to
posted workers.
While minimum wage requirements of the host country apply to posted workers,
posted workers continue, to pay their social security contributions in the member state where
they are normally based for up to two years. During this period they do not pay social security
contributions in the Member State where they are temporarily posted.
Companies providing cross-border services therefore have a cost advantage when social
security contributions are lower in their home country than in the host country.
There have been various abuses, some related to exploitation of posted workers and
others to subcontracting, where posted workers have sometimes been left without being paid,
sometimes when the company had disappeared or never really existed (letter-box companies).
To combat this, the European Commission proposed an Enforcement Directive
in March 2012, which was approved on 13 May 2014 (Directive 2014/67/EU). A draft
implementation act for Belgium was approved by parliament on 24 November 2016, giving
the social inspectorate new powers to monitor compliance with the Posted Workers Directive.
This includes the designation, by an employer who wishes to use posted workers, of a liaison
officer who is responsible for providing any information requested by civil servants in respect
of the posted workers.
The most striking development from the Enforcement Directive for the construction
industry is the introduction of possible joint and several liability for the employer and
main contractor in respect of the supply chain. It is therefore likely that in arm’s-length
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subcontractual arrangements the employer or contractor, will require an indemnity from its
contractor or subcontractors in respect of any liabilities arising from the Posted Workers and
the Posted Workers Enforcement Directive.
At the national level, Belgian industry stakeholders identified 27 national and 13 EU
measures to fight unfair competition. Key measures include:
a the compulsory LIMOSA registration system, to better supervise the number of foreign
employers in Belgium; and
b the compulsory registration (since March 2016) of attendance on construction sites for
any worker on a construction project with a value of more than €500,000 (known as
the Checkinatwork scheme).
ii Permits
Belgium has extremely broad and detailed legislation regarding urban development,
environmental issues and sustainability. This legislation is to a very large extent based on
EU directives. The baseline is that for building works a rigid procedure must be followed
to obtain a building permit and an environmental permit prior to starting the works. In
the Walloon region these can be combined into one permit and, since 2017, this has also
been the case in the Flemish region, where these permits will be combined into an ‘all-in-
one permit for physical aspects’. In fact, permits are the Achilles heel of many (possible)
construction and infrastructure projects.
Besides these particular rules, Belgium has extensive legislation on air pollution,
discharge of water, environmental impact assessment, general sustainable development and
carbon emissions, etc.
iii Equator Principles

Nearly all financial institutions dominating the Belgian project finance market, in particular
PPPs, adopted the Equator Principles. As a result, one can assume that most project
finance transactions and construction contracts insofar as they apply are subject to the
Equator Principles.
iv Responsibility of financial institutions

Financial institutions are subject to general Belgian law. Hence, all criminal, contractual as
well as tortious liability legislation applies to financial institutions. There is a mechanism to
convert a theoretical punishment for corporate criminal liability from imprisonment into
a pecuniary punishment.
In administrative terms, the Financial Services and Markets Authority is the most
important entity in Belgium. It supervises the rules of conduct applicable to financial
institutions, to maintain confidence in the financial markets and to ensure that investors and
financial consumers are treated honestly, fairly and professionally.
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IX PPP AND OTHER PUBLIC PROCUREMENT METHODS

i ESA accounting rules
A main driver for public authorities opting for the PPP model is its potential for an
off-balance treatment under the ESA 2010 accounting rules of the European Union.2 The
ESA 2010 rules operate a ‘binary’ system: the assessment is that the project is either a wholly
owned government asset or else it is a non-wholly owned asset (i.e., on or off-balance sheet).
Eurostat (the European agency in charge of monitoring the national accounts) had
over recent years adopted a much stricter application of said rules towards certain countries,
including Belgium, leading to uncertainty and public authorities (temporarily) abandoning
important infrastructure projects.
To clarify its statistical treatment of PPPs, in September 2016, Eurostat released
a comprehensive document, in cooperation with the European PPP Expertise Centre of
the European Investment Bank, and published under the aegis of both institutions.3 This
150-page document examines in detail the project structure of a typical PPP deal, and
highlights particular risk allocations that it considers will point to a project being treated as
on or off-balance sheet.
The Eurostat guidelines give all stakeholders clear indications of an appropriate fiscal
and project risk allocation for the public sector body to assume in a PPP project, and
practitioners in Belgium have welcomed the important clarifications.
ii Procurement methods
Belgian public procurement legislation distinguishes between four types of procurement
procedures referred to as ‘sale by auction’, ‘call for tender’, the ‘negotiated procedure’ and
competitive dialogue.
In the event of a sale by auction, the contract must be granted to the tenderer who
has submitted the lowest regular tender. In the case of a call for tender, the contract must be
granted to the most advantageous tender, according to the award criteria (e.g., price, quality
or timing) mentioned in the contracting documents. The contracting authority has the free
choice between both procedures. Both procedures may be awarded by means of an open or
restricted procedure. In an open procedure all interested contractors may submit tenders; in
a restricted procedure, only those contractors so invited by the contracting authority may
submit tenders.
The negotiated procedure allows the contracting authority to consult the economic
operators of its choice and to negotiate the terms of the contract with one or more of them.
PPP transactions are still usually tendered through the ‘negotiated procedure’, although
recently the competitive dialogue has also been introduced into the Belgian legal system.
Most PPPs involve a selection phase followed by one or more offer phases, consisting of
rounds of negotiations leading to subsequent offers, and usually a ‘best and final offer’. Finally,
after the preferred bidder is selected, final negotiations are conducted and the contract is
closed. Usually, ‘contract close’ concurs with ‘financial closure’ between the contractor and
its funders.
2 ESA 2010 stands for the latest version of the European System of National and Regional Accounts, the
EU accounting framework for a systematic and detailed description of an economy. The ESA 2010 was
published in the Official Journal as Annex A of Regulation (EU) No. 549/2013.
3 ‘A Guide to the Statistical Treatment of PPPs’, September 2016.
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Belgian legislation on public procurement was previously codified in the Act of

24 December 1993 and its implementing royal decrees. As of 1 July 2013, this Act has been
fully replaced by the Public Procurement Act of 15 June 2006. This Act contains the core
of the coordination and codification of all existing public procurement regulations and the
transposition into Belgian law of the European Procurement Directives.
There are, in addition, several royal decrees implementing this Act.
The 15 June 2006 Act was replaced, on 17 June 2016, by new legislation to implement
the following European directives:
a Directive 2014/23/EU of 26 February 2014 on the award of concession contracts;
b Directive 2014/24/EU of 26 February 2014 on public procurement and repealing
Directive 2004/18/EC; and
c Directive 2014/25/EU of 26 February 2014 on procurement by entities operating in the
water, energy, transport and postal services sectors and repealing Directive 2004/17/EC.
The new Belgian Act of 17 June 2016 concerning public procurement (the new Public
Procurement Act) and the Act of 17 June 2016 on concession agreements have been published
in the Belgian official journal. They are expected to enter into force on 30 June 2017.
Contracting authorities must in addition always respect the general principles relating
to good administration and the fundamental principles of the Treaties of the European
Union when they award public procurement contracts. Of these general principles, the most
relevant in terms of public procurement are equal treatment and non-discrimination, free
competition, transparency, legal certainty and proportionality. These principles can also be
used when interpreting Belgian (and European) public procurement law and have to be taken
into consideration in situations where no explicit regulation exists.
The suspension or annulment of the decisions taken by contracting authorities are
brought before the Council of State, except in cases where the contracting authority is
not a public authority in the sense of the legislation on the Council of State. In this case,
suspension or annulment actions are brought before the civil courts. Applications for review
do not have an automatic suspensive effect.
The civil courts have the exclusive competence for damage claims, for the suspension
and annulment of the public procurement contracts and for all disputes concerning the
execution of these contracts.
X FOREIGN INVESTMENT AND CROSS-BORDER ISSUES

The Belgian economy is open to foreign lenders, investors and contractors. There are no
specific restrictions on foreign investments and ownership. On the contrary, Belgian
legislation contains certain particularities that should attract foreign investment, such as
the ‘deduction for risk capital’ also known as ‘notional interest deduction’, which is a tax
incentive to reinforce Belgium as an attractive location for investors.
In relation to public works licensing, it is essential that both national and foreign
contractors are ‘licensed to build’, or alternatively are able to prove that they have equivalent
experience and skills to entitle them to a licence. These licences are granted in different grades
according to the size of the construction works, and in different categories and subcategories.
As Belgium has an open economy, there are no real currency controls that would make
it difficult or impossible to change operating funds or profits from one currency to another,
nor any controls or laws that restrict removal of profits and investments.
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XI DISPUTE RESOLUTION
i Special jurisdiction
In Belgium there are no specific courts or tribunals dealing with project finance transactions
or construction contracts. Depending on the specific circumstances, disputes fall under the
jurisdiction of the civil or commercial courts. In practice, each court will have a specialised
construction chamber.
Nevertheless, two administrative courts are important to note in a project finance
context: the Council of State at the federal level, and the Board of Permit Appeals in the
Flemish region. The latter is competent to rule on (appeals against), inter alia, building permits
in the Flemish region, and the former is competent to rule on administrative decisions taken
by most public authorities.
ii Arbitration and ADR

The use of ADR in the Belgian market is increasingly popular. Nonetheless, its market share
is still limited, and disputes regarding projects or construction are usually dealt with by the
courts, quite often combined with expert advice to the courts. In particular regarding public
contracts or strictly national transactions, ADR is only applied occasionally.
In a commercial context, the use of arbitration precedes mediation or any (other) ADR
mechanism. The governing legislation as to both (international and domestic) arbitration
and mediation can be found in the Judicial Code. The general rules on arbitration can be
found in Part 6 of the Judicial Code, which as of 1 September 2013 was completely revised
(largely based on the UNCITRAL Model Law). The rules on mediation constitute Part 7 of
the Judicial Code.
The importance of expert determination in construction contracts is growing, in
particular regarding large or long-term projects, requiring an efficient settlement of certain
categories of disputes. In general, the use of expert determination is limited to technical issues.
Dispute resolution or adjudication boards are still rare. In recent PPP projects, however,
dispute boards do appear. Typically, they act as an intermediate procedure, prior to falling
back on the courts or arbitration. Most probably the foreign influence on the structures used
for these PPPs and the standardisation in this field explains why such boards start to appear.
The most prominent Belgian organisation for institutional arbitration and ADR is
CEPANI,4 providing rules on arbitration, mediation and (technical) expertise. New CEPANI
arbitration rules and CEPANI mediation rules entered into force on 1 January 2013.
The Belgian courts adopt a rather neutral approach towards arbitration, neither
favouring arbitration nor showing a particular bias against it. Tax disputes or criminal matters
are excluded from arbitration. When an individual is concerned, caution is required, as use
of arbitration in consumer, insurance and labour matters is restricted. Automatic domestic
arbitration does not exist in Belgium.
The New York Convention entered into force in Belgium in 1975. Upon ratification
Belgium declared that it will only apply the Convention to recognition and enforcement of
awards made in the territory of another contracting state. If an award is contrary to public
policy or the dispute was not arbitrable, enforcement will be refused. Enforcement of a foreign
award will also be refused if one of the grounds for setting aside the award exists.
4 www.cepani.be.
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Belgium ratified the ICSID Convention in 1970 and has signed a large number of
bilateral investment treaties, providing for either ad hoc or ICSID arbitration. The first ICSID
arbitration ever against Belgium under the ICSID Convention was dismissed in 2015,5 while
Belgian investors have initiated several proceedings against foreign countries.
XII OUTLOOK AND CONCLUSIONS

A healthy pipeline of projects is available, including the projects coming out of the Juncker
Plan. The clarification by Eurostat on the application of the ESA 2010 rules is very welcome
in the PPP sphere.
From a political point of view, there will be no elections until October 2018. Following
a period where there have been elections (municipal, regional, federal, European) on an
almost annual basis, this offers the prospect of a long-lasting period of stability, during which
the current right-wing government can implement the necessary economic reform to render
the Belgian economy more efficient. Growing investor confidence is expected because of this
relative political stability and appetite for infrastructure investment nationwide.
5 ARB/12/29 – Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of
China, Limited v. Kingdom of Belgium.
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Chapter 7
BRAZIL
Júlio César Bueno1
I INTRODUCTION
i Brazil’s economic history
Brazil is a federative republic divided into 26 states, a Federal District (with Brasilia the
capital since 1961) and 5,565 municipalities. With more than 190 million inhabitants,
Brazil is the sixth most populous country in the world after China, India, the United States,
Indonesia and Russia. Brazilians share a common multi-ethnic and multiracial background,
and because of Portugal’s influence Brazil is the only Portuguese-speaking nation in the
Americas. Immigration from Europe, Africa and Asia (mostly Japan) was the primary source
of Brazilian population growth up to the 1930s.
Inflation was a major problem in Brazil during the 100 years that followed the
proclamation of the Republic in 1889. The problem became more severe after the 1970s and
several measures were taken to control inflation in the 1980s and early 1990s. Over a period
of 27 years, Brazil had seven different currencies and the inflation rate reached a historical
high of 6,821.31 per cent in January 1990. After the failure of six monetary changes, Plano
Real (the Real Plan) was created in 1994 by the then Finance Minister Fernando Henrique
Cardoso, who would launch the plan as the base of his presidential run a couple of months
later. The success of the Real Plan was the hallmark of Cardoso’s two terms as President.
During the administration of former President Luiz Inácio Lula da Silva, surging
exports, economic growth and social programmes helped lift tens of millions of Brazilians
out of poverty. For the first time, the majority of Brazilians have become middle class, and
domestic consumption has become an important driver of Brazilian growth. President Dilma
Rousseff, who took office on 1 January 2011, indicated her intention to continue Lula da
Silva’s economic policies, including sound fiscal management, inflation control and a floating
exchange rate. Rising employment and strong domestic demand pushed inflation to nearly
6 per cent in 2010, and to 6.87 per cent in 2011. The economic boom and high interest rates
have attracted foreign currency inflows that have driven up the value of the currency (the
Brazilian real) by nearly 40 per cent since the start of 2009.
The Brazilian economy’s solid performance during the 2008 financial crisis and its
strong and quick recovery, including growth in 2010 of 7.5 per cent, have contributed to
the country’s transition from a regional to a global power. Nevertheless, Brazil’s economy
continues to face its worst recession for 25 years. This entire scenario has deeply affected the
construction industry in Brazil such that it is no longer the fourth-biggest ‘construction site’
in the world, as it was until recently.
1 Júlio César Bueno is a partner at Pinheiro Neto Advogados.
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The Brazilian multinational petroleum corporation Petrobras has implemented

significant cuts, taking its long-term spending plan to its lowest level in eight years, and from
now until 2019 the company plans to invest 41 per cent less than it has done previously over
comparable periods. The move is designed to reduce the company’s debt pile and restore
some of the eroded investor confidence in the firm. Because of the size of the company and
its importance to the Brazilian economy, the drop in Petrobras’s level of investment in Brazil
may reduce national GDP growth this year by a full percentage point. This is all taking place
at a time when investment is needed to restart growth in the parlous Brazilian economy.
Brazil has had a new president since May, when lawyer Michel Temer took the helm
of the country after Dilma Rousseff was suspended by the Senate to face an impeachment
trial. Together with Henrique Meirelles, the new Minister of Finance, President Temer faces
a difficult time combating growing inflation and a widening fiscal deficit.
ii The role of governments in the development of the infrastructure business

Governments usually play an important role in the development and finance of infrastructure
projects, for which political will and sustained political support are needed. There was
a global tendency in 1980s and 1990s to diminish the role of the state, with the privatisation
and concession of public services to the private sector. In this context, between 1990 and
1994 the federal government privatised 33 state-owned companies tied to strategic sectors.
Nevertheless, as private companies are quite often unable to compromise their
budgets during the long course of the maturation of infrastructure projects, commercial
banks, multilateral agencies and export credit institutions became important financiers of
infrastructure projects through project finance.
Project finance is usually defined as the financing of long-term infrastructure, industrial
projects and public services based on a non-recourse or limited recourse financial structure,
where the project debt and equity used to finance the project are paid back from the cash flow
generated by the project. It is a financing technique that generally allows a company to raise
funds to set up a project based on its feasibility and its ability to generate revenues at a level
sufficient to cover construction and operational costs, as well as debt service and a return for
the investor.
The country has seen considerable activity in projects and construction in the past two
decades, as well as an increased use of more complex financing structures, especially project
finance and PPPs. As a financial model that adapts well to the funding needs of private
sector projects, project finance represents an important instrument to make investments in
Brazilian infrastructure viable.
In recent years, project finance in Brazil has developed an advanced and sophisticated
legal framework, based upon a diversified security package including direct and indirect
securities, as well as the assignment of different rights under the security agreements.

i Operation Car Wash
Brazil is no stranger to corruption. However, several attempts to bring major cases to trial
have failed to achieve convictions; sometimes this is because of police work, sometimes
because Brazil’s anti-corruption laws offer innumerable possibilities for technical challenges,
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particularly when evidence comes from wiretaps, and frequently because the convoluted
judicial system allows cases to drag out until they expire, particularly if elected officials
are involved.
Presently, Brazil finds itself in the grip of its biggest and most shocking scandal to
date. The Petrobras scandal, known locally as operação Lava Jato, or Operation Car Wash,
has rocked the country socially, economically and politically. The operation has exposed the
extent to which the tendrils of corruption have spread through Brazil’s economy.
The scandal initially began as a money laundering investigation in March 2014, but
quickly transitioned into a wider exploration of allegations of corruption at state-controlled
Petrobras and a number of other firms. Some of Petrobras’s directors have been accused of
taking bribes from construction companies in return for awarding lucrative contracts. The
elaborate nature of the racket established by Petrobras and its fellow conspirators has shocked
many – especially as the company was once considered the world’s ‘most ethical oil and gas
company’. Its standing in Brazilian society has tumbled in light of the revelations.
In Operation Car Wash, police and prosecutors are bending over backwards to avoid
previous errors. To date, the operation has seen several arrests and billions of dollars seized by
investigators. The secret of the success of Operation Car Wash has been in persuading suspects
to provide detailed confessions in exchange for reduced penalties (rewarded collaboration).
The Organisation for Economic Co-operation and Development (OECD) Working Group on
Bribery, in its latest (Phase 3) report on implementing the OECD Anti-Bribery Convention
in Brazil, published in October 2014, calls it ‘cooperation agreements and judicial pardon’.
Collaboration has existed in Brazilian criminal law since at least 1995, but formalised
agreements have only now come into their own with Law No. 12,850 of 2013, known as the
Organised Crime Law. This defines organised crime, lists acceptable investigatory methods
and provides a detailed road map for collaboration. One or more of the following results must
be achieved: identification of co-authors and participants in the criminal organisation, and of
their respective crimes; exposure of the hierarchical structure and division of functions within
the organisation; total or partial recovery of proceeds; prevention of further crimes; and the
safe release of victims. Prosecutors can ask the judge to grant a full judicial pardon, reduce the
collaborator’s sentence by up to two-thirds, or substitute imprisonment with a lesser penalty.
Collaboration is voluntary, with defence lawyers present, but collaborators must tell the
truth – and the whole truth. Any future discovery of lying, concealment or omission can lead
to the agreement being revoked. The process starts with a signed statement detailing what
the suspect will reveal and the leniency that prosecutors will recommend in return. For each
collaboration agreement, prosecutors weigh factors including the importance and novelty of
the information to be provided about the crimes and those responsible, the evidence to be
offered and the amounts to be recovered.
Operation Car Wash has entered a crucial phase, as it is now having to deal with
accusations not only against former presidents Lula da Silva and Rousseff, but also against
President Michel Temer, eight government cabinet members and former presidential
candidate Aécio Neves. Despite the fact that it may be considered the biggest corruption
scandal in world history, Brazilians hope Operation Car Wash will mark a crossroads and
herald a permanent and stable change, with standards moving towards the desired levels of
ethics in business.
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ii The Investment Partnerships Programme

Just a few hours after becoming President, Michel Temer created a new programme for
infrastructure projects – the Investment Partnerships Programme (PPI) through Provisional
Measure No. 727/2016 (MP727). Provisional measures are presidential decrees with the
force of law used in ‘relevant and urgent’ cases. Provisional measures must be submitted to
Congress, which will decide within a 60-day term whether the measure should be converted
into law or not. MP727 was converted into law by Law No. 13,334 of 13 September 2016
(Law No. 13,334/2016).
The PPI is intended to expand and strengthen relations between the state and the
private sector, so that they can run jointly public infrastructure projects and undertake other
privatisation measures through partnership contracts. The partnerships between the state and
the private sector under the PPI encompass not only concessions, public–private partnerships
(PPPs), grants of permits and leasing of public assets, but also any other public–private
arrangements that have the same legal structure as the aforementioned – and, therefore,
involve similar risks, levels of investment and complexity.
The federal public projects that adopt the PPI partnership model will be specified and
regulated by presidential decrees, which will also determine projects’ strategic guidelines and
main legal aspects, and will establish long-term policies for investment. The decrees will also
determine the federal policies regarding partnerships in public infrastructure projects in the
states, cities and the Federal District, and will establish other privatisation mechanisms. Law
No. 13,334/2016 represents an institutional rearrangement in Brazil, modifying the way
undertakings are structured, improving their licensing procedures and requiring the adoption
of better conduct and working practices.
Furthermore, Law No. 13,334/2016 created a PPI Council and a PPI Executive
Secretary, entities answering directly to the President. The Council will assist the President
in managing the PPI and consolidates the functions of three different entities: the PPP
management office, the National Council for Integration of Transportation Policies, and the
National Council of Privatisation. The Executive Secretary will lead, monitor and evaluate all
the action taken in the course of the PPI. The Brazilian Logistic and Planning Company will
now report to the Executive Secretary instead of the Ministry of Transport, and will provide
support to the PPI Council. Law No. 13,334/2016 also authorises the Brazilian Development
Bank (BNDES) to create and participate in the Partnership Structuring Support Fund, with
a view to enabling partnerships approved within the scope of the PPI. The fund will run for
a term of 10 years, it will be private in nature and have its own capital – distinct from that of
its administrators and shareholders.
Together with MP727, the President issued Provisional Measure No. 726/2016
(MP726), to create a ‘super Ministry of Transport’. MP726 has now also been converted
into law, by Law No. 13,341 of 29 September 2016 (Law No. 13,341/2016). Law
No. 13,341/2016 incorporated the Secretariat of Civil Aviation and the Secretariat of Ports
into the Ministry of Transport, thereby removing their ministerial status. The new Ministry
of Transport will expand its functions and will focus on the establishment of national policy
for transport, creating general concession-award plans for railways, highways, waterways and
airports. Licensing procedures should be improved for PPI projects, and licences should be
issued efficiently and on time to meet PPI priorities and schedules. The entities and authorities
from the federal government, states, the Federal District and municipalities will have to work
together to enable efficient licensing procedures. As regards the structuring of the projects,
it is now possible to open a preliminary procedure to support the definition of the basic
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characteristics of a project. However, Law No. 13,334/2016 prohibits the reimbursing of

the authors of such preliminary projects – which is significantly different from what used to
happen in past concessions.
Administrative bodies with jurisdiction over matters related to the PPI will have to adopt
their own programmes of good practices according to national and international standards. To
ensure fair competition and compliance with sectoral rules, Law No. 13,334/2016 emphasises
public consultation prior to the issuance of rules, impact studies for regulatory changes,
annual monitoring of results, and joint efforts with control bodies and with the Administrative
Council for Economic Defence.

According to the Basel Committee on Banking Supervision, International Convergence of
Capital Measurement and Capital Standards (Basel II), November 2005, project financing is
a method of funding in which the lender looks mainly to the revenues generated by a single
project, both as the source of repayment and as security for the exposure. Project finance
transactions require joint efforts from lenders, investors, suppliers, off takers and sponsors to
make the implementation of a project feasible. The success of project finance depends on the
joint effort of several related parties, as issues such as a lack of coordination and conflicts of
interest can have significant costs.
In project finance, equity is held by a small number of sponsors and debt is usually
provided by a syndicate of a limited number of banks. Concentrated debt and equity
ownership enhances project monitoring by capital providers and makes it easier to enforce
project-specific governance rules for the purpose of avoiding conflicts of interest or suboptimal
investments. The use of non-recourse debt in project finance further contributes to limiting
managerial discretion by tying project revenues to large debt repayments, which reduces
the amount of free cash flow. Moreover, non-recourse debt and separate incorporation of
the project company make it possible to achieve much higher leverage ratios than sponsors
could otherwise sustain on their own balance sheets. Non-recourse debt can generally be
deconsolidated, and therefore does not increase the sponsors’ on-balance sheet leverage or the
cost of funding. From the perspective of the sponsors, non-recourse debt can also reduce the
potential for risk contamination; in fact, even were the project to fail, this would not jeopardise
the financial integrity of the sponsors’ core businesses. One drawback of non-recourse debt,
however, is that it exposes lenders to project-specific risks that are difficult to diversify. To
cope with the asset specificity of credit risk in project finance, lenders are making increasing
use of innovative risk-sharing structures, alternative sources of credit protection and new
capital market instruments to broaden the investor base.
Hybrid structures between project and corporate finance are being developed, where
lenders do not have recourse to the sponsors, but the idiosyncratic risks specific to individual
projects are diversified away by financing a portfolio of assets as opposed to single ventures.
PPPs are becoming more common as hybrid structures, with private financiers taking on
construction and operating risks while host governments cover market risks.
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ii Documentation
Documentation for project finance and construction contracts is consistent with international
standards; usually it comprises the following main agreements:
a concession agreements;
b project agreements;
c term sheets;
d credit agreements;
e construction agreements;
f operating agreements;
g service and maintenance agreements; and
h security documentation (security agreements, subordination agreements, guarantees,
collateral agreements, hedging agreements and direct agreements).
iii Delivery methods

Public sector contracts are almost exclusively awarded through formal and competitive
procurement processes regulated by Law No. 8,666/1993. Design-bid-build (DBB) is
the most traditional and generally used delivery method in the public sector, but the
engineering-procurement-construction (EPC) model has been used more and more in large
projects in the past two decades.
Private sector contracts on the other hand are awarded through a mixture of formal
tenders and direct negotiation and award. The use of standard forms for construction contracts
is not common. The most common transactional contractual or procurement structures in
Brazil are DBB; design-bid-build and construction management; EPC; EC+P, hybrid EPC or
split EPC; and engineering-procurement-construction-management. The EPC contract has
been the most commonly used, particularly for hydro and thermal power plants; however,
alliance contracting has recently become more popular.
Alliance contracting
Alliance contracting has represented a viable, proven alternative to adversarial business-as‑usual
contracts in Brazil as it offers a unique system of project delivery whereby risks are shared
between principal and contractor.
Alliance contracting is an incentive-based relationship contract in which the parties
agree to work together as one integrated team. All parties are bound to a risk-or‑reward
scheme where they all share savings or losses, depending on the success of the project. At
first sight, the potential shortcomings of an alliance contract, such as a lack of certainty
concerning project length and cost, may appear critical. However, banks are adapting their
lending practices to accommodate alliance contracting by (1) conducting enhanced due
diligence, (2) examining the financing structure, (3) requiring risk mitigation provisions in
the contract, and (4) specially wording insurance clauses to make them effective.
Advantages
a Alliance contracting offers a unique system of project delivery whereby risks are shared
between the principal and contractor. Alliance contracting is advisable for complex
construction projects, when the parties are unable to assess at the outset the costs
involved and the estimated period for completion of the project.
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b The parties in alliance contracting expect a reduction of the risk of disputes by relieving
short-term demand pressure on the industry and setting up the foundations for
longer-term structural improvement.
c Alliance contracting can relieve the pressure of the short-term demands on the
industry and set the foundation for longer-term structural improvement in the way the
industry works.
d Alliance contracting eliminates, or at least significantly reduces, the risk of claims and
disputation between the parties through the use of inclusive and collaborative legal and
commercial arrangements. These arrangements enable the parties to work together in
an open and productive manner and to strive to achieve the business goals of everyone
in the relationship.
Disadvantages
a In most alliance contracts, time and cost obligations are notably lacking; the emphasis
is on the result (e.g., delivery of the project) and less on the road that leads to the result.
This brings with it a degree of uncertainty about budgets and delivery dates. If a project
has an inflexible completion deadline or inflexible budget, then an alliance contract
could lead to major problems. Unfortunately, but understandably, the dredging industry
is more often than not confronted with inflexible deadlines or budgets. Government
agencies, which are often the clients, do not in general have the liberty to engage in
projects with open deadlines or budgets.
b The organisation of an alliance contract can also be much more difficult as soon as more
than two parties are involved. With three or more parties, an alliance board may easily
become unmanageable. Parties may therefore prefer a traditional contract with all the
usual certainties. Also, third parties confronted with an existing alliance contract may
wish to deal only with either the contractor or the client, not with both. In an alliance
contract, three can seriously be a crowd.
c Third-party involvement may even lead to a conflict of interests. Nowadays the
willingness to work in an alliance can be one of the selection criteria for a construction
contract. But, because of obligations deriving from relationships with third parties,
forming an alliance contract may turn out to be difficult.
iv Standard forms
The choice of a contract depends on various factors including the type of works and time
pressure for its execution; the parties and their capacity to be involved in one or more areas
of responsibility; the procurement method; the expected risk allocation system, including
allocation of fit-for-purpose concept and design responsibility; and the costing and
pricing mechanism.
The most commonly used standard forms of contract, which have become increasingly
popular in Brazil, are those produced by the International Federation of Consulting Engineers,
commonly referred to as FIDIC forms of contract. Because of the spread of the news of their
use in recent major sport events such as the 2014 World Cup and 2016 Olympic Games,
NEC3 contracts are also becoming more familiar to investors and lenders in Brazil.
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The success of large projects depends on the joint effort of several related parties so that
coordination failures, conflicts of interest and free-riding of any project participant can be
avoided or mitigated.
Various factors affect the allocation of each risk, including political issues, the
availability and economics of insurance cover, commercial bargaining power and the nature
of the individual project. Often a party is prepared to take a risk only if it knows its exposure
is not open-ended, and limitation of liability is frequently accepted as going hand in hand
with apportionment of risk.
The management of risk requires an individual approach to each project. It is important
to conduct risk assessments throughout to ensure it is being allocated correctly. This process
will involve a consideration of each category of risk:
a design;
b construction and development;
c performance;
d operating costs;
e variability of revenue;
f termination; and
g any other project-specific risks.
In Brazil, parties are excluded from liability for any indirect damages as provided in the
Brazilian Civil Code. Parties may also include a limitation of liability clause for direct
damages, but they are not allowed to simply eliminate any kind of liability they may have
towards the other.
The limitation of liability for direct damages may exclude loss of business profits and
restrict the responsibility for all other general losses and damages to a cap. There is no legal
limit to this cap, but it is advisable to have a limitation that is compatible with the type of
contract and the risks assumed by the parties in their execution of it. A liability cap does not
apply in the case of gross negligence, fraud, wilful misconduct or wilful refusal to perform
works that may cause the other party damage.
While insurance and liability limitation clauses are conceptually separate, they are both
integral to any analysis of the limitations of liability in a contract in terms of risk to the parties
involved. Contractual caps on liability can follow the limits of cover under insurance policies,
and insurance policies can be seen as mitigating the contracting parties’ risk by passing the
risk and cost of certain events on to a third-party insurer. Liability is not automatically capped
at an agreed indemnity insurance limit unless there is express provision to this effect.
iii Political risk

In Brazil, foreign investors enjoy the same property rights as those available to Brazilian
citizens and there is a very low risk of nationalisation or government expropriation of assets
or any other example that may characterise political risk.
The term ‘political risk’ is widely used in relation to project finance and can conveniently
be defined to mean both the danger of political and financial instability within a given
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country and the danger that government action (or inaction) will have a negative effect either
on the continued existence of the project or on the cash flow-generating capacity of a project.
Examples of events that might be classified as political risks are as follows:
a expropriation or nationalisation of project assets;
b failure of a government department to grant consent or a permit necessary for starting,
completing, commissioning or operating a project or any part of it;
c imposition of increased taxes and tariffs in connection with the project or potential
withdrawal of valuable tax holidays or concessions;
d imposition of exchange controls restricting the transfer of funds outside the host
country or the availability of foreign exchange;
e changes in law having the effect of increasing the borrower’s or any other relevant
party’s obligations with respect to the project;
f politically motivated strikes; and
g terrorism.
There is no single way to eliminate all risks in connection with a particular project; however,
one of the most effective ways of managing and reducing political risks is to lend through, or
in conjunction with, multilateral agencies such as the World Bank, the European Bank for
Reconstruction and Development or other regional development banks. Where one or more
of these agencies is involved in a project, the risk of interference from the host government
or its agencies may be reduced on the basis that the host government is unlikely to want to
offend any of these agencies for fear of cutting off a valuable source of credit in the future.

The strength of the security package on offer will also have an impact on the ‘bankability’
of a project. Typically, lenders will seek to take security over all of a project company’s
assets. However, in a project located in an emerging market with an undeveloped collateral
framework, the practical reality of creating and enforcing security is that it may be expensive,
time-consuming and uncertain in outcome. In practice, therefore, enforcement of security
over a project company’s assets is generally seen by lenders as a last resort. For many lenders,
the main driver in taking security over a project company’s assets is, should the project
company face financial difficulties, to maximise the strength of their bargaining position
against (1) the project company’s other creditors, (2) the host government, and (3) the project
company’s sponsors. Should a project face financial difficulties, the lenders’ ability to enforce
their security (with, subject to local law requirements, no obligation to share the benefits of
the enforcement proceeds with anyone else) puts them in the strongest possible position in
the context of any restructuring negotiations.
As a general rule, security must be granted in favour of all lenders. However, lenders
may appoint a collateral agent to act on their behalf as an attorney-in-fact. The power of
attorney must clearly state the matters entrusted and the scope of the authority.
Brazilian law requires that the assets given as collateral be described so that they are
identifiable to third parties and imposes different requirements for perfection, depending
on the type of asset. Therefore security interests in Brazil are usually created by means of
several security agreements, each covering assets with similar perfection requirements.
Security interests in Brazil can be obtained through pledges and security assignments, and
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be ensconced in trusts or tucked into mortgages. Owners and lenders also typically require
insurance (performance) bonds, bid bonds and bank guarantees. The project loan typically
will be secured by multiple forms of collateral, including:
a mortgage on the project facilities and real property;
b assignment of rights and operating revenues;
c pledge of bank deposits;
d assignment of any letters of credit or performance or completion bonds relating to the
project under which the borrower is the beneficiary;
e liens on the borrower’s personal property;
f assignment of insurance proceeds;
g assignment of all project agreements;
h pledge of stock in project company or assignment of partnership interests;
i step-in rights;
j parent company guarantees; and
k contractual guarantees for equipment and materials.
Once executed, the security agreement has to be registered with the competent public registry
depending on the type of collateral and its location (e.g., the Real Estate Registry for real
property and pledge over equipment and machinery, the Registry of Titles and Deeds for
security interests over most moveable goods and the Maritime Court for Brazilian ships).
Security agreements related to certain assets (e.g., real property and ships) require public
form (i.e., the parties’ representatives must be present before a public official, who will record
the agreement). Security interest over credit rights require notification or, if required by the
underlying agreements, consent of the debtor.

i Insurance for infrastructure projects
Along with providing performance security, contractors often must take out life and personal
accident insurance for employees; a performance bond; civil liability risk insurance; and
engineering risk insurance.
Performance bonds are generally in standard form established by the Insurance
Regulatory Agency and provide funding to cover the owner’s increased costs in the event
the contractor defaults on the contract up to the value of the bond. Usually the bonding
company has the option of paying these costs or taking proactive steps to complete the
contract such as appointing a replacement contractor.
ii Green construction risks

While there have been very few reported claims for risks associated with green construction
risks; they will probably rise. And carriers are increasingly aware that their insurance policies
do not properly account for the new risks inherent green construction. While a standard
commercial general liability (CGL) policy may cover most of the issues a principal or builder
may face during the construction of a green building, there are situations that may be unique
to green building and might fall outside the coverage provided by the CGL policy. As a result,
new green builders’ endorsements are being created by several insurance companies. For
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example, some insurance endorsements cover the added costs of attaining a specific level of
green certification if the certification standards change during construction. Other products
cover delays related to the completion of a green construction project.
Although insurance providers have started to account for some green risks, others have
largely been ignored.

In Brazil, enforcement of security follows the rules set out in the Civil Procedure Code and
the Civil Code.
As for bankruptcy issues, Law No. 11,101/2005 (the New Bankruptcy Law) provides
enhanced protection and flexibility for debtors in financial distress to reorganise while
continuing to operate their businesses. At the same time, creditors – particularly secured
creditors – are likely to see their debt recovery prospects improve when businesses are
liquidated, giving them a more significant role in the negotiation of restructuring plans and
in reorganisation proceedings than previously.
It gives priority to the settlement of guaranteed loans – along the lines of Chapter
11 provisions in the United States – and makes the restructuring of firms in financial distress
more cooperative and conducive to recovery. The new bankruptcy law introduced three
procedures: extrajudicial reorganisation, judicial reorganisation and bankruptcy liquidation.
The law does not apply to fully or partially state-owned companies, financial institutions,
credit cooperatives, purchasing pools, supplementary private pension entities, healthcare
plan operators, insurance companies, capitalisation companies and other legally equivalent
entities. For this type of legal entity there are regulatory agencies that provide for liquidation
when it is apparent that they do not have the ability to honour their debts.

i Licensing and permits
Brazil has adopted an environmental protection policy, including:
a Law No. 6,938/1981, which provides the purposes and mechanisms to formulate and
apply national environmental policy and institutes the National Environmental System;
b Law No. 4,771/1965, which establishes the Forest Code;
c Law No. 9,985/2000, for the study and conservation of wildlife (fauna and flora) in
conservation areas;
d Law No. 9,433/1997, to regulate the use of water resources; and
e Law No. 9,605/1998 and Decree No. 3,179/1999, establishing civil, administrative
and criminal sanctions for individuals or legal entities that breach environmental laws.
Environmental legislation and regulations in Brazil are enacted at the federal, state and
municipal levels. Federal agencies set out general requirements of broad applicability,
while specific standards of enforcement are left to state agencies, either by regulation or
by administrative orders. The states and municipalities can also issue standards of equal
or more stringent requirements than their federal counterparts. In addition, the Brazilian
Technical Standards Association issues technical norms and standards addressing specific
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environmental issues. The content of these standards is generally considered to be the best
management practice. However, the standards can also be considered to be legal requirements
when recommended by any piece of legislation.
Brazil is one of the very few countries (if not the only one) to employ a three-stage
process, with separate procedures for granting licences at all three stages. This procedure
allows or contributes to transferring, restarting or revisiting old disputes during the three
phases. In addition, it generates significant uncertainty and delays, and high transaction
costs. The three stages of the environmental permitting process are:
a Preliminary licence: this is issued during the preliminary planning stage of a project for
a maximum five-year term. The licence signifies approval of the location and design of
the project, certifies its environmental feasibility and establishes the basic requirements
and conditions to be complied with during the subsequent stages of implementation.
b Installation licence: this authorises construction, civil works and the installation of
equipment in accordance with the specifications contained in the approved plans,
programmes and projects, including environmental mitigation provisions and
other conditions.
c Operating licence: this authorises operation of the development in accordance with
environmental mitigation measures and operating requirements, on confirmation that
the previous licensing conditions were met. These licences can be granted for between
four and 10 years and are renewable within the legal time frame established by the
competent environment agency.
All requirements set by the operational permit must be met during the project’s operation.
Failure to meet these conditions may trigger administrative, civil and criminal liability. This
could mean a range of penalties, including fines, indemnification, suspension of activities
and imprisonment.
ii Equator Principles
Worldwide, 72 banks have subscribed to the Equator Principles (EPs); among those are
ABN Amro Group, Banco Bradesco SA, Banco do Brasil SA, Banco Santander SA, Caixa
Economica Federal, HSBC Holdings plc and Itaú Unibanco SA. The EPs are as follows:
a Principle 1: review and categorisation;
b Principle 2: social and environmental assessment;
c Principle 3: applicable social and environmental standards;
d Principle 4: action plan and management systems;
e Principle 5: consultation and disclosure;
f Principle 6: grievance mechanism;
g Principle 7: independent review;
h Principle 8: covenants;
i Principle 9: independent monitoring and reporting; and
j Principle 10: Equator Principles financial institution (EPFI) reporting.
Adoption of the EPs by a financial institution is voluntary, but once they have been adopted,
the adopting entity must take all appropriate steps to implement and comply with them.
Every adopting institution declares that it has or will put in place internal policies and
processes that are consistent with the EPs and that it will report publicly (as required by
Principle 10) regarding its implementation experience. As part of their review of a project’s
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expected social and environmental impacts, EPFIs use a system of social and environmental
categorisation, based on the environmental and social screening criteria of the International
Finance Corporation.
iii Responsibility of financial institutions

Financial institutions must comply with applicable federal and regulations, and may be
subject to administrative, civil or criminal liabilities; however, lenders can hardly assume
environmental liability for financing an infrastructure project in Brazil.
If, however, control of the project company by the lenders is too tight, financial
institutions may qualify as shadow directors and, hence, become liable to a certain extent
for the activities of the borrower. Therefore, structuring of the supervision of the project
company in the credit agreement is crucial for the lenders to avoid liability.

The authorities have authorised PPP projects in many areas, including transport, irrigation
and water resources, and even football stadiums. States and municipalities may also enact
their own PPP laws to govern state or municipal PPPs. The states of São Paulo, Rio de Janeiro
and Minas Gerais, for example, have already enacted their own state PPP Acts.2 At municipal
level, several laws have been enacted. The cities of São Paulo, Rio de Janeiro and Minas
Gerais, for example, have already enacted their own municipal PPP Acts.3
Law No. 11,079/2004 defines PPPs as administrative concession contracts of two
different types:
a sponsored concession: a concession contract for the provision of public services or
public construction works (with subsequent provision of a public service), established
by Law No. 8,987/1995, under which the public administration provides a direct
payment in addition to the tariff charged to and payable by the users; and
b administrative concession: a contract under which the public service, which may
involve carrying out public construction works or supplying and installing fixed assets,
is provided directly or indirectly to the public administration, which, in turn, provides
all the compensation to the private partner for rendering this public service.
The legislation promotes risk-sharing, with risks allocated, according to which the party is best
placed to control them. A contractor’s risks for the cost of future maintenance as well as quality
control on PPPs may be mitigated by performance and risk-shifting contract provisions.
Contract selection must always be made through competitive public bids under the
pre-qualification system and preceded by a public audience. The tender process must comply
with the procedures set out in the legislation regulating tenders and administrative contracts.
Among the most significant transactions that have been structured or completed to
date are:
a urban renewal – Porto Maravilha, in the City of Rio de Janeiro (municipal level);
b metro – line 4 and line 6 of the São Paulo Metro and the Salvador Metro (state level);
2 São Paulo State Law No. 11,688 of 19 May 2004, Rio de Janeiro State Law No. 5,068 of 10 July 2007 and
Minas Gerais State Law No. 14,868 of 16 December 2003.
3 Belo Horizonte Municipal Law No. 9,038 of 14 January 2005, São Paulo Municipal Law No. 14,517 of
16 October 2007 and the Rio de Janeiro Municipal Law No. 105 of 22 December 2009.
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c water and sewage – Rio das Ostras (municipal level), System Water Producer Alto
Tietê and São Lourenço – SP(state level) and Jaguaribe Ocean Disposal System – SP
(state level);
d road concession – MG 050 (state level) and Bridge and Road to Paiva’s Beach – PE
(state level);
e prison – Itaquitinga Integrated Resocialisation Centre PE (state level);
f hospital – Hospital do Suburbio – BA and Couto Maia Institute – BA (state level); and
g stadiums – Fonte Nova – BA (state level) and Dunas – RN (state level), Pernambuco
Stadium, Maracanã Stadium and Fortaleza Stadium (state level).

Foreign enterprises may do business in Brazil without having to establish Brazilian companies
or joint ventures with Brazilian contractors and designers. Also, Brazilian law does not require
local partners to control a joint venture. In fact, general policy is to admit foreign capital and
treat it in the same way as local capital, and except in clear, defined areas (such as mining,
coastal navigation and alike), 100 per cent foreign ownership of local companies and joint
ventures is normally permitted.
The most common form of business organisations in Brazil are limited companies and
joint-stock companies. Limited companies have a much simpler structure than joint-stock
companies, and are more often adopted for closely held companies; they are more cost-effective
for simpler structures and their organisation is cheaper than that of joint‑stock companies.
Establishment of joint ventures is common in Brazil. A major motivation for establishing
joint ventures is to pair specific know-how and technical cooperation between domestic
and foreign firms to compete in segments of the government procurement market or in
other markets subject to government regulation, such as telecommunications and energy.
Usually, the foreign company partners supply technology and financial support to Brazilian
companies leading in the local market.
There are no rules governing the incorporation of joint ventures, and they may be in
the form of a limited or joint-stock company by way of a formal contract. The joint venture
agreement is intended to establish a close relationship between the participants to attain
common business goals, whether or not this implies a capital contribution or the organisation
of a new company. There are no rules in regard to the participation of each company, which
may differ according to the interest in maintaining stock control.
i Currency controls
Pursuant to Law No. 10,192/2001, payments of monetary obligations enforceable in Brazil
must be made in reais at face value. Contractual provisions for payment stated in or indexed
to any foreign currency are expressly prohibited and are deemed void. The only exceptions are:
a contracts and bonds related to import or export of goods;
b finance agreements or collateral agreements related to export of domestic goods sold by
means of credit facilities abroad;
c foreign exchange contracts in general;
d any obligations involving a party that is resident and domiciled abroad, except lease
agreements relating to real property located in Brazilian territory;
e assignment, delegation, transfer, assumption or modification of obligations involving
a party that is resident and domiciled abroad; and
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f leasing agreements entered into by and between parties resident and domiciled in Brazil
involving funds raised abroad.
Bank accounts in a foreign currency in Brazil are only permitted in very specific cases,
such as accounts held by diplomats, tourism agencies, credit card companies and insurance
companies. The foreign exchange rules have been amended over time, and presently there is
considerably greater freedom for remittances of funds to and from Brazil.
ii Removal of profits and investments

Until the middle of the past decade Brazil was subject to a strict foreign exchange scenario,
and the inflow and outflow of funds were subject to specific rules and regulations enacted
by the National Monetary Council and the Central Bank of Brazil (BACEN). This foreign
exchange control has been relaxed in time, and new measures have been provided that are
expected to further ease existing controls. Pursuant to the foreign exchange rules currently
in place, any individuals or legal entities resident in Brazil have freedom to remit funds to
or from abroad without any limits, provided that any such remittances are processed by
a local agent duly authorised to deal in foreign exchange, based on the legal grounds of
the transaction and taking into account the responsibilities of the parties defined in the
underlying documents.
The registration of foreign capital with BACEN is provided for by Law
No. 4,131/1962 and by Law No. 4,390/1964, guaranteeing equal treatment of foreign and
domestic capital. Foreign capital is defined as goods, machinery and equipment, imported
into Brazil without prior foreign capital disbursements, for the production of goods or
services, as well as financial resources remitted to Brazil for application in economic activities,
provided that, in both cases, the foreign capital belongs to individuals or legal entities resident,
domiciled or with a head office abroad.
Foreign capital must be registered with BACEN in its original currency within 30 days
of the entry of the funds into the country. This registration represents the official recognition
of the investment and allows for the remittance of profits and dividends (as from 1996,
exempt from income tax), repatriation of the invested capital and reinvestment of profits at
any time, without applying for any further authorisation.
There are no specific courts or tribunals in Brazil dealing solely with project finance transactions
or construction contracts. Generally, such matters would be litigated in the federal courts
(mandatory if the federal government is involved), state courts or in arbitration.
ii Arbitration
General aspects
Although arbitration is a fairly recent development in Brazil – since 2001 arbitration has
begun to be a real choice in contracts – it is now a reality and it is widely used, especially
in projects, construction and engineering disputes. Arbitration proceedings are governed by
Law No. 9,307/1996 (the Brazilian Arbitration Law) and significant events have affirmed the
use of arbitration for resolving disputes in Brazil:
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a the Brazilian Federal Supreme Court recognised the constitutionality of the Brazilian
Arbitration Law in 2001;
b Brazil enacted Federal Decree No. 4,311/2002, which ratified the Convention on the
Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (the New
York Convention); and
c Brazil has also ratified the Panama Convention, the Montevideo Convention and the
Buenos Aires Protocol on International Commercial Arbitration in the Mercosur.
The Brazilian Arbitration Law provides for two kinds of arbitration agreements, both in
writing: the arbitration clause (the parties to an agreement elect to submit to arbitration any
controversies arising from it) and the arbitration commitment (the parties agree to submit
a specific dispute to arbitration).
The arbitration clause may be inserted either in the agreement text or in a separate
document referring to it, and shall indicate whether the arbitration will proceed under the
supervision and in accordance with the rules of a given institution or, alternatively, the rules
expressly selected by the parties to govern the arbitration.
The arbitration commitment may be entered into by the parties either in court or out
of court, by means of a public or private instrument (to be also executed by two witnesses)
and must indicate:
a the parties’ names and personal data;
b the arbitrators’ names and personal data or a reference to the institution that shall
appoint them;
c the subject matter of the dispute; and
d the place in which the award shall be issued.
Each party should appoint one or more arbitrators and may also appoint their alternatives. If
an even number of arbitrators is appointed, the arbitrators may appoint another arbitrator;
if they do not reach an agreement, then the parties shall request that the court make the
appointment. The appointment of an arbitrator may be challenged whenever there are
questions about his or her impartiality. Also, by means of the arbitration agreement, the
parties may set further restrictions as to the appointment of arbitrators.
What constitutes an arbitral award in Brazil?

Arbitral awards in Brazil are as binding as court decisions and are enforced accordingly.
Awards can only be challenged by means of court actions for nullification of the awards. To
request nullification of an arbitral award, parties should demonstrate the existence of one of
the requirements provided for in Article 32 of the Brazilian Arbitration Law, which are all
related to procedural issues (i.e., non-existence of arbitration commitment, violation of due
process, award rendered beyond the limits of the arbitration agreement, decision that fails to
address the entire dispute referred to arbitration, etc.).
There are no appeals against awards issued in arbitration proceedings and the merits of
the arbitration cannot be re-examined by the courts. The arbitral award shall be signed by the
sole arbitrator or by the entire arbitration tribunal. The chair of the arbitration tribunal shall
expressly indicate that one or some of the arbitrators cannot or do not want to sign the award.
The Brazilian Arbitration Law has adopted a territorial criterion that classifies the award
in one of two categories: foreign or domestic. Therefore, a foreign award is considered to be
one rendered outside Brazil. This distinction is important for recognition and enforcement
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purposes as a domestic arbitral award is not subject to appeals or to recognition by the courts
and a foreign award will first have to be recognised by the Superior Court of Justice before it
can be enforced in Brazil.
The role of the Superior Court of Justice

Application for recognition before the Superior Court of Justice is mandatory for the validity
of a foreign arbitral award in Brazil. The award does not have to be recognised by the foreign
state’s judicial courts before being submitted to the Superior Court of Justice. The application
for recognition should contain the original foreign arbitration award or a certified copy thereof,
duly notarised by the Brazilian consulate and translated into Portuguese by a sworn translator
in Brazil, and the original agreement to arbitrate or a certified copy thereof duly translated
into Portuguese by a sworn translator. The standards regarding the enforcement of a foreign
arbitration award in Brazil are consistent with Article V of the New York Convention.
The Superior Court of Justice has recognised foreign arbitral awards whenever they do
not violate any of the provisions of Article 38 of the Brazilian Arbitration Law. It is important
to note that the Superior Court of Justice has analysed only formal aspects of the award.
The merits of the arbitration award have not been analysed. The Superior Court of Justice’s
internal rules authorise the Court to issue preliminary injunctions during the recognition
proceedings, such as freezing assets or temporary restraining orders. Once the foreign
arbitration award is recognised by the Superior Court of Justice, the judgment creditor is
entitled to enforce the award in the same way as a domestic award, that is, before a competent
first-instance state court.
Arbitration organisations
Arbitration in Brazil is developing quickly and strongly, and it is becoming one of the most
important methods for dispute resolution in the country. Statistics of the International Court
of Arbitration of the International Chamber of Commerce (ICC) show a steady growth in
the use of commercial arbitration in Brazil. By number of arbitration proceedings involving
Brazilian parties since 2006, Brazil is first in Latin America and fifth in the world out of the
total number of parties that submit their disputes to the ICC.4
One of the main reasons for this strong and steady development is the unquestionable
support of Brazilian courts, in particular the Superior Court of Justice in Brasilia, responsible
for deciding the final appeals on court cases and for recognising foreign arbitral awards for
future enforcement in Brazil. The strong support arbitration is receiving from the courts
makes Brazil a convenient place of arbitration and provides foreign and Brazilian parties with
a reliable, binding and faster method for dispute resolution, mainly for complex contracts.
Arbitration, a well-favoured mechanism for the engineering and construction sectors, has
become increasingly predictable and user-friendly as a result of various systemic changes. The
choice of an international arbitration institution or the adoption of international arbitration
rules has no influence on the future enforcement of an arbitration award in Brazil. A foreign
contractor is therefore free to adopt the arbitration rules of any international institution.
Among national arbitration institutions, the best known and most frequently used are:
a the American Chamber of Commerce Arbitration Center;
b the Brazil–Canada Chamber of Commerce Arbitration Center;
4 ICC International Court of Arbitration Bulletin, Vol. 22, No. 1, 2011.
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c the Brazilian Business Arbitration Centre in the State of Minas Gerais;

d the CIESP/FIESP Chamber of Conciliation, Mediation and Arbitration;
e the FGV Chamber of Conciliation and Arbitration; and
f the Mediation and Arbitration Chamber of the Institute of Engineering of São Paulo.
With regard to Brazilian infrastructure disputes, the most noteworthy international

arbitration institutions are:
a the ICC;
b the International Centre for Dispute Resolution; and
c the London Court of International Arbitration.
Amendments to the Brazilian Arbitration Law

Important amendments were recently approved to the Brazilian Arbitration Law:
a Brazilian governmental bodies are now explicitly authorised to engage in the arbitration
of disputes.
b Arbitration is expressly provided for in corporate disputes. Shareholders may approve
arbitration clauses in the corporate by-laws by a majority vote, giving minority
shareholders the right to liquidate and be reimbursed for the value of their shares, with
a few exceptions.
c Parties may now opt to dispense with those arbitral institutional rules that restrict
their choice of arbitrators to those on the institutions’ lists. This is one of the most
controversial of the proposed changes, with opposition coming from some of the main
Brazilian arbitral institutions, which assert a possible loss of institutional quality and an
unconstitutional interference with the freedom of private arbitral entities to operate.
Those supporting the change believe it is necessary to respect party autonomy in their
choice of arbitrators, which is in line with international arbitration practice and the
rules of major international arbitral institutions.
d Arbitrators are authorised to issue partial awards.
e The parties and arbitrators by common agreement can extend the period prescribed
by law in which the arbitral award must be issued (in the absence of agreement by the
parties, the limit is currently six months under the 1996 Law).
f It is now explicitly provided that all foreign arbitral awards must be ratified by the
Superior Court of Justice to have effect in Brazil.
g Before an arbitration proceeding is instituted, the Law authorises parties to go to the
courts to obtain protective or emergency measures. However, once the arbitration
proceeding is instituted, it will be up to the arbitrators to maintain, modify or revoke
these measures. And after the arbitration proceeding is instituted, the parties must go
directly to the arbitral tribunal to request such measures.
h The arbitral tribunal may issue an ‘arbitral letter’ requesting that the courts in the
territory where the arbitration proceeding is seated help to ensure the requests of the
tribunal are being carried out.
i The statute of limitations (prescription period) in a litigation will be interrupted by the
pleading of the existence of an arbitration proceeding regarding that same dispute.
iii Dispute boards

Dispute boards are starting to be used in Brazil, and are composed of a panel of three
experienced, respected and impartial reviewers. Each board is normally organised before
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construction begins, and meets at the job site periodically. The board is usually formed by
the owner selecting a member for approval by the contractor and the contractor selecting
a member for approval by the owner, with the two thus chosen selecting the third to be
approved by both parties. The three members then select one of their number as chair with
the approval of the owner and contractor.
Board members are provided with the contract documents, become familiar with the
project procedures and the participants, and are kept abreast of job progress and developments.
The board meets with owner and contractor representatives during regular site visits and
encourages the resolution of disputes at job level. The board process helps the parties discuss
problems before they escalate into major disputes.
When a dispute arising from the contract or the work cannot be resolved by the parties,
it can be referred to the board for a decision or recommendation. The board convenes a hearing
at which each party explains its position and answers questions. In arriving at a decision
or recommendation, the board considers the relevant contract documents, correspondence,
other documentation and the particular circumstances of the dispute.
The use of dispute boards is increasing in Brazil and has become a real choice for
investors and participants to resolve disputes before, and hopefully instead of, arbitration.
The basis for their success in Brazil is that they help to preserve relationships and keep
construction claims and delays to a minimum.
The Dispute Resolution Board Foundation has played a major role in promoting
dispute boards in Brazil and in Latin America, and dispute boards may well become even
more popular in the region, primarily because the trend in the construction market appears
to be for alliance construction projects. The Rio 2016 Olympic and Paralympic Games
and the Dispute Resolution Board Foundation are implementing dispute avoidance and
resolution provisions in a unique way across 35 contracts for this upcoming international
event. Successful delivery for these high-profile projects is critical, since there is no possibility
of delay to completion of the contracts, and everything is in the public eye.
iv Mediation
Law No. 13,140 (the Brazilian Mediation Law) was enacted on 29 June 2015. It provides
for mediation involving individuals and private entities, as well as the settlement of disputes
involving public entities. The new law, regulates judicial and extrajudicial mediation. Courts
of law in the country may create judicial centres of conflict resolution to which all cases that
present the possibility of agreement through mediation will be forwarded.
The provisions on judicial mediation must be interpreted together with the new
Brazilian Civil Procedure Code (Law No. 13,105/2015). The new Brazilian Civil Procedure
Code provides for a mediation or a conciliation hearing in the early stages of most lawsuits.
The Code also regulates the activities of mediators in judicial proceedings.
Extrajudicial mediation involving individuals and private entities has been already used
in some cases, since it does not require a specific law regulating the matter. But it is expected
that the new legal framework will boost the adoption of mediation and provide comfort to
parties that are not familiar with this method of conflict resolution.
The Brazilian Mediation Law establishes that parties to an agreement may provide for
a mandatory mediation meeting if a dispute arises. Like an arbitration clause, this mediation
clause will have a binding effect. According to certain studies, the binding effect of the
mediation clause contributes significantly to the development of the mediation proceeding
and to the resolution of conflicts without arbitration or judicial proceedings.
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With respect to disputes involving public entities, the Brazilian Mediation Law provides
for the future creation of administrative resolution and conflict chambers. It allows, however,
the immediate adoption of ad hoc proceedings while these chambers are not constituted.
The overriding considerations during mediation proceedings must be the autonomy
of the parties and confidentiality. A duty of confidentiality will apply to the parties, their
lawyers, their experts and any others who participate in the proceedings. This duty would
extend to preventing the mediator from testifying in any subsequent court or arbitration
proceedings and would apply strictly to the parties in any such proceedings subsequently.
Statements and admissions made during, and documents prepared especially for, mediation
proceedings will be deemed inadmissible in any arbitral or judicial proceedings.

i What the future holds
The widening Petrobras Car Wash scandal continues to radically impact business in Brazil.
Not only has this put a major dampener on petrochemical projects, but it has also had
a nationwide impact upon the economic, political and business landscape.
Nevertheless, several important infrastructure projects are expected to be launched
soon creating an unprecedented opportunity for infrastructure investors and international
contractors. With the economy and federal budget in crisis, other participants in the
infrastructure sector – notably pension funds and the government itself – are sitting on
the sidelines and may even look to sell existing projects. All that has opened the door to
new players.
China takes a long view on Latin American infrastructure investment and a major
wave of Chinese investment in Latin America is expected to increase in 2017 and 2018.
Notably, China Three Gorges Corporation, State Grid Corporation of China and China
Communications Construction Company plan to expand their acquisition of sizeable
greenfield assets, develop transmission lines and invest in big infrastructure projects.
One of the government’s new major strategies therefore is to focus heavily on
infrastructure and to achieve this, consistent project investment is required. Yet the economy
is dealing with high tax rates and high debt, deprioritising finance for these capital-hungry
projects. In attempt to alleviate this, the government and states are working on ways to
develop a PPP model. Concessions are also being offered to investors or companies to finance,
build and then run the infrastructure.
The focus in the medium term is expected to be on:
a highways – often using the PPP or concession models;
b air transport and airport facilities – often using the concession model;
c railway facilities – potentially built and owned by private companies that need
large-scale transportation such as iron ore or mining companies; and
d upgrading and expansion of port facilities – often tied to rail facility developments.
ii The role of the BNDES

The BNDES is the main financing agent for development in Brazil. Since its foundation, in 1952,
it has played a fundamental role in stimulating the expansion of industry and infrastructure.
Over the course of the bank’s history, its operations have evolved in accordance with the
Brazilian socio-economic challenges, and now they include support for exports, technological
innovation, sustainable socio-environmental development and the modernisation of public
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administration. The bank offers several financial support mechanisms to Brazilian companies
of all sizes as well as public administration entities, enabling investments in all economic
sectors. In any supported undertaking, from the analysis phase up to the monitoring, the
BNDES emphasises three factors it considers strategic: innovation, local development and
socio-environmental development.
iii The advancement of PPPs in Brazil

The PPP Law illustrates the urgency and importance that the federal government has attached
to this matter in response to the pressure brought by state governments (notably, Minas
Gerais and São Paulo) and the private initiative.
The driving force behind the quick congressional passage of the draft bill into the PPP
Law was the well-known critical shortage of public funds for sponsoring infrastructure works
and utility services, and meeting the demand resulting from the country’s economic growth
spurt. This shortage of public funds, coupled with the private sector’s lack of interest in taking
over these works and services under the traditional concession system, may help to explain
why infrastructure investments have nearly halted.
The approval of PPPs has undoubtedly represented a great victory for the federal
government, especially by offering a wide array of possibilities for the presence of private
entities in key sectors of the Brazilian economy. Therefore, the great expectations and
discussions over the role of PPPs in Brazil are justifiable.
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Chapter 8
CHINA
Zhu Maoyuan and Zhang Jiong1
I INTRODUCTION
Financing for infrastructure in China is currently in a state of transition from state funding
to comprehensive market financing. With the legislative recognition and vigorous promotion
of public–private partnerships (PPP), the importance of conventional financing (i.e.,
governmental financial support and bank loans) is experiencing a drastic downtrend, and it is
constantly predicted that PPP financing will be the principal financing mode and topic focus
in the next few years. Presently, major project financing modes in China include the following.
i PPP financing
PPP financing, which flourished in China back in the 1980s and 1990s and became popular
again at the turn of the 21st century, had been something of an ongoing experiment, until
2014 when a series of laws and policies on PPP were promulgated at an unprecedented rate.
PPP financing modes have since become a hot topic and, having been extensively utilised in
the infrastructure sector, are now realising their massive potential.
ii State funds
State funds are invested in infrastructure mainly by (1) being invested directly in project
construction, or (2) being used as the registered capital and development funds for most
of the investment and financing platforms set up since the 1990s around China for urban
infrastructure construction.
iii Bank loans

Bank loans are obtained mainly through financing platforms established by local governments.
These platforms are backed by government funds and operate with land as the key asset and
with land revenues providing the essential collateral. With the extensive weakening of land
financing at local levels as a result of central policy, the influence of this financing mode is
decreasing rapidly.
1 Zhu Maoyuan is a senior partner and Zhang Jiong is a partner at Zhong Lun Law Firm. Zhang Wenjing,
Zheng Zhiping, Zheng Yongxin, Zhang Lina, Sun Ao, Han Tianji, and Yan Jiaxin, lawyers from the same
firm, also contributed to this chapter.
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According to statistics released by the Government and Social Capital Cooperation (PPP)
Research Centre, by the end of December 2016, projects included in the investment projects
database of the National Development and Reform Commission (NDRC) for preliminary
election (Included Projects) amounted to a total of 11,260, with overall investment of
13.5 trillion yuan. Among these, 1,351 projects, with investment amounting to 2.2 trillion
yuan, have been signed and executed. The current trend has seen a steadily rising number of
Included Projects and executed ones. As for industrial distribution, the top three in number
are municipal engineering projects, transportation and urban comprehensive development,
amounting to 54 per cent of the Included Projects. As for geographical distribution, the top
five provinces in number are Guizhou, Shandong, Xinjiang, Sichuan and Inner Mongolia,
amounting to 48 per cent of the Included Projects. As for the number of projects signed and
executed, Shandong ranks first, accounting for 16.4 per cent of projects nationwide, while
Xinjiang and Zhejiang rank second and third respectively. And as for the project investment
return mechanism, the proportion of annual government payment and viability gap funding
is increasing gradually.
As a result of the consistent and intensive implementation of laws and regulations
at central level throughout 2016, the path for PPP financing has been further cleared. In
particular, and in response to prevalent confusion regarding the functions of government
authorities and laws and policies in the operation of PPP projects, documents – including
Guidelines for the Implementation of Public–Private Partnership Projects in the Fields of
Traditional Infrastructure released by the NDRC; Notice of the Ministry of Finance on
Deepening the Public–Private Partnership Model in the Fields of Public Services; and Interim
Measures for the Fiscal Management of Public–Private Partnership Projects – have explicitly
explained the relationship with the Bidding and Bid Law with regard to the selection of social
capital and construction parties, detailed the concrete operational methods of PPP projects
and defined the functions of competent authorities.
However, some notable problems have emerged during the promotion of PPP modes.
First, the overlapping functions of the National Development and Reform Commission and
the Ministry of Finance in PPP management, characterised by different management patterns
and inconsistent regulatory documents, have resulted in difficulties in understanding the
policies regarding the operation of PPP projects. Second, as the enthusiasm for participating
in PPP projects is running high, over-competition might in some cases lead to an excessive
overall price for the operation of PPP projects. Third, although state-owned construction
enterprises are playing a rather active role in social capital, the major goal for them is to
profit from engineering construction and this, together with their lack of attention and
inexperience in the operation of projects, means that we have yet to see the actual effects of
a sustained phase of PPP projects in operation.

In 2016 and 2017, the Chinese government has continued to promote the application
of PPP financing modes in public service and infrastructure sectors. Among the various
operational modes evolved under the PPP mechanism, the typical modes include operations
and maintenance (O&M), management contract (MC), build-operate-transfer (BOT),
build-own-operate-transfer (BOOT), transfer-operate-transfer (TOT), rehabilitate-operate-
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transfer (ROT) and build-own-operate (BOO). The choice of mode largely depends on such
factors as pricing mechanism, level of investment return, basic framework for risk allocation,
financing demand, reconstruction and expansion demand, and disposal upon the expiry of
the partnership.
Under O&M, MC and BOT, the ownership to project assets is vested in the government
and not transferred to private investors during the entire lifetime of project; under BOOT,
TOT and ROT, the ownership of project assets is first transferred by the government to
private investors and then returned to the government upon the expiry of the partnership;
and under BOO, the ownership of project assets is transferred by the government to private
investors, and there is normally no transfer back upon the expiry of the partnership.
BOT has a history of over 20 years in China and is the most widely used mode among
BOOT, BOT and BOL in the practice of project financing. The Shajiao B Power Plant in
Shenzhen, which came into use in 1988, is recognised as the earliest BOT project in China. In
1955, the former State Development Planning Commission labelled the Laibin B Power Plant
in Guangxi as the first standardised BOT pilot project approved by the Chinese government.
Thereafter, project financing mostly focusing on BOT has achieved a rapid development
and extended to power plants, water works, water supply, heating, sewage treatment, waste
treatment, expressways, bridges, tunnels and other infrastructure. In comparison, BOOT is
less used than BOT because, for one thing, state-owned enterprises monopolise the industries
involving public interests, and private entities only have a chance to operate PPP projects
through concession and are not allowed to have an ownership of those projects; for the other
thing, the ownership period for a real property is restricted by China’s policy that the land is
state or collectively owned and that the property owner must be the same person who uses
of the land covered by the property. BOL is a variant and development of BOT, but is not
explicitly provided for in the current laws and policies and therefore is rarely used in practice.
ii Documentation
Project financing mainly involves the following types of agreement:
a cooperation agreements;
b operation entrustment agreements;
c technical service agreements;
d concession agreements; and
e consulting agreements for other intermediaries.
Projects usually involve the following agreements:

a general contracting agreements;
b subcontracting agreements;
c survey agreements;
d engineering agreements;
e procurement agreements;
f supervision agreements; and
g consulting agreements for cost estimation, project management, etc.
The Operational Guidelines for Public–Private Partnership (for Trial Implementation) issued
by the Ministry of Finance specify a contract system for project financing transactions, which
mainly incorporates the project contract, shareholders’ agreement, financing agreement,
contracting agreement, operation service agreement, raw material supply agreement, product
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purchase agreement and insurance agreement. Among these contracts and agreements, the
project contract is the most essential legal document, as evidenced by the Circular on the
Standardisation of Administration of PPP Contracts released by the Ministry of Finance
in December 2014, under which the main content of project contracts is laid down in the
Guidelines for PPP Project Contracts. At present, the Guidelines for Work Relating to
Public–Private Partnership issued by the National Development and Reform Commission
provide for the general conditions of project contracts in the Guidelines for General Contracts
for PPP Projects.

In China, common commercial projects usually adopt the traditional design–bid–build
mode, and energy and petrochemical projects usually adopt general project contracting,
including the engineering–procurement–construction (EPC) mode and the design–build
mode. In May 2016, the Ministry of Housing and Urban-Rural Development published
Certain Opinions on the Further Promotion of General Project Contracting, which clearly
defined the major mode, qualification requirements and subcontracting methods of general
project contracting, and stated that government-invested projects and fabricated buildings
shall actively adopt general project contracting. In February 2017, the General Office of
the State Council’s release of the Opinions of the General Office of the State Council on
Promoting the Sustainable and Healthy Development of the Construction Industry has
further emphasised the policy of prompt implementation of general project contracting and
the requirement for the prompt improvement of general project contracting-related rules,
and regulations concerning bidding and tendering, construction permits, completion and
inspection. It is believed that the general project contracting mode will be extensively utilised
in the Chinese construction project market for the foreseeable future. The EPC management
mode is uncommon in practice because of its high requirements regarding the management
and technical abilities of project managers, and because of the lack of explicit provisions in
Chinese law on the qualification of project managers. Alliance contracting (where one party
provides land, the other provides funds and they are jointly responsible for the construction
and share the revenues), once popular in urban real estate development and industrial
projects, is now rarely used in infrastructure investment and financing.
According to the Implementation Rules for the Bidding and Bid Law, a project
that must undergo a bidding procedure shall use the standard documents formulated by
the National Development and Reform Commission together with related regulatory
departments. In practice, however, Chinese central and local governments have formulated
and issued a number of model and standard construction contract documents, and to ensure
meeting the filing requirements parties usually select the model and standard documents
issued by the authorities who govern where the projects are located. In addition, as many
quantity surveyors retained by employers of construction projects are companies or their
branches located in Hong Kong, the United Kingdom or Singapore, where regulation is less
onerous, FIDIC or JCT forms of contract, especially FIDIC forms, are commonly used in
those projects, while AIA and NEC standard documents are less used in practice.
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i Major risks of PPP projects
As mentioned previously, PPP has become the most important project financing mode
in China. To promote a reasonable allocation of risks among contracting parties in PPP
projects, the Ministry of Finance has provided basic principles for risk allocation in its
contract guidance:
a the party bearing the risk shall have the capacity to control the risk;
b the party bearing the risk shall have the capacity to reasonably transfer the risk;
c the party bearing the risk has greater economic interest or incentives in controlling
the risk;
d the party bearing the risk has a greater degree of efficiency; and
e should the risk eventually materialise, the party bearing the risk shall not transfer the
costs or losses incurred therefrom to the other party.
Major risks and common risk-allocation arrangements in PPP projects:
Major risks
Risk Type Specification Content Risk-bearing party
Legal risks Law and regulatory risk The variation of laws, regulations and other The government
regulatory documents
Land acquisition risk Whether land use rights can be granted via The government
transfer or allocation
Administration risks
Project approval risk Whether project can obtain relevant The government
administrative approvals
Project-financing risk Whether project financing can be granted in Project company
a timely manner
Project design risk Risks that might emerge during project design Project company
phase
Commercial risks Project construction risk Risks that might emerge during project Project company
construction phase
Project operation risk Risks that might emerge during project operation Project company
phase
Project maintenance risk Risks that might emerge during project Project company
maintenance phase
Government payment Direct payment made by government for public The government
goods and services
User charges Direct payment made by the ultimate consumers Project company
for public goods and services
Demand risks
Viability gap funding Provided that user charges are insufficient for the Risk-sharing
project company’s cost recovery and reasonable between the parties
return, the government offers the project company
certain economic subsidies to make up for the gap
Other risks Force majeure Risk-sharing
between the parties
The above-mentioned risk-allocation arrangements are commonly found in practice and

might vary depending on the specific circumstances and risk-bearing capacities of each party
in different PPP projects.
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ii Major risks of construction projects

According to whether the risks are caused by human elements, risks in the construction
projects may be classified as either ‘subjective’ or ‘objective’.
Subjective risks mainly refer to those caused by negligence or mistakes by the parties
to the relevant contract during its performance, such as defects in the engineering design,
absence of substantial contract clauses and disqualification of materials or equipment.
Objective risks mainly refer to those that are uncontrollable or insurmountable by the parties
to the relevant contract and caused by events not attributable to the parties, including:
a natural risks, including natural disasters;
b political and social risks;
c economic risks, such as a downturn in the economic environment; and
d other risks, mainly referring to the impact arising from the discovery of items with
archeological or geological significance, and from the neighbouring buildings.
The current construction market in China is dominated by owners, and contractors are
intensely competitive with each other. For this reason, owners are apparently predominant
in the allocation of risks in practice. The Chinese construction authorities are, however,
intervening in this imbalance in project risk allocation by formulating and announcing
standard documents, and strengthening the compulsory application of these documents and
any corresponding examination and review.
According to current Chinese law, most construction projects, other than those legally
authorised (which account for a quite small portion), are subject to bidding procedures,
and are required by law to apply the standard documents issued by competent authorities.
The standard documents afford more importance to the parity and reasonableness of
risk allocation, and – taking into account the strengths of the owners compared with the
contractors – to the protection of the contractors’ interests. Meanwhile, the construction
authorities will review the project contracts between parties by requiring the parties to file
records of the contracts and requiring them to amend any obviously unfair provisions, thus
effectively allocating the risks.
As the foregoing filing and review requirement is inconsistent with the realities
of the Chinese construction project market, in practice, many owners and contractors
execute ‘disguised contracts’ (which have the same subject matter but different provisions)
to avoid review by the construction authorities. According to the relevant Chinese judicial
interpretations currently in force, contracts already filed are the basis for the final settlement
of project price if the parties separately execute another contract for the same project that
differs from the filed contract in content.
Nevertheless, the country has been modifying its current policies, with a view
to narrowing down the scope of projects that require compulsory bidding by law, and
differentiating the requirement for and degree of supervision between projects funded by
state-owned entities and projects funded by non-state-owned entities. The bidding monitoring
and management of projects funded by state-owned entities has been further enhanced, while
for projects funded by non-state-owned entities, a regime allowing construction-project
employers to decide themselves whether to go through a bidding and tendering process is in
trial implementation, and the standards for contract record-filing and corresponding review
have been gradually eased. Therefore, for projects funded by non-state-owned entities, the
number of ‘hidden contracts’ might be gradually reduced.
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iii Limitation of liability

Current Chinese law has no specific and explicit requirements on whether the parties
may agree on the limitation of liability. The predominant theory deems that parties may
stipulate exemption clauses in their contract to exclude compensation for certain losses.
But exemption clauses that excuse a party from liability for personal injury or property loss
caused by its intentional act or gross negligence in relation to the other party are invalid. In
practice, the parties usually agree to a capped limit for compensation or liquidated damages
to excuse a party from liability beyond that limit. For example, in a construction contract,
the parties may agree that the liquidated damages payable by the contractor for delay should
not exceed a certain percentage, say 5 per cent of the contract price. The court tends to hold
that such clauses are the outcome of consensus and that, upon conclusion of the contract, the
parties have foreseen and agreed to take the risk of bearing loss beyond the capped limit, and
therefore, the validity of the disclaimer clauses should be respected.
The law currently in force prescribes that in the absence of any specific requirements
in law and of any separate agreement between the parties, the losses to be compensated or
indemnified for include indirect as well as direct losses, provided that the claiming party
abides by the principles of objective certainty and foreseeability when claiming against
indirect losses, and bears the burden of proof. The heavy burden of proof makes it hard in
practice to obtain a favourable decision from the judiciary relating to such claims.
As to the losses arising from force majeure events, the law currently provides that
a party unable to perform a contract because of a force majeure event may be released from
its responsibilities in whole or in part based on the impact of such an event; however, it is
not entitled to this release if the force majeure event occurs after a delay in its performance.
The law also prescribes that a party must take proper measures to prevent further losses if
the other party breaches the contract, and may not claim any compensation for further such
losses in the event of failure to take the proper measures.
iv Political risks
Under Chinese property law, the state owns the land, mineral resources, rivers and sea in
China and may expropriate individuals’ chattels or real property, and thus, the modes of
project financing are restricted. This must be taken into consideration before investment is
made in construction projects in China.

The following means are often used in China to mitigate the possible risks of investment
projects and protect the interests of investors:
a security: China has five methods of security: guarantee or surety, mortgage, pledge, lien
and deposit. Real estate mortgage, pledge of equity interests and receivables, and joint
and several surety are frequently used in project-financing transactions;
b insurance;
c promise of equity buy-back or of purchase by a third party: in project-financing
transactions, if an investor invests through equity, the parties to the transaction
may execute a series of investment framework agreements under which the original
shareholder or a third party undertakes to the investor that they will buy back the
project or take it over; and
d equity control in project companies and supervision of bank accounts.
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The following security methods are commonly used in project financing transactions. An
agreement on such security takes effect from the date of execution. The security interests
involved must be registered before coming into being or, specifically, real estate mortgages
must be registered with the real estate registration authorities; a pledge of equity interests
must be registered with the securities registration and clearance institutions in the case of
equity interests registered with the same institutions, or with the administration for industry
and commerce in the case of other equity interests; and a pledge of receivables must be
registered with the credit information service.
a Real estate mortgage: according to the Property Law, any property not forbidden by
relevant laws or administrative regulations from being mortgaged may be put under
mortgage, and the mortgage of real estate is the most common way. Further to this:
• land ownership, the right to the use of collectively owned land (as in most
cases), and teaching and medical facilities and other public facilities of
government-sponsored institutions, such as schools and hospitals, and of public
interest societies, may not be mortgaged;
• the land-use right and the buildings on the corresponding land plot must be
jointly and undividedly put under mortgage; and
• the precedence of a relevant party’s right to the mortgage generally depends on
the time of registration, and the parties may enter into an agreement to change it.
b Pledge of equity interests (including stocks), especially in the following aspects:
• where the equity interests in a limited liability company are pledged to a party
outside the company, the registration authority may require that a resolution of
the company’s shareholders on approval of the pledge be submitted;
• where the equity interests in a foreign-funded enterprise are pledged, the pledge is
subject to the prior approval of the examining and approving authority governing
the establishment of such enterprises; and
• Chinese law has no specific rules on whether the remaining value of any pledged
equity interests may be pledged for a second time, but this is rare in practice, and
the industrial and commercial administrations in most areas of China expressly
refuse to accept applications for such pledges.
c Pledge of receivables: this is a good financing channel for large infrastructure
construction enterprises.
In practice in China, banks and other lenders often care more about whether mortgages and
other types of security provided in project financing are sufficient. They seldom claim step-in
rights as a condition for granting loans. But in the PPP projects developed in recent years,
lenders normally require their step-in rights to be expressly stipulated in PPP project contracts
or in the step-in agreements executed by them with the government and project companies.

Bonds and insurances are widely used in investment projects and construction project
contracts in China. Bonds used in investment projects, such as PPP projects, are mainly
for bidding, contract performance, maintenance or post-transfer maintenance, while bonds
used under construction contracts mainly cover bidding, performance, advance payment,
project quality and payment of project price, among which performance bonds are most
commonly used. In China, bonds are mainly issued by banks or bonding companies, and, in
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a few cases, by insurance companies. In the construction field, the Chinese government has
been pushing hard for a noteworthy bilateral security mechanism for construction projects.
Taking Beijing as an example, if the owner of a construction project requires the contractor
of the project to provide a performance bond in favour of the owner, the owner must provide
a payment bond in favour of the contractor at the same time. Otherwise, the project will
not be allowed to be filed with the government and will, in turn, be unable to proceed.
For a long time, the effectiveness of independent letters of guarantee had been heatedly
debated, until explicit confirmation of their effectiveness in domestic transactions was given
by the judicial interpretation titled Provisions of the Supreme People’s Court on Several
Issues Concerning the Handling of Cases of Independent Letters of Guarantee, officially
implemented in December 2016.
Insurance relating to construction projects mainly includes construction (contractor’s)
all-risks insurance or erection all-risks insurance (including third-party liability insurance),
work-related injury insurance for migrant workers, accident insurance for personnel dealing
with dangerous operations, professional liability insurance, 10‑year or two-year liability
insurance, cargo transportation insurance, and stored goods insurance. Among them,
work-related injury insurance and accident insurance for personnel dealing with dangerous
operations are compulsory under law. Moreover, most of the foregoing insurances, such as
the third-party liability insurance and professional liability insurance, are required by the
legislations of local people’s congresses or the regulations and other regulatory documents
issued by local governments with respect to construction projects. Besides these insurances
required by laws and local regulations, the construction (contractor’s) all-risks insurance or
erection all-risks insurance, cargo transportation insurance and stored goods insurance are
also commonly used in construction projects.
The Chinese bond market consists of three sub-markets: the interbank market, the
exchange market, and the commercial bank over-the-counter market. The main bond issuers
include the Ministry of Finance, the People’s Bank of China, local governments, policy-related
banks, commercial banks, finance corporations and other non-banking financial institutions,
securities companies, non-financial enterprises or companies.
Since 2014, because of the vigorous encouragement and promotion of PPP modes, as
well as credit financing modes such as government bonds, corporate bonds or debentures,
medium-term notes and short-term financing bills, the Chinese government has also begun to
foster the issuance of project revenue bonds and project revenue notes as common financing
modes for PPP. In July 2014, the National Association of Financial Market Institutional
Investors published the Guidelines for the Issuance of Project Revenue Notes for Non-financial
Enterprises; in April 2015, the National Development and Reform Commission published
the Guidelines for the Issuance of Special Bonds for Pension Industry, the Guidelines for the
Issuance of Special Bonds for Strategic Emerging Industries, the Guidelines for the Issuance
of Special Bonds for the Construction of Parking Lots in Urban Areas, and the Guidelines
for the Issuance of Special Bonds for the Construction of Utility Tunnels in Urban Areas;
in August 2015, the National Development and Reform Commission further published
the Interim Measures for the Administration of Project Revenue Bonds. As a result of the
promulgation of the series of supporting documents, China is seeing a growing number of
project revenue bonds and project revenue notes. Moreover, to further eliminate difficulties in
project financing, the National Development and Reform Commission is currently researching
setting up special PPP corporate bonds, financing costs for which are rather lower than for
bank loans and ordinary corporate bonds. In addition, Notice of the National Development
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and Reform Commission and the China Securities Regulatory Commission on Relevant
Work of Promoting the Asset Securitisation of Public–Private Partnership (PPP) Projects
in the Traditional Infrastructures Field, released in December 2016, has encouraged asset
securitisation of PPP projects; on 10 March 2017, the first batch of four asset securitisation
projects were approved for release by the Shanghai Stock Exchange and the Shenzhen Stock
Exchange. Despite the fact that regulations in relation to asset securitisation of PPP projects
are yet to be improved, many national ministries and commissions, including the People’s
Bank of China and the Ministry of Finance, are currently working on relevant supporting
policies, and the prospects for the market are massive.

Article 170 of the Property Law provides that parties may agree on other causes that authorise
the obligee to exercise its right to relevant security interests, apart from the obligor’s failure
to fulfil its debts. As to a pledge of equity interests and receivables, according to Article 216,
where the damage to or apparent depreciation of the pledged property not attributable to
the pledgee is sufficient to impair the pledgee’s rights, the pledgee has the right to request
the pledgor to provide a corresponding security, guarantee or surety; where the pledgor fails
to do so, the pledgee may auction or sell the relevant pledged property, and the funds so
obtained will be used to settle the debt in advance or be escrowed or consigned to a competent
institution, as agreed by the pledgee and the pledgor.
According to Article 195 of the Property Law, the mortgagee of a real estate mortgage
may enter into an agreement with the mortgagor to directly use the mortgaged property at
an agreed valuation, or use the funds obtained from the auction or sale of the property, to be
repaid under priority. Where the mortgagee and the mortgagor fail to reach an agreement on
the exercise of the right to the mortgaged property, the mortgagee may petition the competent
people’s court to auction or sell the property. Article 202 provides that the mortgagee may
exercise its right to the mortgaged property within the limitations of relevant action over the
principal debt, otherwise, the right will not be protected by the people’s court. In addition,
according to the Written Reply on the Priority in the Repayment of Construction Project
Price issued by the Supreme People’s Court in June 2002, the contractor’s right to repayment
of the construction project price is superior to repayment of the real estate mortgage. Investors
should consider such risks in their provision of financing for real estate projects (including
infrastructure construction projects).
According to Articles 219, 220 and 229 of the Property Law, a pledgor of equity interests
and receivables may use the pledged property to repay its debts at an agreed valuation, and
the pledgee may also be repaid under priority from the funds obtained from the auction or
sale of such property. The pledgor may request that the pledgee exercise its right to pledge
upon the expiration of the debt performance period in a timely fashion, and if the pledgee
fails to do so, the pledgor may petition the competent people’s court to auction or sell the
pledged property.
Moreover, according to Articles 196 and 197 under the Civil Procedure Law amended
in 2012, the people’s court may decide to auction or sell any relevant collateral upon a petition
from an obligee of a security interest or other entitled parties if it finds the petition legitimate
upon review; the party involved may petition the people’s court for enforcement based on the
ruling. The people’s court will reject the petition if it does not find it legitimate, and the party
involved may initiate an action before the competent people’s court.
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According to the Enterprise Bankruptcy Law of the People’s Republic of China and
the Provisions II of the Supreme People’s Court on Issues Relating to the Application of
the Enterprise Bankruptcy Law of the People’s Republic of China, after the people’s court
has accepted a bankruptcy petition, the preservative measure then existing on the debtor’s
property will be released and its enforcement suspended. However, if, after the bankruptcy
court accepts the bankruptcy petition, there is a possibility that the bankruptcy proceeding
will be impeded because of any reason in connection with any act of the interested party or
because of any other reason, the bankruptcy court may take a preservative measure against
all or part of the debtor’s property upon application by the administrator or ex officio, If
the bankruptcy court rejects the bankruptcy petition or rules to terminate the bankruptcy
proceeding, it shall notify the original court (which took the original preservative measure
that was later legally released by the bankruptcy court) to resume the preservative measure
in the original preservation order, provided that before it is so resumed or the original court
indicates that it will not resume it, the bankruptcy court may not release the preservative
measure that it has imposed on the debtor’s property. During restructuring, while the right
to the security interest in a debtor’s specific property is suspended, related debts will be
repaid in full from the specific property. If, however, there is any possibility of damage to or
apparent depreciation of the collateral to the extent that the obligee’s right will be impaired,
the obligee may petition the people’s court to resume its exercise of the right to the collateral.
During a composition in bankruptcy, an obligee with a right to the security interest in the
debtor’s specific property may exercise its right from the day the people’s court makes a ruling
of composition. During liquidation, the obligee with the right to the security interest in the
bankrupt’s specific property has a priority right to the property.

China has enacted a number of laws and regulations on environmental protection and
management of construction projects. Of these, the most important are:
a the Environmental Protection Law, implemented from 26 December 1989 and
amended in 2014;
b the Law on the Prevention and Control of Atmospheric Pollution, implemented from
1 June 1988 and amended in 2015;
c the Cleaner Production Promotion Law, implemented from 1 January 2003;
d the Environmental Impact Assessment Law, implemented from 1 September 2003 and
amended in 2016;
e the Energy Conservation Law, implemented from 1 April 2008 and amended in 2016;
f the Circular Economy Promotion Law, implemented from 1 January 2009;
g the Urban Afforestation Rules, implemented from 1 August 1992;
h the Administration Rules on the Environmental Protection Regarding Construction
Projects, implemented from 29 November 1998;
i the Rules on the Energy Conservation of Public Institutions, implemented from
1 October 2008; and
j the Rules on the Energy Conservation in Civil Buildings, implemented from
1 October 2008.
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According to the amended Environmental Protection Law and the Environmental Impact
Assessment Law, if a construction project has an impact on the environment, the owner
of the project should prepare environmental impact assessment (EIA) documents in
accordance with the law. The competent environmental authority has responsibility for
classified management of the EIA. The EIA documents, which were previously all subject to
approval by the competent environmental authority, now may be subject to either approval
or record-filing formalities, according to their impact on the environment. The owner is also
required to organise an EIA inspection after the project is completed, and may only settle
the completion acceptance formalities for the finished project after the project has passed the
EIA inspection.
If the EIA documents fail the approval, the owner may not commence the construction.
If the owner commences the project without conducting the required EIA, the competent
authorities will order the owner to stop construction or to restore the site to its original
state, or impose on the owner a fine of between one and five per cent of the total investment
amount of the project; furthermore, the employees or agents of the owner who are responsible
may be held personally liable.
Apart from the EIA mechanism, the amended Environmental Protection Law also
emphasises enterprises’ responsibilities for the prevention of environmental pollution by
introducing such mechanisms as pollutant emission permits, an environmental protection
tax, an information disclosure system and an environmental protection responsibility system;
the Law also introduces tougher punishments for environmental pollution.
The issue of a pollution discharge permit has long been carried out only at local level,
and the issuance authority of this permit has previously caused confusion. The current
laws and regulations provide consistent requirements for the pollution discharge permit.
These requirements act as the legal basis for the companies’ discharge during production
and operation. Together with the project environment access-threshold EIA, the current
requirements will be beneficial in achieving whole-process management, from pollution
prevention to pollution discharge.
Whether a project is in compliance with the requirements set out in the environmental
protection regulations and policies not only affects the commencement, inspection and
usage of the project, but also may impact the financing for the project. The Opinions on
Implementation of Environmental Protection Policies and Regulations and Prevention
of Credit Risks released in 2007 explicitly presents a ‘green credit’ policy, also called the
Green Credit Guidelines, which, in accordance with relevant industrial policies, encourages
financial institutions to give priority to projects that comply with environmental protection
laws and regulations. Moreover, whether a company adheres to environmental protection
regulations and policies will be one of the factors that the financial institutions will take
into consideration when acting on the Green Credit Guidelines. With the implementation
of the Guiding Opinions on Strengthening the Construction of Enterprise Environmental
Credit System from November 2015, the company environmental credit assessment system
will be further improved, which means that a company’s performance regarding adherence
to the environmental protection regulations and policies will have a more profound impact
on its project financing. On 31 August 2016, the People’s Bank of China, the Ministry
of Finance, the National Development and Reform Commission, the China Banking
Regulatory Commission and three other authorities jointly issued the Guiding Opinions on
Building a Green Financial System, proposing a series of incentive measures to support and
encourage green investment and financing, including allowing financial discounts for projects
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supported by green credit, establishing green development funds and other measures. These
measures will greatly promote an environment-friendly transformation of the development
of construction projects. Furthermore, the newly promulgated General Rules of the Civil
Law include a noteworthy Green Principle as a fundamental civil principle, which both
implements green development and provides an explicit legal basis for judicial review.
In addition to the foregoing laws and administrative regulations at the state level,
local governments have also enacted localised ordinances, regulations and rules relating
to environmental protection and management of construction projects. Generally, local
ordinances, regulations and rules are not as detailed as state laws and administrative
regulations, but in some cases they may be stricter.
Most policy-related banks and commercial banks in China apply the foregoing Green Credit
Guidelines, while only a few banks, such as the Industrial Bank, adopt the Equator Principles.
In contrast to the Equator Principles, China’s Green Credit Guidelines are compulsory.
The Green Credit Guidelines highlight the standards for environmental protection and
energy conservation and emission reduction, while the Equator Principles focus on social
development and ecological systems.

According to the Commercial Bank Law and other laws and regulations on financial
administration, financial institutions must assume civil liability if they cause damage to the
property of depositors or other clients. They must also assume administrative liability if they
violate the compulsory or prohibitive provisions of state laws or administrative regulations
(such as illegally collecting deposits from the public, making investments in violation of state
policy on the development of industry, or illegally settling and selling foreign currencies),
and will be held criminally liable if the misconduct is serious enough to constitute a crime.
Further, according to the Opinions on the Implementation of Environmental
Protection Policies and Regulations and Prevention of Credit Risk, where commercial banks
extend loans to projects that violate the environmental protection laws or regulations, those
banks and relevant responsible persons shall assume the corresponding liability. The Guiding
Opinions on Building a Green Financial System repeatedly propose accelerating research into
the clarification of the environmental liability of lenders.
IX PPP AND OTHER GOVERNMENT PROCUREMENT METHODS

i PPP
On 1 May 2004, the Ministry of Construction’s Measures for the Administration of Municipal
Public Utility Concessions (Order No. 126 of the Ministry of Construction) took effect,
regulating the selection, through market competition, of investors or operators of municipal
public utilities, such as supply of gas and heat, public transportation, sewage treatment and
waste treatment. In addition, Beijing and other local governments also enacted similar local
ordinances and regulations.
These regulations, ordinances and rules of concessions establish the legal basis for the
application of PPP in China.
Since the State Council promulgated the Measures for the Administration of
Infrastructure and Public Utility Concession in 2015, the central and local governments
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have issued a series of PPP supporting laws and policies, which as a whole construct the
current legislative framework for PPP modes to be operated in China. However, from a legal
prospective, no top-level design for PPP has been developed. In the 2017 Legislative Working
Plan of the State Council, the Regulations on Introducing Private Capital into Infrastructure
and Public Service Projects are listed in the urgent legislation required for comprehensively
deepening reform.
According to these regulatory documents and the practice of PPP projects, China’s PPP
modes have the following features:
a Scope of application: PPP modes are mainly applicable to public service or infrastructure
projects that are part of the governments’ responsibilities and suitable to be carried
out on a market-oriented basis in the form of concession, purchase service, equity
cooperation, etc.
b Work division between private and public participants: the private investor of
a project shoulders a substantial part of financing, design, construction, operation
and maintenance of the project, enjoys full autonomy in its operation, assumes all
responsibilities for its profits and losses, and makes returns on its investment; while the
government is responsible for the supervision of prices and the quality of the project
and may facilitate private investors in its financing and construction management by,
for example, offering preferential tax rates.
c Allocation of risks: the commercial risks arising from design, construction, finance,
operation and maintenance of a project are borne by its private investor, and the risks
pertaining to policies and laws are borne by the government. Force majeure risks are
borne by both parties.
d Project stages: a PPP project normally undergoes the following stages: identification
(early-stage assessment, including value for money assessment and financial capacity
evaluation), preparation (preparation and review of a project plan), procurement
(selection of partners), implementation (execution of the project-related contracts,
organisation and implementation of the project), and transfer (transfer of the project
upon expiry of the partnership).
e The term of a PPP project: determined based on, among other factors, the characteristics
of the industry concerned and the scale and operational mode of the project, up to
a maximum of 30 years.
f Dispute resolution: a PPP contract possesses the characteristics of both a civil contract
and an administrative contract. According to the Administrative Procedure Law of
the People’s Republic of China, the government’s failure to act in compliance with the
concession agreement for a PPP project conducted by means of concession falls within
the jurisdiction of administrative cases. A dispute over a PPP contract that involves
only the parties’ civil rights and obligations is subject to civil litigation or arbitration,
while a dispute over the government’s infringement upon the legitimate interest of
private capital during its performance of planning, supervision or other administrative
functions in the capacity of administrator of public affairs should be resolved through
administrative litigation.
g The leading role of recommended projects: from 2014 to 2016, the competent financial
authority issued three batches of recommended projects, with an increasing number
year by year and with reductions made to the implementation period. Recommended
projects obtain professional guidance and policy preference from the competent
authority and play a leading and demonstration role in all industries.
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h Practical effect: according to the PPP Comprehensive Information Platform Database,

up to the end of 2016, the above Platform had elected 11,000 national database
projects, covering energy, transportation, water conservancy, environmental protection,
municipal works, agriculture, tourism, healthcare, education, culture, sports, and eight
other major economic and social areas, with an investment amount of 13.5 trillion
yuan and the preliminarily establishment of the Chinese PPP market. The development
of these PPP projects promotes further government developments and market
competition, and so we begin to see the effects of the comprehensive reform. However,
given the relatively low status in the legal hierarchy of PPP regulatory documents, the
possible conflicts among those documents, the complexity of the legal relationships
involved, the unbalanced development between areas and industries, and other relevant
factors, the social and comprehensive effects of PPP projects will only be seen once PPP
has been established in the market for some time.
Selection of investors for a PPP project normally requires a bidding or other competitive
processes. A typical procurement procedure goes as follows: pre-qualification examination,
preparation of procurement documents, review of response documents, and negotiation on
and execution of contracts.
The following is a comparison of the essential features of the typical operational modes
used in PPP projects:
Investor’s rights and responsibilities (private capital or project company)
Scope of responsibility Will the investor Return on investment Term of

Operational mode
obtain the partnership
ownership to
project assets?
Operation and maintenance of No Government pays for No more than
Operation and
public stock assets the operations and eight years
maintenance (O&M)
maintenance
Operation and maintenance of No Government pays for No more than
Management contract
public stock assets, and provision the management three years
(MC)
of related user service
Design and financing for and No User pays/government 20–30 years
Build-operate-transfer construction, operation and provides viability gap
(BOT) maintenance of a new project, and funding (VGF)
provision of related user service
Design and financing for and Yes (within User pays/government 20–30 years
Build-own-operate- construction, operation and a certain period) provides VGF
transfer (BOOT) maintenance of a new project, and
provision of related user service
Operation and maintenance of Yes (within User pays/government 20–30 years
Transfer-operate-transfer
public stock assets, and provision a certain period) provides VGF
(TOT)
of related user service
Reconstruction, operation and Yes (within User pays/government 20–30 years
Rehabilitate- maintenance of public stock a certain period) provides VGF
operate-transfer (ROT) assets, and provision of related
user service
Design and financing for and Yes User pays/government No transfer
Build-own-operate construction, operation and provides VGF/ in the entire
(BOO) maintenance of a new project, and government pays lifetime of the
provision of related user service project
In addition to the above-described typical modes, PPP projects have developed into other
modes in practice, such as build-transfer-operate, design-build-finance-operate, buy-build-
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operate, and design-build-operate. Furthermore, regarding return on investment, apart

from direct payment, the following methods of government payment may also be adopted
in practice: contribution of capital, financial discount interest, substituting subsidies with
rewards, granting subsidies after construction, providing building materials free of charge, etc.
One of the most notable PPP projects in recent years in China is the Philips solar-energy
LED street lighting project in Guiyang, Guizhou Province, which has been selected as one
of the 10 global representative cases of the UNFCCC Momentum for Change initiative.
Another notable PPP project is the Beijing Metro Line 4, the first PPP project in China’s
urban rail transit sector. This metro line has an overall length of about 28.2 kilometres and
a total investment of around 15.3 billion yuan, of which 4.6 billion yuan was used by private
investors to set up a concession company to invest in and construct the project. The project has
so far produced a good return on investment. In 2016 and early 2017, the implementation of
PPP projects was accelerated, with the Beijing Line 16 rapid transit rail line, a recommended
PPP project in 2015, now under construction and in full swing. Currently, one section has
been put into operation and the line will be fully open to traffic by 2019. The project, with
a total investment amount of 49.5 billion yuan, is the first urban rail transit project using
the ‘equity financing and franchising’ model, which introduced a total of 27 billion yuan of
private capital. This is a pioneering PPP project and its financing model and capital scale are
heralded as blazing the trail for domestic PPP practice, providing a new model for domestic
infrastructure investment and construction.
ii Government procurement
Government procurement is regulated by the Government Procurement Law, the Bidding
and Bid Law, and their supporting regulations and other regulatory documents. Specifically,
construction projects involving government procurement in the form of bidding, including
projects and their closely related goods and services are governed by the Bidding and Bid Law
and its implementation rules; construction projects involving government procurement in
forms other than bidding or non-construction projects involving government procurement
are governed by the Government Procurement Law and its supporting implementation
rules. Government procurement may be conducted through open bidding, selected bidding,
competitive negotiation, competitive consultation, procurement from a sole source, inquiry,
and other procurement methods approved by the procurement supervision and administration
office of the State Council, but open bidding must be given priority.
Government procurement is conducted both in the forms of centralised and
decentralised procurement. The people’s governments at or above the provincial level
periodically publishes the centralised procurement catalogue. For example, the current
centralised procurement catalogue for the government procurement items under the central
budget is the 2017–2018 Catalogue and Standards of Government Centralised Procurement
by Central Budget Entities. The governments at various levels have agencies that deal
with procurement matters under the centralised procurement catalogue, provided that
government procurement outside the centralised procurement catalogue may be conducted
by the government itself, or by the said agencies as authorised by the government.
The Government Procurement Law expressly provides that government procurement
shall adhere to the principles of openness, transparency, fair competition, impartiality and
good faith. The Bidding and Bid Law also lays down a similar provision, which requires that
bidding and bid activities shall follow the principles of openness, fairness, impartiality and
good faith.
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The financial authorities are the regulatory bodies of government procurement.

Other relevant government departments perform their respective functions to regulate
government procurement in accordance with the law based on the types of procurement
and the industries involved. For example, common commercial and residential buildings
and other construction projects, or municipal projects, are regulated by the construction
authorities, and roads and other transportation projects are regulated by the communications
and transportation authorities. Suppliers may legally make inquires or queries to the
procuring entities, make complaints to the regulatory authorities, and initiate administrative
re-examination proceedings or administrative actions with respect to issues regarding
government procurement procedures. Specifically, if an inquiry or query may affect the
bidding outcome or the successful procurement, the procuring entity shall suspend the
execution of the contract; or if the contract has been executed, the performance shall be
suspended. Under specific circumstances, a regulatory authority, may, during the period in
which it is dealing with a complaint, notify in writing the procuring entity to suspend its
procurement activities, provided that the period of suspension may not exceed a maximum
of 30 days. If the regulatory authority discovers that government procurement is in violation
of the legal procedure, it may, according to the severity of the violation, order the violator to
make rectification within a given period or may stop providing funds. If the violation affects
or may affect the bidding outcome or successful procurement, the regulatory authority may
order a termination of the procurement activities or invalidate the winning bid or successful
procurement, and require another round of procurement to be conducted.

China permits foreign investors to establish enterprises, purchase company equity interests and
carry out other investment in China in accordance with the applicable laws and regulations
and without prejudice to the public interest. The establishment of enterprises in China
by foreign investors is subject to the prior review and approval of Chinese foreign-related
economic and trading authorities or other agencies authorised by the State Council and
should be conducive to the development of China’s national economy and consistent with
the applicable policies and requirements of the relevant industries.
China executes different policies depending on the industries that foreign investors are
entering. According to the Catalogue of Industries for Guiding Foreign Investment circulated
in 2015 (the 2015 Catalogue), apart from sectors that foreign investment were encouraged
to access in the prior version of the catalogue, such as water conservation, the environment,
public facilities (including urban streets, metros, light railway transit, and sewage treatment),
communications and transportation (including roads, expressways, and civil airports),
some previously restricted sectors, such as large-scale land development, construction and
operation of high-end hotels, office buildings and international conference and exhibition
centres, and real estate transactions in the secondary market and agencies, have been removed
from the catalogue of restricted sectors and investment in these areas is now encouraged. In
addition, the construction and operation of golf courses and villas remain prohibited, but
their operations are removed from the catalogue of prohibited sectors. Although restrictions
previously imposed on the real estate sector are mostly lifted in the 2015 Catalogue, foreign
investment in China’s real estate market is still subject to a set of restrictive requirements
for investment with a foreign origin, such as the commercial presence principle applicable
to purchase of non-self-use real property by foreign investors, the requirements imposed on
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real estate companies established with foreign capital). However, in the past two years, China
has successively introduced a series of regulatory documents to further lift the restrictions on
foreign investment in China’s real estate market. The major changes include:
a lifting the restrictions on the ratio of registered capital to total investment of
foreign-invested real estate companies, and further lowering the ratio of registered
capital to total investment for a project with a total investment over US$10 million;
b removing the requirement on full payment of registered capital of foreign-invested real
estate companies before applying for domestic or foreign loans or foreign exchange
loan settlement;
c streamlining the foreign exchange registration formalities applicable to foreign-invested
real estate companies; and
d regarding projects for which foreign investment is encouraged, the commerce authority
will no longer issue written confirmation of state-encouraged, domestically funded or
foreign-funded projects and will no longer review the lists of duty-exempted equipment
imported by foreign-invested companies.
Further, a foreign enterprise must establish a foreign-funded enterprise in China if it intends

to undertake a construction project in China, and must also abide by the applicable laws and
regulations regarding the sources and proportions of the investment in construction projects.
i Removal of profits and investment

The receipts, disbursements and operations of foreign exchange by foreign entities and
individuals in China are under a certain degree of control. China requires in its foreign
exchange administration laws and regulations that an investor’s purchase and remittance of
foreign exchange and collection of investment earnings are subject to the approval of the
competent foreign exchange authority. The foreign exchange authority will check that:
a the funds for foreign exchange settlement have been used as permitted;
b the foreign exchange receipts and disbursements are based on genuine legal
transactions; and
c the investors or investment projects have abided by the relevant Chinese requirements
for settlement and tax payment.
The regulatory documents promulgated last year further improve the regulations regarding
the removal of profits, which also bear on the regulatory control of the export of funds. The
current regulations explicitly provide that where a bank is requested to transfer profits of
a domestic institution equivalent to more than US$50,000 (exclusive), the bank shall, based
on the principle of real transaction, review the profit distribution resolution of the board of
directors (or profit distribution resolution of partners) relating to the profit remittance, the
original tax record form and audited financial statements. The current regulations emphasise
that a domestic institution shall firstly recover losses of the previous years in compliance with
the law before removal of profits. For profits of less than US$50,000 (inclusive), the previous
regulatory documents still apply, namely a bank is not required to review the relevant
transaction documents in principle, provided, however, that for funds of an unclear nature,
the relevant transaction documents shall be submitted for reasonable examination.
In accordance with the promulgation of the above regulatory documents, the competent
tax authorities and banks have reinforced their practices regarding the review and relevant
administration of supporting documents for removals of profits equivalent to more than
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US$50,000 (exclusive), and, in practice, some authorities and banks are even requesting
more specific supporting documents. This may increase the difficulty of profits removal to
some degree. However, a review of relevant transaction documents is always requested in
China. The newly promulgated regulatory documents have not restricted the removal of
profits, but further reinforce the review of its authenticity and compliance.
China has no courts or other judiciaries specialising in project financing or construction
projects, and the disputes relating to such projects are tried before the common civil courts.
According to the Civil Procedure Law and the supporting interpretations of the Supreme
People’s Court, disputes over a construction contract shall be subject to the exclusive
jurisdiction of the court of the place where the construction project is located.
Chinese laws and regulations have restrictions on the investment and contracting
activities of both foreign investors and foreign construction enterprises. Under the current
Chinese judicial system, except for the legal provision that intermediate people’s courts have
jurisdiction over foreign-related major cases – such as those with a relatively large amount
in dispute or with complicated merits – there are no other special dispute resolution rules
for foreign investors. In general, foreign investors and Chinese entities enjoy the same rights
and assume the same obligations in litigation, subject to the principle of reciprocity that the
Chinese courts employ if a foreign court restricts the civil litigation rights of Chinese entities.

Generally, any Chinese arbitration bodies may accept and hear disputes relating to project
finance and construction projects. An investor needs to present a definite arbitration
agreement should it intend to resolve a dispute through arbitration. The China International
Economic and Trade Arbitration Commission,2 the Beijing Arbitration Commission
(Beijing International Arbitration Centre),3 the Shanghai International Economic and
Trade Arbitration Commission (Shanghai International Arbitration Centre),4 and the South
China International Economic and Trade Arbitration Commission (Shenzhen Court of
International Arbitration)5 are among the common choices for investors. Some investors
choose the tribunals in Hong Kong or Singapore for arbitration.
In China, disputes relating to marriage, adoption, custody, succession and other
domestic relationships, as well as administrative disputes that are legally required to be
administered by the administrative bodies, may not be arbitrated. Arbitral awards take effect
2 Official site of the China International Economic and Trade Arbitration Commission:
www.cietac.org.cn.
3 Official site of the Beijing Arbitration Commission (Beijing International Arbitration Centre):
www.bjac.org.cn.
4 Official site of the Shanghai International Economic and Trade Arbitration Commission (Shanghai
International Arbitration Centre): www.cietac-sh.org.
5 Official site of the South China International Economic and Trade Arbitration Commission (Shenzhen
Court of International Arbitration): www.sccietac.org.
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from the dates when they are made and may not be appealed, but investors may petition
for judicial review of the effectiveness of their arbitration agreements and arbitral awards,
requesting the courts to set aside or decide not to enforce the arbitral awards.
At the end of 1996, a dispute review board was formed for the Xiaolangdi Water
Conservancy Project, as suggested by the World Bank, and played an independent, fair and
authoritative role in managing the dispute resolution process. ADR, however, is still not
widely used in China.
The Chinese government began to vigorously promote the ADR mechanism in 2007.
However, as yet there is no legal framework for ADR and it has not been widely used in
practice. In project financing and construction practice, investors mostly use litigation or
arbitration to resolve their disputes. The contract templates formulated by the government,
such as the Standard Bidding Documents for Construction Projects issued by nine ministries
and commissions under the State Council in 2007, the Project Construction Contract
(Model) issued by the Ministry of Housing and Urban-Rural Development in 2010, the
Project Construction Contract (Model) issued by the Ministry of Housing and Urban-Rural
Development in 2013) and the adjudication rules issued by arbitral bodies (such as the Rules
for Adjudication of Construction Disputes issued by Beijing Arbitration Commission in 2009,
and the Rules for Adjudication of Construction Disputes released by China International
Economic and Trade Arbitration Commission in 2015, and the Arbitration Rules formulated
by the Shenzhen Court of International Arbitration in 2016) have introduced the concepts
of ‘dispute review board’, ‘expert review board’ and ‘mediation centre’ into the dispute review
and mediation mechanism. Some arbitration commissions have even established specialised
agencies to handle disputes. These have facilitated investors’ understanding and application
of ADR in resolving their construction disputes. However, much still needs to be done for
the promotion of ADR in practice.
Regarding the enforcement of awards rendered by foreign arbitral bodies, China
joined the Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(the 1958 New York Convention) in 1987, and also joined in 1993 the Convention on
the Settlement of Investment Disputes between States and Nationals of Other States (the
1965 Washington Convention, pursuant to which the International Centre for Settlement of
Investment Disputes, or ICSID, was established). According to the 1958 New York Convention
and relevant Chinese laws, in relation to ‘contractual or non-contractual commercial legal
relationship’, if an arbitral award made by a foreign arbitral body requires acknowledgement
and enforcement by a Chinese court, and if the country in which the arbitral body is located
is a contracting party to the 1958 New York Convention, this convention shall apply; where
the country in which the arbitral body is located is not a contracting party to the convention
but has entered into a bilateral agreement on judicial assistance with China, that agreement
shall apply; where the country in which the arbitral body is not a contracting party to the
convention, nor has it entered into a bilateral agreement on judicial assistance with China,
the principle of reciprocity shall apply.

In 2016, PPP, having been given responsibility for solving local government debt and
other significant financial issues, has become the hottest topic and most studied subject
not only in the infrastructure sector, but also in China’s entire economic realm. With the
formation and maturing of new financing models, and the increasing involvement of private
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investment, there are hopeful prospects for even further expansion of the scale of investment
in infrastructure, indicating an unprecedented depth of involvement of private capital.
However, current private investment comes mainly from state-owned enterprises, while
private-owned enterprises largely play wait-and-see; there is still a long way to go before we
achieve real in-depth cooperation between public and private capital.
In April 2017, the Chinese central government announced a significant plan to establish
the Xiongan New Area in Hebei province, describing the move as ‘crucial for the millennium
to come’, with a proposal to relocate Beijing’s ‘non-capital functions’ there. According to this
plan, China will build a large-scale area near Baoding in Hebei province, which will, in the
long term, cover 2,000 square kilometres and be sufficient to hold 10 million people. It is
anticipated that the Xiongan New Area will drive trillion-yuan-scale investments in the next
two or three years. This area will not use the traditional real-estate development model, and
it is widely anticipated that a large volume of government-led affordable housing and public
rental housing will be developed. The Xiongan New Area will see a specific focus on creating
an attractive and ecologically sensitive environment, high-quality public services, and quick
and efficient traffic networks. It is anticipated, therefore, that the opportunities presented
by PPP financing modes may distinguish the development, with the Xiongan New Area
becoming a significant pilot project and resulting in new PPP modes.
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Chapter 9
COLOMBIA
Carlos Umaña, Rodolfo Gutierrez and Rafael Bernal 1
I INTRODUCTION
In recent years, Colombia has experienced an infrastructure and project finance boom
following certain improvements to its legal framework and increased interest from investors.
As regards public–private partnership (PPP) projects, legal developments have helped
to structure the Fourth Generation (4G) toll road concessions programme, comprising
42 projects to build approximately 4,970 miles of motorway and requiring investments of
around US$24.4 billion. Nevertheless, there is still a long way to go close the infrastructure
gap in Colombia. Public budgetary constraints make the involvement of the private sector
through private finance initiatives (PFIs) necessary. Tailor-made legislation is required to boost
the development of social infrastructure projects. Other sectors, such as power generation,
while drawing increasing interest from developers, still need further regulation to ensure the
bankability of the projects.
The enactment of Law 1508 of 2012 was a milestone in Colombian legislation, because
it provided a specific legal framework for PPPs in Colombia. Furthermore, Law 1682 of 2013
(the Infrastructure Law) provided solutions to what, historically, have been considered as
infrastructure bottlenecks. There is now clear legislation on land acquisition, environmental
licence procedures and relocation of public utility networks to overcome the complexity and
challenges that infrastructure projects always pose.
Although the National Infrastructure Agency (ANI) – the government entity in charge
of structuring, tendering and supervising the performance of transportation infrastructure
projects at national level – has been very successful in attracting first-tier local and international
participants for the 4G programme, there is another area of PPP projects that should be
closely watched: social infrastructure, such as hospitals, schools, libraries and prisons, merits
further attention. In addition to Law 1753 of 2015 (the National Development Plan), which
allows for the compensation of concessionaires’ investments with real estate rights (without
considering it a public funds contribution), the Colombian government is in the process of
enacting new legislation to incentivise private investment in this sector.
In addition, other major PPP projects are being structured by local authorities. For
example, the City of Bogotá is working with the National Development Bank on the public
tender for the first line of the Bogotá Metro. This project entails investments of around
US$6 billion.
1 Carlos Umaña is the managing partner, Rodolfo Gutierrez is a mid-level associate and Rafael Bernal is
a junior associate at Brigard & Urrutia.
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Another sector of interest relates to clean energy generation. Law 1715 of 2014 promotes
investment in renewable energies (mainly wind and photovoltaic) and introduces tax breaks
such as deductions on income tax, accelerated depreciation, exemption from VAT and
reduction of custom duties for equipment, machinery, supplies and services. In the same
vein, the Regulatory Commission for Energy and Gas is issuing new regulations to ensure
the bankability of these projects and foster the rebalancing of Colombia’s power generation
portfolio. These initiatives are complemented by regional transmission line projects
undertaken by the Mining and Energy Planning Unit, which are under tender, to transmit
power generated in the northern part of Colombia.
Finally, the government is structuring a project for a regasification facility on the Pacific
coast, which, along with the brand-new floating storage and regasification unit (FSRU)
located at Cartagena, will ensure the supply to gas-fired power plants that generate power
during El Niño–Southern Oscillation periods.
The award of a significant number of PPP projects indicates that Colombia has
significantly increased its infrastructure investments, which could be an opportunity
to reinforce and improve the young but solid legal framework in this field, as well as the
capabilities of its public institutions to supervise and enforce concession agreements.

During 2016, there were many relevant projects in the infrastructure realm, across such
different sectors as roads, oil and gas, airports, energy, railways and ports.
In relation to roads infrastructure, the award by ANI of a significant number of road
projects is notable, and the following projects in particular:
a Bucaramanga–Barrancabermeja-Yondo (152km and investments of US$744 million);
b Bucaramanga–Pamplona (133km and investments of US$355 million);
c Ibagué–Cajamarca (35km and investments of US$460 million);
d Neiva–Girardot (193km and investments of US$334 million);
e Vías del Nus (157km and investments of US$401 million); and
f Bogotá North Accesses (53km and investments of US$195 million).
In addition, last year saw the award of the tender for Colombia’s first six-lane highway, which
was structured as a private initiative. This highway will connect the capital, Bogotá, with the
neighbouring city of Girardot, and will be a strategic road in connecting the capital with
Buenaventura, Colombia’s main port on the Pacific Ocean.
Furthermore, two of the 4G road projects recently achieved financial close. The
concessionaires Perimetral Oriental de Bogotá SAS and Autopistas del Nordeste SAS have
not only executed the definitive documentation, but also received disbursements from local
and international lenders.
Holdtrade’s successful test of the railway line connecting Santa Marta on the north
coast with La Dorada in the inner part of the country was another important event in 2016.
Holdtrade sent a commercial cargo train from one point to the other without major stops;
this is the first time in 20 years this has been achieved and could signal the renewal of the
railway sector in Colombia.
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Airport infrastructure also played a significant role with investment in renovation and
new construction work in the country’s main terminals; for example, expansion works at
Cali International Airport were finished recently, including a new and modern international
terminal to cope with increasing air traffic.
In the energy field, the regasification plant near Cartagena is the first of its kind in
Colombia; with investment of US$150 million (and significantly higher with the inclusion
of the value of the FSRU vessel), it is representative of the projects adopted by the national
government to secure the country’s energy supply. The government is also in the process of
expediting construction of a second regasification plant on the Pacific coast.
Another relevant project was the opening of the Aguadulce Port project, located on
the Pacific coast, increasing port facilities capacity in the Pacific Ocean. With investment of
approximately US$650 million, this port represents one of the biggest private initiatives in
the sector, and by improving logistics will boost the country’s foreign trade.
On the other hand, Colombia has also faced challenges regarding the implementation
of those projects, especially given the corruption scandals that have affected the continent.
However, Colombian authorities and institutions have reacted promptly to the corruption
scandal involving the Brazilian company Odebrecht. The Attorney General’s Office
commenced criminal prosecution against individuals involved, the Inspector General’s Office
filed an action for the protection of the affected collective rights, the Administrative Tribunal
of Cundinamarca has ordered certain precautionary measures and the Superintendence of
Industry and Commerce, on the basis of the potential for disruption of the free market,
ordered the government to immediately terminate the Ruta del Sol, Sector II concession
agreement, which resulted in the parties executing a termination agreement. The national
government is currently in the process of structuring a new tender while it performs the
required works to maintain the corridor.

The road concession contracts entered into by the Colombian government typically follow
a build-own-operate-maintain-transfer (BOOMT) model. Thus, the concessionaire builds
the road, operates and maintains it for a determined period, which normally coincides
with the requisite period for investment return, and then transfers the operational facility
to the government. In 2013, ANI launched a standard BOOMT contract, and this will
be applicable for all the 4G projects. The most recent tender for a 4G road (the recently
awarded Cúcuta–Pamplona) employs the model BOOMT contract without major changes
from that used for the first roads. The standard contract comprises a series of elements typical
in traditional project-financing arrangements that are intended to establish basic principles
to contribute to the bankability of the infrastructure projects that are to be developed. The
standard contract includes a general part applicable to every project and a special or particular
part that shall govern the specific aspects applicable to an individual project. The standard
contract encompasses a series of provisions that are relevant for bankability purposes regarding
risk allocation, concessionaires’ remuneration, lenders’ step-in rights, cash-flow management
and effects upon early termination, among others.
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Before 2012, contractors used to receive an upfront payment for the execution of the
works. Upfront payments have now been abolished by Law 1508 of 2012 for all contracts
awarded after 2012. Payment mechanisms to contractors now depend on the availability of
the infrastructure and level of service.
ii Documentation
The most important documents in project finance transactions are no different from those
used in similar transactions worldwide. These include offtake agreements, supply agreements,
engineering-procurement-construction (EPC) contracts, operation and maintenance
contracts, ground leases and site purchases, parent guarantees, loan agreements, pledges,
mortgages and securities.

The most common delivery method for large projects involving international construction
companies is the EPC contract. However, when contracts are awarded within a public bidding
process, there is no opportunity for the parties to freely negotiate the terms of the contract
as these are unilaterally established by the contracting entity in the request for proposal
terms, although during the public procurement procedure, potential contractors may submit
comments and observations that can be voluntarily accepted by the contracting authority.
Colombian law does not oblige public entities to use specific models for infrastructure
contracts. However, there is the standard contract model developed by ANI for 4G projects
as mentioned above.
The main aspects that must be contained in concession contracts under Colombia’s
PPP scheme are regulated, and can be summarised as follows:
a contracts must have a maximum term of 30 years, except where studies approved by the
National Council for Economic and Social Policy (CONPES) justify a longer duration;
b all project funds should be administered through a trust agreement;
c contracts should contain payment mechanisms to determine early termination payments;
d each contract should identify the property that will be returned to the government or
contracting authority on expiry of the contract; and
e repudiatory breach and unilateral termination clauses should be stipulated in
the contract.
In addition, lenders must have step-in rights should the contractor breach its duty to complete
the concession contract or the financing documents.

There is no regulation for risk allocation in private law contracts and the parties are free to
allocate the risks as they see fit. The risk matrix for these contracts is similar to corresponding
international contracts.
Risk allocation for private participation in public infrastructure is dealt with by
Article 4 of Law 1150 of 2007, Decree 1082 of 2015 and Guidelines 3107 and 3133 of 2001,
3714 of 2011 and 3760 of 2013, issued by CONPES (the CONPES Guidelines).
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Article 4 of Law 1150 states that requests for proposals should identify, estimate
and assign foreseeable risks arising from proposed contracts. Contractual risk is generally
understood as any circumstances that may arise during the development of a contract and
can alter its financial balance.
For the purposes of risk regulation, the CONPES Guidelines distribute contractual
risk in five branches or categories, which include foreseeable risks, unforeseeable risks,
contingency risks, risks covered by performance bonds and risks generated by misconduct of
the contractor. The CONPES Guidelines regulate foreseeable risks allocation.
Below is the basic matrix for risk allocation as recommended by the CONPES
Guidelines. In general, the guidelines try to allocate risk according to which party is in
position to best assume and manage that risk. Risk may therefore be reallocated on a case-by-
case basis, depending on the parties’ positions.
Risk allocation
Risk Concessionaire Government
Operational X
Economic X
Financing X
Nature X
Environmental X
Social and political X
Technology X
Under the latest CONPES Guidelines (2011), land acquisition risk has been incorporated
within the definition of operational risk, while regulatory risk has not been allocated to
a specific party. The guidelines instead recommend a case-by-case basis for allocation of
regulatory risk, dictated by the parties’ abilities to manage risk.
As an example of such case-by-case risk allocation, the Colombian government set
out specific guidelines for 4G projects by means of the CONPES Guidelines 3760 of 2013,
which include, inter alia, the following relevant rules applicable for 4G projects:
a Land acquisition risk: the contracting authority (ANI) only assumes a portion of land
acquisition risk when its value exceeds 120 per cent of the initial budget destined to
land acquisition, and assumes the total value of the risk when it exceeds 200 per cent of
the initial estimated budget.
b Regulatory risk: the contracting authority (ANI) only assumes regulatory risk when, as
a consequence of the regulatory change, the concessionaire profits are affected beyond
a deviation parameter previously stipulated at the contract.
c Environmental risk: the contracting authority (ANI) only assumes a portion of
environmental risk when the value of compensations required by the environmental
authority exceeds 120 per cent of the initial budget destined to environmental
compensations, and assumes the total value of the risk when it exceeds 200 per cent of
the initial estimated budget.
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The CONPES Guidelines also set down two exceptional circumstances where a public
entity should assume certain environmental risks, and these arise in situations where no
environmental licence is required or where such a licence has yet to be obtained prior to the
closure of a public procurement process.
In cases of operational risks, the contracting entity may structure mechanisms or issue
guarantees to partially cover these risks.
As a general rule, Colombian civil and commercial law are based on the principle that
the parties to a transaction are free to agree upon the terms and conditions of the relevant
contract, such as stipulating liability limits. Thus, parties are entitled to stipulate provisions
that deviate from the rules established by the Civil Code in that respect; however, this
principle is subject to exceptions.
In certain cases, the parties are required to observe rules that are mandatory because
they involve public policy considerations. In this context, the Civil Code provides rules that
prevent the parties from limiting liability for damages arising from gross negligence or wilful
misconduct or that might allow a party to willingly breach its obligations under a contract.
These types of limitations would be invalid and unenforceable in Colombia.
Additionally, a party to a contract shall be excused from performing its duties in force
majeure events, which are legally defined as unforeseen circumstances that no one can resist
(Law 95 of 1890). Since Law 80 does not establish exceptions or particular rules concerning
limitation of liability clauses, the aforementioned general rules and exceptions to limitation
of liability clauses also apply to public contracts.
iii Political risks

Foreign investors in Colombia are fairly well protected from political risk. Although political
risk is allocated to the contractor pursuant to the CONPES Guidelines, Article 58 of the
Constitution expressly forbids the possibility of expropriation without indemnification.
Specifically, Article 58 of the Constitution protects private property and other rights
under civil law, so the Colombian state cannot ignore or violate those rights with subsequent
legislation. However, when a law is enacted for reasons of public or social interest, and its
application conflicts with rights of individuals, the private interest must yield to the public
or social interest. In such cases, expropriation will be determined by the competent judge
and the affected individual indemnified by the state. In certain cases, established by law, the
expropriation process may be made through an administrative process, and subject to further
judicial controls.
Moreover, Colombia is undertaking the process to become a member of the Organisation
for Economic Co-operation and Development, which supports additional expropriation
and foreign investments protection measures. In addition, free trade agreements have been
signed with Chile, Canada, the European Union and the United States, which include similar
protection measures.

The concession agreements under the 4G programme, which will be developed over the
next 30 years, require long-term debt, high-equity commitments from sponsors and strong
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support from the government. In this scenario, combining several complex projects and
diverse participants, the security package for Colombian project financing transactions has
started to become more sophisticated.
Lenders are requesting blanket liens over all the assets of the project company; share
pledge agreements; amendments to the existing trust agreement to modify the concession
trust to become a security interest trust covering the cash flows generated by the project;
concession rights pledge agreements; construction contract pledge agreements; assignment
of concessionaire’s consideration under the concession agreement to a different trust in
which the lenders will be beneficiaries; offshore and onshore accounts control agreements;
trust rights pledge agreements; subordinated loan pledge agreements; and material project
documents pledge agreements; among others.
The structure of project finance security packages implemented in Colombia before
the 4G programme – which involved a share pledge agreement, a commercial establishment
pledge agreement and a trust agreement – has now changed to a very complex structure to
cover every asset necessary for the ownership, development, construction and operation of
the project in the event of default by the borrower.

Decree 1082 of 2015 sets out the performance bonds and insurance required in public
contracting. Pursuant to this regulation, during the government procurement process,
contractors are required to submit a bid bond to guarantee the seriousness of their proposal.
The successful bidder is then required to submit a performance bond to ensure compliance
with its contractual obligations. The risks covered by the performance bond are those related
to the breach of the terms of the bid or the awarded contract. In construction contracts this
bond will normally include coverage for wages and salaries, for the quality and stability of the
works, and for the quality of goods provided.
The bid bond performance guarantees may be one of the following types of guarantee:
(1) insurance policies, (2) collateral trust, or (3) bank guarantee. In addition, foreign bidders
without domicile or branches in Colombia may submit standby letters of credit issued abroad
as guarantees. The coverage amounts of the guarantees are determined by law.
Recently, in 4G transactions, parties have started to include as part of the security
package at the EPC contract level, a completion bond guarantee issued by an insurance
company and designed to cover EPC contractor defaults under the construction contract,
including specifically: (1) any expenses and costs overruns due to a change of the EPC
contractor; (2) fines, sanctions and deductions applicable to the concessionaire as a result
of an EPC contractor default under the construction contract; and (3) the capex variation
between the ANI-recognised termination payment had no default of the EPC contractor
taken place and the actual final termination payment recognised by ANI. Therefore, this
policy aims to cover the risk that the project will not be completed and able to operate at
the time required and at the budgeted price because of an EPC contractor default under the
construction contract.
In construction contracts, the government will also require a third-party liability
insurance to be submitted by the contractor. In this case, the only accepted type of guarantee
is an insurance policy.
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Based on recommendations by the World Bank and on the UNCITRAL Model Law, and to
have a complete and non-fragmented regulation regarding guarantees over moveable assets,
the Colombian Congress recently enacted Law 1676 of 2013, whose purpose is to promote
the access to credit through a complete and efficient regulation regarding the legal regime
applicable to guarantees over moveable assets.
Law 1676 covers three main topics: (1) definition of guarantee over moveable assets,
(2) creation of a universal registry of guarantees over moveable assets, and (3) the efficient and
effective enforceability of the guarantees.
Under Law 1676, a security interest over moveable goods is created by means of
a contract (security agreement) executed between the debtor and the secured creditor. It is
important to highlight that the rights granted by the security interest shall only take effect
against third parties when the publicity requirements have been fulfilled. The publicity
requirement of non-possessory securities is the recording in the public registry of security
interests created pursuant to Law 1676 and the publicity requirements of possessory securities
is the delivery of possession or control of the encumbered asset to the secured creditor or
a third person appointed, unless the parties otherwise agree. Furthermore, the constitution
of a mortgage or of a pledge over assets such as vehicles, vessels or shares requires some
additional procedures such as the issuance of public deeds and registration of the security
before the competent authorities.
The definition of moveable assets is broad and expressly covers goods that will be
acquired in the future by the pledgor, inventories over non-entirely identified goods, and
receivables regardless of whether or not the receivables are represented in ‘credit documents’,
among others.
Law 1676 includes a centralised and electronic public registry for all guarantees
regarding moveable goods in chronological order. The registry is available at a national
level and will be updated with all the information regarding the guarantees (amendments,
extensions, cancellations, enforcements, among others).
Under Law 1676, it is possible to enforce the guarantees through an out-of‑court
(non-judicial) proceeding before any chamber of commerce or public notary duly authorised
by the government (subject to certain special rules). Furthermore, Law 1676 provides that
parties to a security agreement are free to decide upon the foreclosure procedure and rules.
This would significantly reduce the time and costs of enforcement. Before the enactment of
Law 1676, the foreclosure of moveable assets under a pledge agreement had to be implemented
through a judicial proceeding.
On the other hand, collateral over real estate is typically facilitated by a mortgage.
Mortgages are perfected by (1) having the mortgagor and the mortgagee execute a public
deed before a notary public (or a Colombian consular officer overseas), which must include
information that identifies the mortgagor, the mortgagee, the secured obligations and the
real estate subject to the mortgage; and (2) recording said public deed at the Registry of
Public Instruments at the place where the real estate is located. The mortgage is not valid
or enforceable unless and until it has been properly registered. A certificate issued by the
Registrar of Public Instruments evidences the creation and validity of the mortgage.
Even though Law 1676 was enacted to regulate security interests over moveable assets, it
can be construed that the foreclosure regime under Law 1676 is also applicable to mortgages
of real estate. As Article 2448 of the Colombian Civil Code provides: ‘A mortgage creditor,
to pay itself with the mortgaged assets, shall have the same rights as those of a pledge creditor
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under a pledge.’ However, as this issue remains unclear, if this is the valid interpretation the
foreclosure procedure of real estate assets would not strictly require to be conducted under
a court proceeding. This would significantly reduce the time and costs of enforcement.
Insolvency proceedings of business entities in Colombia are regulated by Law 1116 of
2006. The main insolvency proceedings regulated by Law 1116 are business reorganisations
and judicial liquidations.
The purpose of the business reorganisation proceeding is to reach an agreement between
the inside creditors (shareholders) and the outside creditors, and to promote the viability of
the business through the restructuring of the assets and liabilities of the debtor. Generally,
during the reorganisation proceedings and the performance of the reorganisation agreement,
the debtor will continue to operate the business, and, generally, ongoing contracts cannot be
terminated because of the commencement of this type of proceeding.
On the other hand, the judicial liquidation seeks the termination of the existence of
the company and the business by selling or adjudicating the debtor’s assets to the creditors.
Creditors must be paid promptly with the proceeds from the sale and any remaining assets
will be adjudicated pursuant to an adjudication agreement entered into by the creditors or by
judicial ruling if the creditors are unable to reach an agreement. Once the judicial liquidation
process has commenced, the debtor is authorised to engage only in activities related with the
liquidation of the business and those related with the maintenance of the assets. The transfer
of any asset of the debtor to satisfy an obligation caused prior to the commencement of the
judicial liquidation proceedings will be ineffective.
Payments under a business reorganisation or in a judicial liquidation process must be
made in the priority order set out under the law.
Law 1676 modified substantially the rules on enforcement of security interests within
insolvency proceedings. In fact, Law 1676 provides that, under certain circumstances, the
secured creditors may enforce the security interests even though the debtor is subject to
a reorganisation proceeding, unless the asset is required for the operation of the debtor.
Note that the operational assets must be identified by the debtor in the reorganisation
request. However, if the secured creditor does not agree with the classification of the asset as
operational, it may object before the Superintendency of Corporations, who will rule on the
nature of the asset, and therefore, on the possibility of the security interests being enforced
by the creditor.
Furthermore, in a judicial liquidation proceeding, the secured creditor is allowed
to enforce the secured interests over those assets of the debtor that hold a duly registered
secured interest as said assets are expressly excluded from the liquidation. Prior to Law 1676,
under a judicial liquidation process those assets were deemed part of the assets subject to
liquidation and distribution between the creditors depending on the priority order set forth
by insolvency law.
Even though Law 1676 was enacted to regulate security interests over moveable assets,
in the context of an insolvency scenario, Law 1676 expressly provides that the aforementioned
rules are applicable to real estate assets.

The 1991 Constitution is said to be a ‘green constitution’ because of the degree and importance
of reference made to environmental principles and the rights given to nationals seeking
protection for the environment from the government and the judiciary. The Constitution
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expressly states that a healthy environment is considered as a fundamental right; citizens may
seek protection of this right by means of class actions and civil actions, among others. These
constitutional principles gave rise to a proliferation of environmental regulations.
Law 99 of 1993 introduced the most significant changes to the environmental laws,
the most important being the introduction of the concept of environmental licences (now
regulated by Decree 1076 of 2015). Recently, Law 1333 of 2009 tightened the liability
regime, initially established by Law 99 of 1993, for violations or other actions harmful to the
environment. Thus, the use of renewable natural resources or the performance of any activity
that affects the environment in Colombia is subject to strict controls.
As a general rule, an environmental licence is required to initiate any project, operation
or activity that may entail the exploitation of natural resources or may have an environmental
impact. Activities that typically require an environmental licence include the construction
of ports, roads, railways, international airports and hydroelectric facilities. The activity of
the holder of an environmental licence is limited to the precise terms and conditions of
the licence.
The environmental authorities may impose sanctions, penalties or fines for
non-compliance with the conditions set out in the environmental licence or any other violation
of environmental regulations, permits or authorisations including the commencement of
activities without the relevant environmental licence, permit or authorisation, when required.
Furthermore, certain violations of environmental law are considered criminal offences, such
as illicit holding or handling of hazardous substances, illicit use of biological natural resources,
illicit exploration or exploitation of mines.
In addition to the foregoing, pursuant to Law 70 of 1993, for an environmental
licence to be granted to a project that may have an impact on indigenous or Afro-Colombian
communities, the execution of prior consultation agreements with the leaders of these
communities is required with respect to the protection of their rights and the compensation
by the project sponsor of any negative effects that the project may have.
Consequently, environmental and social issues are one of the most important aspects
to be considered by potential infrastructure investors in Colombia. In the past few years,
several large infrastructure projects have been affected by such issues, and when managed
inadequately these can lead to serious cost and deadline overruns.

i Public procurement
Public procurement in Colombia is seen as an important tool for the achievement of state
goals in the public sector, subject to certain principles and specific regulated procedures.
Thus, regulation of public procurement is structured according to the principles of state and
the objectives set out in the Constitution, such as the principles of a free market and free
competition, transparency and ensuring the nation’s economic and social welfare.
Public procurement is mainly governed by the Public Procurement Statute (PPS),
comprising Law 80 of 1993, Law 1150 of 2007 and numerous regulatory decrees. The PPS
is applicable to almost all public agencies and procurement procedures, with the exception
of some sectors, which according to their specific needs and characteristics are regulated
independently, as is the case for residential public utilities, information and communications
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technologies, the domestic public loan operations of territorial entities and their regional
bodies, renewable and non-renewable natural resources exploration and exploitation
contracts, including mining concession contracts, and sales of state-owned property.
The PPS establishes a list of main principles to be followed by public entities in
procedures for the award of public procurement contracts. In general, these principles are
transparency, economy, planning, responsibility, preservation of the financial equilibrium
of the contract, objective selection of bidders and respect for legal due process. In addition,
the PPS establishes a reciprocity principle, allowing foreign bidders to participate in public
procurement procedures to execute contracts with state entities in Colombia under the same
conditions that apply to a Colombian bidder participating in procurement procedures in the
foreign bidder’s country of origin. The most important principles include:
a objective selection, which requires that the contracting authority selects the most
favourable offer without considering any subjective factors;
b the reciprocity principle, which entails that foreign bidders may participate in selection
processes to enter into contracts with state entities in Colombia under the same
conditions as Colombian bidders; and
c the right to due process if any government agency wishes to use its powers to impose
fines or declare a breach of contract.
In accordance with these public procurement principles, the PPS has established several
procedures for the selection of bidders, which are classified depending on the purpose of the
contract, its amount or the particular circumstances that motivate the contractual need of the
relevant public entity. These procedures are: public tender, abbreviated selection, merit-based
selection and direct selection.
Public entities are obliged to select the contractor as a general rule through a public
tender procedure, with the exception of those cases specifically determined by law where
they can follow the abbreviated selection, the merit-based selection or the direct selection
procedures. In general terms, one of the main differences between the public tender and the
other special procurement procedures is that it takes longer to award a contract by public
tender because of the legal stages incorporated in the PPS.
The public tender procedure is the most complete and is the basis for the other public
procurement procedures. In most procurement procedures, bidders are required to submit
guarantees for purposes of risk mitigation.
ii PPP
To address the country’s infrastructure shortcomings, on 10 January 2012, following
a fast-track legislative procedure, the President of Colombia enacted the PPP Law, a new law
incentivising the development of infrastructure projects in Colombia with a view to attracting
new foreign companies to invest in this field. The PPP Law creates new opportunities to
build and operate public infrastructure projects, provides additional comfort to lenders and
substantially improves the country’s previous private finance initiative regime.
The main objective of the PPP Law is to utilise private capital for the provision of
public goods and related services. Under the previously applicable legal framework, private–
public initiatives were strictly limited to certain public works projects, and projects related
to public housing, courthouses, schools and prisons did not fall within their scope. The new
PPP Law significantly broadens the types of permitted projects to include a wide variety of
construction and infrastructure projects and their operation.
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In addition, under the new regime, payments to contractors are only made once the
project has reached the stage of commercial operation, and payment depends on meeting
certain service levels and quality standards. In essence, contractors will not be paid for work
performed until the project is completed in accordance with the original project plan.
Generally, the PPP law and Decree 1082 of 2015 provide for a maximum term
of 30 years for PPP projects. However, subject to a favourable ruling by CONPES, this
maximum term may be extended under special circumstances.
The PPP Law also includes elements typical in traditional project financing
arrangements. For example, the Law requires that the project’s resources must be administered
through a trust fund, to which all assets and liabilities of the project must be transferred. This
requirement provides greater assurances to lenders with respect to outstanding payments and
enforceability of any security interests. Likewise, the PPP Law expressly confers on project
lenders step-in rights in the event of a default under the applicable loan agreement. Finally,
the PPP Law requires that any PPP contract must include an early termination formula,
which serves as additional security for the lenders.
Another important change introduced by the PPP Law is the enactment of a special
procedure for contractor proposals for new projects and the award process for such
private-initiative projects; and this has created incentives that did not exist under the
previous regime.
The PPP Law establishes two different bidding procedures, depending on whether the
private-initiative project requires any public resources. Once accepted by the contracting
authority, projects that do not require any public resources will be publicised for a period of
one to six months, during which time interested parties may express their intention to bid for
the project. If there are no other interested parties, the contracting authority will award the
contract to the original proponent, subject to certain minimum participation requirements
being met.
If other parties express an interest in bidding for the project, they must post the
required bonds, at which point the government will open a simplified tendering process in
which the original proponent of the project has the right to match a better offer submitted
by a third party.
On the other hand, private-initiative projects requiring government funding (up to
a maximum of 20 per cent of the project costs in road projects, and 30 per cent in other
types of projects, as recently modified by the National Development Plan) will be awarded
through an ordinary tender process in which the original proponent of the project will receive
additional bonus points (ranging from 3 per cent to 10 per cent of the points already awarded)
for its submitted bid. By way of background, government agencies generally assess bids
received and assign points to each bidder on the basis that the bidder that receives the highest
scores will generally be selected for the performance of the contract.
Regardless of whether a private-initiative project requires government funding, it must
comply with certain technical, socio-environmental, financial and legal requirements. The
proposing contractor for any private-initiative project must meet any expenses incurred in
connection with the structuring process. However, if ultimately the proposing contractor
does not win the project bid, the winning contractor must reimburse the expenses incurred
by the proposing contractor in the structuring of the project.
In addition, the National Development Plan provides the option to pay the
concessionaire with real estate rights (and this compensation will not be considered as part of
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the public contribution to a PPP project).2 However, owing to the fact that this provision was
only enacted recently, it has yet to be regulated by decree and is still not in force. Therefore,
further regulation of PPP matters is to be expected in the future, with legislation designed to
complement the achievements of the National Development Plan (see Section I, supra) and
to boost the implementation of PPP in social infrastructure projects such as schools, prisons
and hospitals.
Following the first ‘wave’ of PPPs in road projects, which are still being implemented,
all these new regulations are intended to incentivise the structuring of PPP projects in social
infrastructure and we can, therefore, expect to see a considerable number of these kinds of
projects in the future.

Foreign investment is permitted in all sectors of the economy in Colombia except for
activities related to defence and national security, and processing, disposition and disposal
of toxic, hazardous or radioactive waste not originated in the country. Generally, foreign
investments in Colombia do not require prior authorisation. However, some types of
investment in the insurance and finance sectors may require prior authorisation by the
relevant authorities (i.e., the Financial Superintendence of Colombia). Additionally, certain
percentage limits may apply to foreign participation in some sectors of the economy, such as
the telecommunications sector.
All foreign investment must be registered with the Colombian Central Bank. Only
foreign investments duly registered with the Central Bank confer on foreign investors the
right to:
a transfer abroad dividends resulting from the investment;
b reinvest dividends and income derived from the sale or liquidation of the investment; and
c transfer abroad any income derived from:
• the sale of the investment within the country;
• the liquidation (winding up) of the company or portfolio; or
• the reduction of the company’s capital.
Additionally, when the activities of the foreign investors are deemed to be a permanent
business, however, the foreign investor must incorporate a Colombian branch or subsidiary.
Although Article 474 of the Code of Commerce lists some examples of activities considered
to be ‘permanent’, such as the granting of a concession by the government, analysis of
whether an activity undertaken by a foreign company may be deemed permanent is made on
a case-by-case basis.

Colombian law allows the Central Bank to intervene in the foreign exchange market if the
value of the Colombian peso is subject to significant volatility. The Central Bank may also
limit the repatriation of dividends or investments temporarily whenever the international
reserves fall below an amount equal to three months of imports. Generally, Colombia has
2 Section XX of Law 1753 of 2015 provides that the amount of public contributions to a PPP cannot exceed
20 per cent in the case of road projects and 30 per cent for any other type of project.
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some level of regulated foreign exchange liberty. This means that Colombian investors
may freely transfer foreign currency if they comply with all applicable regulations and
reporting requirements.
The Central Bank establishes the main regulations and procedures in connection
with transactions that must be completed through the foreign exchange market, while
the Superintendency of Corporations and the Tax Office are in charge of controlling
and monitoring.
As a general rule, remittances can be carried out through the exchange market without
the Central Bank’s prior authorisation. All transactions and remittances carried out through
the foreign exchange market are subject to specific registration with the Central Bank and
therefore to the filing of reports and foreign exchange declarations specifically regulated by
the Central Bank.
The foreign exchange regime makes a distinction between two different markets: the
foreign exchange market and the free market.
The foreign exchange market is strictly regulated and comprises foreign exchange
transactions that must be completed through authorised foreign exchange intermediaries (i.e.,
local banks or local financial entities) and compensation accounts (offshore bank accounts
held by Colombian residents and registered with the Central Bank). Foreign exchange
transactions that must be completed through the foreign exchange market include import
and export of goods, foreign debt operations, and investment of foreign capital in Colombia.
The free market comprises foreign exchange transactions that may be completed
voluntarily through the foreign exchange market, which is the case for payments for services
and transfer of foreign currency for donations, inter alia.
It is common for the parties involved in project finance transactions or construction contracts,
including those entered into with the government, to submit their disputes to arbitration.
Arbitration is generally more efficient and faster than the judicial system in Colombia.
The duration of the arbitration is subject to maximum term agreed by the parties in the
corresponding arbitration clause. If the parties have not established a maximum duration
for the arbitration, it can last no longer than six months from the completion of the first
procedural hearing. This term may be extended once or several times, as long as the total of
the extensions does not exceed six months.
Since the issuance of Law 1564 of 2012 (the General Procedure Code), in theory,
regular proceedings before local courts must not exceed one year for sentence to be passed in
the first instance, and six months in the second instance. In practice, it has been known for
judicial proceedings in Colombia to take between three to five years.
Law 1563 of 2012 (dealing with domestic and international arbitration) allows parties
to agree to a valid international arbitration based on foreign law, even where the contract
itself will be carried out in Colombia. Arbitration is considered to be ‘international’ when the
following conditions are met:
a the parties to an arbitration agreement had, at the time of the conclusion of that
agreement, their domiciles in different states;
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b the place where a substantial part of the contractual obligations are to be performed, or
the place with which the subject matter of the dispute is primarily related to, is located
outside the domiciles of the parties; and
c the dispute under arbitration could affect the interests of international trade.
Also, under Law 1563 of 2012, no state or government-owned company can invoke its own
right to withdrawal from an arbitration agreement.
ii Exequatur procedures
Enforcement of foreign judgments in Colombia must take place via exequatur procedures.
In addition, despite Colombia being party to international treaties such as the 1958 New
York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, foreign
arbitration awards must comply with Colombian validation proceedings.
Validation proceedings must be commenced before the Supreme Court of Justice and
will be granted if the foreign judgment or award meets with the following requirements:
a the judgment does not relate to in rem rights vested in assets located in Colombia at the
time the proceedings were commenced;
b it does not contravene ‘public policy’;
c it is a final award not subject to further challenges;
d it does not refer to any matter over which Colombian courts have exclusive jurisdiction;
e it does not refer to a matter under pending litigation in Colombia or already ruled
upon in Colombia;
f if the sentence has been handed down in contentious proceedings, the court must
provide a proper citation and the defendant will have the right to appeal, in accordance
with the law of the country of origin; and
g it was rendered without fraud and complying with due process.
During exequatur procedures the counterparties to the arbitration award may also participate,
object, request and gather evidence, and file the corresponding motions. Once the validation
is granted, if the ruling or award is not fulfilled voluntarily by the losing party, the interested
party may commence collection proceedings before a lower court to enforce the foreign ruling
or award. The only defence available to the defendant is proving payment or compliance with
the ruling.

Colombia’s ambitious infrastructure programme has put the country on the world map.
During 2012 and 2013, Colombia understood that significant modifications had to be made
to its legal framework to ensure the success of infrastructure projects. In this context, three
key pieces of legislation were enacted by Congress: a bill that aimed to provide a specific legal
framework for PPPs (approved in Law 1508 of 2012 and Decree 1082 of 2015); a regulation
that aimed to resolve the main bottlenecks that had hindered previous infrastructure projects
(approved in the Infrastructure Law); and a regulation pertaining to security interests and
enforcement of guarantees (approved in Law 1676 of 2013).
The first years of implementation of this regime, 2015 and 2016, saw it tested in
practice, and fortunately there was an outstanding level of interest and participation in the
bidding processes for the 4G road projects, as well as for other projects, including ports,
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energy-related infrastructure and airports. In similar vein, the coming years will involve the
execution of works that will test the aims initially stated by the government. However, current
projects nearing completion, such as the Aguadulce Port project on the Pacific coast, the
expansion of El Dorado international airport (named best Latin American airport in 2016 by
Skytrax), and the New Pumarejo Bridge over the Magdalena river connecting Barranquilla
and the first works in the 4G corridors, are positive indicators of the successful path the
country has started to follow.
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Chapter 10
DENMARK
Peter Wengler-Jørgensen and Maygan Mike Lundgaarde1
I INTRODUCTION
Following the financial crisis it became more difficult to obtain construction financing in
a number of European jurisdictions, and this also held true for Denmark.
Because of the lack of typical project financing from banks, employers and developers
have been teaming up with institutional investors in joint ventures and other structures to
complete development projects. Some Danish pension funds are involved in the financing
of public–private partnership (PPP) projects and have publicly stated that they are willing to
expand their activities in financing and support even large-scale infrastructure work.
Prior to the financial crisis, the multinational banks had to a large extent dominated the
project finance market in Denmark and the market had become accustomed to a standard
project finance package from these lenders. As project financing by banks has returned to
the market it is clear that most banks – including local banks – are utilising more detailed
documentation than previously, and the Danish project financing package will become even
more aligned with international standards.
Infrastructure projects have traditionally been funded significantly by the state through
the ‘state guarantee model’, where a state-owned company is responsible for the planning,
construction, operation and financing of the projects. The company raises the loans to
finance the project in the international financial markets, and the Danish state provides
a guarantee for the loans, which ensures low-cost financing because of the high credit rating
of the Danish state.
In recent years, there has been a tendency towards involving private investors in funding
these projects through PPPs, and in the coming years the tendency is likely to increase this
cooperation between the state and the private sector.

Institutional investors are generally playing an increasingly central role in project financing
and the real estate project financing market is currently largely dominated by institutional
investors, which are either driving the development works on their own behalf or directly
or indirectly providing the financing through forward-funding structures, forward-purchase
arrangements, or actual project-financing loans to the employers.
1 Peter Wengler-Jørgensen is a partner and Maygan Mike Lundgaarde is a senior attorney at Plesner
Law Firm.
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Danish infrastructure is in need of project financing and a number of projects are

planned and preliminary studies have been carried out. The efforts of the Danish state to
increase investment in infrastructure will heavily influence the market in the coming years.
A fund for infrastructure projects was established in 2009 with the expectation of investing
more than €12 billion until 2020. However, the funding of the ‘train fund’ was increasingly
criticised in late 2014 and early 2015 because of the dwindling revenue from taxation from
oil companies due to the fall in oil prices.
While international players are entering Denmark, construction in the country remains
dominated by large construction companies based in Denmark, the top four of which in
2015 realised turnovers in the range of approximately €440 million–€1.37 billion;2 however,
Per Aarsleff A/S clearly distinguishes itself as the number-one company, with an annual
turnover in 2015 approximately 60 per cent higher than the turnover of runner-up MT
Højgaard A/S.
Consultant services are also dominated by a few large Denmark-based companies,
of which the internationally active Rambøll Group realised an annual turnover in 2016 of
€1.4 billion.
The Danish Ministry of Climate, Energy and Building in early 2015 appointed
a commission to suggest a revised set of agreed documents for use in Denmark (AB92,
ABT93 and ABR89), which are expected to be approved in 2018. Possible changes include
the introduction of a wider array of agreed documents to better accommodate parties’
preferences, in terms of, for example, differing formal requirements for small and big
projects or a new document better tailored for models such as build-operate-transfer (BOT),
build-own-operate-transfer (BOOT) or design-build-finance-operate-maintain.

To date, models such as BOT, BOOT and PPP have not played a significant part in the
Danish market. Expectations and current trends are, however, indicating that this is about to
change. More and more PPP projects are scheduled to commence or be offered to the market
and pension funds are showing interest in acting as final owner of PPP projects. Although
the Danish state rarely acts as direct owner or employer, its role is often very influential as
it is heavily involved in the approval of the project, the sponsoring of the project and the
granting of the necessary permissions and concessions, etc. Equally, municipalities like to
get involved in project development and the project financing, but specific rules on public
lending may have hampered the ways in which the municipalities actively participate in this
market. A number of municipalities have, over the past few years, teamed up with private or
semi-private companies in joint ventures to develop specific projects or even larger areas or
projects in cities. Normally, the joint venture company will ultimately own the property and
the private party will contribute cash to partly finance the development and construction
works. As an example, the municipality of Copenhagen has teamed up with Realdania to
develop a new multipurpose arena in Copenhagen.
2 According to Licitationen & Building Supply praesenterer Byggeriets Top (November 2016).
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Outside the PPP segment, institutional structures are becoming more and more
important and their involvement currently ranges from very active equity ownership to a very
passive end-user profile. Transactions will very often be structured around a special purpose
vehicle (SPV), which is transferred to the fund either up front or at the end of the project.
The most common structure in the market is to place a development project in an SPV
structure. A Danish project company will accordingly often be an SPV created solely for
the purpose of completing the project. The SPV will, during the life span of the project, be
the centre of the project, and enter into and handle all relations with operators, contractors,
lenders, authorities, etc., and it will accordingly also very often act as borrower under any
project-financing agreements.
The project partners will in the relevant agreements determine, inter alia, whether to
allow the SPV to receive any income during the project, what to do with cost overruns and
how to distribute dividend.
The SPV presents an opportunity for the project partners to avoid risking their own
balance sheets in a development project. The SPV structure will also help the project sponsors
and owners to limit liability. For this reason, multinational sponsors or owners often act
through a Danish subsidiary to further limit liability, as in Denmark it takes a lot to pierce
the corporate veil. Having said that, and as the SPV normally acts as borrower under the
construction facilities, the banks will very often demand that the sponsors or owners wholly
or partly guarantee the obligations of the SPV, but even this situation may be more attractive
than putting the corporate balance sheet of the sponsor or owner at risk.
In Denmark, the role of the contractor is normally limited to acting as the contractor
under construction contracts. After the financial crises, few contractors are willing or able to
take equity shares in development projects, but it is not uncommon that they have significant
incentive programmes in the agreements with the sponsors. Institutional or multinational
investors often prefer that contractors have an equity stake in the SPV as the equity ownership
aligns the interests of the parties.
ii Documentation
Prior to the financial crisis, multinational banks had introduced a standard loan package that,
when compared with the traditional Danish standard, was very long-winded and closer to
a Loan Market Association or UK-type loan agreement. The banking crisis in Denmark and
the increased focus on risk management and regulatory issues have resulted in most Danish
banks moving their documentation in the same direction; the loan documentation, the list of
conditions precedent and the security package seem to get longer and longer. Equally, pension
funds are basing their agreements and arrangements with developers and contractors on the
same, more detailed documentation. However, compared with international standards, the
documentation is still relatively simple.

Danish construction law is generally characterised by the parties’ freedom of contract. As
such, no legislation defines or lays down rules specifically relating to construction contracts.
Since Danish construction contracts are largely unregulated by means of legislation, the
various stakeholders within the building industry have agreed on a set of general conditions
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for the provision of works and supplies within building and engineering, known as AB92.3
A similar set of general conditions, known as ABT93,4 exists for design-build contracts and
turnkey contracts. AB92 and ABT93 are generally considered balanced to both parties in
a construction contract, and the conditions are commonly referred to as ‘agreed documents’.
Similarly, a set of general conditions for consulting services – known as ABR895 – has been
drafted for use between the employer and the employer’s technical advisers, regardless of
whether they are architects or engineers.
All three agreed documents – AB92, ABT93 and ABR896 – must be agreed upon by
the parties to enter into force, but in great part these agreed documents consolidate general
principles of law laid out in case law. The agreed documents are widely used in Denmark
across the board from small private construction agreements to major public construction
and infrastructure projects. It is, however, common for parties to draft a set of particular
conditions in which derogations and additions are added to the agreed documents. In
2010 a set of general terms specifically for consumers acting as employers were adopted
(AB Consumer).
FIDIC7 terms are used, but mainly in relation to large projects where there is a need
for international tenderers.

Significant risks in project finance transactions and construction contracts in Denmark
primarily fall into the categories of time-related risks, cost-related risks, safety-related risks
and quality-related risks. Furthermore, risks related to environmental issues are especially
important in connection with large projects and such risks are normally assessed by mandatory
tests and examinations carried out early in the process.
Direct claims
According to both AB92 and ABT93, the parties may assign their rights to the contract sum
and to claims against subcontractors and suppliers. If either AB92 or ABT93 has been agreed
upon, an employer can put forward a claim directly against a subcontractor or supplier if it
has been proved that a claim against the (main) contractor is very difficult.
In early 2014 an arbitral decision allowed an employer to bring a direct claim against
a sub-consultant without limitation and despite an agreed limitation of liability between the
consultant and the sub-consultant.
The effect of the decision has not resulted in a general tendency of direct claims, but
the situation under Danish law seems to be that a (negligent) party risks being liable without
limitation if a claim is made by someone who is not a contractual party.
3 General Conditions for the Provision of Works and Supplies within Building and Engineering.
4 General Conditions for Turnkey Contracts.
5 General Conditions for Consulting Services.
6 All available in English at www.voldgift.dk.
7 International Federation of Consulting Engineers.
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Time-related risks
Measured in terms of the number of conflicts resolved by courts and arbitral tribunals, one of
the most frequent risks that the parties fail to avoid is delay. A large number of cases are either
related to contractors demanding extension of time (EOT), or employers requiring damages
for the contractor’s inability to deliver at the agreed time.
According to AB92, EOT can only be granted because of:
a alterations to the nature and extent of the work ordered by the employer;
b circumstances relating to the employer or delay on the part of another contractor;
c circumstances for which the contractor cannot be blamed and are outside its control
(e.g., war, unusual natural events, fire, strikes, lock-out or vandalism);
d the occurrence of precipitation, low temperatures, strong winds or other weather
conditions that prevent or delay the work because they are essentially more severe than
is usual for the season and region concerned; or
e public orders or bans that were not issued because of the contractor’s own situation.
The contractor must inform the employer without delay if the contractor considers itself
entitled to EOT.
Provisions are often made for liquidated damages payable to the employer, and if
such provisions are made, no additional damages due to the delay can be claimed. Even
though agreed liquidated damages may (in theory) be disputed, there is no general rule that
liquidated damages must be a genuine pre-estimate of loss, but employers must observe the
rather strict case law on notification of liquidated damages, and is not unusual that liquidated
damages on intermediate milestones are rejected by arbitral tribunals.
Cost-related risks
The two predominant ways for the contractor to charge the employer is either by offering to
complete the works for a fixed contract price or on a cost reimbursement basis.
Even when agreeing on a fixed contract price, the employer is entitled to order variations
during the course of the work where the variations are naturally linked to the works agreed
upon (see AB92, Clause 14). The contractor is entitled to undertake such variations, unless
the employer can prove specific well-founded reasons for not using the contractor, and, failing
to do so, the employer is not allowed to engage another contractor. Payment for the variations
is made on a cost reimbursement basis unless otherwise agreed by the parties.
It is not uncommon for the parties to agree on unit rates and where variations relate to
work for which unit rates are agreed, the unit rates will then form the basis of the payment.
Payment based on unit rates will, however, only be made within a range of plus or minus
15 per cent of the contract sum and within a range of plus or minus 100 per cent of the
individual items in the tender list. When these limits are exceeded, the contractor may claim
payment on a cost reimbursement basis.
Safety-related risks
Safety-related risks are present on any construction site, and in Denmark such risks should
be mitigated with due care. There are examples of foreign companies in the construction
sector not being aware of the strict Danish rules on working environment health and safety
legislation, which is not a matter to be taken lightly.
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The National Board of Industrial Injuries has the authority to shut down a site if the
rules are breached and has issued a number of general instructions that are to be observed.
Labour unions are relatively active in the construction industry and will not fail to bring
attention to employers or contractors that do not comply with safety regulations.
Provisions on ‘chain liability’ seem to be used more frequently by not only public
employers, but also private employers.
Quality-related risks
Quality assurance is applied to any large project to avoid small inadequacies turning into
major defects or causing damages. Quality assurance continues to be an essential tool for the
parties in construction projects to achieve the desired result, be it a non-defective building for
the employer, or a successful investment for the project financier.
Whereas AB92, ABT93 and ABR89 exclude liability for indirect losses to a large degree,
neither AB92 nor ABT93 includes limitation as to the amount of damages. Apart from
liquidated damages, which is often capped in larger projects, contractors often face unlimited
liability in monetary terms. However, there is a tendency for contractors on larger projects
to seek to include overall liability caps. As for consultancy services (ABR89), an overall
cap is often agreed upon and this amount often corresponds to the amount covered by the
consultant’s professional liability insurance.
Also AB92, ABT93 and ABR89 contain provisions regarding the period during which
the contractor or consultant can be made liable for work performed under the contract
(generally five years from handover, which includes latent defects). Provisions in the statute
of limitations, however, prohibit such clauses from being used in consumer contracts, where
the total limitation period is extended to 10 years.
In addition to the five-year defects notification period the Danish statute of limitations
stipulates that a claim for damages is time-barred three years after the claimant became aware
or should have become aware of the event or circumstances giving rise to the claim; this
period also applies in consumer contracts.
The three-year period is important under AB92, ABT93 or ABR89, as in regard to the
defects notification period a simple notice may suffice, whereas the three-year period in the
statute of limitations requires that legal proceedings are instituted.
One important exception to the parties’ freedom of contract is that an exclusion
of liability will usually be set aside if liability is incurred by gross negligence or intent.
A contractor or consultant who is liable for an action characterised as gross neglect cannot
rely on a clause that limits liability.
Finally, AB92 and ABT93 have special notice provisions regarding civil engineering
works (e.g., road and railway construction) that differ from those regarding building works.
Where the general rule for construction works is that the employer must give notice within
five years of handing over, no such rule exists for the aforementioned civil engineering works.
This means that the statute of limitations governs the matter, giving the employer an overall
10-year time limit to put forward its claim.
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iii Political risks

All reports made on political risks rate Denmark as a country with very low political risks.
Surveys indicate that no political decisions with adverse effects on multinationals’ profits are
in the process of being made. Incidents involving politically motivated damage to projects or
installations are very rare in Denmark.
In 2016, Transparency International ranked Denmark, together with New Zealand, as
the country where the public sector is perceived to be the least corrupt in the world.

A standard project financing package today consists of a long-form loan agreement, which
is typically mortgage-backed and with a pledge of shares of the SPV, negative pledges,
assignments (VAT, rent, insurance, etc.), guarantees from the beneficial owner, etc. Moreover,
the bank or partner will often appoint a project monitor who participates throughout the
project and advises the bank or partner on all aspects of the project and who reviews progress
reports, etc., prior to release of funds to the contractor.

i Contractor’s bonds
AB92 and ABT93 both oblige the contractor to issue a performance bond. The bond may be
in the form of a guarantee from a bank or other adequate types of security. Parent company
guarantees do not suffice.
The purpose of the bond is to cover all claims that the employer may have under
the contract (including liquidated damages). Until handover of the work, the bond must
correspond to 15 per cent of the contract price; after handover, it must correspond to
10 per cent, and one year after handover will be further reduced to 2 per cent of the contract
sum unless a claim has been put forward in writing by the employer. The bond will cease five
years after handover unless a claim has been put forward in writing by the employer, in which
case the bond will cease only when the rectification has been effected.
While the performance bond is made as an on-demand bond, both the contractor and
the guarantor may ask for a third-party opinion, which will then stall payment.
ii Employer’s bonds
AB92 and ABT93 contain provisions for the employer to issue a performance bond, but only
if the contractor so requires.
The bond must correspond to the average payment for a three-month period, but with
a minimum of 10 per cent of the contract price, so calculated that the contract sum is divided
evenly over the number of months stipulated in the contract for the performance of the work.
The purpose of the bond will be to cover all claims that the contractor may have under the
contract, including claims related to variations.
Under AB92 and ABT93 only private employers can be requested to issue a performance
bond by their contractors and it is also common that private employers seek not to issue
performance bonds by excluding the relevant part of AB92 and ABT93.
While the performance bond is made as an on-demand bond, both the employer and
the guarantor may ask for a third-party opinion, which will then stall payment.
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iii Insurance
According to AB92 and ABT93, the employer must take out fire and storm insurance that
must provide cover for the work of all contractors under the contract. For renovation projects,
the insurance must cover damage to the work and the building or engineering work on which
alterations or additions are being made.
At the request of the contractor, the contractor and any subcontractor may be included
as insured under the employer’s insurance policy.
Contractors and subcontractors are not required by law to take out liability insurance,
but if either AB92 or ABT93 is agreed upon, the contractor and subcontractor must do so in
relation to injury or damage for which they may incur liability under the general principles
of tort law.
It is common for the construction contract to include terms that require the employer
to take out all-risk insurance, and that the contractors are co-insured under the policy.
Consultants are not required by law to take out liability insurance, but it is a requirement
to do so for consultants that are members of one of the two professional organisations for
engineers and architects in Denmark: FRI and DANSKE ARK. In effect, most consultants
have thus taken out liability insurance.

Outside the context of bankruptcy proceedings, the most effective way for a project lender
with security in real estate, cars or any other property to enforce its right and to secure the
collateral is to force a sale.
In regard to bankruptcy proceedings, Denmark adopted new rules in 2011 supplementing
ordinary bankruptcy proceedings and making it possible to restructure a distressed company.
Both the debtor and the creditor may submit a petition for restructuring proceedings.
When restructuring proceedings have been commenced, they cannot be withdrawn.
This means that the proceedings will end with the debtor either obtaining a compulsory
composition arrangement or bankruptcy proceedings being commenced against the debtor’s
estate, either in combination with a complete business transfer or as a consequence of
unsuccessful restructuring.
In both bankruptcy proceedings and restructuring proceedings, control over the estate
is taken from the debtor after a decree has been issued by the court and control is transferred
to a court-appointed administrator or trustee. The estate will publish a notice convening
the creditors, and limiting claims not lodged within a certain time and may in certain cases
continue the contract or even ‘annul’ a termination.
The Danish Bankruptcy Act contains rules on the priority of bankruptcy claims
(the sequence in which claims against the bankrupt estate are covered). Claims secured by
mortgage or other types of security will be fully covered, provided that the value of the
mortgage asset is sufficient and that the pledging of the asset cannot be set aside.
Public authorities in Denmark are in practice excluded from bankruptcy proceedings,
but limited liability companies owned by the Danish state are not.
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The Danish population is one of those most prepared to pay more for products and services
from companies that are socially or environmentally responsible. This is also reflected in
the legislation in Denmark, where several environmental and energy requirements are
systematically imposed on households as well as on businesses, both foreign and domestic.
Certain reimbursement schemes and subsidy measures exist, however, for the purpose of
reducing the costs for companies, thereby safeguarding Danish competitiveness.
Together with local authorities, the state lays down the rules for land development to
ensure that the overall planning synthesises the interests of society with respect to land use and
contributes to protecting nature and the environment. This means that most construction
works have to be approved by the authorities.
The Danish financial institute EKF8 and a limited number of banks and credit institutes have
adopted the Equator Principles.

Financial institutions are generally not held liable for project financing, but in principle
it is possible that a financial institution may be found liable if it involves itself deeply in
the project.
Financial institutions may also be held liable for inadequate advice to lenders on the
form of the financing.
Denmark has implemented the EU Money Laundering Directive, which means that
a number of measures are to be taken by financial institutions and certain non-financial
corporations in relations to their customers.

i PPP
In 2012 the Danish Competition and Consumer Authority published a report on the
experiences from the 13 PPP projects carried out so far in Denmark. The conclusions
regarding the economic benefits achieved and the quality of the projects are largely positive.
However, experience in the field to date is limited. Notably, from an international perspective,
the PPP projects carried out in Denmark are quite small in terms of budget, and the majority
of the projects are projects for the construction of buildings such as schools and court houses.
Neither the Danish Tender Act nor the Public Procurement Directive includes specific
rules regarding construction projects realised as PPP projects. There are, however, rules issued
as a statutory order for public authorities to consider whether PPP is a viable option in every
single project planned. The added focus and the political desire to promote PPP has led the
Danish Competition and Consumer Authority to prepare three standard contracts, as well as
standard PPP models (including guidelines) for both new projects and renovation projects,
for parties to use in future PPP projects. In 2014, the National Audit Office of Denmark
8 Denmark’s export credit agency.
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criticised the government for not promoting sufficiently alternative models, such as PPP
or BOT, in which there is a focus on considering all of the economic implications over the
lifetime of the construction.
ii Public procurement
The current EU Procurement Directives9 have been implemented into Danish law and
consequently apply to all public contracts with a value exceeding the Directive thresholds.
This, inter alia, means that public works (construction, etc.) must be publicly tendered
if the value net of value added tax (VAT) exceeds €5.225 million, irrespective of whether the
Public Procurement Directive or the Utilities Directive apply. Contracts for goods or services
(except for so-called social and other specific services) must be publicly tendered if the value
exceeds either €135,000 (state authorities covered by the Public Procurement Directive),
€209,000 (municipal or regional authorities covered by the Public Procurement Directive),
or €418,000 (contracting entities covered by the Utilities Directive). The threshold values for
social and other specific services are €750,000 for contracts covered by the Public Procurement
Directive and €1 million for contracts covered by the Utilities Directive. Pursuant to the
Concessions Directive, the threshold for all works or services concessions is €5.225 million.
The Danish Tender Act in principle applies to all works contracts of lesser value,
although it is possible to award a works contract directly if its value does not exceed 3 million
kroner. Contracts for goods and services are covered by the Danish Public Procurement Act
if the value of the contract exceeds 500,000 kroner.
The rules and procedures prescribed in both the EU Procurement Directives and the
Danish Public Procurement Act promote principles such as more efficient use of resources,
effective competition, equal treatment, transparency, non-discrimination and proportionality.
Contracts covered by the EU Procurement Directives must be announced in the
EU Tenders Electronic Daily. These procedures ensure that all invitations for tender are
announced correctly and that all possible suppliers and contractors are informed of the
procurement process.
If a dispute arises in respect of the procurement rules (for instance, if the wrong
contractor has been awarded the contract or if the employer has set aside rules in the EU
Procurement Directives or the Danish Public Procurement Act), a complaint may be lodged
with the Danish Complaints Board for Public Procurement. The Complaints Board has the
authority to (1) award damages, (2) to cancel the award decision, which will generally require
the contracting entity to terminate the contract, and (3) in certain specific situations declare
the contract ineffective and either order the contracting entity to terminate the contract or
impose an economic sanction on the contracting authority, or both. The Complaints Board
may also decide that a complaint is to have suspensory effect on the procurement procedure
until the matter has been settled. It is also possible to contest a public procurement procedure
before the Danish courts, but since the Complaints Board is highly specialised in public
procurement law and generally offers quicker procedures than the courts, it is generally
advisable to lodge complaints with the Complaints Board.
9 Directives No. 2014/24/EU (the Public Procurement Directive), No. 2014/25/EU (the Utilities Directive)
and No. 2014/23/EU (the Concessions Directive).
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i Open to foreign investments
Denmark is generally considered to be an investor-friendly environment for foreign investors.
A number of international surveys place Denmark high in the areas important to companies
interested in entering into project finance transactions and construction projects in Denmark.
Denmark has been ranked the third-easiest place in the world, and the easiest place
in Europe, to do business in the World Bank ‘Doing Business’ index for 2017, which shows
how the regulatory environment is more conducive to the start-up and operation of a local
firm. Similar studies by Forbes Magazine, The Economist and Goldman Sachs in 2012 and
2013 reached comparable results.
ii Labour environment
Denmark has a very flexible labour market compared with the markets that many foreign
investors are used to. According to the IMD World Competitiveness Report 2010, Denmark
offers the highest labour market flexibility in Europe. Scaling a business up or down can
take place more smoothly in Denmark than in most places in Europe. Generally speaking,
the employer can freely choose whom to dismiss, as long as the dismissal is justified. There
are no obligations to re-employ previous employees, as in some other jurisdictions. This
flexibility is balanced by most employees having private and state-funded insurance against
unemployment, securing two years of pay in the case of unemployment – a model known as
the ‘flexicurity model’.
Even though labour unions are relatively ‘strong’ in Denmark, general or large-scale
strikes are rare.
Setting up a business
Setting up a business in Denmark can happen quickly and cost-efficiently. The most
commonly used limited liability companies – A/S and ApS – can be incorporated and ready
to operate within a few hours by using an online electronic registration system provided by
the Danish Business Authority. The required share capital for an A/S company is €67,000,
whereas the required capital for an ApS company is €6,500.
In 2014, a new type of company with limited liability – the IVS – was introduced. This
new type of company has a required capital of €1, and thus in practice is free to set up. Some
additional restrictions apply to an IVS, requiring any surplus to be used to build up capital in
the company to €6,500 before any is paid to the owners as dividend.
Ownership restrictions
One notable rule for foreign citizens setting up a business in Denmark is the Act on the
Acquisition of Real Estate, which stipulates that only Danish citizens or people who have
lived in Denmark for five years may acquire real estate. A number of exceptions mean that in
practice this has very limited effects on foreign companies setting up business in Denmark.
The most important exception is that a foreign company operating by setting up a Danish
company can acquire real estate through that Danish company. Furthermore, the rules do
not apply to EU citizens who have moved to Denmark. One rule from the Act that continues
to be debated is a ban on foreign citizens buying holiday cottages in Denmark. In recent
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years, the rule has been increasingly debated, as it is perceived as preventing investment in
Denmark, by Germans in particular – investments that are assumed to have positive effects
on the general economy because of expected ‘spillovers’ in the construction sector.
Apart from the foregoing restrictions on real estate, ownership restrictions are generally
rare. Ownership restrictions apply, however, in a few sectors such as hydrocarbon exploration,
arms production and ownership of aircraft and ships.
Protection of foreign investment

Denmark has concluded bilateral investment treaties providing protection for investments
with 54 countries of which 46 are in force and eight await ratification. The majority of
these treaties favour International Centre for Settlement of Investment Disputes (ICSID)
arbitration, but it is often left to the investor to choose between alternative forums such as
ad hoc arbitration under UNCITRAL rules, the ICC, the Stockholm Chamber of Commerce,
the Cairo Regional Centre for International Commercial Arbitration and a number of other
institutes. In general, Danish bilateral investment treaties (BITs) are quite different on
a number of subjects. Therefore, an international investor investing in Denmark who is aware
of these rules and wishes to make its investment through a country with an investor-friendly
BIT must carry out extensive research into the Danish BITs to determine whether preferred
forums, etc. are available under a particular BIT.
Denmark is a member of the Multilateral Investment Guarantee Agency, but no policies
have yet been taken out for projects in Denmark.
Currency
The euro is not in use in Denmark, but Denmark pursues a fixed exchange rate policy with
the Danish krone, linked closely to the euro. The Danish krone has a fluctuation band of plus
or minus 2.25 per cent of the central rate of 746.038 kroner per €100.
There are no restrictions on converting to or from Danish currency; neither are there
any restrictions on the transfer of funds when investing into or out of Denmark. As an
anti-money laundering measure, any person leaving or entering Denmark with more than
€10,000 in cash must report this fact to customs.
No specific courts or arbitral tribunals deal with project finance transactions, and if no
particular dispute regulation mechanisms are agreed to by the parties, conflicts arising from
such transactions are accordingly handled by the ordinary courts.
Denmark has opted out of cooperation with the rest of the EU in the field of justice
and home affairs. To mitigate the effects of Denmark’s solitary approach, parallel agreements
have been concluded between Denmark and other EU member states regarding two of the
most commercially important regulations – the Brussels I Regulation (on recognition and
enforcement of foreign decisions) and the Regulation on the Service of Documents. In other
areas, Danish legislation is not identical with that of the rest of the EU. One example of this is
the Rome I Regulation (regarding choice of law in contractual matters), which does not apply
in Denmark, whereas the old Rome Convention from 1980 instead applies. Even though
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observers had expected that the Danish reservation on these matters would be abandoned or
at least reduced to a less extensive version, this was turned down at a public referendum in
December 2015.

Since 2005 the Danish Arbitration Act has to a wide extent been based on the 1985 UNCITRAL
Model Law and accordingly follows internationally recognised principles for arbitration.
The only two permanent arbitration institutes in Denmark are the Danish Institute
of Arbitration10 and the Danish Building and Construction Arbitration Board.11 The
latter handles the vast majority of construction disputes in Denmark because of its
inclusion in the agreed documents most commonly used in construction contracts (AB92,
ABT93 and ABR89).
Arbitration before the Danish Building and Construction Arbitration Board is
conducted in Danish and the arbitrators are not appointed by the parties but by the Board.
Under the Danish Building and Construction Arbitration Board a special mechanism
exists in relation to disputes on payments and guarantees. In such cases, the dispute may be
referred to a technical expert rather than being tried or processed before a traditional arbitral
tribunal. The opinion of the technical expert can, however, subsequently be challenged in
arbitration proceedings.
The Danish Institute of Arbitration has a set of rules for mediation. If the dispute is
settled, the parties can request that the settlement is confirmed in the form of a final arbitral
award on agreed terms, which means that the settlement may be enforceable in the ordinary
courts to the same extent as any other arbitral award.
Denmark is a member of the ICSID and has adopted the New York Convention.
Thus, international arbitral awards, including those in investment disputes, are binding and
enforceable in Denmark.

As a member of the EU, Denmark is comparable with most other EU Member States in terms
of legislation and regulation. Although the sets of general conditions – AB92, ABT93 and
ABR89 – have been drawn up exclusively for Denmark, they should hold only a few surprises
for those used to doing business in continental Europe.
When it comes to financing, Denmark is yet to adopt PPP on a larger scale, but
the first signs are that it will do so. The traditional view that infrastructure and public
buildings are solely state or municipal tasks without private financing may be changing. At
a time when public spending is continuously on the agenda, large pension funds and other
private companies are expected to take part in the financing of projects formerly seen as
public projects.
10 www.voldgiftsinstituttet.dk (English, German, French, Russian and Chinese versions of the rules
are available).
11 www.voldgift.dk.
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Chapter 11
FRANCE
Paul Lignières, Mark Barges, Darko Adamovic and Marianna Frison-Roche1
I INTRODUCTION
Until the 1990s, the French market for project finance was centred on concessions, which
have historically played a key role in the development of infrastructure in France. Because
of legal constraints, project finance schemes were usually not available in sectors in which
there was no or non-significant payment coming from end users (e.g., health, education, law
and order). This changed gradually until a general framework was adopted for partnership
agreements in 2004. On that basis, multiple waves of projects were successfully launched,
starting with hospitals and prisons, then railway infrastructure and arenas or universities.
Project finance played a key role in the French stimulus plan for the economy during
the financial crisis. Major railway projects were launched to keep the market active, most
notably the SEA high-speed link, one of the largest project finance transactions in Europe.
Project finance has also been one of the major tools of the French energy transition.
More than 13,000MW of renewable energy projects have now reached production stage
under a power purchase obligation regime, with fixed preferential tariffs put in place in 2000.
France became the largest market for public–private partnerships (PPPs) in 2011 and
remained one of the largest markets in 2012. It is now a mature market, with practices, legal
structures and precedents that foreign investors are often familiar with.
Because of the leading position of the French construction contractors, most notably
Vinci, Bouygues and Eiffage, the French construction market has always been difficult for
foreign players.
The financing market, on the other hand, has always seen foreign investors and foreign
banks playing a major role for project finance, alongside the main French banks (Société
Générale, Natixis, CA-CIB and BNPP) and the key public sector participants (the French
Caisse des Dépôts et Consignations and the European Investment Bank).
The role of foreign players in the French market should increase in the coming years
despite the somewhat protectionist image attached to France, with key opportunities to enter
the French market arising from the development of the brownfield market (see below).
1 Paul Lignières is a partner, Mark Barges is a counsel and Darko Adamovic and Marianna Frison-Roche are
managing associates at Linklaters LLP.
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The greenfield infrastructure market has seen a significant reduction in size since 2013 because
of (1) the stimulus plan for the economy coming to an end, (2) the public finance crisis, (3) the
lack of need for new infrastructure after the completion of the previous waves of projects, and
(4) the 2016 government being less enthusiastic about PPPs than its predecessors.
In addition, 2014 saw some well-known projects facing difficulties: the Ecotax project
was suspended in 2013 by the government and was eventually aborted, with the government’s
decision on 30 October 2014 to terminate the PPP agreement with Ecomouv; and the quite
controversial Corbeil-Essones hospital project faced some difficulties and was ultimately
terminated in 2014.
Furthermore, project bonds became a key trend, including on refinancing transactions,
as they can offer finance for longer periods than conventional debt. For instance, the European
Investment Bank has implemented its Project Bond Credit Enhancement instrument in the
context of a partly paid project bonds issuance subscribed by Allianz funds for the purposes of
financing a 50-year concession for the operation, extension and maintenance of the seaports
of Calais and Boulogne-sur-Mer.
The year 2016 has seen several major refinancing projects, in particular the refinancing
of the A28 toll road concession project and others are well advanced and should reach
financial close in 2017.
A significant brownfield market for French regulated infrastructure assets grew in 2016.
Notable transactions in 2016 included the privatisation of the Nice and Lyon airports. Nice
airport was awarded to the consortium led by the Italian group Atlantia, whereas the Lyon
airport went to a French consortium comprising Vinci Airports, Caisse des Dépôts et des
Consignations and Prédica.
The secondary market for PPP projects also continued to strengthen in 2016, with
sponsors considering the sale of portfolios of assets that had entered their operational phase.
The development of the brownfield market should remain an important trend over the
coming years, with major opportunities for foreign investors.
The greenfield market for energy projects presents major future opportunities for
project finance. With volumes of onshore wind transactions set to increase and clear targets
for the development of 3GW of solar power through six 500MW solar tenders between
2017 and 2020, France should be one of the most attractive European markets over the
coming years in the solar and the wind energy sectors. France must indeed achieve a target of
producing 23 per cent of its energy needs from renewables by 2020. To this end, the Energy
Transition Law2 created a new energy model by introducing a new support mechanism taking
the form of a premium on top of the market price, or feed-in premium, that is to become
the main support mechanism for renewable energy, while a revised feed-in tariff mechanism
would only be applicable to a certain extent to smaller projects.
In a nutshell, the French market is now mature, but there are still some major projects
being launched, such as the third call for tender for offshore wind, in the Dunkerque area,
2 Law No. 2015-992 dated 17 August 2015 on Energy Transition for Green Growth, with three
implementing decrees that give more details on the new support mechanism: Decree No. 2016-682 dated
27 May 2016, Decree No. 2016-190 dated 28 May 2016 and Decree No. 2016-691 dated 28 May 2016.
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for a capacity of 250MW to 750MW, and the brownfield market is well developed. Going
forward, we expect many opportunities for smaller, local PPPs and for foreign investors to
enter the French market buying brownfield projects.

PPP projects on the French market are typically developed by a special purpose vehicle (SPV).
Historically, contractors saw the PPP market as an extension of the construction industry. As
the market matured, sponsors have become more diverse and also included the concession
division of such contractors and specialist financial investors such as Ardian (formerly AXA
Private Equity), CDC Infrastructure, FIDEPPP, Macquarie, Marguerite and Meridiam.
PPP projects are structured as build-operate-transfer schemes. Renewable energy
projects are privately owned.
ii Documentation
The SPV typically enters into a PPP contract with the public sector, and into
engineering-procurement-construction (EPC), operation and maintenance (O&M) and
financing contracts. Depending on the complexity of the project, other agreements can
be required, such as interface agreements to deal with interfaces between construction and
maintenance, and direct agreements between the lenders and the sponsors or public sector.
Renewable energy projects are developed on the basis of a power purchase agreement
and grid connection agreements entered into with various entities of the EDF group (the
French electricity integrated historical incumbent).

PPP contracts are not standardised, although concessions granted at state level tend to be
very similar. MAPPP, the French PPP task force, has suggested standard terms, but their use
is not mandatory. On the renewable energy market, power purchase and grid connection
agreements are standardised.
The International Federation of Consulting Engineers (FIDIC) documents are well
known by French players and used for inspiration, although the major French construction
contractors usually use their own standard documents as a basis for discussions.

The management of risks is in line with international project finance standards and based on
widely accepted principles, such as the transparency and ‘back-to-back’ principles that govern
the relationships between the SPV and its subcontractors.
On the PPP market, the risk of third-party challenge has required specific treatment
over the past few years because of case law being unclear on certain issues, most notably the
treatment of swap breakage costs in the case of judicial cancellation of the PPP contract.
This has been clarified by the Ordinance relating to Public Procurement,3 as ratified and
3 Ordinance No. 2015-899 dated 23 July 2015 relating to Public Procurements.
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amended by the Sapin II Law,4 which now provides that, in the event of an early termination
of a PPP contract, the costs relating to the financing of the PPP contract, incurred by the
sponsor, including swap breakage costs, can be reimbursed if they have been useful for the
public entity counterparty to the PPP contract. Specific arrangements, known as ‘tripartite’
agreements, have often been made available by the public sector to cover such costs should
a PPP be held invalid as a result of a challenge.
Limitation of liability is accepted under French law, except in a few cases, notably gross
misconduct. Public sector clients, however, cannot accept a complete exoneration of liability.
In PPP projects, the liability cap of the construction contractor is often around 20 to
40 per cent of the contract price, with specific risks excluded from the cap (e.g., penalties
payable by the SPV to the public sector and gross negligence). The liability cap of the O&M
contractor is generally equal to one or two years of payments under the O&M. While
PPP, EPC and O&M contracts regularly include liquidated damages provisions (known as
penalties), a court can revisit them if it considers them to be unreasonably high or low.
As a general principle, contractors cannot be held liable for the consequences of
force majeure.
iii Political risks

Although projects in France are not totally immune from political risks, as demonstrated by
the payment of compensation in the Ecotax project by the government and the renegotiation
of the motorway concession contracts, it is not seen as a major cause for concern given the
fairly protective legal and institutional framework.
PPP contracts can be unilaterally modified or terminated on general interest grounds,
but the contractor is entitled to full indemnification of the damage resulting from such
a decision. PPP contracts generally provide for protection against changes in law that would
specifically affect the project. Such protection is also offered under case law under the
theory known as fait du prince, which entitles contractors to indemnification in the event of
unilateral measures affecting the performance of a contract. Another theory, imprévision (the
doctrine of unforeseen circumstances), offers protection where unforeseeable situations have
a significant impact on projects, which can cover civil disturbances and other political risks
to some extent.
PPP contracts do not normally include any termination provisions in favour of the
SPV. However, the SPV will be entitled to seek termination of the PPP contract and recover
compensation for its losses (including loss of profits) in the event of material breach by the
public sector authority.
The rights of foreign investors, including property rights, are protected under the
Constitution, which does not discriminate against foreign investors. Their rights are
protected in the same way as those of French citizens and corporate bodies. Expropriation is
possible, but only to the extent that it serves a general interest purpose and that appropriate
indemnification is paid prior to expropriation. Nationalisations are possible, provided that
4 Law No. 2016-1691 dated 9 December 2016 relating to Transparency, the Fight against Corruption and
Modernisation of the Economy creates in its Article 39, a new Article 89 of the Ordinance.
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indemnification is paid. There have been no examples since the early 1980s, when the
socialist government nationalised major French corporates and French banks, which were
then privatised a few years later.
Because of this protective legal framework, the intervention of the Multilateral
Investment Guarantee Agency of the World Bank Group is not considered as necessary when
acting on the French market.

Finance parties involved in the financing of projects in France are secured by way of
a standard security package, which mainly includes an assignment by way of security under
Article L313-23 et seq. of the French Monetary and Financial Code (the Dailly assignment)
over certain receivables held by the project company in the context of the project.
The package typically includes pledge agreements in respect of the shares of the project
company, the bank accounts and other moveable assets and direct agreements. There is no
equivalent in France to the floating charge found under English law, although specific security
can be put in place for specific classes of assets.
In the context of the financing of renewable energy projects, the finance parties also
benefit from a mortgage in respect of a percentage of the value of immoveable assets thereunder.
For projects on the French market, the main security remains the Dailly assignment,
which results in an assignment over certain receivables (such as proceeds of the termination
compensation that may be due by a public authority under PPP agreements, or proceeds of
the termination compensation that may be due by EPC or O&M contractors under their
respective contracts with the project company). Although such an assignment may only
benefit lenders (as opposed to hedging banks, whose interest is equally protected through
specific contractual and security arrangements), it is usually considered as a strong bankruptcy
remote instrument as it grants to the finance parties full title over the assigned receivables.
On the PPP projects, lenders may also benefit to some extent from an ‘accepted’ Dailly
assignment, whereby, after completion of the construction phase, the public authority is
statutorily prevented from raising any defence on the grounds of the PPP agreement against
the lenders benefiting from the said accepted Dailly assignment. This makes the underlying
loan immune from the risks of the project and results in a structure quite comparable to
a loan extended directly to the public authority.
Standard step-in rights are usually available on projects, although the consent of the
public sector will be required before substituting a new entity to the initial project company.

i Bonds
Standard bonds for projects in France are performance bonds and parent company guarantees.
Bid bonds are not standard in the context of French PPPs. However, for particularly large
projects (such as the €7.8 billion high-speed SEA railway project), the bidding consortium
might be requested to provide a bid bond to ensure that it will reach financial close within
the required period.
The EPC contractor usually requests a performance bond, to secure performance of its
obligations under the EPC contract. Such bonds are usually in the form of first demand bank
guarantees issued by financial institutions with a specified credit rating.
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Defects liability risks are generally covered through contractual mechanisms and parent
company guarantees. However, for important projects, construction contracts may provide
for a warranty bond to be issued by a financial institution on behalf of the EPC contractor to
cover the defects liability period.
Parent company guarantees are generally required in the form of a suretyship (a specific
form of performance undertaking) and issued to secure the contractual obligations of both
EPC and O&M contractors.
In addition, French law provides that the EPC contractor guarantees civil works
for a period of 10 years (known as the decennial guarantee) from the completion date of
the works.
ii Insurance
Insurance coverage of the project is divided between the project company, the EPC and
the O&M contractors. Standard insurance policies include construction all-risk, delay in
start-up, business interruption and third-party liability risk. With respect to the insurance
policies subscribed by the project company, the finance parties usually request to be included
as co-insured or loss payee.

In France, security interests can generally be enforced when the secured claim is due. Security
interests are enforced in different ways, such as contractual foreclosure of title, sale of pledged
assets at public auction or petition to court for asset appropriation.
Insolvency proceedings may limit the possibility of enforcement. Ahead of any
cash-flow insolvency situation, French companies may seek protection from their creditors
through a safeguard procedure whenever they are not able to overcome difficulties. Once
cash-flow insolvent, only reorganisation or liquidation proceedings are available, the latter
when the rescue of the debtor is manifestly impossible.
During these proceedings, and subject to certain exceptions, enforcement of security
interests and actions for payment of pre-petition debts are frozen. This automatic stay applies
during the ‘observation’ period, which may last up to 18 months. If a plan to continue the
business is approved by the court (in safeguard or reorganisation proceedings), the secured
creditor may still not be able to enforce the security or exercise its acceleration rights to the
extent the plan is complied with.
Certain security interests, such as the Dailly assignment of receivables, are not affected
by the above pre-insolvency and insolvency proceedings.
French public law entities are immune from bankruptcy proceedings and from private
law enforcement measures. This does not mean, however, that judgments against French
public entities are unenforceable. Under a law of 16 July 1980, where a final judgment has
been made against a public entity ordering the payment of a sum of money, the payment must
be ordered within two months, otherwise, the representative of the state or the supervising
authority for the entity in question must make the order.
If there are insufficient funds available to the public entity to meet the payment, the
supervising authority must issue an injunction against the entity ordering that the necessary
resources be created or made available (e.g., raise new taxes). If the public entity does not
comply with the injunction, the supervising authority can impose it on the public entity
or raise the necessary resources. Should the supervising authority fail to act as provided in
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the law, an action could be brought against the state for breach of its duties. Such an action
could potentially result in the state being ordered to pay damages to the creditor for breach
of public duties.

As is generally the case throughout Europe, the main permit to be obtained is usually
a building permit. Large projects will often require a public enquiry. On major infrastructure
projects or on renewable projects, specific environmental permits (Water Law, and Regulation
on Classified Installations permits) may be required.
ii Compliance
The Sapin II Law introduced new compliance obligations into French law to prevent
corruption. Companies with at least 50 employees are obliged to set up warning procedures
for processing alerts raised by whistle-blowers, particularly in relation to violations of
environmental regulations or risk of damage to the environment. Also, larger companies
with at least 500 employees and a turnover of €100 million (or part of a French group falling
within these thresholds) have to implement various compliance measures against corruption
before June 2014, including an audit of the risks, a code of conduct and training programmes.
Company directors are personally liable in respect of these obligations and criminal penalties
can be imposed.
In addition, a new French law on the corporate duty of care5 applicable to major French
groups having at least 5,000 employees in France or 10,000 employees in France and abroad
creates an obligation to set up a vigilance plan concerning corporate social responsibility.
iii Equator Principles

The documentation for French projects does not refer to the Equator Principles, given that
French environmental law is considered to require at least equivalent standards.
iv Responsibility of financial institutions

Lenders to an SPV have very few obligations under the finance documentation other than
to make the debt available. The only real exception is on the exercise of step-in rights under
a direct agreement. Another exception is the requirement on lenders to disclose the global
effective interest rate being charged to the SPV under the finance documents. Failure to do so
may lead to an inability to recover the difference between the statutory interest rate (which is
very low) and the margins included in the loan.
5 Law No. 2017-399 dated 27 March 2017 on the Corporate Duty of Care of Parent Companies and
Controlling Companies.
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i Transposition of EU directives applicable to public procurement and concessions
Following the adoption by the European Union of modernised public procurement and
concession rules on 11 February 2014,6 transposition works began in France in 2014 and
resulted in a simplification of the procurement rules, and, in particular, of rules applicable to
PPP contracts.
This transposition resulted in the enactment of two main sets of rules: on the one hand,
the Ordinance relating to Public Procurement and its implementing decree transpose the
European Directive on public procurement and reunite all rules applicable to procurement
contracts;7 on the other hand, the Ordinance relating to Concession Contracts and its
implementing decree transpose the European directive on the award of concession contracts
and clarify the existing legal framework applicable to concession contracts (replacing most
notably a law dated 1993 known as the Sapin Law).8 This legislation should be compiled
soon in a Code of Public Procurement.9
As a result of these new rules applicable to PPPs, multiple tools allowing the occupation
of the public domain, formerly also used in PPP transactions in various sectors to satisfy the
needs for works, furniture and services of public entities, have been confined to their original
function, that is the occupation of the public domain.
As from now, the ‘partnership procurement’, along with concessions, shall be the sole
available tools for PPP transactions.
ii Partnership procurement and concessions

The rules in relation to PPPs are now included into public procurement law by the Ordinance
on Public Procurement, which replaces the partnership agreement with the partnership
procurement as a sub-category of procurement contracts.
French public procurement law dates back to the 1830s and has been a key source
of inspiration for European public procurement law. The French and European public
procurement processes are based on the same principles: equal treatment, transparency,
proportionality and the proper use of public funds.
Where there is no payment from end users, the partnership procurement is available,
but only to the extent that the project has specific advantages compared with traditional
procurement (former criteria of urgency and complexity that were required for partnership
agreements have been removed). The procurement value also has to exceed a certain threshold
(i.e., €5 million for infrastructure, notably in the energy, transport, urban planning and waste
water sectors).
In contrast, concessions are allowed in almost all sectors where end users pay for the
service (or at least for a significant part of its costs).
6 Directive 2014/24/EU of 26 February 2014 on public procurement, Directive 2014/25/EU of

26 February 2014 on procurement by entities operating in the water, energy, transport and postal services
sectors and Directive 2014/23/EU of 26 February 2014 on the award of concession contracts.
7 Ordinance No. 2015-899 dated 23 July 2015 and Decree No. 2016-360 dated 25 March 2016 relating to
Public Procurement.
8 Ordinance No. 2016-65 dated 29 January 2016 and Decree No. 2016-86 dated 1 February 2016 relating
to Concession Contracts.
9 Law No. 2016-1691 dated 9 December 2016 relating to Transparency, the Fight against Corruption and
Modernisation of the Economy in its Article 38 authorises the government to adopt the legislative part of
the Code by way of an ordinance.
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The procurement process for partnership procurement is similar to traditional public

procurement. The new rules have extended the option to use the competitive dialogue
procedure and the ‘competitive procedure with negotiation’, the use of both of which is
widespread in relation to PPPs. The negotiation procedure remains the rule for concessions
(a call for tenders is mandatory before negotiations begin).
Unsuccessful bidders are allowed to challenge the procurement process before
administrative courts through an emergency hearing known as a ‘pre-contractual action’.
This procedure suspends the conclusion of the contract.
Once the contract is signed, the contract itself can be challenged before courts, but its
implementation is not suspended. An emergency hearing (known as a ‘contractual action’) is
available to unsuccessful bidders to challenge the contract where blatant violations of public
procurement law are involved.
iii Rules relating to the sale of shares by the state

The rules relating to the state’s intervention as a shareholder, and to companies in which the
state holds (directly or through public entities) share capital, were substantially amended
in August 2014. This reform aims to bring the status of the state as a shareholder closer to
that of ordinary shareholders, and to simplify governance rules as well as rules relating to
transactions on the share capital of public companies (i.e., companies where the state owns
the majority of the share capital or voting rights).
In addition, the Macron Law completed and further simplified the rules applicable to
the sale of shares by public entities by repealing almost entirely the old ‘privatisation laws’
dating back to the 1990s. The Macron Law also provides that privatisations carried out by
local authorities, or their groupings, involving companies with a turnover or staff exceeding
€75 million and 500 employees will be decided by the local assembly on the recommendation
of the Commission for Shares and Transfers.

As a general rule, free movement of capital is guaranteed in France, and foreign investors will
in most situations be treated as French investors, either based on bilateral investment treaties
or on the general principles at law.
However, in some cases, a prior declaration or authorisation can be needed before
acquiring control of a company operating in certain sectors, the list of which has been recently
revised in the context of the offer of General Electric to purchase part of Alstom. The list of
sectors varies depending on whether the investor resides within or outside the European
Union. It covers sectors such as defence, dual-use technology, energy, transportation,
telecommunications and health.
France has a bank monopoly law whereby only credit institutions can make loans to
third parties in the ordinary course (subject to some exceptions such as intragroup loans). To
be a credit institution, banks must either be licensed by the French Prudential Supervisory
Authority (ACPR) or an equivalent regulatory authority in another EU country, provided
notice is given to the ACPR of their activity in France (this is known as the ‘European
passporting regime’).
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Disputes between the public authorities and contractors relating to PPP contracts are to be
settled by administrative courts, because of the distinction between private and public law
that exists in France, as in other continental European countries. This is also the case for
disputes relating to power purchase agreements entered into for renewable energy projects
(although this remains uncertain for offshore wind farms).
Regarding concessions or PPP projects, the case law of administrative courts has often
been more protective than that of civil courts. The doctrine of unforeseen circumstances,
which can protect private parties from an upheaval due to unforeseen circumstances, has been
applied by administrative courts for almost a century. Since the French contract law reform,10
the doctrine is also now implemented by civil courts. The existence of these specific courts has
therefore not been a major concern for participants on the French market.
Disputes between the private parties involved in a project are settled by the civil courts.

Despite Paris being one of the major centres for arbitration, arbitration is not used on the
French PPP market. As a general rule, arbitration is not available to French public entities.
Provision has been made for an exception regarding partnership agreements, but it is generally
left unused.
This tendency to settle disputes by reference to national courts will have been reinforced
by the controversy and criminal proceedings around the arbitration involving Crédit Lyonnais
and Bernard Tapie regarding the sale of Adidas.
PPP contracts often provide for a preliminary amicable settlement phase before disputes
can be taken to courts. Appointed experts can help in this phase, although their opinion is
generally not binding on the parties.
Arbitration is available to private parties involved in French projects, but the parties
usually choose national commercial courts for dispute resolution, even on major projects.

In the past 10 years the French projects market has become a mature market, with a stable legal
regime and relatively stable market practices, despite the lack of standardised documentation.
Over the next few years, renewable energy should keep the market active for
greenfield projects.
The secure assets of the brownfield market should remain attractive, and portfolios
of medium-sized projects could create new opportunities for investors, including new
opportunities to enter the market.
10 Ordinance No. 2016-131 dated 10 February 2016 on the Reform of Contract Law and of the Obligations
Regime and Evidence Rules.
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Chapter 12
INDIA
Sunil Seth and Vasanth Rajasekaran1
I INTRODUCTION
India, being a federal structure, upholds the Constitution of India as the suprema lex.
Following the doctrine of separation of powers, the responsibility for legislation is divided
between the Union (central government or GOI) and the state governments. The central
government is vested with powers to make laws on matters enumerated in the Union List,
while the state government can legislate on matters enlisted in the State List. Both the central
and the state government can make laws on matters enumerated in the Concurrent List. The
legal framework for infrastructure development is thus sub-divided between the central and
the state governments. The central government has provided sector-wide legislation in sectors
such as airports, national highways, major ports and power, while many states in India have
also promulgated legislation in areas covered under their jurisdiction.
In the past couple of decades, project finance has emerged as an integral driving factor
for projects and infrastructure development in India. Initially, infrastructure was primarily
financed by the public sector, which predominantly included outlay from the central or the
state government depending upon the geographical interest; however, the perspective has
now shifted towards private sector participation, which promises capital contribution in the
project, sharing project-related responsibilities and risks, and time-bound delivery schedules.
Presently, in accordance with the Twelfth Financial Plan (2012–2017), investments
worth US$1 trillion are estimated in the infrastructure sector, which is more than double the
investment projected during the Eleventh Financial Plan. The private sector is expected to
contribute at least half of the over US$1 trillion investment planned in infrastructure, thereby
creating an immediate need to conceptualise a robust framework to tap these resources.

To boost infrastructure development and provide a robust framework, the GOI has taken
various initiatives. These initiatives include:
a formulation of viability gap funding scheme for making infrastructure projects
commercially viable;
b setting up of the Public Private Partnership Appraisal Committee to streamline the
project appraisal process and to eliminate administrative hurdles;
1 Sunil Seth is a senior partner and Vasanth Rajasekaran is a partner at Seth Dua & Associates. The
information in this chapter was accurate as of July 2016.
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c setting up of the India Infrastructure Project Development Fund for extending financial
assistance in infrastructure public–private partnership (PPP) projects;
d setting up institutions such as the Infrastructure Finance Company Limited for
providing long-term financial support and to act as a catalyst in the stream;
e standardising bidding and contractual documents such as a request for qualification
(RFQ), request for proposal (RFP), model concession agreements for making the
procurement process swift;
f creation of the National Investment and Infrastructure Fund to maximise economic
impact through infrastructure development;
g amendments to the National Waterways Bill 2015, which will provide for enacting
a central legislation to declare 106 additional inland waterways as the national waterways;
h launch of the ‘Make in India’ programme to foster innovation and build state-of-the-art
manufacturing infrastructure;
i relaxation of foreign direct investment (FDI) regulations, making the FDI policy more
investor-friendly; and
j relaxation of external commercial borrowing policy by the Reserve Bank of India (RBI).
i Recent measures
Recently, the GOI established a committee to revitalise and reinvent the existing PPP model.
The committee headed by Dr Vijay Kelkar (the Kelkar Committee) presented its report to
the Finance Minister on 19 November 2015. Its report primarily focused on issues relating to
strengthening existing PPP model contracts to allow renegotiations, proper risk management
and risk allocation provisions for private entities, focus on quality of service delivery rather
than fiscal benefits, amendment of existing governance policies and formulation of a specific
PPP law for ease of procurement. The report of the committee is under active consideration
and the GOI is expected to ramp up and streamline the PPP framework.
In respect of formulating legislative frameworks, the GOI has been proactive and has
recently enacted the Real Estate (Regulation and Development) Act 2016 (the Real Estate
Act). The Real Estate Act envisages mandatory provisions to establish state-level regulatory
authorities called real estate regulatory authorities to adjudicate complaints of buyers and
developers within a stipulated time. It intends to create a uniform regulatory mechanism
across the country to enhance the growth of the construction sector.
Additionally, the GOI has also introduced the Insolvency and Bankruptcy Code 2015
(the Code) to streamline insolvency and bankruptcy dispute solving. The Code aims to
provide robust legal framework to resolve systematic delays and complexities existing owing
to overlapping jurisdictions.
Further, the GOI has also launched its innovative mission of developing ‘Smart Cities’
across India aimed at providing state-of-the-art infrastructure facilities. A total of 100 Smart
Cities are expected to be developed through the PPP model. The project can be seen as one of
the biggest infrastructure initiatives, requiring huge fiscal amounts and private participation,
which can lead to effective and efficient PPP policies for its proper implementation.
In terms of facilitating speedy disposal at the appellate level, the GOI has enacted
the Commercial Courts, Commercial Division and Commercial Appellate Division of High
Courts Act 2015 (the Commercial Courts Act) to expeditiously resolve commercial disputes.
Under the Commercial Courts Act, all such disputes arising out of transactions of bankers,
financiers, construction and infrastructure contracts, including tenders, agreements relating
to immoveable property, distribution and licensing agreements, joint ventures, shareholders
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agreements, subscription and investment agreements insurance and re-insurance, contracts

of agency, etc., shall be deemed to be commercial in nature and shall be adjudicated by
the commercial court or division. Further, the commercial appellate division is required to
dispose of appeals arising from the commercial court or division within six months.
III DOCUMENTS AND TRANSACTIONAL STRUCTURE

Generally, the most preferred form of transactional structure for financing a project would
include the constitution of a special purpose vehicle (SPV) that serves as a single-purpose
entity created solely for the execution of the project. The key stakeholders involved in
the project include the project sponsors, the procuring entity (i.e., the central or the state
government, the lenders, contractor, operator and the supplier). The ownership structure will
be a combination of project sponsors’ equity and lenders’ debt and will usually be covered
under a shareholders’ agreement in relation to the SPV.
Another aspect is PPPs, which are increasingly becoming an accepted model for
developing and financing infrastructure projects. Some of the structures under the PPP
model include build-operate-transfer model (BOT) categorised into the BOT annuity model
and BOT toll model (which is most commonly used in the road and transport sector and
railway sector); the power sector is more inclined towards build-own-operate-model. Some
other known models are build-operate-lease-transfer model, design-built-finance-operate
transfer model and build-operate-own-transfer model (BOOT).
ii Documentation
Project documents
Construction and infrastructure projects are usually accompanied by a variety of
documentation. Owing to the increase in requirements of the stakeholders involved in the
project, there has been a rampant increase in complex and lengthier documentation in relation
to project finance and construction. Generally, an umbrella contract is entered into (such as
an engineering, procurement and construction contract), which paves the way for execution
of various other facility agreements such as supply contracts, works contracts and operation
and maintenance contracts. Apart from these, tender-related documents, memoranda of
understanding, joint venture agreements (in the case of an SPV), state support agreements
and sub-contractors’ agreements are also used.
Financing documents
Financing documents may generally include shareholders’ agreements, mortgage deeds, pledge
agreements, bank guarantee agreements, hypothecation deeds, inter-creditor agreements,
hedging agreements, direct agreements, escrow agreements, etc.

The delivery method would depend upon the type of contract (e.g., BOT or BOOT) that has
been executed for implementation of the project. In India there is a dearth of standardised
contracts, thus the delivery methods may vary depending upon the need of the parties and
upon the nature of the project.
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However, there has been a considerable increase in the use of the engineering and
construction contract and International Federation of Consulting Engineers (FIDIC)
conditions of contract for engineering, procurement and construction (EPC) or turnkey
projects (FIDIC Silver) standard forms of engineering and construction contract that are
being used on a variety of projects in India. Both forms of contract follow a fundamentally
different approach in relation to management of the project.
A JCT standard form of contract is one set up by the Joint Contract Tribunal and is
rarely used in India as a standardised form for construction projects. The FIDIC contracts are
the most used in India, although other standard forms are also gaining momentum and have
started to be used by industry professionals in recent times.

Keeping in mind the huge amount of investment involved, developing an infrastructure and
construction project attracts multifarious risks such as environmental risk, geopolitical risk,
country risk, risk as regards global and local competition or industry risk, land acquisition
risk, policy and regulatory risk, project-related risk such as construction risk, completion
risk, operation risk, supply risk and force majeure risk. To expedite the smooth execution of
the project, the stakeholders involved in the project must essentially pre-identify all such
potential risks that could jeopardise the completion of the project. Some of the ways in which
the risk could be mitigated are:
a ensuring proper industry analysis and dynamics involved in the project;
b ensuring insurance cover against force majeure events;
c employing experienced contractors, operators with strong track records;
d incorporating provisions for liquidated damages, limitation of liability, performance
bonds, warranties and guarantees in case of failure;
e incorporating remedial provisions including sponsor support in case of cost overrun,
delay in completion, etc.; and
f provision for substitution of rights for lenders.
Liabilities in relation to the project must be pre-evaluated to avoid or manage delay in
execution of the project. In the case of a contractual liability, the umbrella contract would
generally include and define the obligations and liabilities of each of the concerned parties,
which can also be negotiated and capped according to needs and requirements and according
to the nature of the project. Normally, the project participants are jointly and severally liable
for the execution of the entire project.
The project participants can allocate roles and responsibilities among themselves;
however, by virtue of the assignment clause in the umbrella contract, a project participant
may assign its role and responsibility to some other member. Nevertheless, that member
continues to be jointly and severally liable for the execution of the entire project.
Further, the Indian Contract Act 1872 also recognises the doctrine of force majeure and
frustration wherein parties are exempted from their contractual liability arising out of the
consequences of anything over which they have no control. If, because of the occurrence of an
unexpected event, performance becomes ‘impossible’, a party may be excused from carrying
out its contractual obligations under most legal systems. The force majeure clause should be
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construed with the utmost attention in respect of the words that precede or follow it, and
with regard to the nature and the general terms of the contract that specifically entail the
situation where parties are exempted.
iii Political risks

Infrastructure projects are likely to encounter significant political risks such as strikes, riots,
civil commotion, political violence and terrorism, or any general amendment of the law in
the nature of change in tax policies, energy policies, environment policies, non-cooperation
in terms of obtaining various licences and permits, change in political landscape and local
political environment that may affect the work progress and smooth rendition of the project.
Protection against such political risks can be achieved by incorporating suitable clauses
in the construction and finance contracts, thereby safeguarding the rights of the concerned
parties. Further, the concerned parties can also opt to avail themselves of suitable insurance
cover against political insurgencies. The host government (central or state government)
involved in the project can also facilitate the provision of certain legislative recourse in the
event of any adverse change in the legal or fiscal environment.

The arrangement of securing interest against obligations to be performed under a project
and construction contract is a standard industry practice followed to protect the interest of
a concerned party against a defaulting party. The security can take a number of forms including:
a pledging of shares of the project company;
b mortgage over immoveable assets including project site of the project company;
c moveable assets in the form of pledge, hypothecation, general lien or hire purchase;
d fixed or floating charge over the project assets;
e creation of a charge over the project company’s bank account;
f creation of a charge over revenue streams and cash flows generated by the project;
g assignment by way of security of project insurances, underlying project contracts and
rights over receivables;
h provision of a bank guarantee at a fixed percentage of the contract price; and
i provision for a parent-company guarantee (i.e., a guarantee from the ultimate parent
(or other suitably related entity) of the contractor to stand in if the contractor does
not perform).
i Security perfection requirements

Notice must be given of a security interest (e.g., mortgage by deposit of title deeds) created
in favour of secured lenders, in accordance with the provisions of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interests Act 2002 (the
SARFAESI Act), and must also be registered with the Central Registry of Securitisation Asset
Reconstruction and Security Interest of India.
If the security interest is created by a company, the details of the security must be
registered with the Registrar of Companies within the stipulated time. Prior approval of
the RBI is required under the Foreign Exchange Management (Acquisition and Transfer of
Immoveable Property) Regulations 2000 if the security interest is created over immoveable
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property in favour of a non-resident. If interest is secured in the form of pledging of

dematerialised shares and securities, then the process as prescribed by the rules of the relevant
depository must be followed.
ii Stamp duty and admissibility as evidence

Stamp duty is payable on all documents, including security documents, and it shall be levied
according to the amount secured. The stamp duty charges may vary from state to state.
A document will be subject to stamp duty if it is executed in India, and if the document
is executed outside India, stamp duty will be levied when the document is brought (i.e.,
for enforcement) into India. A document will not be admissible in evidence and will be
unenforceable in any court in the eventuality of it being unstamped. Further, in accordance
with contractual arrangements, the concerned parties can also shift the burden of these
statutory obligations and are free to decide the bearer of stamp duty.
iii Sponsor support

Extension of sponsor support is a widely accepted commercial arrangement in international
project finance transactions. A project company may rely for sponsor support in the project
in cases of considerable delay, default in discharge of obligations, in the event of cost overrun,
etc. Sponsor support can be in the form of equity commitment by way of subscription of
shares, debt without creation of any security interest over the project asset or guarantee of
infusion of capital for completion (also known as ‘completion support’).
iv Substitution rights
Project lenders can also secure their interest by way of incorporating step-in clauses or
substitution rights in a harmonious manner under the contract terms. These rights, apart from
protecting the interest of the lenders, also safeguard the execution and implementation of the
project in a situation where the project company (e.g., an SPV) has delayed the execution of
the project on account of failure to fulfil its obligations. This failure can be caused by delay
in land acquisition, environmental clearances, or other statutory or regulatory clearances, etc.
The lenders enjoy the right to step in to the project company’s position under the
contract and subsequently, by way of assignment of rights, take control over the project rights
or transfer or substitute the defaulter with another entity to ensure the smooth progress of
the project.
In India, owing to the huge amount of debts accrued by lenders in infrastructure
projects, the RBI has issued a circular2 providing substitution rights as a way out to various
commercial banks to secure their interest in the eventuality of any default.

Generally, a contract (e.g., EPC contracts, turnkey contracts) would encompass provisions
for a performance bond or performance guarantee in addition to any other security interest
provided by the guarantor (i.e., mainly the contractor) or its parent company.
2 https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7896&Mode=0.
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Pursuant to notifications issued by the RBI, only the authorised dealer banks are vested
with the authority to give performance bonds or guarantees. The bond acts as a surety for
performance obligations in a situation of any default committed by the guarantor and enables
the lenders to overcome such difficulties.
Insurance for delay damages and for damages owing to environmental hazards are less
common in the Indian construction sector. Generally, the contractor is required to secure
insurance against all projects assets, loss or damage of property and the death or bodily
injury to a person. The amount of the insurance may be prescribed by the employer or the
contractor may secure appropriate cover taking into account the cost of the project and the
risk involved.

Secured lenders of a project can resort to various legislative recourses to initiate recovery
proceedings and enforce their security interest in the event the borrower fails to repay any
amounts due and payable, before knocking on the doors of judicial courts. The Indian
legislation encompasses comprehensive recourse framework such as the Recovery of Debts
Due to Banks and Financial Institutions Act 1993 (the RDB Act), which facilitates setting
up debt recovery tribunals (DRTs) across various regions in India. The DRT focuses on
expeditious adjudication and recovery of debts due to banks and financial institutions.
Another legislative addition to the facilitate debt recovery is the enactment of the
SARFAESI Act, which empowers and grants statutory rights to the banks and financial
institutions, being lenders in a project, to enforce their security interest by taking possession
of, selling or leasing the assets without having to resort to judicial intervention.
If the lenders are not covered under the RDB Act and the SARFAESI Act, then relevant
provisions of the Civil Procedure Code 1908 (CPC) can be invoked and appropriate recovery
proceedings can be initiated against the defaulter.
Further, security interest over moveable property is regulated by the Transfer of Property
Act 1882, the Sale of Goods Act 1930 and rules and regulation notified under the Foreign
Exchange Management Act 1999 (FEMA). The various types of security interests in relation
to moveable property are, inter alia, pledge, charge, hypothecation, lien and assignment
(actionable claims). In addition, when there is a foreign exchange component attached to
the loan, the rules and regulation notified under the FEMA need to be duly complied with.
In India, bankruptcy can be dealt through various legislative framework such as the
Sick Industrial Companies Act 1985, RDB Act, SARFAESI Act, the Indian Companies Act
1956 (the Companies Act), etc. In a case of insolvency, Section 433(e) of the Companies
Act provides for liquidation and for the winding-up of a company. Banking companies and
non-banking financial companies have to comply with additional requirements under the
Banking Regulations Act and RBI guidelines for completing the winding-up process.
Presently, there is no specifically codified law for adjudicating insolvency and bankruptcy
in India, although the GOI has introduced the Insolvency and Bankruptcy Code 2015 with
an intent to create a separate legislation for dealing with insolvency and bankruptcy issues.
The Insolvency and Bankruptcy Code 2015 is awaiting the president’s assent before coming
into force.
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One of the major issues entrenched in project financing transactions are the social and
environmental hurdles faced by the project lenders. The Environment Protection Act
1986 acts as the umbrella legislation in India for environmental laws. Any infrastructure
project in the country requires environmental approval from the Ministry of Environment
and Forests (MOEF). The concerned parties may be required to prepare an environmental
impact assessment report (EIA) with respect to their projects and suggest methods to mitigate
any harmful impact on the environment. The MOEF studies the EIA and, if it is acceptable,
grants an approval, subject to applicable modifications. Furthermore, consent from state
pollution control boards, including a ‘no objection’ certificate, is required under the Water
(Prevention and Control of Pollution) Act 1974 and the Air (Prevention and Control of
Pollution) Act 1981. In cases where the project is situated in a forest and there is a threat
to wildlife, permission of the relevant forest department and wildlife board is also required.
Delay in land acquisition is another major concern, causing risk of delay in the progress
of the project. One of the prime factors for these delays is resistance by the local community
due to poor compensation and below-market value offers being made for the land.
Generally, extensive environmental approvals are mandatory at the start of the project
itself. However, these clearances can be challenged through public interest litigations, which
could lead to project execution delays. At times, non-government organisations challenge
the clearances through direct activism and protests, creating obstacles to project execution.
Currently, banks in India have not adopted the Equator Principles. However, in
June 2013 Infrastructure Development Finance Company Ltd became the first Indian
financial organisation to sign up to the Equator Principles.

All financial, lending institutions and non-banking financial institutions are required to
comply with the directions issued by the RBI. The RBI acts as the chief regulator of banks
and from time to time issues various guidelines and directives to ensure proper administrative
procedure are followed by the banks. In addition, financial institutions, while investing in
infrastructure development, must take note of all civil and criminal liabilities, including
environmental responsibilities arising from a project.
Banks must also refrain from indulging in corrupt practices inasmuch as there are
various laws that prohibit corrupt business practices both under criminal common law
and also specific law, namely, the Prevention of Corruption Act 1988. The Companies Act
2013 also contains provisions relating to corrupt practices. Penalties can be both civil and
criminal, depending on the nature of the act.

i PPP
In India, there is no established statutory or regulatory framework for PPP transactions,
although the GOI has formulated various guidelines, schemes and standardised model
documents for all the interested ministries, state governments and private players who are
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intending to venture in PPP projects. These guidelines aim to ensure competitiveness and
provide transparency in the bidding process. Generally, the model standard document
outlines essentials elements relating to the scope of bidders, eligibility and clarifications on
the bidding process involved in PPP projects.
Each PPP project comes with distinct requirements aligned in accordance with the
concerned sector and proposed operating model of PPP. These documents clearly specify
details about the proposed project, general and specific requirements for qualification,
evaluation criteria for meeting technical and financial requirements by the proposing entity,
restrictions applicable and set standards to be achieved under the project.
Generally in India, a two-stage bidding process is followed wherein two separate bids –
a technical bid and a financial bid – are invited from the bidders. The first stage incorporates
a selection of eligible and prospective bidders and is the RFQ, or expression of interest. The
second stage, which involves the financial evaluation of bidders, is referred to as an RFP. The
bidders are first shortlisted on the basis of the technical bid, and only successful technical bids
are taken into consideration for final selection.
The commonly adopted mechanism for the selection of the bidder in bid documents
includes selection of the lowest bidder (L1 method), typically adopted for the selection from
among technically qualified bidders, in respect of lump-sum and rate contracts. Selection of
the highest bidder (H1 method) is made for technically qualified bidders based on revenue
sharing and an upfront payment mechanism. Further, the selection of the bidder may also be
based on the combined scores from the evaluation of their technical and financial bid, on the
basis of a predetermined weighting mechanism. In this mechanism the financial proposals
would continue to be evaluated on the basis of the methods identified above, as applicable,
given the nature of the bid process.
In any case, the procuring entity is not bound to accept the bid of the most highly
evaluated bidder and can select other bidders, subject to the procuring entity being able to
demonstrate that the selection process was duly undertaken on a reasonable, fair, transparent
and non-arbitrary basis. The procuring entities may even reject bids that are extremely low or
whose financial terms are extremely prejudicial to the bidder.
Public procurement
In the absence of any nationalised procurement law, public procurement in India is mainly
dependent on various heterogeneous rules and guidelines issued by GOI from time to time.
The General Financial Rules 2005 (GFR) and the Delegation of Financial Powers Rules
1978 in addition to guidelines issued by the Directorate General of Supplies and Disposals
and the Central Vigilance Commission combined with instructions by the Ministry of
Finance virtually govern and regulate the public sector procurement process in India. The
state governments and central public sector units have their own general financial rules based
on the broad principles outlined in the GFR.
Public procurement legislation in India has its foundation in the Constitution, if
specifically in light of the right to equality and non-discrimination under Article 14.
All procuring entities have a fundamental duty and obligation to undertake all
contractual arrangements through reasonable and non-arbitrary procedures and practices. The
procurement processes are subject to limited judicial review in exercise of the writ jurisdiction
of the High Courts and the Supreme Court of India. Typically, the courts only intervene in
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the bid process on the grounds of violation of constitutional or statutory provisions, or on

account of a lack of probity, fairness and transparency, or reasonableness, or the presence
of arbitrariness.

A foreign company can establish its business operations in India by setting up a liaison or
branch office or project office and can undertake to render its services subject to compliance
with the rules and regulations as mentioned in FEMA. A foreign company can also venture
either through investing in an existing Indian company (i.e., wholly owned subsidiary) or by
incorporating a completely new entity (i.e., a joint venture) pursuant to the provisions of the
Companies Act 2013.
The GOI, through the Department of Industrial Policy and Promotion under the
Ministry of Commerce and Industry, regularly sets out various guidelines and circulars to
regulate the investments made by foreign investors through FDI. In India, FDI is facilitated
either through the automatic route (i.e., without prior government approval) or through the
government route. Under the automatic route, 100 per cent FDI is allowed in certain sectors
such as construction, plantation, power, e-commerce, drugs and pharmaceuticals. In most
sectors FDI is capped under the automatic route and beyond that limit FDI is either not
permitted or requires prior approval of the GOI. Further, under the government route, FDI
is allowed in sectors such as civil aviation, telecommunication and banking subject to prior
approval of the GOI. Prior approval of the GOI through the Foreign Investment Promotion
Board is also necessary in areas or activity sectors that do not fall within the automatic route
or where the proposed FDI exceeds the specified sector limits.

In India there is no specific set of guidelines for dealing with currency control issues and
generally it is regulated by the Foreign Exchange Management Regulations 2000 under
FEMA. The procedure for dealing with foreign currency transactions has been delegated to
the various authorised dealer banks.
Further, as far as repatriation is concerned, profits, dividends, interest on fully,
mandatorily and compulsorily convertible debentures, etc (which are remittances classified
as current account transactions), are freely repatriable without any restrictions through an
authorised dealer bank. Mostly, foreign investments are freely repatriable except in cases
where investment is in a sector wherein the foreign investment is subject to a lock-in period
(i.e., three years) or where the non-resident of India chooses to invest specifically under
non-repatriable schemes.
Further, concessional import duties are available under the free trade agreements entered
into by the GOI with various countries. Withholding tax exemptions are also available under
the double taxation avoidance agreements subject to the person deducting the tax making
a deposition to the central government.
Indian legislation does not confer any special jurisdiction on any court to specifically deal
with project finance transactions; however, with the advent of the Commercial Court Act, as
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discussed earlier, all disputes of a ‘commercial’ nature and that fall within the ambit and scope
as defined under the Commercial Court Act shall be adjudicated by the commercial court
or division. These courts have been established to specifically deal with commercial disputes
and to expedite the long pending backlog of commercial cases. The lenders can seek recourse
through existing routes under the SARFAESI Act and RDB Act.

In India, there are no specialised tribunals constituted under any act for dealing with
construction disputes. Generally at the initial level, it is common in construction matters to
constitute a dispute review board (DRB) for resolving disputes among the concerned parties.
In the event of failure, the parties can pursue litigation or arbitration, as the case may be.
In India, DRBs do not function effectively owing to a half-hearted approach on the part of
employers and contractors and owing to their non-binding nature.
Arbitration is another alternative dispute resolution method prevalent in construction
disputes. Generally, contracts have an in-built arbitration clause for the resolution of
disputes, and parties have the freedom to choose the governing law according to their needs.
If a dispute is referred for arbitration, it is governed under the provisions as envisaged in
the Arbitration and Conciliation Act 1996 (Arbitration Act). The Arbitration Act is based
on the 1985 UNCITRAL Model Law on International Commercial Arbitration and the
UNCITRAL Arbitration Rules 1976 and deals with domestic arbitration, enforcement of
foreign awards and conciliation.
Under Section 36 of the Arbitration Act, an arbitral award is enforceable as a decree
of the court, and could be executed like a decree in a suit under the provisions of the CPC.
An award resulting from international commercial arbitration (i.e., a foreign award) is
enforceable in the event it is passed in a convention country and that country has also been
recognised by the GOI as a country to which the convention is applicable. If the foreign
award falls from a country that is not a convention country nor recognised by the GOI, then
a suit can be filed before the competent court under the provisions envisaged in the CPC.
India is a signatory to the New York Convention and the Geneva Convention, although it is
not a signatory to the ICSID Convention.
Further, enforcement of foreign awards by the International Chamber of Commerce or
any other international tribunal may be refused by the appropriate court having jurisdiction
subject to the party furnishing such proof as is prescribed under the Arbitration Act.

The GOI has been proactive in understanding the needs of the infrastructure requirements
in the country and has been launching and implementing various schemes, guidelines and
plans for supporting infrastructure development. PPP models, project finance transaction
initiatives to encourage foreign investment are gaining momentum to secure robust and
dynamic infrastructure development in the country. The recently formed central government,
under the leadership of Prime Minister Narendra Modi, has also prioritised development
of international relations with other nations to boost infrastructure development and has
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launched schemes such as the Smart Cities Programme, Atal Mission for Rejuvenation and
Urban Transformation, Pradhan Mantri Aawas Yojana, Make in India and Digital India.
Though the GOI has been taking a lot of initiatives and steps to ensure that this development
takes place, a lot still needs to be done at the ground level to ensure the successful
implementation of its policies.
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Chapter 13
IRELAND
Conor Owens, Michael Kennedy and Fergal Ruane1
I INTRODUCTION
Project finance is a well understood and widely used model for carrying out infrastructure
projects in Ireland across all sectors including health, education, roads, rail, waste, water, IT
and energy.
Public–private partnerships (PPPs) are the most widely used model of project finance
in Ireland. The government established the National Development Finance Agency (NDFA)
in 2003. The NDFA procures all infrastructure projects with a capital value in excess of
€30 million. The NDFA procures all PPP projects other than in the transport, water and
local government sectors.2
Following the merger of the Railway Procurement Agency and the National Roads
Authority on 1 August 2015, roads, light rail and metro projects are now carried out by the
National Roads Authority (NRA) exclusively. For operational purposes, the NRA describes
itself as Transport Infrastructure Ireland. Iarnród Éireann carries out any heavy rail projects.
Project finance is also widely used in the energy sector, particularly on renewable energy
projects such as wind farms. This is not the PPP model but is a very typical structure where
finance is secured by way of a power purchase agreement.

Ireland has gone through a deep recession in recent years and has correspondingly seen the
number of construction and project finance transactions diminish. Banks have not been
lending and the Irish government cut back its capital spending as part of the austerity package
agreed with the International Monetary Fund and the European Central Bank. Residential
and commercial construction projects suffered the biggest decline during the recession. PPP
projects were also significantly cut. Indeed, as part of the government’s deficit reduction
programme of 2009–2013, a number of PPPs were no longer affordable and were stopped,
including: the National Concert Hall; the government office Decentralisation Programme;
the Third Level PPP Programme; Dublin’s large-scale mass-transport projects (Metro North
and DART Underground); and Thornton Hall prison.
1 Conor Owens is a partner, and Michael Kennedy and Fergal Ruane are associates at Maples and Calder.
2 The NDFA was dissolved in January 2015 and now operates as a department within the National Treasury
Management Agency (NTMA).
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However, Ireland has returned to growth and there has been a steady increase in the
volume of construction projects coming to the market in the past 24 months, as well as
a corresponding level of interest from international bidders (buoyed by the positive upturn in
the market and the comparatively low costs).
In connection with the return to growth, the government announced a stimulus
package in late 2014 including a number of PPP programmes with a total value of €1.4 billion
(funding for this is to come from the European Investment Bank, domestic banks and the
National Pensions Reserve Fund (NPRF)). In addition, in November 2015, the NTMA
announced that it was beginning a procurement process for infrastructure projects with
a combined value of €1 billion. These projects include: 1,500 social housing units at a cost
of €300 million; €200 million-worth of investment in third-level institutions; €150 million
for courthouse developments and justice projects; €150 million investment in community
nursing units and healthcare; and investment in the Grangegorman campus for the Dublin
Institute of Technology. The NTMA has been actively promoting the Irish PPP market with
the aim of attracting interest from both domestic and international investors.
In the past 18 months, the NTMA has been involved on projects with a value of
around €1.8 billion. These include ten schools, seven courthouses, 14 primary healthcare
centres and three major road projects (the M11 Gorey, M25 Cork and N17 Galway to
Oranmore – scheduled for completion in the fourth quarter of 2017).
There have been very few project finance deals outside PPPs during the recession. These
have principally been in the renewable energy sector (primarily wind farms).
Notwithstanding the aforementioned, it is important to note that in May 2014 the
government announced its intention to proceed with a package of measures known as
‘Construction 2020’. The central aim of the strategy is to triple housing output by 2020 and
to create 60,000 jobs in the construction sector, thereby reducing the current housing deficit
and increasing construction sector employment to a level that is sustainable going forward.
As part of the increase in housing output, the government has created the Social Housing
PPP Programme. The location of six sites comprising the first bundle of this Programme has
been named, with design teams appointed and planning processes currently under initiation.
The sites under the Social Housing PPP Programme will stay in state ownership and the
developers will receive payments for a 25-year period. The government has also recently
created a new senior Minister for Housing, Planning and Local Government (who will be
supported by a Minister of State for Housing and Urban Renewal) with responsibility for
tackling the mounting housing shortage problems.
Funding will come from various sources. The NPRF will provide equity for major
infrastructural work and the National Asset Management Agency (NAMA) will provide new
advances to complete development projects held as security for its loans. PPP projects will
also continue, particularly on smaller-scale projects, which are labour intensive. The stimulus
package is not solely aimed at housing but at road projects as well.
The strategy also aims to use innovation in that it intends to develop uninhabitable
properties and vacant sites in urban areas to encourage efficient use of land; ensure a proactive
approach to planning; adopt a stricter building control regime under the relatively new
Building Control (Amendment) Regulations, which came into effect on 1 March 2014; and
improve on the introduction of minimum energy efficiency standards for new developments
and building renovations.
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The predominant model for project finance in Ireland is the PPP model, whereby the private
sector PPP company designs, builds, finances and operates or maintains the asset. It is usually
granted a licence by the procuring entity to occupy and operate the land and asset for the
length of the project finance deal – typically 25 years, or such time as is necessary to recoup the
costs of construction, operation and financing, and to return a profit to the equity investors.
At the end of this period the licence terminates at the same time as the project agreement, and
the asset remains at all times in the ownership of the procuring public body.
Build-operate-transfer and build-operate-lease models are not typically used for
infrastructure projects in Ireland with the exception of the Health Service Executive, which
has traditionally favoured the lease-operate model.
ii Documentation
A typical suite of documents in a PPP transaction in Ireland will include the following.
Project or concession agreement

The NDFA and NRA have carried out the majority of project finance deals in Ireland by
way of PPP and both have template project agreements that have been used and banked
successfully for several years. They are similar to the UK standard PFI and roads concession
templates with a few important differences. This means that the key London and Spanish
project finance banks such as Barclays and BBVA are very comfortable investing in Irish
projects and have invested more heavily than the Irish banks as they have extensive project
finance experience, which Irish banks have not traditionally had.
Construction documents
The Irish government has a suite of construction documents that it uses for traditional
construction and engineering projects, but these are not used for project finance deals as
design and construction risks must be passed down fully from the PPP company to the
design and construction company, almost always by way of a lump-sum fixed-price
contract; therefore, a bespoke contract is used. Typically, this will include a design and
construction contract between the PPP company and the design and construction company,
and subcontracts between the design and construction company to the design team and
construction contractors. The bank and public procuring body typically require collateral
warranties from all design and construction team members.
Operation and maintenance agreements

This is a bespoke contract that accepts all of the operating and maintenance risk from the
project agreement.
Funding documents
This will be the typical suite of funding documents that would be expected in any project
finance deal: facility agreement, syndication documents, account documents, hedging
agreement and funder direct agreements.
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Equity and shareholder documents

These will consist of a joint venture agreement between the investing consortium that will
be replaced by a shareholder agreement governing ownership of shares in the PPP company
special purpose vehicle (SPV). Unlike in the United Kingdom, the Irish government does not
take shareholdings in PPP companies and so this is simply a standard company established
under Irish company law with articles and memoranda of association.
Property documents
These relate to the ownership of the land being developed. Typically the public body secures
title to the land involved and the title documents are produced as part of the tender package.
Title usually remains with the public authority and the licence alone is granted to the
project company.

A variety of standard contracts are used in Ireland for private sector construction including
FIDIC, JCT, NEC, MF1 and IChemE. The Royal Institute of Architects of Ireland produces
its own template documents, which are also used, but modified as necessary.
Public construction contracts are carried out using a suite of standard government
design, construction and engineering contracts (the Public Works Contract). These have been
controversial since their introduction in 2007, as they transfer most of the cost and time
overrun risk to the private sector, they are cumbersome to use, and no amendment of the
contracts is permitted.
In December 2014, the Office of Government Procurement produced a review of the
Public Works Contracts in which it made interim recommendations for amendments to
the Public Works Contracts and provided a medium-term strategy for the development,
procurement and administration of projects under the Exchequer Capital Programme (the
Review). The Review concluded that risk is not currently being priced in many tenders for
a variety of reasons and, where risk arises, it is leading to claims. Accordingly, the outcome,
in circumstances where risk arises, is often the opposite of that intended since cost certainty,
in a significant number of cases, is not being bought but deferred to the dispute resolution
phase. In short, contractors considered that they were being asked to foot the bill for risks,
which while contractually theirs, were not risks that they could manage properly. On the
other side, contracting authorities faced endless claims and disputes that had to be pursued by
the contractors. Since the dispute resolution procedures are private to the parties concerned,
there is no wider dispersal of the outcome, leading to uncertainty in the interpretation of key
clauses in the contract.
In recognition of the changed market and to encourage more realistic pricing of public
works projects, a range of interim measures are being implemented on foot of the recent
Review. These measures leave the core contract intact but aim to: (1) rebalance the level of
risk currently transferred by making the bill of quantities the primary reference document;
(2) introduce more direct tendering of specialist works packages, where same constitute
a significant percentage of the overall works; (3) place greater emphasis on quality over
pricing; and (4) review with a view to amending the dispute resolution procedure available
to the parties under the contract (introduce more informal mechanisms such as engagement
between senior management).
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The risk allocation in a typical, availability-based accommodation PPP project in Ireland
is shown in the table below. In terms of design and construction risk, the PPP company is
responsible for the design, construction, integration, installation, testing, commissioning,
operation, maintenance and ultimate performance of any asset procured or developed for the
purposes of meeting the requirements of the output specification.
Private Public
Risk Shared
sector sector
Outline X
Planning
Full X*
Physical condition or contamination X
Site risk Sufficiency of title X
Access to site X
Environmental risk X
Archaeological risk X
Design and construction risk X
Demand risk X
Availability and performance risk X
Discriminatory change in law X
General change in law involving capital expenditure during the
X
service period
Change in law
General change in the law other than that involving capital
X
expenditure
Change in VAT X
Residual value X
Maintenance risk X
General X
Insurance Increase in premiums X
Uninsurability X
Refinancing X
General X
Compensation on For PPP company default X

termination For authority default and voluntary termination X
For force majeure, uninsurable risk or change in law X
* The NDFA has more recently begun to obtain full planning permission where the design is developed enough to allow it.
Many construction and project agreements will have a limitation of liability clause, which is
applicable in Ireland except in the case of death, personal injury or fraud.
Other than this, the parties are free to agree to exclude whatever heads of liability they
choose. Risks that parties commonly attempt to exclude are those associated with indirect or
economic losses, which is permissible under Irish contract law.
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iii Political risks

Traditionally, political risk in respect of project finance has not been a cause for concern in
the Republic of Ireland. The economic downturn, however, which caused relatively minor
political disruption and the nationalisation of some of the major banks in Ireland, together
with the formation of NAMA, has caused some concern on the part of international project
sponsors entering the domestic market. Accordingly, a private insurance market exists
covering political risk in the event that a party wishes to cover itself. Crucially, the type of
political risk that can be insured against is fairly narrowly defined: political violence (war and
revolution), the imposition of exchange controls and expropriation.
In addition to private political risk insurance, project sponsors can also obtain political
risk insurance from the Multilateral Investment Guarantee Agency. Following on from
this, political risk insurance is also provided on behalf of the Irish government through the
Organisation for Economic Co-operation and Development (OECD). This scheme is similar
to the widely documented US Overseas Private Investment Corporation programme.

In project finance transactions in Ireland, as with everywhere else, the project cash flow is
secured by way of a contract such as a power purchase agreement or a PPP project agreement.
The contract will provide for a fixed regular payment from the public authority to the project
finance company. The funders get first call on this regular payment and that is their security
in place of security over the asset. This is combined with a rigorous compensation-on-
termination clause to ensure that in the event of the contract terminating early the debt
is repaid.
In traditionally funded projects or projects where the cash flow is not entirely guaranteed,
more traditional security is sought. Funders will undoubtedly conduct due diligence in respect
of the financial soundness of both the project itself and the main parties to the project. As
part of this due diligence, the funders will require evidence of financial standing of sponsors
together with the contractors and subcontractors undertaking key works packages.
Following on from this, funders will generally seek to obtain a security package. This
can include a floating charge over the assets of the developer or the project, third-party
guarantees of the developer’s obligations (including cost overrun guarantees and interest
shortfall guarantees), standard security over the development site (in the form of a mortgage),
and the assignment of the building contract, performance bond and or another form of
guarantee issued by the contractor.
In addition, developers will often provide funders with a suite of collateral warranties and
direct agreements. In essence, the provision of collateral warranties will tie the subcontractors
in with the funder. For example, a subcontractor will warrant to the funder that it has
complied with the terms of its subcontract. Crucially, collateral warranties will likely provide
a funder with the right to step in to the place of the developer in the event of default, to the
extent that the funder assumes all of the rights and obligations of the developer. Step-in rights
became more relevant and prevalent during the recent period of recession in circumstances
where it was more likely that parties would become insolvent during the course of a project.
The step-in rights therefore afforded the funder an additional layer of protection.
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Furthermore, funders may seek to impose financial covenants on contractors when

providing funding. These covenants will seek to ensure that the project performs within
the stipulated parameters, whether by reference to cash flow or the ability to service debt
repayments on the length of a loan.
In addition to the foregoing, project funders will seek to have income that is generated
upon completion of a particular project, managed through a specially created bank account
over which the funder will exercise a form of joint control with the project company.
Accordingly, the funder will seek to exercise priority over the income generated before any
other creditors are paid.

The vast majority of construction projects in Ireland include stipulations for the provision
of performance bonds or parent company guarantees from the main contractor and the
main subcontractors. In connection with this, during the recession and presently, public
agencies through the Public Works Contract have turned to bonding and guarantees as
a means of protecting the public funds used in the Public Works Contract. While historically
it was uncommon for claims to be made against bonds, the recent insolvencies of some of
Ireland’s best-known contractors, together with insolvencies of many small to medium-sized
contractors, have been accompanied by a rise in claims against bonds and parent company
guarantees. Accordingly, bonds are becoming increasingly difficult to obtain.
In this jurisdiction, performance bonds are often issued by insurance companies, banks
or specialised bond companies (construction guarantee). Generally, performance bonds can
be described as ‘on demand’ (claim can be made against the bond at any time) or ‘default’ (the
bond beneficiary must establish that the contractor has breached the contract – a conditional
bond). An on-demand bond is the best security a beneficiary can have in this jurisdiction.
In theory, all the beneficiary has to do is present particular documents (as specified in the
bond), along with a call letter in the appropriate form, and the surety must release the funds.
Critically, no evidence of default by the principal is required. All that is required is that the
call on the bond be made in the manner prescribed by the terms of the bond.
Currently, it is extremely difficult for contractors to obtain on-demand bonds from
insurance companies and banks. The cost of the on-demand bond to the contractor reflects
the bond provider’s reluctance to provide the on-demand bond. Default bonds are much
easier than on-demand bonds for contractors to obtain, and yet, they provide adequate
security to beneficiaries. However, some sureties will cap the amount or value of default
bonds that they will provide on behalf of a contractor at any one time.
Following on from this, contractors must be careful to review the terms of a specific
contract before entering into it to establish the nature of the bond required. Indeed, the
nature of the bond may ultimately prevent the contractor from entering into the contract.
Ultimately, if bonds cannot be obtained, bigger retentions or letters of credit may be required
and the price will increase. To try and address the growing difficulties faced by contractors in
acquiring high-value performance bonds and to reduce the costs associated with the provision
of construction bonds, the Department of Public Expenditure and Reform, following
consultation with public sector contracting authorities, construction industry representatives
and the surety sector, issued a direction in May 2013 under the Capital Works Management
Framework that set out the following requirements (amending previous requirements under
Section 2.3.3 of guidance note GN 1.5 of Public Works Contracts) for performance bonds:
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a performance bonds should generally only be provided for contracts with an estimated
value in excess of €500,000 (including VAT);
b for contract values of up to €10 million, a performance bond of 12.5 per cent of the
contract sum should be sought; and
c for contract values in excess of €10 million, a performance bond of 10 per cent of the
contract sum should be sought.
In addition to bonds, guarantees may also be provided. In the Irish construction industry,
guarantees will often take the form of a parent company guarantee, but guarantees can also
be provided by a financially sound third party.
Guarantees are different to bonds in that they usually provide an obligation on the
guarantor to guarantee the whole performance of the party on whose behalf the guarantee is
provided, as opposed to a fraction of the contract sum, in the event of default. Accordingly,
the intended beneficiary of the guarantee will seek to make sure the guarantor is of sufficiently
sound financial standing before proceeding with the contract. Following on from this,
provision of bank or insurance guarantees in this jurisdiction are rare.
Finally, careful attention must be paid to guarantees, particularly in relation to
notification requirements to the guarantor of default by the contractor and or the mechanism
by which a claim under the guarantee is to be made. Strict compliance with the aforementioned
requirements will often be a prerequisite to a claim being pursued successfully.

In a project-financed project, insolvency will trigger termination and a compensation-on-
termination regime will kick in in accordance with the detailed provisions of the project
agreement, essentially ensuring that debt is paid off and that the state does not receive
a windfall.
In traditional projects, if the funder wishes to enforce its rights over collateral,
there are a number of steps it can take outside the context of initiating insolvency
(winding-up) proceedings:
a The project funder can seek to have an examiner appointed to the company and its
assets under the Companies Act 2014. Upon appointment, the examiner must set out
its proposal in respect of the objectives of the examination of the company. The objective
will be either to try to achieve the survival and rehabilitation of the company as a going
concern or to secure the most lucrative realisation of the company’s assets possible. It
should be noted that no steps can be taken to enforce security within the context of
examinership, unless the examiner has first obtained the permission of the court.
b The project funder can seek to appoint a receiver over the company and its assets. The
receiver will take possession of the assets the subject of the debenture holder’s charge
(the project funder in this instance). The receiver will then seek to realise those assets
and discharge the debt owing to the debenture holder.
c The project funder may seek to obtain a court judgment with respect to collateral.
Within the context of insolvency (winding-up) proceedings, the project funder, as a secured
creditor, can initiate said proceedings via a petition to wind up the company. The project
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funder’s security over the asset will then crystallise and the funder will rank in accordance
with the type of security it holds. In the event that the assets are realised, the funder will
obtain the benefit of same prior to any unsecured creditor.
In summary, after the holders of a fixed charge have been paid, the order of payments
to be made is as follows:
a liquidator’s fees and expenses;
b preferential creditors’ claims (which will include certain statutory tax and employee
benefit liabilities);
c claims of the holders of floating charges that have not crystallised prior to the
winding up;
d unsecured creditors’ claims;
e deferred debts; and
f members of the company.

Ireland has extensive legislation and regulation in relation to planning and environmental
issues. Environmental issues will generally be dealt with as part of the planning permission
process and it is common for projects to be required to produce an extensive and detailed
environmental impact assessment. Ireland has many areas of cultural and historical
significance, and managing areas of interest in a sympathetic way is an issue that arises
frequently on many projects.
The Equator Principles are an internationally recognised set of principles that are used for
managing social and economic risk in larger-scale PFI projects. These principles have no legal
status in Ireland but a number of lending institutions3 recognise and abide by the principles
in addition to the IFC Performance Standards4 and they are introduced to projects through
the lending institutions.

It is extremely rare in Ireland for financial institutions to accept any risk or liability in relation
to socio-environmental issues. Unless and until a financial institution exercises a right over
the land in question (i.e., enforcing security over the land) there is no basis for that institution
to assume any liability. If, however, the financial institution enforces security over the land
and effectively becomes the landowner, then the financial institution has potential liability
for any issues connected with that land, such as pollution or the creation of a nuisance.
3 See BNP Paribas’ Corporate Social Responsibility (CSR) policy announced in 2010 (BNP Paribas.ie).
4 IFC Performance Standards are a set of principles with outcome-oriented objectives and requirements that
are designed to improve the environmental and social performance of a business activity.
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i PPP
PPPs are the main project finance model used in Ireland and the template is a more flexible
version of the PFI model in the United Kingdom.
The Irish government introduced PPP in Ireland by way of the State Authorities (Public
Private Partnership Arrangements) Act 2002. This gave a list of designated bodies the legal
authority to enter into PPPs and to enter into transactions ancillary to these arrangements,
such as hedging agreements, land transactions and the borrowing or investing of money.
The definition of PPP was deliberately broad to enable almost any combination of design,
construction, finance, operation and maintenance. In fact, any operation and maintenance
contract of five years falls within the definition of a PPP contract in Ireland.
The NDFA has responsibility for most sectors for PPP projects, the exception being
transport, water and local government.
The State Authorities Act also gives the NDFA the authority to procure PPP projects
on behalf of government departments and other public entities.
A typical PPP project for a school or courthouse will involve the public body entering
into a project agreement with a PPP company, who will set up an SPV for the purpose
of carrying out the project. In such a project the public sector will produce an output
specification and the PPP company will design, build, finance, maintain and partially operate
the school or courthouse for a designated period, typically 25 years.
In Ireland, the public sector has kept to a minimum the extent of operations carried out
by the private sector, and typically in a school it will be little more than maintenance. Hence,
politically, there have been very few union or employee issues with PPP projects.
The PPP company will be granted a licence to occupy the land and school for the
purpose of carrying out the project agreement but will at no time lease or own the project.
PPP projects tend to be procured by way of competitive negotiated procedure or
competitive dialogue in accordance with EU procurement law. The tender process is rigorous
and lengthy.
PPPs continued throughout the recession but at a slower pace. It has also tended to
be the less risky projects that are reaching financial close, such as schools projects. In such
projects, the risk on student numbers is taken by government and therefore the financial
model is predictable and low risk. However, Ireland has returned to growth and there has
been an increase in the volume of PPP projects coming onto the market in the past 12 months
as well as a corresponding level of interest from international bidders.
Recent PPP activity

The government announced a stimulus package in late 2014 including a number of PPP
programmes with a total value of €1.4 billion. These include the construction of two groups
of six schools, two additional quadrangles for Grangegorman campus of the Dublin Institute
of Technology, around 20 primary care centres, three Garda divisional headquarters, seven
courthouse developments and three inter-urban road-building projects.5 In the recent past,
the following projects have been announced:
a the Schools PPP Bundle 4 project was awarded to the BAM consortium in
December 2014;
5 www.ndfa.ie/tendercompetitions/projects.
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b the Inspired Spaces consortium was announced in November 2015 as the preferred
bidder for the Schools Bundle 5 PPP project, which reached financial close in 2016;
c the Charlemont Street Social Housing PPP project reached financial close in
December 2015. This is a land swap PPP involving the delivery of 79 social housing
units and community facilities. Alcove Properties will develop up to 162 new apartments
as part of the scheme;
d the BAM consortium was awarded the Courts Bundle PPP project in December 2015.
Bank of Tokyo-Mitsubishi UFJ is providing the financing structure for this project. All
seven courthouse projects are due for completion by December 2017;
e the Prime–Balfour Beatty consortium was announced as preferred bidder on the
Primary Care Centres PPP Programme in May 2015. The European Investment Bank
(EIB) is funding €70 million of the project debt through the European Fund for
Strategic Investment (EFSI). This project will be the first healthcare project to benefit
from EIB support and one of the first PPPs in Europe to benefit from EFSI funding;
f the Eriugena consortium was appointed as preferred tenderer in March 2015 to carry
out a major PPP project in Grangegorman consisting of state-of-the-art mental health
facility, a purpose-built university campus for the Dublin Institute of Technology
consisting of 10,000 student places and a variety of public amenities;
g a consortium of BAM and Dragados was appointed in October 2015 for the
€350 million M11 Gorey to Enniscorthy PPP project. Construction is scheduled for
completion in 2019;
h a consortium led by BAM was appointed in February 2016 for the €230 million
N25 New Ross bypass PPP project;
i Topaz Energy Group Ltd was appointed as the preferred tenderer for the Motorway
Services Area – Tranche 2 project in May 2015; and
j the Schools PPP Bundle 5 was announced on 22 July 2016, comprising four new school
building projects to create 4,500 additional school places. The PPP has been entered
into with the Inspired Spaces Consortium and will be funded by two international
investors, BTMU and Haleba.
The head of the NDFA recently stated that there is an increased market interest in PPP
schemes and that this has been reflected in the pricing and the value for money that the
NDFA is currently obtaining in PPP schemes.6
In contrast, while PPP road projects have also continued to close, the model has
changed from a user-based model to an availability-based one, as the banks and contractors
were simply not willing to take a risk on traffic forecasts.
Irish public procurement law is entirely compliant with EU public procurement law and
enforces its processes rigorously. Directive 2014/24/EC on the award of public contracts
and Directive 2014/25/EC on the award of utility contracts were transposed into Irish law
in May 2016 by means of the European Union (Award of Public Authority Contracts)
Regulations 2016 and the European Union (Award of Contracts by Utility Undertakings)
Regulations 2016. Remedies Directive 2007/66/EC was transposed by way of Statutory
Instrument 130 of 2010.
6 Eolas Magazine, 29 March 2016.
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These rules capture best practice internationally and comply with the requirements of
all major funding agencies and banks as well as OECD, etc. They are technically detailed but
also overlaid with the basic EU Treaty principles of equal treatment, transparency, freedom to
provide goods, works and services, etc.
A challenge to a public procurement process in Ireland is by way of judicial review to
the High Court. The effect of initiating proceedings is that an automatic injunction applies
to the project and the public authority may not proceed with the project until the substantive
issue has been heard. In One Complete Solution Limited v. Dublin Airport Authority,7 the
Dublin Airport Authority (DAA) had sought to lift the automatic suspension that had arisen
on the initiation of proceedings by One Complete Solutions Limited, who were seeking to
review the DAA’s decision to award a contract for site services to another bidder. The High
Court had initially refused to lift the automatic suspension and the DAA therefore appealed
that decision to the Supreme Court.
On appeal, the Supreme Court focused on the relevant legal framework, which
included both EU law (Directive 92/13/EEC – the Utilities Remedies Directive) and the
Irish implementing Regulations (SI 131 of 2010 – the Remedies Regulations). Following
its analysis, Mr Justice Frank Clarke, giving judgment for the Supreme Court, indicated
that it had reached two substantive conclusions. First, the Supreme Court confirmed that
an automatic suspension arises on initiation of proceedings (provided a contract has not
yet been signed), therefore, preventing a contracting authority from concluding a contract
until the substantive issue has been determined by the Court or the proceedings have been
settled. Second, the Supreme Court confirmed that the Irish courts do not have jurisdiction
under the Irish Remedies Regulations to lift the automatic suspension on an application from
a contracting authority.
As the Supreme Court decision would have led to significant disruption to the award
of public contracts in Ireland, the Irish government introduced emergency legislation to give
the High Court jurisdiction to make orders lifting the automatic suspension, at interim or
interlocutory stage thereby making the decision of the Supreme Court in One Complete
Solution (in terms of its interpretation of the Remedies Regulations) largely redundant.

There are no particular restrictions in Ireland on foreign investment, which – to the
contrary – is actively encouraged and supported. Ireland’s low corporation tax rate has been
an incentive for many foreign investors and retention of this low corporation tax rate is
important going forward.
Many of the large PFI and PPP projects in Ireland over the past 10 years have involved
foreign contractors who are typically a leading part in a consortium of contractors. Because
of the relative size of the Irish construction industry, PFI and PPP has required the financial
support of foreign contractors who generally have greater access to credit and bonding facilities.
7 [2014] IESC 6.
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There are no specific courts or tribunals in Ireland that deal with either project finance
transactions or construction contracts.

The principal forms of dispute resolution in Ireland in the context of private finance
transactions are:
a dispute adjudication boards;
b mediation;
c arbitration; and
d litigation.
Dispute adjudication boards and adjudication panels

The most recently awarded PPP contracts in Ireland make provision for the establishment
of a sitting adjudication panel to resolve escalated disputes. The adjudication panel is to
comprise four experts from the following sectors: construction; services; legal and financial.
Either of the parties can refer a dispute to the appropriate member of the adjudication panel.
Older PPP contracts or more internationally influenced construction contracts (such as
those based on FIDIC forms) allow for dispute resolution by the courts or by way of referral
to a dispute adjudication board. This is a consensual process whereby the parties will typically
identify an industry expert (in Ireland there is usually just one individual or one organisation
identified as opposed to three) to provide a recommendation in relation to any dispute that
arises. The parties are free to reject the recommendation and, if they do, they then move to
the next step in the dispute resolution process.
It is important to note that the Construction Contracts Act 2013 (which finally
commenced on 25 July 2016) (the 2013 Act) provides for a form of statutory adjudication
that is entirely new to this jurisdiction, although similar provisions are in place in the
United Kingdom. The 2013 Act would seem to envisage a more inquisitorial process than
would be the case in arbitration, in that the adjudicator’s role is not anticipated to involve
the traditional adversarial model. The Act does not apply to PPP contracts or low-value
construction contracts (not more than €10,000).
In addition, the 2013 Act envisages a speedy process of adjudication in circumstances
where it will take 35 days from the beginning of the process to the adjudicator’s award.
It should be noted, however, that the 2013 Act is relatively imprecise about timeliness
of enforcement of the adjudicator’s award, in that it seems to state that the award can be
enforced either by court action or with leave of the court in the same way as any court order.
Mediation
The process of mediation in Ireland is fairly well developed and most forms of PFI contract
will include a provision that requires the parties to at least attempt some form of mediation
before commencing either arbitration or litigation. Mediation is a process whereby the
parties will attempt to resolve any dispute that arises between them with the assistance of an
independent third party and, if a resolution cannot be reached by agreement, then the process
may provide for the mediator to issue a recommendation to the parties that, if not rejected,
becomes binding on the parties.
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Mediation in Ireland is given judicial support and there are certain judicial decisions
whereby parties have been penalised as a consequence of refusing to mediate in circumstances
where mediation was appropriate.
Arbitration
The arbitration process in Ireland has recently undergone a fairly radical transformation with
the introduction of the Arbitration Act 2010. The purpose of this Act was to bring Irish
arbitral procedures in line with the procedures generally used in international arbitration
through the incorporation of the UNCITRAL Model Law (the Model Law). As Ireland
now recognises and incorporates the Model Law, foreign investors and contractors are more
comfortable with conducting their business in Ireland.
In combination with the introduction of the Model Law, the Arbitration Act
2010 severely restricts any judicial intervention in the arbitration process. The reason for
this is, again, to give confidence in the process for the purposes of international contractors
and investors.
Ireland does benefit from a number of high-quality arbitrators but, in recent years, the
arbitration process has suffered some criticism as a consequence of a perceived increase in cost
and decrease in speed.
Litigation
Since 2006 and the introduction of the Irish Commercial Court, litigation in Ireland has
dramatically improved. The Commercial Court in Ireland is generally perceived as being of an
extremely high quality, in a process that is case-managed in all important respects. Any party
with a commercial dispute that is valued in excess of €1 million and that has been prosecuted
with some degree of urgency will generally be able to avail itself of the Commercial Court.
In the event that a dispute does not meet the thresholds for entry into the Commercial
Court, the dispute will be resolved in the normal High Court process. While this process
is slower and more unpredictable than the Commercial Court process, it is nonetheless
a process that has improved dramatically in recent years.
In terms of litigation, it is worth noting that there is a current drive towards generally
reviewing litigation processes and the court system. Among the reforms currently being
debated is the introduction of a separate appeals court, which would, again, greatly improve
the standard of litigation services in Ireland.

While Ireland has undergone a deep recession for seven or eight years, the past 24 months have
seen a sharp upturn in the economy and the construction and projects sector is returning to
strong growth. A pipeline of projects is emerging and lending has begun again. International
consortia have returned with the announcement of new projects, clearly undaunted by
the recession.
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Chapter 14
JAPAN
Tetsuya Itoh, Reiji Takahashi, Kenichi Yamamoto and Tetsuro Motoyoshi1
I INTRODUCTION
In Japan, project finance transactions are generally limited to finance transactions with
limited recourse to cash flows and underlying assets or contracts contained in certain projects,
in contrast with corporate finance transactions, which have full recourse to incomes of
borrowers or issuers.
From a legal perspective, project finance transactions require the examination and
creation of complex structures under the Civil Code, which is the general statute for contracts
and secured transactions, insolvency laws and other certain special laws, including those
designed for securitisation transactions. Private finance initiative (PFI) transactions are also
governed by the Act on Promotion of Private Finance Initiative (the PFI Act),2 which promotes
private involvement in certain types of construction and operation of public facilities.
Although there have been a considerable number of cash-flow transactions including
securitisation of real estate, there were not many project finance transactions announced in
Japan until the late 1990s. The reason for this is not clear, but it might have been a result of
certain regulatory and legal requirements for security interests and insolvency proceedings.
However, after the enactment of the PFI Act in 1999, more than 300 PFI transactions were
initiated by the national government and municipal governments by virtue of the PFI Act, and
this high volume may reflect the general attitude of the national government and municipal
governments in encouraging PFI transactions. In these transactions, business operators such
as developers, who may also make equity contributions, and debt providers such as banks,
generally play important roles.
In addition, the introduction of a feed-in tariff scheme in renewable energy projects
by the enactment of the Act on Special Measures concerning the Procurement of Renewable
Energy by Operators of Electric Utilities (the Renewable Energy Act)3 in 2012 created
a sizeable project finance market in Japan. Since 2012, a considerable number of photovoltaic
(PV) power plant projects have been financed through project finance schemes and, as
a result, project finance is now recognised as an expanding finance transaction area in Japan.
1 Tetsuya Itoh, Reiji Takahashi, Kenichi Yamamoto and Tetsuro Motoyoshi are partners at Anderson Mōri
& Tomotsune.
2 Act No. 117 of 1999.
3 Act No. 108 of 2011.
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Japan

i The PFI Act
The amendment of the PFI Act in December 2011 has enabled the private sector to operate
economic infrastructure (such as ports, roads, airports, water supplies and sewage treatment
facilities) that was traditionally owned and operated by public entities. To further encourage
the implementation of PFI projects in economic infrastructure, the further amendment of
the PFI Act passed the Diet in June 2013, and pursuant to which the national government
established the PFI Promotion Co Ltd of Japan, which will act as an infrastructure fund to
supply seed money to promote the implementation of PFI projects in economic infrastructure,
whose income will mainly depend on user fees.
In Japan, where most of the economic infrastructure has already been constructed,
brownfield projects are more likely; in these projects a public body creates the operation
rights on existing economic infrastructure with a definite term (for example, 30 years) and
sells the operation rights in a bidding process to private companies that want to enter the
infrastructure business. Considering the dire financial situation of the Japanese national and
municipal governments, their sale of operation rights may be an effective way of rebuilding
their finances.
A noteworthy project is being spearheaded by the New Kansai International Airport
Co Ltd, a wholly-owned subsidiary of the national government. The bidding process for the
privatisation of Kansai International Airport (KIA) and Osaka International Airport (OIA),
conducted in accordance with the PFI Act, started in 2014 and the consortium constituted by
Orix Corp and Vince Airports SAS was selected as the preferred bidder in November 2015.
The transition of the operation of KIA and OIA took place in April 2016.
In June 2013 the Act on the Operation of Government-Owned Airports Utilising the
Ability of the Private Sector passed the Diet, which allows the national government and
municipal governments to privatise the other remaining airports by selling the operation
rights created under the PFI Act. In June 2014, the Ministry of Land, Infrastructure,
Transport and Tourism (MLIT) started the bidding process for the privatisation of Sendai
Airport and the consortium headed by Tokyu Corporation was selected as the preferred
bidder in September 2015 followed by the execution of the project agreement. The transfer
of the operation took place in July 2016.
After the successful closing of those first two epoch-making airport privatisation
projects, MLIT has boosted the implementation of other airport privatisation projects. The
bidding process for the privatisation of Takamatsu Airport started in 2016, and MLIT started
the bidding process of the privatisation of Fukuoka Airport, one of the busiest airports in
Japan, in May 2017. Furthermore, it is expected that the bidding process for the bundling
privatisation of Chitose Airport and six other airports in the Hokkaido area will take place
in 2018.
ii Renewable Energy Act and the reform of the electric power system
The Renewable Energy Act, which was enacted in July 2012, introduced a feed-in tariff
scheme for renewable energy by compelling retail electricity companies to purchase electricity
generated from renewable energy sources at a rate and for a period set by the Ministry of
Economy, Trade and Industry (METI).
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The level of the feed-in tariff has been set relatively high during its first three years
(2012–2014) and, as a result, many PV power plant projects have been introduced and
financed through project finance schemes.
In addition to the enactment of the Renewable Energy Act in 2012, the national
government set the schedule for the reform of the electric power system in 2013 and as
a result of the enactment of the new Electricity Business Act:4 (1) the establishment of the
Organisation for Cross-regional Coordination of Transmission Operators and operational
control of the transmission system by independent system operators shall be established by
2015; (2) entry to the electricity retail business shall be fully liberalised from 1 April 2016;
and (3) the legal unbundling of the transmission and distribution sector shall take place in
2020. While the detailed regulations will be discussed through the enactment of further
amendments and implementing regulations in a few years’ time, it is recognised that the
reform of the electric power system will be the source of various power plant projects financed
through project finance schemes.

In construction projects involving commercial facilities, such as offices or residential buildings,
the most common structure is build and lease. Independent power producer projects,
including mega-solar projects, generally use the build-own-operate (BOO) structure.
In PFI projects such as prisons, schools, hospitals and government buildings,
build-operate-transfer, build-transfer-operate (BTO) and BOO structures are generally used.
The structure of most PFI projects in Japan is the BTO structure, where the facilities
constructed are those used by the public entities themselves (such as government buildings
and housing for government workers) and the sole income for the project is the service fee
paid by the public entities. Except for the Haneda Airport passenger terminal project and the
airport privatisation project described above, there have been limited projects where income
arises from user fees.
ii Documentation
Broadly speaking, the documentation for project finance in Japan is similar to that used in
international markets.

In the construction industry in Japan, design-bid-build is the most traditional and generally
used delivery method, although the engineering-procurement-construction model is also
used in larger projects.
The standard form of contracts for construction in Japan has been developed domestically.
The most standard form is the General Conditions of Construction Contract published by
the General Conditions of Construction Contract Committee of Japan, which includes
academic experts, architects’ associations and associations of construction companies. As for
the construction of plants, the model contract published by the Engineering Advancement
Association of Japan is used.
4 Act No. 170 of 1964.
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Japan
In addition, the standard form of construction contract for public works, which is
separately published by the Central Construction Industry Council, is commonly used in
public works.
It is a generally accepted practice in Japanese construction projects to add special
conditions to the standard forms to reflect the agreed risk allocation between the parties.
However, in large projects initiated under the PFI Act, terms and conditions of construction
contracts are sometimes drafted separately and do not necessarily follow the standard forms.

In project finance transactions, various risks are incurred and allocated to the contracting
parties. These risks include risks that the project might collapse, risks relating to cash flow
(e.g., increasing costs), risks relating to the insolvency of parties, risks relating to change of
law, force majeure and risks relating to government or other political influences.
Those risks that can be monetarily assessed are likely to be mitigated by fixing fees and
expenses payable to one of the parties or by requiring a capital injection to make up for the
shortfall. Delay in the completion of construction projects often requires the responsible
party to pay liquidated damages. However, risks that are not capable of being assessed in
this manner may not be easily resolved. When it becomes impossible to continue the project
because of a change of laws or force majeure, parties may have to give up their interests or even
inject additional investment. A better approach to dealing with such risks is to allocate them
to the contracting parties, who ultimately benefit from the project when it is successfully
completed and who are able to manage the risks.
As for PFI projects, the PFI Promotion Office in the Cabinet Office publishes guidelines
on risk allocation and the general terms of project agreement (the PFI Guidelines). The
PFI Guidelines discuss most risks encountered in project finance practice, and PFI project
contracts are conducted in accordance with them.
As for renewable energy projects, in September 2012 the Agency for Natural Resources
and Energy published a model power purchase agreement that is applicable to projects
conducted under the schemes set out in the Renewable Energy Act. Pursuant to the model
agreement, while a retail electricity company, as an offtaker, is obliged to purchase electricity
at a fixed price and to pay compensation for any output restrictions placed by the general
transmission companies (unless the restriction is more than 720 hours per year or is caused by
force majeure or other justifiable reason), it is basically not obliged to take any risks associated
with an increase in the costs of the project.
Under Japanese law, parties can agree to limit their liabilities to the extent that the limitation
does not contravene public policy and does not harm consumer rights. Further, if parties
agree on liquidated damages, the plaintiff is no longer required to prove the amount of
damages and the court must respect the agreement. An agreement on penalty is deemed as an
agreement on liquidated damages.
In project finance transactions, parties often use both liquidated damages and – if there
are extra damages – general damages that must be proved by the plaintiff.
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Japan
Parties may or may not agree to a cap in the amount of damages, although the general
rule under the Civil Code is that ordinary damages are almost always granted and special
damages are granted only when they are foreseeable by a breaching party at the time of
a breach.
Force majeure is a concept that releases parties from contractual restraint. However,
monetary obligations are not released even in the case of force majeure under Japanese law as
Japanese law takes a position that money can be procured anywhere. In reality, if force majeure
occurs, the parties usually sit down to negotiate a mutually agreeable solution.
Another concept to release parties from contractual constraint is the theory of
significant change of circumstances in light of equity among the parties. While this is a widely
recognised legal principle, it may not be easy for a party who wants to walk away to submit
sufficient grounds for its application.
In Japan, there is no such concept as ‘efficient breach’. The breaching party’s liability
may be limited by reason of it being an efficient breach, but the case law is not clear on
this point.
iii Political risks

The Constitution clearly recognises property rights and Japanese administrative law has
a statutory provision on indemnification of damage suffered as a result of expropriation.
In PFI projects where a public entity is a contracting party in a project agreement,
the public entity has the right under administrative law to terminate the agreement on the
grounds that the termination is ‘for a public purpose’, even without any other cause.
Once a project agreement is terminated for a public purpose, administrative law
requires public entities to indemnify the damage suffered by private companies. In practice,
PFI project agreements generally provide for compensation in the case of such a termination.
The risk of a change in law usually falls on the project company. It should be noted that,
depending on the case, change-of-law risk that applies only to specific projects or industries
are sometimes taken by the offtaker, user or public bodies in PFI projects.
As for renewable energy projects, the Renewable Energy Act limits the cases where
a feed-in tariff may be changed. Once a renewable energy producer executes a contract with
a retail electricity company setting the price and period, the price cannot subsequently be
changed during the period agreed upon, except by METI should METI find it necessary to
revise the price or period already set, such as in the event of a drastic change in the economic
situation or if drastic change in the economic situation is likely to occur.
War and civil disturbance is categorised as force majeure and generally the theory of
significant change of circumstances in light of equity is applicable. Typical terms dealing with
force majeure in project agreement provide that both the project company and the public
entity or other counterparty to the agreement share the risk by using a certain predetermined
percentage or by bearing its own costs incurred.

Under Japanese law, the general rule is that the contents and effects of security interests are
decided by statute and must be perfected (if at all) pursuant to statute. Typical types of security
interest include mortgages on real estate, pledges on share, and pledges on claimable assets. An
assignment for security, which is a type of security interest upheld by court precedent, is also
often used. A mortgage is perfected by real estate registration. A pledge on shares in a certificated
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form is created by delivery of certificates and perfected against the company by recording in
the shareholders’ register. A pledge on shares in an uncertificated form is created by agreement
between the parties and is perfected by record in the shareholders’ register. However, if there
is a transfer restriction on the shares, the issuer’s consent is necessary to enforce the pledge.
A pledge on claimable assets is perfected by either contents-certified mail to an obligor, consent
of an obligor with a certified date stamp or (with regard only to third parties) registration
of the pledge. Perfected security interests survive the civil rehabilitation proceeding and the
bankruptcy proceeding, but are subject to the corporate reorganisation proceeding.
Security interests under Japanese law are generally created on each individual asset that
is distinguishable from other assets.
In project finance transactions, in addition to the statutory security interests, contractual
arrangements that operate to ensure the performance of obligations or to replace parties are
often incorporated. Typically, a power of attorney and an assignment of contractual status is
given to a lender for it to step in. These are broader and more flexible than statutory security
interest, but they may not operate smoothly except with the reasonable cooperation of the
other parties. They may also not survive insolvency proceedings involving the relevant parties.
In project finance transactions, sponsor support is often obtained. Whether and to
what extent the sponsor support is enforceable largely depends on the documentation.

In project finance transactions in Japan, performance bonds (guarantee) of banks and
performance insurance from insurance companies or the like are often used.

i Enforcement of security rights
As floating charges are not available to a project lender under Japanese law, it will need
to enforce its security rights over each asset separately. As a general rule, the enforcement
of security rights must be done by public auction supervised by the court under the Civil
Execution Act.5
The enforcement of pledges created over shares or monetary rights and the enforcement
of assignments for security created over moveables, monetary rights or shares are, however,
exceptions. Secured lenders holding these security rights may dispose of the collateral in the
market or obtain the collateral at market value as the enforcement of security.
Although it is theoretically possible to create security over contractual rights other than
monetary rights (such as the right to approve and the right to termination), it is not clear how
such security may be enforced under Japanese law because it is difficult to assess the value of
the rights.
The most realistic ways for project lenders to improve the cash flow of a project are to
enforce share pledges by obtaining the shares of the project company at market value, to take
control of the project company, or to change the management or contractor.
5 Act No. 4 of 1979.
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Japan
ii Enforcement of security in bankruptcy proceedings

Under the Bankruptcy Act6 and the Civil Rehabilitation Act,7 security rights are categorised as
rights of separate satisfaction and may be enforced, without any interruption, by bankruptcy
proceedings or civil rehabilitation proceedings.
Under the Corporate Reorganisation Act,8 a secured creditor cannot enforce its security
rights under corporate reorganisation proceedings. The Corporate Reorganisation Act
provides that tax debt, employees’ claims and other claims for expense of court proceedings
are superior to those of secured creditors.
Under the Bankruptcy Act, the Civil Rehabilitation Act and the Corporate
Reorganisation Act, security interests created within one year prior to the filing of a petition
for bankruptcy, civil rehabilitation or corporate reorganisation proceeding under the relevant
law may be nullified if the creditor knew that the debtor was unable to pay or that such
a petition had been filed.
A creditor has a right to submit a civil rehabilitation plan or a corporate reorganisation
plan, although this is rare. A creditor does not have a right to appoint a receiver or trustee.
The Bankruptcy Act and the Civil Rehabilitation Act are applicable to all types of
entities, whereas the Corporate Reorganisation Act is applicable only to stock companies.
Accordingly, godo kaisha (which is a corporate form similar to that of a limited liability
company) is sometimes used as the form of a project company.

The Environmental Impact Assessment Act enacted in 1997 (the EIA Act)9 obliges the parties
to large-scale projects to conduct assessments before obtaining the governmental permits
under the applicable business regulations to implement them. There are 13 types of projects
subject to EIA, including the construction of roads, dams, railways, airports and power plants.
In addition to the EIA Act, all prefectures and specially designated cities have established
their own EIA regulations. The regulations of the municipal governments add project types
subject to assessment and usually to small projects.
The three largest Japanese banks (Mizuho Corporate Bank, Bank of Tokyo Mitsubishi UFJ
and Sumitomo Mitsui Banking Corporation) have adopted the Equator Principles.
As Japan is categorised as a high-income OECD country, the successful completion of
an assessment (or its equivalent) process under and in compliance with local or national law
is considered an acceptable substitute for the requirements of Equator Principles.

A lender may be liable if it performs any tortious act, and exercise of a lender’s right may be
barred if it contravenes the good-faith doctrine or abuse of rights. However, there have not
6 Act No. 75 of 2004.

7 Act No. 225 of 1999.
8 Act No. 154 of 2002.
9 Act No. 81 of 1997.
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Japan
been many cases where a lender has been found liable or where a lender’s exercise of rights has
been barred. Academics sometimes say that the discussion of a lender’s liability is still under
development in Japan. Having said that, if a lender is a bank, it should be careful not to abuse
its rights so as not to violate rules under the Antimonopoly Law.

i PPP
Since the introduction of the PFI Act in 1999, more than 300 PFI projects have been
implemented in various areas of public service. PFI projects constitute the majority of project
finance transactions. Whereas the volume of simple public construction has decreased
because of the dire financial situation of many Japanese public entities, PFI projects have
become more important to the construction industry.
As described in Section II, above, it is expected that the amended PFI Act will
further open up the business of operating economic infrastructure. In addition to the
airport privatisation projects, which have seen a lot of activity in recent years, the toll road
privatisation in Aichi Prefecture closed in 2016 and private sector participation in water
supply and sewage projects is now seriously being considered by the national government.
There are specific statutes regulating public procurement by the national government and
municipal governments. Equal treatment, transparency and open competition are regarded
as basic principles in applying the provisions of the public procurement regulations. The
Japanese government has also adopted the World Trade Organization Agreement on
Government Procurement (GPA).
The public procurement regulations provide three basic methods: open tender,
designated tender and contract at discretion. The use of contract at discretion is very limited
as it needs to satisfy very strict conditions.
These regulations also apply to PPP transactions – there is no specific statute applicable
to the PPP tender process. Although the process of negotiating with a preferred bidder is
generally not regarded as satisfying the basic requirements under the current procurement
regime, the process of competitive dialogue has been introduced in the bidding process for
privatisation projects.
In Japan, public procurement by the government is subject to both the GPA and
a government procurement challenge system. Under this system, parties involved in a public
procurement process are allowed to file a complaint to the government procurement review
board and the board reviews the process. The board can request that the government suspend
the procurement procedure or performance of the contract under limited circumstances.
Other than the government procurement challenge system, legal protection is limited
to filing a lawsuit against public entities under the Government Liability Act,10 requesting
compensation for damage suffered because of an intentional act or negligence of the public
officer in charge of the procurement procedures.
10 Act No. 125 of 1947.
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If a person makes a loan in, or to a person in, Japan in the course of business, that person must
be registered as a money lender pursuant to the Money Lending Business Act,11 unless the
person is otherwise permitted to give loans, as is the case with banks or insurance companies
licensed in Japan. If a person markets bonds, stocks, limited partnership interests, anonymous
partnership interests, and other types of securities in or to a person in Japan in the course of
business, the person must be registered as a financial instruments business operator pursuant
to the Financial Instruments and Exchange Act.12 If a person is engaged in sale and purchase
of real estate or a brokerage of real estate leases in the course of business, that person must be
licensed as a real estate broker pursuant to the Land and Buildings Transaction Business Act.13
If a person engages in construction of buildings in the course of business, that person must be
licensed as a constructor pursuant to the Construction Business Act.14 There are other relevant
acts that may apply to businesses relating to project finance transactions.
Generally, business registrations and licences are equally open to foreign persons,
although some may require the applicant to be a Japanese corporation. Generally, foreign
persons are able to have title to assets and become parties to contracts in the same way as
domestic persons.
Under the Foreign Exchange and Trade Act,15 certain acts by a foreign person are subject
to post facto reporting or – in very limited situations – prior approval of the government.
Typical examples include the acquisition of shares in unlisted companies, including special
purpose vehicles, and the acquisition of bonds.

There is no Japanese statute that generally prohibits transfer of profits or investments other
than the regular requirements of the Financial Instruments and Exchange Act.
i No special jurisdiction
There are no courts or divisions specialising only in construction or project disputes, and
the Civil Procedure Act16 does not provide any exclusive or non-exclusive jurisdiction
for these disputes. However, parties’ agreements on jurisdiction (including international
jurisdiction) made in writing are generally accepted and the Tokyo District Court and the
Osaka District Court do have special divisions for construction disputes and mediation.
The regular divisions of these two district courts may refer the case to mediation divisions at
their discretion. Other district courts as well as summary courts may also conduct mediation
proceedings. Mediation, where one judge and two non-judge members (an expert member
may be included) appointed from the court’s list constitute a mediation committee to settle
disputes amicably, are sometimes useful in domestic construction disputes.
11 Act No. 327 of 1983.

12 Act No. 25 of 1948.
13 Act No. 176 of 1952.
14 Act No. 100 of 1949.
15 Act No. 228 of 1949.
16 Act No. 109 of 1996.
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Japan
ii Use of experts
Project and construction disputes can involve technical issues. The court may appoint
experts to assist it in considering technical issues in two ways. The first is where the court has
a technical adviser participating in the court proceedings to provide explanations on various
technical areas where required. However, practically speaking, a technical adviser is not utilised
frequently. The second method is by expert testimony, where an expert witness is appointed
by the court and the expert witness states his or her opinions either in written or oral form,
as determined by the court. In general, expert testimony is conducted at the request of the
parties, but the court sometimes takes the view that expert testimony is necessary and asks the
parties to make a request. If the parties choose to present their own expert evidence, the parties
may present an expert’s written opinion as documentary evidence. At the opposing party’s
request, the expert may be examined as a witness so that the opposing party can conduct
a cross-examination. Sometimes, both parties present their respective experts’ written opinion
as documentary evidence and, thereafter, the court conducts further expert testimony.
iii Arbitration and ADR

Project and construction disputes are both arbitrable in Japan. In addition to the mediation
at the court discussed above, private mediation is also available.
The Arbitration Law of Japan, which is based on the UNCITRAL Model Law,
prescribes that an arbitral award (irrespective of whether it is issued by a domestic tribunal)
can be enforced when the relevant court recognises that award. The substantive requirements
for recognition are almost the same as those stipulated in the UNCITRAL Model Law. When
the court recognises the award, the court renders an enforcement decision.
The General Conditions of Construction Contract adopt arbitration as an optional
dispute-resolution mechanism, if the parties agree to refer a dispute to a construction work
dispute committee (CWDC). CWDCs are unique bodies established by each prefectural and
central government in accordance with the Construction Business Act. Members of CWDCs
are appointed by prefectural governors or MLIT, and arbitrators are nominated from those
members. However, the jurisdiction of CWDCs is limited to disputes concerning contract
agreement for construction works. As CWDCs are established by prefectural and central
governments, they are not the appropriate bodies to handle disputes with governmental
entities. Moreover, inasmuch as CWDCs are not necessarily familiar with construction
contracts drafted as part of project finance schemes, many construction disputes are referred
to district courts, summary courts or other commercial arbitration institutions. Adjudication
and dispute boards, which are commonly adopted by international construction contracts,
are rarely used in domestic projects and construction contracts. While the MLIT recently
began a pilot project adopting a dispute resolution mechanism similar to adjudication, it may
take some time before industries and practitioners become accustomed to it.

In Japan, project finance has mainly developed through an accumulation of PFI projects.
Structures and risk-allocation issues have been discussed by the PFI Promotion
Committee, which is composed of scholars and practitioners. However, as most PFI projects
are those in which facilities and buildings are for the use of public entities themselves and
project companies receive service fees from public entities, the arguments regarding the
allocation of market risk have not been well developed.
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Japan
Despite the foregoing, because of the dire financial situation of the Japanese government
and the amendment of the PFI Act, it is expected that the government will have to shift
to using private finance to maintain and rebuild Japan’s economic infrastructure, much of
which is ageing and will require additional investment. In fact, some scholars estimate that
the total cost of rebuilding infrastructure in Japan in the next 50 years could be more than
¥330 trillion.
Following the sale of the KIA and OIA operation rights and the privatisation of Sendai
Airport, the airport privatisation in Japan has become a large and attractive market for project
finance and infrastructure investment. The amended PFI Act could also create a market for
investment in various economic infrastructure projects in the future such as water supplies,
ports and roads.
Strong political momentum is the key to promoting the use of operation rights under
the amended PFI Act in economic infrastructure sectors. Furthermore, considering the
potential size of the market and the need to utilise private finance in infrastructure in Japan,
it is quite important to further develop practical guidelines and to create standard terms
of agreement reflecting the risk allocation generally accepted in the international project
finance market.
Apart from PFI projects, renewable energy projects have become a major sector in
terms of project finance. Many private companies, including solar panel manufacturers,
institutional investors and energy-related companies, have already entered the renewable
energy market. Many municipal governments offer their unused land for sites for renewable
energy projects, while the national government has introduced a subsidy programme and
preferential tax treatment to promote renewable energy projects.
It may prove quite difficult for the Japanese government to raise the large amount of
money required for Japan to reconstruct ageing infrastructure if it intends to do so solely
through public finance. Project finance structures, as well as the creation of investment
opportunities in infrastructure and renewable energy for the private sector, may well form
part of the solution.
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Chapter 15
PORTUGAL
Manuel Protásio, Teresa Empis Falcão and Frederico Quintela1
I INTRODUCTION
It is public knowledge that in 2011 the Portuguese government put in place a severe austerity
programme as a consequence of the bailout advanced by the European Union (EU) and the
International Monetary Fund (IMF), which resulted in a significant drop-off in government
funding for investment in public infrastructure.
Concurrently, the existing public–private partnerships (PPPs) became the subject of
strong public disapproval, given the heavy burden that payments by the Portuguese state
under those projects represented to the national budget, in a context where taxes have
increased considerably and social benefits were significantly reduced.
In 2013, the Portuguese government initiated a negotiation process with the PPP
concessionaires with a view to reducing public expenditure in connection therewith. That
negotiation process has reached a conclusion in respect of several road PPPs but is yet to be
completed in a significant number of concessions.
The construction sector one was of the sectors most severely affected by the economic
crisis of 2011, with the construction companies seeking new opportunities in foreign markets,
particularly in the Portuguese-speaking countries in Africa.
The financial assistance programme came to an end in May 2014 and the Portuguese
economy has since shown consistently positive signs of recovery.
With regard to public works, growth has been relatively slow, because of the
government’s unwillingness to allow an increase in debt, combined with political and social
pressure to avoid PPP models.
The Strategic Plan for Transport and Infrastructure approved by the former Portuguese
government has earmarked a range of infrastructure projects that could have a positive
economic impact on Portugal until 2020. The priority projects include the modernisation
of the Portuguese rail freight sector, the development and increase in capacity of major
Portuguese ports, a few projects in the road sector deemed essential to complete the road
network, as well as the increase of cargo capacity at Lisbon Airport.
The execution and financing of these investments – in an amount exceeding €6 billion
– together with the views of the new Portuguese government on the role of public investment
in boosting the economy – might still give rise to many opportunities in the coming years,
although execution is, at the time of writing, quite delayed.
1 Manuel Protásio and Teresa Empis Falcão are partners and Frederico Quintela is a managing associate at
VdA Vieira de Almeida.
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Project finance and PPP business in Portugal has been quiet in recent years with regard to
new deals coming to the market.
There were, however, some important projects accomplished in the past year, as in the
case of the Tunel do Marão project, construction of which was completed in May 2016.
Nevertheless, in this case, the Portuguese state used a typical turnkey structure instead of
reverting to a PPP solution.
With a view to meeting the conditions of the EU–IMF financial assistance programme
and following the feasibility assessment of major PPP projects, the Portuguese government
set in motion the renegotiation of certain road PPP contracts by appointing a renegotiation
commission to negotiate the relevant contracts on its behalf.
The main goal of the renegotiation process was to reduce public expenditure during
the life of those contracts to bring sustainability to the Portuguese road sector. To this end,
some development projects were reduced in their scope, permitting savings not only in the
construction works and associated capital and financing costs, but also in operation and
maintenance spending in the future.
Moreover, in relation to the projects already completed, the renegotiation process
encompassed the reduction of service requirements and availability payments and, in one
specific case, the replacement of availability payments with a traffic risk-based regime together
with a minimum revenue assured by the contracting authority to the extent required to service
debt under the financing contracts. Renegotiated contracts will also contemplate a set-off
mechanism against toll revenues for the benefit of the concessionaires and an upside-sharing
mechanism to encourage concessionaires to promote traffic in their concessions.
Those amendments to the concession contracts, taken together, represent a substantial
modification to the original risk allocation between the contracting authority and the road
project companies.
The renegotiation process was completed in relation to most of the road concessions
included in the renegotiation package, although still pending lenders’ approval and the
formal amendment of the concession contracts. There are, however, some road concessions
whose renegotiation is still ongoing, with the final results expected shortly.
The Portuguese government has also appointed negotiation commissions to renegotiate
the urban rail PPP contracts and the port terminal concession contracts.
With respect to the health sector, some PPP-based contracts will soon come to
the end of their terms; therefore, renegotiation with the private partners is ongoing,
with the maintenance of the PPP model in these hospitals or, conversely, their return to
public management, being currently under political discussion. It should be stressed that
the contractual structure adopted in the PPPs in the healthcare sector in Portugal was
implemented in a particularly innovative way, by including the provision of the healthcare
services in the scope of the PPP. For that purpose, two concessionaires were incorporated
in some PPP projects in the healthcare sector, to ensure the segregation of liabilities and
remuneration: one entity was responsible for the design, build, financing, maintenance and
operation of the hospital facilities and another entity was responsible for the provision of
the healthcare services. Also, the solution regarding the risk allocation adopted in the PPP
projects in the healthcare sector has proved to be rather favourable for the public partner,
allowing significant savings for the state budget, when compared with traditionally managed
National Health Service hospitals.
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With respect to the construction industry, it is worth mentioning that the tourism
sector’s enhancement in recent years has proved to be vital in the renovation of main cities’
historical centres, with a positive impact on small and medium-sized construction companies.
Also, in 2013, the Portuguese government and the Portuguese Construction and
Real Estate Confederation, representing Portuguese construction companies, signed the
Commitment towards Sustainable Competitiveness of the Construction and Real Estate
Sectors with the aim of creating new jobs and skills, improving access to funds and promoting
private investment, promoting urban regeneration and the real estate lease market, and
supporting environmental sustainability in the sector.
This Commitment includes a list of support measures to relaunch and stimulate
competitiveness in the construction and real estate sectors, such as:
a changes to the release mechanism of performance bonds;
b a new legal regime applicable to real estate brokers;
c an exceptional and temporary regime for urban regeneration works mainly for
housing purposes;
d exceptional and temporary rules regarding the criteria for setting what are ‘abnormally
low prices’ for public works contracts; and
e the enactment of a Portuguese Technical Building Code to harmonise several acts into
a single piece of legislation.
Many of the announced competitiveness measures have already been completed while others
are still in progress. Among the former, we should highlight the exceptional and temporary
(seven-year) regime approved by the government in 2014, simplifying procedures and
requirements2 for urban regeneration works, which applies mainly to buildings or flats for
housing purposes either 30 years old or more, or located in urban regeneration areas. The
execution of the Commitment is monitored by the Construction and Real Estate Institute.
With respect to works activities, a new legal regime was recently enacted, introducing
new rules on access to public and private works activities

Other than the power projects (where one can come across the build-own-operate-transfer
model), most project finance deals closed to date in Portugal are based on concessions granted
by a governmental authority or a municipality and typically follow a build-operate-transfer
or design-build-finance-operate structure. There is no precedent in Portugal of project
financings making use of a build-operate-lease structure.
The Companies Code contemplates two forms of limited liability companies that may
be used for the purpose of developing projects in Portugal. These corporate forms are the
corporation (SA), whose capital is represented by shares, and the limited company, the share
capital of which is represented by immaterial participations (quotas) evidenced by registration
with the commercial registry.
The SA is the type of company typically chosen; the rationale being that an SA has a more
complex management structure and decision-making mechanism (compared with a limited
2 Decree Law 53/2014 of 8 April 2014, as amended.
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company) and is generally subject to more stringent corporate governance requirements –

both as to management and auditing of its activities. This combination of factors is generally
seen as ensuring a higher level of transparency and allowing a stronger degree of control of
the activities of the project company by the stakeholders.
Other important features of SAs are the perceived higher liquidity of their equity
participations (shares) when compared with that of limited companies, owing to the less
restrictive transfer formalities to which they are subject and their ability both to raise funds in
the capital markets and to enable enforcement (including foreclosure) by lenders.
With respect to the construction contractor, the corporate form generally used where
the same is formed by a group of construction companies is the agrupamento complementar
de empresas (ACE). The ACE is a joint and several joint venture incorporated and registered
with the commercial registry and subject to a specific legal regime.
ii Documentation
The underlying contractual framework of a project finance transaction in Portugal
traditionally includes a concession contract or a licence giving the project company the right
to carry out the project, a shareholders’ agreement to regulate the relationship between the
sponsors or project company’s shareholders and an equity subscription agreement, a set of
finance documents and certain major commercial contracts.
The finance package usually comprises a commercial bank credit agreement (as well
as the European Investment Bank (EIB) credit agreement and an intercreditor agreement
whenever the EIB is also providing finance to the project), an accounts agreement,
a forecasting agreement, security documents and direct agreements between the lenders
and the contracting authority and the major project parties, all in a form consistent with
international market standards.
Among the major commercial contracts, there is typically a construction contract and
an operation and maintenance contract. Supply agreements and sales agreements may also be
entered into in connection with the project.
As regards the project financings closed in Portugal in the 1990s and early 2000s, it was
generally accepted that, given the need to adapt the legal structure of the facility agreements
to international syndication, the whole financing package other than the security documents
had to be governed by English law, while the project documents, notably the concession
contract, were subject to Portuguese law. That ceased to be the case from the mid-2000s
onwards, at which point the project financiers active in Portugal had become sufficiently
comfortable with Portuguese law and, therefore, most finance documents executed thereafter
are governed by Portuguese law, notwithstanding that they closely follow the structure of
a typical English law project finance documentation package.

In the vast majority of the Portuguese project finance transactions closed to date, the
concession-based construction contracts used do not follow any standard form, such as those
issued by the International Federation of Consulting Engineers (FIDIC), the Joint Contracts
Tribunal or the Institution of Civil Engineers. Hence, the form of construction contract used
in each case has varied depending on the sector of industry at stake or the sponsors involved.
The standard forms of construction contracts issued by the FIDIC or adjusted
FIDIC-based contracts have, however, been used in Portugal for large power (including
renewable) project deals where the contractor is a foreign entity.
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However, because of the crisis, Portuguese construction companies turned their

attention to developing markets in Africa, in particular to the Portuguese-speaking countries,
where the contractual forms issued by FIDIC prove to be important as contractual guidelines
for foreign investors.

The concession contract allocates the relevant project risks between the contracting authority
and the project company. The risks that remain with the contracting authority are covered
by the financial balance mechanism, which is a key concept in all concession-based project
finance transactions in Portugal.
If a financial balance event arises causing a deterioration in the levels of the project
ratios, the contracting authority agrees to compensate the project company with a view to
restoring the financial balance of the concession. Typical financial balance events include
unilateral variations by the contracting authority, force majeure events, specific change-of-law
and construction delays caused by the contracting authority.
Traditionally, archaeological and ground risks were borne by the contracting authority.
That was, however, not the case in the PPP1 Poceirão–Caia high-speed rail project, closed
in May 2010 (which was cancelled as part as the austerity-led review of PPPs), and in the
PPP hospital projects, where that risk was partially assumed by the project company and
transferred by the latter to the contractor.
The project company generally passes on to the contractor all design and construction
obligations, liabilities and risks under a construction contract that is fully back-to-back with
the concession contract.
The contractor usually undertakes to perform the design and construction obligations
on a turnkey and fixed-price basis and, hence, it bears the risk of price escalation of the
material, equipment or workers. In some cases, the contractor is allowed to revise the price
annually to reflect inflation.
Other risks that are transferred by the project company to the contractor under a classic
concession-based construction contract include the delay and completion of the works,
approval risk, expropriation (where the cost and delivery risk is passed on to the project
company by the contracting authority), the risk of damage to the works and defects during
the defects liability period.
The risks generally covered by the financial balance mechanism under the concession
contract do not entitle the contractor to suspend the works, or in any way relieve the
contractor of its obligations under the construction contract. The contractor shall, however,
be entitled to compensation in accordance with the ‘back-to-back, if and when’ principle.3
3 Namely, the contractor will only receive compensation for any of the relevant events to the extent the
project company is compensated for those same events under the concession contract.
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Under general Portuguese law, the contractor is liable to the project company if it breaches
its obligations under the construction contract. All damages arising from such a breach
must be covered, including all direct damages and loss of profit but excluding indirect or
consequential damages.
Portuguese law expressly forbids prior general waivers of the right to compensation
(although specific waivers after the occurrence of the fact giving rise to the right to
compensation are permitted). It is possible, however, for the parties to agree an amount of
liquidated damages for breach of obligations, provided that it represents a reasonable estimate
of the damages that may result from such a breach. Caps on liability are also generally
admitted by most Portuguese scholars.
Portuguese project contractors historically have had unlimited liability under the various
contracts. In recent years, liability caps have been introduced in construction contracts in line
with the commercial practices in other countries.
In contracts where a liability cap is foreseen, the same is often equivalent to the
contract price and, since no restrictions are made as to the types of damages considered for
compensation purposes, the relevant legal provisions will apply. In recent projects, contractors
have successfully demanded the introduction of tighter liability caps and the exclusion of loss
of profit suffered by the project company.
iii Political risks

The protection of private property is upheld by the Constitution. Accordingly, the
nationalisation, expropriation or requisition of private property can only take place on the
grounds of public interest and provided that private entities are duly compensated.
Public interest may also constitute grounds for termination of the concession contract
by the contracting authority, in which case the contracting authority shall compensate the
project company for all damages arising (which may include loss of profit). The construction
contractor may also be compensated on the basis of the back-to-back principle. Some
concession contracts set out the method for calculating the damages due to the project
company in the event of termination on grounds of public interest; this calculation usually
takes into account the status of construction.
Other political risks, such as war, civil disturbance or strikes may be considered as force
majeure events and, therefore, the project company shall be relieved from its obligations
under the concession contract to the extent affected by the relevant force majeure event.
Force majeure events may trigger the financial balance mechanism and, hence, the project
company (and consequently, the construction contractor) shall be compensated. In cases of
prolonged force majeure or if the restoration of the financial balance of the concession proves
too onerous, the concession contract may be terminated.
Changes in law may also be treated as a political risk. Only a specific change in law
entitles the project company to financial rebalancing of the concession. The risk of change in
general law is typically assumed by the project company.

The two main types of security that can be created under Portuguese law are mortgages and
pledges. Mortgages will entitle the beneficiary, in the event of a default, to be paid with
preference to non-secured creditors from the proceeds of the sale of immoveable assets or
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rights relating thereto or of moveable assets subject to registration (such as automobiles,

ships, planes). Pledges will confer similar rights to those created by the mortgages but are
created in respect of moveable (non-registered) assets or credits.
Portuguese law does not recognise the concept of a floating charge. Portuguese law does
not permit the creation of security over future assets and, therefore, promissory agreements and
assignments in security are entered into to overcome this hurdle. However, since Portuguese
law does not recognise the concept of assignment by way of security as it exists in most (if
not all) common law jurisdictions, the instrument used is a true assignment of rights, with
the occurrence of an event of default being either a condition precedent to the assignment or
a condition subsequent to the authorisation for the exercise of rights already assigned by the
borrower. Also, Portuguese law does not recognise the concept of a security trustee, and, as
this issue has not yet been subject to judicial revision, there is some uncertainty as to whether
a security agent might enforce security interests on behalf of the collateral takers, unless they
all prove their capacity as creditors.
Also, Portuguese law does not allow for remedies other than outright sale, other than
in the case of financial pledges where appropriation of financial collateral is permitted on
enforcement of the pledge, provided that the parties have agreed a commercially reasonable
mechanism for evaluating the price. Financial pledges may be granted over cash on bank
accounts or financial instruments (including shares but not quotas in Portuguese limited
liability companies) and, more recently, credits over third parties.
Portuguese project finance documentation generally includes direct agreements
between the lenders and the contracting authority and the lenders and any major contractors.
All direct agreements contemplate step-in rights in favour of lenders, which may be exercised
upon the occurrence of certain events: default of the concessionaire under the underlying
contracts and, in certain cases, default of the concessionaire under the finance documents.
The creation of security interests over assets located in Portugal (including share pledges)
attracts stamp duty, levied on the secured amount. Stamp duty shall not be payable in the
case of security interests that are ancillary and created simultaneously (even if contained
in a separate notarial deed or agreement) to a loan provided that the loan has already been
subject to a similar taxation (no duplication of tax applies).
Shareholders are generally required to provide on-demand bank guarantees to guarantee
their equity subscription and other funding obligations. Standby equity commitments to fund
general investment, operational costs overruns or loss of revenues are often also supported by
on-demand bank guarantees.
In health sector PPPs, shareholders have been requested to provide a corporate guarantee
to guarantee, in the proportion of their shareholding in each project company (the ClinicCo
and the InfraCo) and up to a certain amount, any lack of funds in the project and breach of
the obligations of the project company.

In Portuguese projects, the contractor is usually required to provide a performance bond
to ensure the fulfilment of its obligations. In concession-based projects, not only the
concessionaire has to provide such a performance bond under the concession contract, but
the construction contractor and the operations and maintenance contractor also have to
deliver performance bonds under their respective agreements. Most frequently, performance
bonds are provided by means of irrevocable on-demand bank guarantees.
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In addition, concession contracts foresee the obligation of the project company to insure
the works for their reinstatement value. That insurance obligation is commonly transferred to
the contractor under the construction contract to the extent that the insurance relates to the
activities performed thereunder. Alternatively, the contractor may partially bear the costs of
the insurance policies taken out by the project company.
Any parties who are responsible for the design of the works (including contractors who
are engaged under design contracts) will be expected to maintain professional indemnity
insurance in respect of their design liabilities.
Project bonds or monoline structures for project financing, although not common in
Portugal until recently, have started to be used to finance some ongoing projects, particularly
in the context of refinancings where availability periods and capex controls are no longer
applicable. The provisional legal regime that entered into force on August 2012, allowing for
an early phased release of performance bonds provided by contractors and subcontractors
under public works agreements, is no longer in force, except for those agreements entered
into up until 1 July 2016. Under this regime, contractors and subcontractors can obtain an
early phased release one year from provisional reception of the works if an inspection confirms
that there are no defects for which the contractors or the subcontractors are responsible.

The enforcement of mortgages shall be made through court proceedings and the proceeds
of the relevant sale shall be paid to the mortgagee (after payment of any preferential claims).
The enforcement of pledges may be made through court or out-of-court proceedings
and the proceeds of the relevant sale shall be paid to the pledgee. Alternatively, the financial
pledges may also be enforced by appropriation of the relevant assets.
Appropriation of the asset is not available to mortgagees or pledgees under pledges that
are not financial pledges. Should the lenders be willing to acquire the secured assets, they
will need to bid in the judicial sale along with, and with no preference over, any other parties
interested in the purchase of the property.
Court procedures usually take several months or even more than a year if the complexity
of the legal arguments at stake leads to court appeals.
Insolvency of the Portuguese companies is governed by the Portuguese Insolvency
Code. The debtor will be insolvent whenever its liabilities exceed its assets or if the debtor
is unable to meet its financial obligations as they fall due. Insolvency proceedings may be
filed by the debtor or by any of its creditors. However, the directors of a company have an
obligation to file for the debtor’s insolvency within 30 days of the date on which they become
aware or should have become aware of the insolvency, and failure to do so may give rise
to liability.
The court assumes the key role of ensuring compliance with the legal rules governing the
insolvency proceedings, with particular responsibility in the assessment of whether the debtor
is insolvent or not, in declaring the debtor’s insolvency and in confirming the lawfulness of
the insolvency plan approved by creditors. The court’s declaration of the debtor’s insolvency
and the appointment of the insolvency administrator must be published on the Citius website
(the Portuguese judiciary online platform, which includes an online section for insolvency
notifications) and registered at the debtor’s commercial registry.
All creditors have to file a claim by submitting to the insolvency administrator a formal
written claim within 30 days (or less if the court rules so) as from the notice publishing the
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declaration of the debtor’s insolvency. Claims submitted by creditors that have been accepted
by the insolvency administrator will be paid in accordance with the payments plan approved
by the creditors or, in the event of liquidation of the debtor, on a pro rata basis, depending
on the proceeds resulting from the sale of the insolvent assets, and provided that insolvent
estate’s debts have been paid (the proceeds from the sale of the secured assets may be used to
pay insolvency debts up to a limit of 10 per cent of the proceeds from the sale).
After the declaration of insolvency, the company is controlled by the insolvency
administrator. The administrator can perform all acts and carry out all transactions within the
ordinary course of business to allow the continuation of the company’s trading. The directors
of the company will remain in office; however, they cannot receive any remuneration.
Taking into consideration the difficult economic environment, a new procedure was
enacted to allow debtors in pre-insolvency situations or in difficult economic situations
(unable to secure any credit or lacking liquidity) to enter into negotiations with their
creditors for the revitalisation of their businesses (the Special Revitalisation Process or PER).
This procedure may be of relevance to creditors since any capital granted to the debtor under
the PER shall benefit from a statutory creditor’s general preferential claim to be ranked first,
even above the workers’ statutory general preferential claims. Additionally, a new legal regime
to allow the extrajudicial recovery of companies and individual entrepreneurs was recently
enacted and was due to enter into force on 1 July 2017.

A new regime concerning environmental impact assessment (EIA) for each project was
approved by Decree Law 151-B/2013 of 31 October 2013, pursuant to which any application
for an environmental approval must enclose a detailed EIA, the procedure for granting the
relevant environmental impact decision (DIA) implying a coordinated effort between a range
of entities for better assessment of the environmental risks associated with each project.
With respect to PPP and since the previous PPP Decree Law dated 2003,4 procurement
procedures may only be launched and awarded after approval of the relevant DIA and once
the relevant environmental and urban planning licences and permits have been obtained, to
ensure an effective transfer of execution risks to the private partner.
Depending on the sector of industry in question, a project may also be subject to
environmental licensing under the new industrial emissions legal framework, approved by
Decree Law 127/2013 of 30 August 2013. The environmental licence (which is required, in
particular, for industrial projects) must be obtained before operation commences and must
be successively renewed during the entire period of the plant’s operation.
Furthermore, in the context of the EU emissions trading system, for projects in certain
industrial sectors and meeting certain conditions or thresholds, the operators must hold
a permit to emit greenhouse gases, and be the holder of emission allowances.
Other industrial and construction licences and permits may be required depending on
the type and specific conditions of each project to be implemented.
4 Decree Law 86/2003 of 26 April 2003.
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Most financial institutions operating in the Portuguese project finance market have already
subscribed to the Equator Principles, reflecting the growing importance of environmental
issues in Portuguese project finance deals.

In general terms, financial institutions are not responsible for any socio-environmental issues
arising in connection with a project transaction. Nevertheless, such liability issues may apply
to the lenders in a step-in scenario, particularly if the concession contract is transferred
to them.

i PPP
Decree Law 111/2012 of 23 May 2012 revoked Decree Law 86/2003 of 26 April 2003, and
establishes the general rules applicable to any PPP launched by the Portuguese state.
It introduces several amendments to the previous PPP regime, in particular regarding the
preparation, launch, execution and modification of PPPs. The main purpose of the new legal
framework is to reinforce supervision and scrutiny of, and consistency of decision-making
by, the public partner, and contemplates the creation of the Technical Unit for Monitoring
Projects, which centralises and carries out all main tasks related to the preparation and
execution of PPP contracts.
This new legal framework continues to take into account, as was the case under
the previous regime, the need to accommodate the type of expenditure within budgetary
regulations and requires the preparation of economic and financial surveys to confirm the
figures for the public sector comparator, and establishes general procedural rules applicable
to any type of PPP contract.
The specific framework for PPPs in the health sector, set out in Decree Law 185/2002 of
20 August 2002, is still in place. That piece of legislation, as amended, governs the development
of PPPs for the construction, financing, operation and maintenance of healthcare units
forming part of the National Health Service. An important feature of these PPPs is that they
may envisage the private partner not only managing the hospital facilities but also providing
clinical services as part of the National Health Service. When both managing facilities and
clinical services provision are foreseen, two separate project companies must be incorporated.
It should also be noted that Decree Law 90/2009 of 9 April 2009 and Decree
Law 194/2009 of 20 August 2009, as amended, established rules applicable to PPPs in
connection with municipal water supplies and water and wastewater treatment. At state or
multi-municipal level, the restructuring of the water utility company that was launched in
2013 – giving rise to a number of regional concessionaires with a view to permitting (partial)
privatisation – was reversed by the current government, which is returning to the traditional
public investment and public management model for multi-municipal water supplies and
water and waste-water treatment.
In line with the above-mentioned Strategic Plan for Transport and Infrastructure for
2014 to 2020, and taking into account the limitations of the new European funds framework,
some of the infrastructure projects in the pipeline are likely to be launched and executed
under a PPP model (the use of which was previously suspended owing to the public deficit).
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The Public Contracts Code (PCC) was published on 29 January 2008 by means of Decree Law
18/2008 and revoked, among other pieces of legislation, Decree Law 59/99 of 2 March 1999,
which applied to public works and to public works concessions.
The PCC entered into force six months after its publication and applies to every public
tender procedure launched after that moment; it implemented the public procurement
Directives 2004/17/EC and 2004/18/EC of 31 March 2004.
The PCC sets out different procedures for the procurement process applicable to
administrative contracts, including those to be entered into in connection with PPP projects:
the direct agreement, the public tender, the limited tender by pre-qualification, the negotiation
procedure and the competitive dialogue. Differently from the previous legal framework, the
PCC does not automatically require a public tender for public works concessions or public
services concession, the awarding entity being entitled to choose between the launch of
a public tender, limited tender by pre-qualification or a negotiated procedure.
In each procedure allowed by the PCC, administrative principles of equal treatment,
legality, transparency and competition are duly reflected in the corresponding regulation.
Moreover, these principles are directly applicable to each procedure and may be invoked
by any interested party. If an interested party considers that an act under the procurement
procedure does not comply with applicable regulations and principles, it may submit a claim
directly to the awarding entity but also to a court. In such cases, the interested party may
ask the court to declare the suspension of all subsequent acts in the procurement procedure
by means of a temporary injunction, to ensure that its rights are not irreversibly threatened.
Substantive provisions dealing with public works and the public services concessions are
included in the PCC, some of which are mandatory in nature. These mandatory provisions
refer to relevant features of a PPP, such as termination by the contracting authority and
sequestration or step-in. Other substantive provisions of the PCC will only apply in the
absence of express provision in the relevant contract.
Compliance with all legal conditions and procedures is subject to validation by the
Court of Auditors. After the execution of a PPP agreement by any public entity, the Court of
Auditors will verify and confirm whether all legal requirements have been fulfilled.
The granting of the approval by the Court of Auditors is a condition for the contracting
authority to make any payments under the contract; the contract may, however, enter into
force prior to the validation and all rights and obligations contained therein may be performed,
except for public payments. However, if the total price of the contract exceeds a certain
threshold, which is currently €990,000, all rights and obligations resulting thereunder would
enter into force only after the granting of the approval of the Court of Auditors.
In February 2014, the European Parliament and the Council adopted
Directive 2014/25/EU (procurement in the water, energy, transport and postal services
sectors), Directive 2014/24/EU (public works, supply and service contracts) and Directive
2014/23/EU (concession contracts).
The recent economic crisis in Europe has made it necessary to reform public procurement
rules, first to make them simpler and more efficient for public purchasers and companies
and second to provide the best value for money for public purchases, while respecting the
principles of transparency and competition. Said Directives comprise major changes to the
European public procurement regime with the aim of (1) promoting environmental policies,
as well as those governing social integration and innovation, (2) improving the access of small
and medium-sized businesses to public procurement markets, (3) implementing stronger
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measures preventing conflicts of interest and corruption, and (4) creating new simplified
arrangements for social, cultural and health services listed in the Directives. Because of the
change of government at the end of 2015 and its intention to implement wide-ranging
reforms in the public procurement legal regime, Portugal failed the legal deadline (April 2016)
for transposition of the said Directives into national law. However, the incorporation of
the new rules into national law is expected shortly, as a draft law was submitted for public
consultation in September 2016. Also a specific new legal framework for electronic platforms
for public procurement (e-procurement) is currently under discussion; the deadline for the
transposition of the Directives regarding this matter is September 2018.

Foreign direct investment is not restricted under general Portuguese law. However,
authorisation from the regulator is required in relation to regulated sectors such as energy,
water and waste management, telecoms, postal services, railways, commercial aviation and
financial services.
Restrictions may apply under the Law of Money Laundering and Terrorism Financing,
which transposed the EU money-laundering regulations into Portuguese Law. There may
also be temporary embargo situations applying to persons or entities residing in non-EU
Member States.

There are no currency controls under Portuguese law and money can be freely transferred
into or out of Portugal. Also, there are no restrictions on the remittance of profits or
investments abroad.
Under Portuguese tax law, any income obtained in Portugal by non-resident entities,
including dividends of shares in a Portuguese company or interest on loans advanced to
a Portuguese borrower, will be subject to withholding tax at the applicable rate. The applicable
rate is either the general withholding tax rate for dividends and interest payable to non-resident
entities5 or the rate otherwise applicable under any relevant double taxation agreement.
The Portuguese judicial system is essentially divided into the ordinary and the administrative
jurisdictions, the first being formed by the judicial courts, which cover all civil and criminal
matters and the latter by the administrative and tax courts, responsible for resolving any
administrative or tax matters.
There are no specific courts or tribunals in Portugal dealing with project finance
transactions or construction contracts and, therefore, any disputes arising therefrom will be
resolved by the judicial courts or the administrative courts, depending on the nature of the
matter in question.
5 In the case of companies, currently 25 per cent or 35 per cent if investment income is paid or made
available to accounts opened in the name of one or more holders acting on behalf of one or more
unidentified third parties, unless the beneficial owner of the income is identified.
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Under Portuguese law, parties may generally elect the jurisdiction that will apply to
their contracts or to resolve a particular dispute, provided that, inter alia, the contract or the
dispute involves rights that can be freely determined by the parties and does not relate to
a matter within the exclusive jurisdiction of a court other than the chosen court.
There are no other specific jurisdictional issues that need to be considered by foreign
project investors.

Major project contracts typically provide that the parties may resort to arbitration for
the resolution of any disputes under the same. Standard arbitration clauses refer to the
Portuguese Law on Arbitration for the definition of the rules relating to the composition
of the arbitration court and the conduction of arbitration proceedings. Where international
contractors are involved, the parties often chose to apply the rules of international centres such
as the International Chamber of Commerce, the London Court of International Arbitration
and the United Nations Commission on International Trade Law.
Portugal adhered to the 1958 Convention on the Recognition and Enforcement of
Foreign Arbitral Awards (the New York Convention) in 1994. Arbitration awards that are
not covered by the New York Convention may still be recognised and enforced in Portugal
provided that they comply with certain legal requirements and have been submitted to
a Portuguese court for review and confirmation.
In line with international market practice, finance contracts generally refer the disputes
arising thereunder to the jurisdiction of the judicial courts.
In March 2012, a new Law on Voluntary Arbitration (Law 63/2011 of 14 December 2011)
entered in force. The approval of a more modern arbitration law is intended to give a new
boost to arbitration in Portugal and to facilitate the recognition and enforcement of foreign
arbitral awards, in a context where arbitration is becoming a valid alternative and, therefore,
consistently replacing the judicial courts in Portugal.
The main innovations set out in the new arbitration rules are precisely intended to
present Portugal as a valid option when electing the seat of arbitration or when choosing the
jurisdiction for the recognition and enforcement of arbitral awards.
In recent years, litigation and arbitration has increased considerably, mainly in major
PPP road concession projects, and relevant arbitration awards were made in this sector
in 2016.

There is growing evidence of recovery in the Portuguese economy since the formal conclusion
of the three-year EU–IMF adjustment programme in 2014.
The construction sector, one of the most severely affected by the sovereign debt crisis
of 2011, has shown some positive signs over the past year. In fact, according to a survey
conducted by the Institute for Public Markets, Real Estate and Construction, the highest
number of public works contracts since January 2014 was registered in October 2016.
As part of the Portugal 2020 programme, a partnership agreement entered into between
the Portuguese state and the European Commission, a considerable amount of funding has
already been approved for investment in construction projects (mainly in the airport sector
and urban regeneration). Also the new government has shown political willingness to provide
new opportunities for the construction industry and, hence, better performance in the
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construction sector is anticipated in the coming years. A clear example of this is the approval
of the Strategic Plan for Transport and Infrastructure, as mentioned above, with a significant
number of projects expected to follow from this, whether using a PPP model or not.
Other opportunities may arise from the Portuguese government’s recent focus on
developing the green economy and green growth in Portugal, in relevant areas such as climate
and energy (including increasing the interconnections between national electricity systems in
the EU), water and waste management, biodiversity and sustainable cities.
Finally, the conclusion of the renegotiation of the PPP road contracts and the
development of other negotiation processes in the urban rail, ports and health sectors are
expected in the near future.
Alternatives to traditional project finance, or complementary ways of financing, may
result in new opportunities for investment in Portugal. Notable in this context, along with the
increasing use of project bond or monoline structures, is the fact that the private equity legal
regime was recently subject to extensive amendments with the enactment of Law No. 18/15 of
4 March, which partially transposes Directive No. 2011/61/EU of 8 June 2011 on Alternative
Investment Fund Managers, and No. 2013/14/EU of 21 May 2013.
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Chapter 16
QATAR
Andrew Jones, Zaher Nammour and Sarah Sage1
I INTRODUCTION
Qatar is a peninsula on the western side of the Gulf, with a land area approximately equivalent
to Connecticut. As at the end of April 2017, the population stood at 2.67 million, of whom
approximately 12 per cent are Qatari citizens.2 This is an estimated annual average population
growth of 4 per cent on the previous year.3 Qatar’s population continued to grow throughout
2016; and the country has resumed its position as number one in the top countries in the
world for net migration and number 16 population growth. The continued growth can be
attributed in considerable part to the strength of the Qatari economy, which has shown some
of the strongest year-on-year growth in the world throughout the global economic downturn.
As a result of its economic success, together with its commitment to hosting the 2022 FIFA
World Cup, Qatar is now undertaking an impressive array of infrastructure and industrial
projects. The current Emir (as of July 2013) has renewed a focus on the country’s domestic
welfare, not only with ambitious infrastructure projects, but also through investment in
healthcare and education facilities. The projects will be funded largely by the government,
from its surpluses generated by Qatar’s liquefied natural gas (LNG), oil, gas and petrochemical
exports. Qatar has the third-largest natural gas reserves in the world (after Russia and Iran)
and has the highest GDP per capita in the world.4 Qatar had the initial approval of the
Council of Ministers to conduct the Qatar 2015 Mini-Census of Population, Housing and
Establishment; however, no further update has since been published. This would be the fifth
census of Qatar, the previous being conducted in 2010.

Hydrocarbon production remains central to Qatar’s economic strength, and it continues to
provide the foundations for Qatar’s current projections for growth. Despite the halving of oil
prices from their 2014 highs, Qatar’s economy continued to grow robustly in 2016, particularly
in the non-hydrocarbon sector, where key infrastructure projects maintained progress.
In 2016, the non-hydrocarbon sector growth saw a more rapid acceleration than the
hydrocarbon sector (with 5.6 per cent growth in the non-hydrocarbon sector recorded in
2016, particularly in construction, transport, communications and finance).5
1 Andrew Jones and Zaher Nammour are partners and Sarah Sage is an associate at Dentons.
2 Qatar Statistics Authority, 30 April 2016.
3 CIA World Factbook, updated 1 May 2017.
4 Ibid.
5 ‘Qatar Economic Insight’, QNB report dated April 2017.
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The slowdown of hydrocarbon growth is attributable to the large expansion of

extraction and processing of these resources coming to an end. After the discovery of a new
field of 2.5 trillion cubic feet in 2013, there remains in place a general moratorium on
further exploration and development in the much larger North Field, holding approximately
900 trillion cubic feet of natural gas. This moratorium is part of the evolution of Qatar’s
hydrocarbon sector, as it moves from a phase of expansion into one of more mature stability
and lower growth. The reduced rate of growth of Qatar’s LNG and gas-to-liquids exports
is, in part, connected to the global economic malaise, from which recovery is slow.6 This
reflects the ongoing oil price crash, which has had an impact worldwide on the hydrocarbon
sector. While Qatar has successfully accumulated a substantial buffer to prevent its economy
suffering during this period,7 there are reports of projects being delayed or cancelled (e.g.,
the Al-Karaana petrochemicals scheme, with an estimated value of US$6.5 billion, which
was jointly abandoned by Qatar Petroleum and Royal Dutch Shell).8 Qatar’s oil output is
expected to be lower by more than 11 per cent year-on-year in 2017, in line with the decision
of the Organisation of the Petroleum Exporting Countries to cut production. Qatar’s oil
production is estimated at 0.62 million barrels per day in 2017 against 0.7 million barrels
per day in 2016 (i.e., a fall of 11.43 per cent). The change in focus is also driven by the
strategy laid down in Qatar National Vision 2030 – a far-sighted programme to diversify the
Qatari economy to lessen its reliance on the hydrocarbons sector and ensure its sustainable
long-term development.
Despite the reduced growth of the hydrocarbon sector, Qatar is well positioned to
withstand lower oil prices, having accumulated significant savings it can use to finance its
programme of improvements and fiscal deficits.9 The fiscal surplus remained at 8 per cent
(down from 15.6 per cent in 2013/2014)10 in year ending 31 March 2015, making Qatar
the only Gulf Cooperation Council (GCC) member not to report a deficit in 2015; however,
it had a US$12 billion (7.8 per cent of GDP) deficit in 2016.11 Growth in manufacturing,
construction and financial services has pushed up the non-hydrocarbon sectors – these
now account for just over half of Qatar’s nominal GDP.12 Hydrocarbons still account for
92 per cent of export earnings and 56 per cent of government revenues are derived from
oil and gas.13 Much of the impetus and investment in infrastructure has been led by central
government. The Ministry of Finance announced on 22 March 2015 that from then, the
fiscal year in Qatar would run with the calendar year, starting in January 2016. As such,
there was an extension to the 2014/2015 budget with an estimated total expenditure of
US$108.51 billion over the full 21 months (being the original 2014/2015 budgeted period
plus the additional nine months until the end of the 2015 calendar year). In a statement
regarding Qatar’s 2017 budget, the Minister of Finance confirmed that the budget allocated
to major projects in Qatar would be US$24.6 billion, to ensure the implementation of
development projects.14
6 International Monetary Fund’s World Economic Outlook, April 2016.

7 ‘Qatar Economic Insight’, QNB report dated September 2015.
8 Shell 2015 Media Releases dated 14 January 2015.
10 Ibid.
11 CIA World Factbook, updated 4 May 2016.
12 Ibid.
13 Ibid.
14 QIF Quarterly Report Q4 2016.
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The main public projects that the government is currently undertaking include:
a Lusail Mixed-Use Development: a residential and commercial waterfront development
valued at US$45 billion;
b Qatar Integrated Rail: a new US$40 billion railway and metro system, including urban
metro, high-speed passenger railway and freight line;
c Ashghal Expressway Programme: the public works authority’s US$20 billion project to
develop a number of major motorways;
d Hamad International Airport: the US$15.5 billion project to expand the new airport
by completing phase 2 and 3 of the development;
e Ashghal Local Roads and Drainage Programme, the US$14.6 billion project under
which the public works authority will complete a network of roads, drainage, utilities
and related infrastructure;
f Bul Hanine Oilfield Redevelopment: the US$11 billion Qatar Petroleum project to
boost crude oil production in Qatar through new facilities expected to double the
capacity of the oil field; and
g Barzan Gas Development: the US$10.3 billion Ras Gas project to increase gas supply
to the domestic market.
Of these projects, the Qatar Railways project is perhaps the most significant, in terms of
its size both financially and from an engineering perspective. It is understood to be one
of the largest civil engineering projects under way in the world, utilising 21 of the world’s
tunnel-boring machines on its underground metro development. Eleven multibillion-dollar
contracts were awarded by 2014 for the design and construction of the tunnels and stations
of the initial phase of the Doha Metro. These contracts will see the construction of the first
103 kilometres of the railway.15 Reportedly 89 per cent of the tunnelling work has now been
completed and completion of the Doha Metro is scheduled for 2019/2020. The Lusail Light
Railway is reported to be 35 per cent completed and completion is scheduled for 2020.16 In
conjunction with these major civil engineering contracts, Qatar Railways issued invitations
to tender for the delivery of all rolling stock, signalling, track and all associated systems
required for the initial phase of the Doha Metro. On 1 February 2016 the contract was
awarded to a consortium of Mitsubishi Heavy Industries, Mitsubishi Corporation, Hitachi,
Kinki Sharyo and Thales for the turnkey construction of a fully automated driverless metro
system along with a 20-year maintenance commitment.
All of these projects are being funded directly or indirectly by the government.
However it is possible that project financing may play a greater role in the near future. On
15 March 2016 Qatar’s Ministry of Economy and Finance announced plans to enact a new
law by the end of 2016, to facilitate the use of public–private partnerships (PPP) in Qatar.
It is possible that this move has been prompted by the enactment of new PPP legislation in
Dubai in November 2015. As the Qatari economy is projected to experience its first deficit,
the demand for private capital may increase. The remainder of this chapter concentrates on
the forthcoming Qatar government-funded projects rather than project financing.
15 www.qr.com.qa.
16 Ibid.
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Qatar
The deadlines for delivery of many of the projects referred to above were set in
December 2010, when Qatar succeeded in its bid to host the 2022 FIFA World Cup. Most
of this infrastructure is promised and necessary for that event. Meeting the deadlines will be
very challenging.
The steady stream of new entrants to the Qatari construction market – contractors,
consultants and professional advisers – continued in 2015, albeit at a slower rate than
previously. According to Economist Intelligence Unit estimates, Qatar’s population is
estimated to increase by 2.3 per cent.17 The deadline of 2022 remains in place; and the
pressure is certainly present given that there is now simply less time in which to complete
the projects called for by the FIFA World Cup. The public organisations responsible for
delivery of the key projects – notably Qatar Rail and the Supreme Committee for Legacy
and Delivery – have now established themselves and have taken appropriate steps to secure
relevant powers and governance. For instance, in recent years, there have been a number of
decisions issued by the then Minister of Municipality and Urban Planning,18 together with
a new law, enabling Qatar Rail to acquire land and carry out tunnelling. There has also been
a new Council of Ministers’ Decision concerning Ashghal and new safety laws relating to
the Civil Defence Department. In the beginning of 2014, those bodies, together with the
other key infrastructure participants for new projects (the New Port Authority, the Public
Works Authority (Ashghal) and Kahramaa, the state water and electricity company) began
construction works in earnest.

Apart from conventional project finance in the oil, gas, independent water and power
production (IWPP) and petrochemical sectors, there has been no private finance of
infrastructure in Qatar – for example, in transport, waste-water or social infrastructure.
However, as mentioned above, if planned legislation is introduced to regulate PPPs it is
possible that more private financing will be utilised in Qatar. Previous failed attempts to
introduce private finance into rail, road, port and water projects in Saudi Arabia, Abu Dhabi
and Jordan provide salutary reminders of the difficulties posed by the additional complexity
of risk allocation and documentation (among other factors). Nevertheless, recently successful
PPP projects in the GCC have demonstrated that this vehicle is a viable option, for example,
the New Madinah Airport in Saudi Arabia. To this end build-operate-transfer procurement,
or longer-term design-build‑operate contracts are under serious consideration in Qatar and
may be used for limited categories of infrastructure, for example, waste-water treatment
plants. Although access to private capital is unlikely to be a driving factor, they could provide
benefits from more efficient and economic procurement and operation. Up to now, almost
all publicly funded procurement has been on the basis of the project owner appointing
design consultants and issuing design to construction-only contractors. Design-build (DB)
is the exception.
17 The Economist Intelligence Unit, updated 20 April 2017.

18 The Ministry of Municipality and Urban Planning became the Ministry of Municipality and Environment
on 27 January 2016 as a result of Emiri Decision No. 5 of 2016.
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ii Documentation
Documentation outside project financing is conventional and makes use of standard forms
of construction contracts and consultants’ appointments. Qatar Petroleum has historically
been the repository for project management expertise in Qatar. It has sometimes managed
projects on behalf of other public bodies, such as Qatar Foundation, and has used its own
standard documents on those projects. For flagship buildings where architectural design and
innovation are paramount (rather than functional performance) this has had mixed results.
Qatar Petroleum has joined forces with Qatar Foundation to establish a joint venture separate
project management arm called Astad Project Management. Ashghal, the public works
authority has its own standard documentation.
International Federation of Consulting Engineers (FIDIC) forms of contract are
becoming more widely used. In April 2012 tender invitation documents were issued by Qatar
Rail Company to pre-qualified consortiums for the first four large tunnelling contracts and
one stations contract for the new Doha Metro. Four of these packages have already been
awarded. Further invitations to tender have been sent out for the procurement of all relevant
systems – including rolling stock, signalling, telecoms, power and track works – required
to operate the Doha Metro. All of these contracts will be based on a bespoke DB form of
contract that Qatar Rail has developed, drawing on the 1999 FIDIC Yellow Book as a base.
In the past, the quality of contract documentation has frequently not been as high as
might be expected for the size and complexity of projects undertaken.
The NEC contract is not used, nor are the UK JCT contracts.

Both in the public and private sector, attitudes to contracting are generally traditional, and
long-term relationships and trust do not play a major role. There is some cynicism among
international bidders as to the relative importance of quality and price in the evaluation of
contractors’ tenders.

The prevailing approach by owners tends to be to maximise risk transfer to contractors
(and consultants). Risk of unforeseen ground conditions is usually sought to be placed on
contractors. Change-in-law risk is also sometimes sought to be transferred to the contractor.
Risk of increases in the price of materials is expected to be borne by contractors as are delays
due to scarcity of materials and delays in approval procedures and import procedures. Material
price fluctuations caused considerable difficulties in recent years with the boom followed by
contraction of the regional construction market, which caused key material prices to rise
and fall dramatically. With the anticipated boom in construction activity in Qatar, headline
inflation picked up to 2.7 per cent in 2016 from 1.7 per cent in 2015. Inflation is expected
to slow to 0.9 per cent in 2017, then pick up to 3.3 per cent in 2018 with the introduction
of VAT.19
Generally speaking, Qatar should be considered a high-risk environment for
contractors. Those who enter into fixed-price lump-sum contracts are expected to stick to
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the fixed price, with a reluctance to recognise rights to compensation for delays caused by
variations, late or inadequate design or information issues, late site access or late payment (the
latter being common).
Generally under Qatar law, parties enjoy freedom of contract. Express terms that either
exclude, cap or pre-estimate damages will in most cases be binding and enforceable between
the parties. Some exceptions to this include the following:
a Liability resulting from ‘deceit or gross mistake’, which under Article 259 of Law
No. 22 of 2004, the Civil Law, cannot be limited or excluded (except in the case of
deceit or gross mistake on the part of subcontractors).
b It is not permissible to exclude liability arising in respect of future unjust acts (very
broadly corresponding to acte illicite or tort).
c Decennial liability under Article 711 of the Civil Law. This is a joint guarantee imposed
on a contractor and architect for 10 years against ‘the total or partial collapse or fault in
the buildings [. . .] or fixed constructions [. . .] and this guarantee shall cover whatever
defects shall appear [. . .] which threaten its sturdiness and safety’. Liability under
Article 711 cannot be excluded or limited.
d Under Article 171 (2) of the Civil Law a court or arbitral tribunal may, after weighing up
the interests of the parties, reduce an ‘exhausting’ contractual obligation to ‘a reasonable
margin’ if:
• ‘public exceptional incidents’ occur that could not have been expected; and
• the occurrence of them makes fulfilment of the contractual obligation ‘though
not impossible, exhausting to the debtor and threatens him with grave loss’.
This provision may not be excluded by agreement.
e Under Article 266 of the Civil Law, where damages are pre-estimated or liquidated, the
agreed amount may not be due if the debtor can show that no loss has been suffered by
the creditor; or the level of the pre-agreed damages was ‘exaggerated to a high degree’; or
the obligation has been partially performed. In that case, the court or arbitral tribunal
may reduce the compensation due. This Article may not be excluded by agreement.
Liability for liquidated damages for delay is often capped at between 5 and 10 per cent of
the contract price. Overall contractual liability is often capped, depending upon the nature
of the work, between 100 and 200 per cent of the contract price. Examples of liabilities that
are commonly excluded from the agreed overall liability cap include: indemnities relating
to intellectual property rights; liabilities recovered by the party in breach under insurance
policies; liability for death and personal injury; and sometimes property damage.
Liquidated damages are commonly applied for delay in completion of work under
contracts for both contractors and consultants. It is becoming common for employers to
seek to impose liquidated damages upon consultants for failing to mobilise and maintain
key personnel.
Force majeure provisions are common in contracts and are generally enforceable. Unclear
drafting often makes it difficult to establish with any certainty the effect of the clause in
specific cases. Article 171 of the Civil Law is also relevant in relation to force majeure scenarios.
Article 258 of the Civil Law allows the parties to agree that the debtor will be liable for
the consequences of force majeure. Accordingly, if a contract term places this risk on a party it
will generally be enforceable, subject to Article 171.
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iii Political risks

Qatar is politically stable. There has been no civil unrest or protest such as in other countries
affected by the Arab Spring. Other than the influence of forces affecting the Middle East
or the Gulf region generally, political risk would not usually be considered a major factor
for contractors. Long-term project finance lenders may of course be more cautious. Qatar
long-term debt presently enjoys a credit rating from Moody’s of Aa2 (as does Qatar Petroleum),
but on 4 March 2016 Moody’s took the decision to place Qatar’s Aa2 credit rating on review
for downgrade.20 Standard & Poor’s continues to affirm Qatar’s AA long-term and A-1+
short-term foreign and local currency sovereign credit rating.21
Article 27 of the Qatari Constitution states: ‘Private property is inviolable; and no
one shall be deprived of his property save by reason of public benefit and in the cases
prescribed by the Law and in the manner stated therein provided that the person concerned
is fairly compensated.’
The Qatari riyal is freely convertible and its value is pegged to a fixed rate of exchange
with the US dollar.

Corporate borrowings from banks licensed by the Qatar Central Bank are required to be
guaranteed by the borrowing company’s shareholders, except in the case of public companies
or if the Qatar Central Bank specifically waives this requirement. In cases where banks fund
private development lenders will also take traditional mortgage security or where this is
legally not possible will typically take an assignment of contractual rights. This happens, for
example, where the borrower’s legal interest in the land being developed cannot be registered
until the development is completed physically.
VI BONDS
Public sector bodies are presently governed by Law No. 26 of 2005 establishing the Law
Organising Tenders and Auctions (the Public Tenders Law) as amended by Law No. 22 of
2008 and No. 14 of 2010. The Public Tenders Law is due to be updated as more particularly
described in Section IX.ii, below. Under the Public Tenders Law, public sector bodies are
required, inter alia, to obtain tender bonds from bidders, payable on demand. Project owners
commonly require from contractors (and consequently, contractors commonly require from
subcontractors) on-demand performance bonds, usually of 10 per cent of the contract price.
Advance payments are common, and are made against on-demand bank guarantees. Also
commonly required as security for performance of construction contracts are retentions of up
to 10 per cent and robust forms of parent company guarantees. Collateral warranties, whether
from main contractors and consultants in favour of end users, or from subcontractors and
sub-consultants, are not common in the Qatar market and are seen as onerous by contractors
and consultants. There are signs, however, that there may be increasing expectations for these.
20 www.moodys.com.
21 www.standardandpoors.com.
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In Qatar, insolvency is mainly dealt with in Law No. 27 of 2006 (as amended by Law No. 7 of
2010), the Commercial Law. The relevant provisions can be found under Title Six entitled
‘Bankruptcy and Preventive Conciliation’. Below is an indicative but not exhaustive list of
some of the other provisions that govern insolvency and preferential claims:
a the Civil Law;
b Law No. 11 of 2015 – the New Commercial Companies Law;
c Law No. 14 of 2004 (as amended by Decree-Law No. 22 of 2007, Law No. 6 of
2009; Law No. 3 of 2014 and Law No. 1 of 2015) – the Labour Law (note this will be
amended one year from Law No. 21 of 2015 being published in the Official Gazette on
27 October 2015, details of which are provided below); and
d Law No. 40 of 2002 – the Customs Law.
Qatar’s insolvency law provides that any contracts executed by a company prior to declaration
of bankruptcy remain valid, unless they are contracts for personal services. This being the case,
a contractual provision allowing an employer, in the event of the contractor’s bankruptcy, to
terminate the contract for contractor’s default and complete the work itself will be valid.

It is not possible to provide an exhaustive list of regulation and legislation that would affect
projects. The following is a general and selective commentary on some matters likely to affect
publicly funded building projects.
a all entities carrying on business in Qatar must be properly registered with the Ministry
of Economy and Commerce. Foreign ownership of companies is regulated;
b planning permission from the municipality;
c preliminary approval by the relevant municipality to open a file;
d fire safety clearance from the Civil Defence Department (CDD);
e clearance for road design and access from the Road Construction Department at the
Ministry of Municipality and Urban Planning (MMUP);
f clearance for power and water service delivery from Kahramaa;
g clearance for telecom service delivery from Ooredoo (the new name for QTel);
h clearance from the Building Permit Department of the MMUP;
i final building permit approval from the municipality;
j submitting a public announcement of the construction project at the municipality;
k fire safety approval from the CDD;
l certificate of completion from the municipality; and
m registration of the building at the municipality.
Engineering-related activities in Qatar are regulated by Law No. 19 of 2005 (the Engineering
Law) together with executive regulations made under it. ‘Engineering’ is widely defined
and includes architecture, civil, electromechanical, mining, quantity surveying services and
project management activities. Each person or firm performing engineering works in Qatar
must obtain a licence from the Engineering Committee of the MMUP. The requirements to
obtain a licence are extensive and usually take a long time to satisfy. In some circumstances an
exemption from the requirement to hold a licence may be granted to non-Qatari persons or
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organisations. An update to this law was passed in January 2014, Law No. 2 of 2014, which
amended some provisions of Law No. 19 of 2005 regarding the practice of the engineering
profession. These changes do not amend the substantive requirement for engineers to obtain
a licence before practising in Qatar or indeed any changes to the registration process, but
amend the length of validity of individual engineers’ licences and amend the make-up of the
committee who approve the registration of engineers and engineering firms in Qatar.
Environmental issues
The Supreme Council for Environment and Natural Reserves and the Ministry of the
Environment are the competent authorities for environmental protection matters in Qatar.
There are a number of environmental laws. Two of the most relevant are:
a Law No. 30 of 2002 – Law of Environment Protection (the Environmental Protection
Law) and executive regulations made under it. These provide that all plans for public or
private development projects must be submitted to the authorities for approval; and
b Law No. 4 of 1983 (as amended) concerning Exploitation and Protection of
Aquatic Life in Qatar. This prohibits certain harmful discharges into internal waters
without approval.
Environmental protection is gaining more importance in Qatar and the role of the
environmental authorities is expanding, especially in the approval process of construction
projects. Environmental impact assessments may be required for some projects.
Sustainable development is gaining increasing attention in Qatar. Several projects
are aiming to meet sustainable standards, such as the central Doha regeneration project
for Msheireb Properties. In general, US Leadership in Energy and Environmental Design
(known as LEED) standards are the prevailing rating system.
Labour laws
An employer must obtain permission from the Recruitment Committee at the Labour
Department of the Ministry of Labour and Social Affairs to employ foreign employees. Once
obtained, the employer must apply for a work visa so that the employee may enter Qatar.
Within seven days of the employee’s arrival in Qatar, the residence permit procedure must be
commenced so that an employee may work and reside in Qatar. The permit will have to be
renewed periodically during the course of the employment in Qatar.
The vast majority of employees in Qatar, particularly those engaged in connection with
the construction industry, are subject to the Labour Law. One of the few exceptions to this
is for employees of governmental entities, who are instead subject to Law No. 8 of 2009 (the
Human Resources Law).
Although not strictly a labour law, Law No. 21 of 2015 (essentially, the Residency Law)
is also relevant in relation to employee residency arrangements. This applies to all non-Qatari
nationals working and residing in Qatar, aside from those working under the auspices of
the Qatar Financial Centre (see Section XI, infra). Law No. 21 of 2015 will came into
force one year from being published in the Official Gazette on 27 October 2015, replacing
the existing kefala (sponsorship) system in favour of a contract-based system that will give
expatriates more freedom to move jobs in Qatar. Previously, if an employee was unable to
get a no-objection certificate from his or her ‘sponsor’ while attempting a job transfer, he or
she would be banned from the country for a period of two years before being able to come
back in search of new employment. Articles 20 and 22 of the Residency Law allow employees
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who have completed their contracts to seek new employment and move to another sponsor
without the approval of their previous ‘recruiter’. They are also able to change jobs before
their contract finishes with the approval from their recruiter, the MOI, and the Ministry of
Labour and Social Affairs (MOLSA). However, employees with open-ended contracts are able
to seek approval for a change of job after five years of work. Nonetheless, if a company ceases
to exist, the recruiter passes away, or the recruiter and the employee are in a lawsuit battle
against each other, the employee is able to move to another recruiter or employer, subject
to permission from the MOI and the MOLSA. The existing exit permit system has been
replaced, allowing expatriates to freely leave the country without obtaining their employer’s
permission. Additionally, the penalty for withholding employees’ passports will be increased
from 10,000 riyals to 25,000 riyals.
Health and safety

Part 10 of the Labour Law imposes a range of health and safety-related obligations
upon employers.

i PPP
So far there has not been any trend towards PPP procurement as generally understood in
Europe and the United States. Consideration is currently being given to the possible future
use of some kind of PPP-type arrangements. A report on the subject was prepared for the
Qatar Ministry of Economy and Finance and the Qatar Financial Centre Authority in
February 2012.
There is no legislation that applies specifically to PPPs but, as mentioned above, the
Ministry of Economy and Finance has announced its intention to introduce new legislation
to govern PPP vehicles in Qatar. It remains to be seen if this will prompt an upswing
in the take-up of PPP arrangements in Qatar. In view of the very pressing deadlines for
infrastructure delivery, the additional complexity of PPP arrangements and frequently
prolonged negotiations prior to contract award are likely to argue against widespread use of
PPP in the near future.
The principal law regulating public procurement is the Public Tenders Law (see Section VI,
supra). On 18 November 2015, the Emir his highness Sheikh Tamim bin Hamad Al Thani
issued Law No. 24 of 2015 to regulate public tenders and auctions.22 The new law took
effect on 13 June 2016. The new law sets out to revamp and modernise the governmental
contracting process by introducing competition as a method of procurement for technical
works, including drawing and design. A two-stage tendering process has been instituted to
assist bidders by defining the technical requirements and the scope of work. This should
help secure appointments of the right contractor, agreed costs and an appropriate transfer of
risk. The new law requires relevant government employees to declare any potential conflicts
of interest direct or indirect, in any governmental contract to bring Qatar in line with
international best practice. A dispute resolution committee has been introduced to hear all
22 As reported in the Qatar News Agency on 19 November 2015.
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Qatar
pre-contract disputes. This will be headed by a senior judge and provides a specialised forum
to resolve disputes, in relation to government contracts. The new tenders law applies to most
governmental and quasi governmental contracts of the State of Qatar. It can also extend to
apply to private entities in receipt of state funding. The new tenders law is subject to specific
by-laws, which have not yet been made available by the Ministry of Finance, as a result it is
difficult to predict how the new law will work in practice.
The Public Tenders Law applies to all ministries and other government bodies and to
public institutions and corporations except as otherwise provided in the law establishing
them. The Public Tenders Law does not apply to the armed forces or police in the case of
confidential procurements, nor does it apply to Qatar Petroleum.
The legislation establishing publicly funded bodies may apply special procurement
procedures to those bodies in place of, or in addition to, the Public Tenders Law. The laws
establishing the bodies must be looked at to determine what procurement procedures apply.
The Central Tenders Committee deals with tenders over 5 million Qatari riyals in
value, and is attached to the Ministry of Economy and Finance. From 13 June 2016 the
Local Tenders Committee will process all public tenders valued at 5 million Qatari riyals or
less. The procedures are prescriptive and detailed.

Regulation of foreign ownership of Qatari companies is referred to above, but the detail is
outside the scope of this chapter.

There are currently no exchange control restrictions in Qatar and subject to payment of taxes
there are no restrictions on remittances of investment returns. However, under Law No. 21 of
2009 (the Income Tax Law) a withholding tax of 7 per cent is payable on interest payments
made to non-residents. This is subject to important exceptions. Under Article 21(4) of the
Executive Regulations of the Income Tax Law, the following, inter alia, are not to be regarded
as subject to the withholding tax:
a interest on bonds and securities issued by the state and public authorities, establishments
and corporations owned wholly or partly by the state; and
b interest on transactions, facilities and loans with banks and financial institutions.
Advice as to how the Income Tax Law is in practice applied by the tax authorities should
always be sought before entering into transactions.
There are no specific courts or tribunals in Qatar dealing with project finance transactions
or construction contracts. Such disputes will be heard in the Qatari courts unless referred to
arbitration or unless the Qatar Financial Centre laws apply.
In 2005, the Qatar Financial Centre (QFC) was established under Law No. 7 of 2005
(as amended), the Qatar Financial Centre Law. The QFC perhaps can best be considered as
a separate jurisdiction within the state of Qatar, for businesses established in the QFC (i.e.,
pursuant to the specific QFC laws and regulations). The QFC has to date had little impact
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on the project finance or construction sectors, since the QFC objectives are to promote
the establishment and conduct of international banking, financial services, insurance and
associated businesses. The QFC has its own court, the Civil and Commercial Court of the
Qatar Financial Centre, which has recently been restyled the Qatar International Court
and Dispute Resolution Centre (QIC-DRC). The Court is staffed (on a visiting basis) by
a number of very distinguished judges from various civil and common law jurisdictions. The
Rt Hon the Lord Phillips, the immediate past president of the Supreme Court of the United
Kingdom, is the current president of the QIC-DRC.
Since its establishment few cases have been heard by the QIC-DRC. The boundaries
of its jurisdiction are as yet not tested. The QIC-DRC is currently promoting the use of its
services, particularly for ADR, in the construction sector through a construction dispute
resolution system known as Q-Construct, which is akin to construction adjudication in certain
common law countries. So far, the public bodies now embarking on procurements have yet
to show an appetite to provide in their contracts for use of services such as Q-Construct or
dispute adjudication boards.
The language of the QIC-DRC may be Arabic or English and rights of audience are
governed by Article 29 of the QFC Civil and Commercial Court Regulations and Procedural
Rules (December 2010). The Court has extremely well-equipped modern facilities and
hearings can take place by video link.

Arbitration
Construction contracts in Qatar, particularly in the private sector, commonly provide for
disputes to be resolved by arbitration. In the public sector and oil and gas sector, some
employers are willing to agree arbitration provisions, but others, such as Ashghal, are more
traditional and their standard terms refer disputes to the Qatari courts. Traditionally, the
courts and practising lawyers have been circumspect in their view of arbitration. However
a significant development has taken place this year, with the passing of a new arbitration
law to replace the law found at Articles 190 to 210 of Law No. 13 of 1990 (the Civil and
Commercial Code of Procedure) (as amended)). Law No. 2 of 2017 (the New Arbitration
Law) was enacted on 16 February 2017 and came into force on 13 April 2017.
This is the first significant update to the state’s arbitration law since 1990. Historically,
lawyers have tended to regard arbitration as merely adding a tier to the bottom of the
court process. However, through the introduction of the new law, it is hoped that the New
Arbitration Law will remove any lingering doubts about Qatar’s approach to enforcement of
arbitral awards, making arbitration a credible alternative to the local courts.
Some of the major developments from the introduction of the New Arbitration Law
include: arbitration agreements can be made electronically; authority for a public entity
to arbitrate must come from the Prime Minister; the Ministry of Justice will maintain
a list of approved people who can act as arbitrators; and the New Arbitration Law sets out
qualifications that must be satisfied if parties wish to nominate an arbitrator who is not on
the Ministry’s list.
Public sector employers who do accept arbitration provisions require Qatar to be the
seat of the arbitration. This is also usual, but not universal, in arbitration agreements between
private sector bodies (e.g., between main contractor and subcontractor).
The International Chamber of Commerce (ICC) is the most commonly accepted
international arbitration institution. The London Court of International Arbitration
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is occasionally an agreed choice. The Qatar International Centre for Conciliation and
Arbitration operates under the auspices of the Qatar Chamber of Commerce and Industry
and publishes its own rules for mediation and arbitration. The QIC-DRC also has its own
procedural regulations for arbitration,23 which apply when the QFC is the seat of arbitration.
Apart from arbitration, the use of formal ADR is not widespread. A small number of
projects have adopted FIDIC dispute adjudication boards, but others using FIDIC contracts
have deleted these provisions. As noted above, the QIC-DRC is promoting its services for
ADR in the construction sector through its proposed Q-Construct scheme.
Where construction disputes are referred to the courts, they are almost invariably referred
by the judge to a court-appointed expert who will investigate the facts and merits of the case
and report to the judge. All proceedings in the Qatari courts are in Arabic and all documents
referred to must be translated into Arabic. It would be difficult to predict with confidence
the outcome of a large and complex construction dispute, heavy on documentation, as to the
court’s judgment and the time and cost involved.
Qatar became a signatory to the New York Convention in 2003. There have been few,
if any, applications since then to enforce foreign awards. A small number of foreign awards
had been enforced in Qatar on other grounds prior to Qatar’s accession to the Convention.
However, a decision in 2014 has indicated a ‘positive step towards a full recognition and
enforcement of foreign awards’ in the Qatari courts.24 In this instance, at a hearing in early
April 2014, the Qatari Supreme Court (the highest jurisdiction of Qatar) overturned the
judgment of the court of appeal that set aside an ICC arbitral award as being in violation of
the Qatari public policy.

As Qatar continues to prepare itself for the 2022 FIFA World Cup, it will undertake an
extraordinary and ambitious programme of infrastructure development, which will be almost
entirely publicly funded rather than project financed. In the oil, gas, petrochemical and IWPP
sectors there have been successful project financings and further development in these sectors
could be expected to be project financed. When Qatar agreed to host the 2022 FIFA World
Cup, it signed up to fixed deadlines for delivery of a number of major infrastructure projects.
Those time limits were ambitious even in December 2010 when Qatar won the bid; since
then almost six years have passed without significant physical progress on a number of key
projects. The next six years will be a period of great change in the built environment of Qatar
and its transport systems, and one of great challenge to contractors, developers, designers,
planners and logisticians. The anticipation of great opportunities has attracted keen interest
from international contractors. Ensuring contracts have a successful financial outcome for
those participants will, as always, need skill and patience in navigating the risks involved.
23 Regulation No. 8 of 2005.

24 Kluwer Arbitration Blog, ‘A Halftone Application of the New York Convention by the Qatari Supreme
Court’, by Minas Khatchadourian, posted 14 April 2014.
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Chapter 17
SAUDI ARABIA
Abdulrahman M Hammad 1
I INTRODUCTION
Saudi Arabia is the largest market economy in the Middle East and North Africa in terms
of gross domestic product (GDP),2 and with 18 per cent of the world’s proven petroleum
reserves, stands as the largest exporter of oil in world.3 However, with a population of
approximately 31 million,4 46 per cent of whom are below the age of 25, and an oil price that
averaged around US$43 per barrel during 2016,5 change was the principal theme over the
past year. And as this reflected an ongoing trend, planning for this change was at the forefront,
as evidenced by the slowdown in expenditure and reduction in construction activities.
Government spending, which historically accounted for a significant part of construction
activities in Saudi Arabia, was reduced by 62 per cent.6 The Kingdom launched Vision 2030,
a road map for the future aiming to diversify revenues away from oil dependence, and to
reform the economy towards an open market framework.7
To channel its Vision 2030, the Kingdom embarked on National Transformation
Program 2020 (NTP 2020), spearheaded by Deputy Crown Prince Mohammad Bin Salman
Al Saud, and the first step towards achieving Vision 2030, to be fully implemented by 2020.
Within this programme, the Kingdom sets out significant privatisation goals.8 However,
while the long- and medium-term goals and plans are visible, addressing the fiscal deficit
brought on by lower oil prices necessitated a significant decrease in expenditure and yielded
a 51 per cent reduction in contracts awarded in 2016.9 Government spending, which
1 Abdulrahman M Hammad is a partner at Hammad & Al-Mehdar Law Firm.

2 Information published by the Saudi Arabian General Investment Authority at
http://sagia.gov.sa/en/WhySaudiArabia/MarketAccess/Pages/Default.aspx.
3 Facts and figures published by the Organization of Petroleum Exporting Countries at
www.opec.org/opec_web/en/about_us/169.htm.
4 Information published by the Saudi Arabia General Authority for Statistics at
https://www.stats.gov.sa/en/43.
5 Information published by the US Energy Information Administration at
https://www.eia.gov/outlooks/steo/report/prices.cfm.
6 Oxford Business Group, ‘Construction and Engineering Overview’, in ‘The Report: Saudi Arabia 2016’,
p. 306.
7 Oxford Business Group, ‘Economy’, in ‘The Report: Saudi Arabia 2016’, p. 39.
8 Oxford Business Group, ‘Economy’, in ‘The Report: Saudi Arabia 2016’, p. 39–40.
p. 311.
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Saudi Arabia
historically was the largest driver of construction and projects in the Kingdom, came in at
825 billion riyals, 1.8 per cent below the budget of 840 billion riyals and 15.6 per cent lower
than the 2015 expenditure.10
At the same time, the Kingdom’s need for infrastructure to maintain and diversify
economic growth, and to address the large urbanisation and youth population growth
did not wane. The White Land Tax Regulation was enacted in June 2016 to incentivise
building in the Kingdom by taxing landowners of undeveloped land plots over 10,000 square
metres in size.11 The Kingdom also started a serious re-evaluation of common approaches to
construction, government procurement and housing.

While construction commonly benefits from a wide array of sector activities, the sharp decline
in infrastructure spending in 2016 resulted in a drastic decrease in contracts awarded. The
year saw a 51 per cent decline in contract awards compared with 2015.12 In addition to an
approximately 10 billion riyal reduction in infrastructure spending, the Ministry of Finance
announced a review and reassessment of all government capital projects to ensure efficient
implementation. That said, a significant number of projects remained active, and more were
cleared to get under way. Chief among these projects is the Riyadh Metro, a 23 billion riyal
programme that includes six lines and 85 stations.13 Total contract awards during the first
half of 2016 stood at 48.2 billion riyals, a significant reduction when compared with the
140.1 billion riyals awarded during the same period in 2015. Listed below are awards made
during the first half of 2016 by sector:14
Awards (percentage) in Q1 Awards (percentage) in Q2
Oil and gas 47% 32%
Power 6% 12%
Residential real estate 16% 15%
Hospitality 21% –
Industrial – 28%
Other 10% 13%
New projects that took shape included the Saudi Landbridge, a US$7 billion infrastructure
project tendered by the Public Investment Fund. That said, new projects were few, and focus
10 Kingdom of Saudi Arabia, 2017 Budget: Kingdom of Saudi Arabia, p. 14. Published at
www.mof.gov.sa/en/budget2017/Documents/The_National_Budget.pdf.
p. 311.
12 Id. at p. 311.
13 Id. at p. 308.
14 Source: NCB Construction Contracts Index.
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Saudi Arabia
was instead given to existing projects such as the King Abdullah International Conference
Center, the Haramain High-Speed Rail project, the King Abdulaziz Center for World
Culture, and the King Abdullah Financial District.15
The continued pressure of low oil revenues, coupled with defence spending resulting
from the geopolitical climate (with threats in neighbouring Syria, Iraq and Yemen), led the
Saudi project and construction industries to take a second look at existing practices in project
finance, construction and use models, and in real estate development.

Despite the planning for significant privatisation as a result of NTP 2020 and the continued
pressure on government spending, viewed as a whole, the year did not see a significant
shift in the type of project financing or contracting and use models deployed in projects in
Saudi Arabia. Contractor balance sheet financing continued to be the prevailing method of
project finance, with secured project financing remaining within the realm of only a handful
of megaprojects.
This traditional construction model was deployed across the spectrum of local and
foreign contractors, although many of the contractors reported spending much of the year in
a cautions ‘wait-and-see’ mode pending developments.16 In 2015, the Saudi Arabian General
Investment Authority (SAGIA) implemented a fast-track system to license foreign investors
in the Kingdom, including issuing temporary foreign investment licences to firms engaged in
public works.17 The requirements for foreign investment licences were further eased by SAGIA
in February 2016 with a significant reduction in the required documentary submissions.18
While Saudi Arabia has for some years seen some deployment of PPP construction and
use models, the utilisation of these models increased in the wake of the prolonged period
of low oil revenues and the increasing government spending deficit.19 This is in line with
the Kingdom’s NTP 2020, which calls for an increase in privatisation and private sector
participation in the GDP.20 PPP models commonly deployed in Saudi Arabia include
build-own-operate-transfer, build-operate-transfer, and build-own-leaseback.
Project financing in Saudi Arabia remains within the realm of large-scale mega projects,
deployed following both conventional and shariah-compliant structures. Conventional
project finance follows the form of secured lending with pledges over project land, assets,
and proceeds. It is commonly utilised in financing by Saudi government entities such as
the Public Investment Fund and the Saudi Industrial Development Fund, and by foreign
banks and export credit agencies. Shariah-compliant (or Islamic) financing is deployed more
p. 309.
16 Id. p. 298.
17 Id.
18 Saudi Arabian General Investment Authority, SAGIA Guide, Section 01.03 (publication of March 2015),
as varied by SAGIA publication dated 15 February 2016.
19 Id.
20 Kingdom of Saudi Arabia National Transformation Program 2020. Published at
http://vision2030.gov.sa/sites/default/files/NTP_En.pdf.
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Saudi Arabia
commonly through Gulf-based shariah-compliant banks, local mutual funds and publicly
listed debt instruments, and while it can follow a number of structures, the Mudaraba
structure is emerging as the most common in such transactions.
ii Documentation
Direct construction contracts continue to be the most dominant form of contracting in Saudi
Arabia. Based on the requirements of Article 29 of the Government Tenders and Procurement
Law21 and Article 32 of its Implementing Regulations, government contracts utilise specific
contract forms prepared by the Ministry of Finance and approved by the Council of Ministers.
Government contract forms are available for a range of project-related services including
public works, operations and maintenance, design and project management.22 Varying from
government contract forms may be permitted in exceptional circumstances, such as large
complex projects, and require approval from the King.23
Private-party construction and projects works commonly employ a direct contracting
structure. Construction contracts are typically between the employer (i.e., owner or
developer) and the contractor, with FIDIC contract forms commonly deployed in large and
medium-sized projects.
Aside from construction, project documents commonly include offtake agreements,
supply agreements and intellectual property licensing agreements. Where a project calls
for the creation of an incorporated joint venture in the Kingdom, the parties to the joint
venture commonly enter into a shareholders’ agreement to further articulate and regulate the
relationship beyond what is commonly listed in company articles of association.

Public project delivery follows the contract forms provided by the Ministry of Finance, which
are structured according to the requirements of the Government Tenders and Procurement Law
and its Implementing Regulations. Project delivery in private projects reflects international
practices, with design-build, construction and turnkey projects being most common. The
engineering, procurement and construction (EPC) method of contracting is also commonly
deployed in larger projects, including the utilisation of FIDIC Silver Book EPC/Turnkey
conditions of contract.
With the increase in PPP projects, we are also witnessing an increase in design-build-
operate, especially with relation to revenue-generating-infrastructure such as airports. The
NTP 2020 additionally sets the stage for an increase in the use of such contracts in roads,
rail and ports.24
21 Issued pursuant to Royal Decree No. M/58 dated 4/9/1427 H (corresponding to 27 September 2006 G).
22 Ministry of Finance, available in Arabic at https://www.mof.gov.sa/Arabic/Pages/ServicesDirectory.aspx.
23 Article 79, the Government Tenders and Procurement Law.
24 Kingdom of Saudi Arabia National Transformation Program 2020, p. 63. Published at
http://vision2030.gov.sa/sites/default/files/NTP_En.pdf.
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Saudi Arabia

Against the background of an over-arching fairness requirement in contracts, Saudi law,
based on shariah and enacted legislation, enforces the terms of contracts agreed by the
contracting parties. Contracted project risk allocation and security provisions are therefore
commonly viewed as enforceable pursuant to the laws of the Kingdom. This includes design
assumption provisions, work guarantees, delay damages and performance parent company
and bank guarantees. This is, of course, to the extent that the provisions are not unfair or
unjust in application.
Fairness elements in projects and construction are commonly examined in situations
where one of the parties lacks the contractual control over triggers to its financial or
performance liability. Examining tribunals applying the laws of the Kingdom may therefore
invalidate on the grounds of violating the shariah principle requiring fairness-in-dealings
provisions in relation to liability against a party that does not control the triggers to the
liability. An example of this is commonly seen in the enforceability of delay damages in
a contract where the causes of the delay were outside the contract’s control, either because of
force majeure events or otherwise.
Contractual provisions providing for limitation of liability among the contracting parties are
generally enforceable in Saudi Arabia pursuant to the general shariah principle of freedom
of contract. In projects and construction, liabilities are commonly limited by contract to
the contract value or 110 per cent of the contract value. The parties also commonly exclude
by contract liabilities for indirect and consequential losses, including losses of profit or
business. This exclusion is additionally provided by law through the shariah principles against
uncertainty (gharar), where a claim for indirect or consequential losses will be subject to
challenge on the grounds that the claim was based on uncertain determinations at the time
of contracting.
iii Political risks

Private property is protected from usurpation or trespass by law. Article 18 of the Basic
Governing Law25 provides that property shall not be usurped or taken in the absence of a court
judgment. This protection is identical for local and foreign-owned property, and is reflected
in Article 11 of the Foreign Investment Law.26 The Regulations for the Expropriation of Real
Estate for the Public Benefit and the Temporary Acquisition of Real Estate Law27 regulate the
requirements and applicable compensation for the expropriation of real property for public
benefit, and further provide for protection of private property from public expropriation.
These property protections apply similarly in relation to government interference in
private contracts, with contracts generally considered enforceable to the extent they do not
violate shariah principles. That said, a force majeure provision suspending or excusing the
25 Issued pursuant to Royal Order No. A/91 dated 27/01/1412 H (corresponding to 8 August 1992 G).
26 Issued pursuant to Royal Decree No. M/1 dated 5/1/1421 H (corresponding to 10 April 2000 G).
27 Issued pursuant to Royal Decree No. M/15 dated 11/3/1424 H (corresponding to 13 May 2003 G).
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performance of contracts is implied by law. This provision may be relied on, where applicable,
to affect offtake or supply agreements to the extent that government policy required the
cessation of offtake or supply.
The Kingdom additionally does not apply any currency exchange or fund transfer
restrictions aside from those related to money laundering.
Finally, as a member of the Multilateral Investment Guarantee Agency (MIGA),
investors and project financiers may obtain political risk insurance coverage for investment,
including project financing, in the Kingdom. MIGA extends insurance coverage for losses
relating to currency inconvertibility and transfer restriction, expropriation, war, terrorism,
and civil disturbance, breach of contract and non-honouring of financial obligations.

As noted previously, contractor balance sheet financing has been the main method of funding
projects in the Kingdom. With the Saudi Arabian riyal (Saudi Arabia’s official currency)
exchange rate fixed against the US dollar, borrowers in Saudi Arabia benefited from
a prolonged period of low interest rates that facilitated balance sheet financing. Bank lenders
commonly require borrowers in construction to forward security in the form of pledges over
real estate or stock. Security interest in real property is acquired through a contractual pledge
perfected through the registration of the security interest on the property title deed through
the office of a notary public. Security interest in stock or other moveable assets such as shares
or physical assets is perfected through registration at the Unified Centre for Lien Registration
maintained at SAGIA and governed by the Commercial Pledge Law.28
In project financing, project sponsors are commonly requested to provide completion
guarantees to fund project cost overruns. The creditworthiness of project offtakers is also
commonly examined, and financiers are likely to require offtaker payment guarantees from
large affiliates of offtaker special purpose vehicles or trading companies. Security commonly
includes project assets and floating liens over project receivables. Security pledges in contracts,
including loan agreements, are commonly recognisable and enforceable pursuant to the laws
of the Kingdom.
Floating liens over receivables are commonly achieved through obtaining security interest
on designated bank accounts opened and maintained at a pledgee bank as security agent.
Step-in rights with respect to projects are legally enforceable but are not commonly
exercised. Lenders generally prefer to enforce security over assets they may transfer quickly
and at low costs.

Construction contracts, public and private, commonly include a requirement on the
contractor to post a performance guarantee in the form of a bond callable on a local bank
in the Kingdom of Saudi Arabia. Contractors also commonly post bonds to secure advance
payments made by the employer or owner to the contractor. Bank bonds are generally issued
by banks in the Kingdom following standardised language resembling a form published by
the bank regulator, the Saudi Arabian Monetary Authority.
28 Issued pursuant to Royal Decree No. M/75 dated 21/11/1424 H (corresponding to 14 January 2004 G).
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Saudi Arabia
Insurance for property, general liability, worker’s compensation, and health are readily
available through insurers in the Kingdom of Saudi Arabia, and are commonly required
by employers in significant construction contracts. Project and construction insurance is
also commonly obtained in large projects, but mainly through foreign insurers or reinsurers
working through insurance brokers.

Outside bankruptcy proceedings, and with respect to most types of collateral, the secured
lender’s enforcement of a pledge over collateral requires the lender’s application to the general
court of applicable jurisdiction to force the sale of collateral and payment of loan amount. The
procedures for the enforcement of a security interest given in publicly listed stocks, however,
may vary depending on the authority contractually granted to the portfolio custodian.
Bankruptcy proceedings in the Kingdom are simplified and aim at administering
a guided settlement of debtor’s obligations. Pursuant to the Bankruptcy Preventive Settlement
Law,29 the process for settlement may be initiated by the debtor30 and is guided by designated
committees at local chambers of commerce.31 Secured lenders may be exempted from
settlement proceedings to the extent of their preference with relation to the collateral.32

The General Environmental Law33 requires government bodies overseeing the permitting of
projects in the Kingdom to require project owners to undertake an environmental impact
assessment study during the feasibility study phase of the project for all projects that may
yield a negative environmental impact.34 Guidelines for these impact assessment studies
are set out in Appendix 2 (Standards and Procedures for Assessing Environmental Impact
for Industrial and Development Projects) to the said Law’s Implementation Rules. The
environmental impact assessment study is subject to the approval of the General Authority
of Meteorology and Environment Protection.35 In addition, persons overseeing projects with
negative environmental impact are required to put in place contingency plans to prevent or
mitigate negative environmental impact and to ensure their ability to execute these plans
where needed.36
29 Issued pursuant to Royal Decree No. 16, dated 4/9/1416 H (corresponding to 25 January 1996 G)
and its Implementing Regulations issued pursuant to Ministerial Decision No. 12 dated 14/7/1425 H
(corresponding to 30 August 2004).
30 Article 1, Bankruptcy Preventive Settlement Law.
31 Article 1, Bankruptcy Preventive Settlement Law Implementing Regulations.
32 Article 9, Bankruptcy Preventive Settlement Law.
33 Issued pursuant to Royal Decree No. M/34 dated 27/8/1422 H (corresponding to 14 November 2001 G).
34 Article 5, General Environmental Law.
35 Article 5-4, Implementing Rules of the General Environmental Law.
36 Article 9-3, General Environmental Law.
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We are not aware of rules or guidance from a relevant Saudi government body relating to the
Equator Principles. Our search of the list of members did not yield any financial institutions
in the Kingdom that had adopted the Equator Principles.37

Generally, project lenders are not considered entities responsible for project compliance with
applicable regulations, including social or environmental regulations. We are not aware of any
instances where financing parties were found responsible for project performance or impact.

i PPP
The Kingdom does not have a specific law governing public–private partnerships. PPP is
further restricted because of the requirements of the Government Tenders and Procurement
Law, which mandates the use of Ministry of Finance approved contract forms in government
contracting.38 As stated previously, however, a number of PPP models have been deployed in
the Kingdom, and we expect that the use of these models will accelerate in the coming period
as a result of the reduction in oil revenues.
Existing PPP transactions have utilised a number of structures to navigate the
requirements of the Government Tenders and Procurement Law. An imperative consideration
regarding these structures is the government body’s authority to enter into contracts or carry
out works outside the reach of the Government Tenders and Procurement Law. This authority
may be pursuant to an express exemption granted based on Article 79 of the Law, or pursuant
to alternative contracting arrangements such as contracting through an independent and
exempt government authority or through a government-owned company. In the past few
years, we have witnessed a rise in the utilisation of the latter of these approaches in relation
to the execution of PPP in the energy, healthcare and housing sectors. However, a case-by-
case review of the proposed PPP structure and the legal authority it relies on is commonly
undertaken by project stakeholders.
The Government Tenders and Procurement Law regulates the government’s procurement
of products and services. The Law aims at curtailing corruption and personal influence, and
effectively administering public spending through competition and equal opportunity.39
With these aims, the Law requires government entities to procure goods and services through
a public bid process, save for certain express exceptions.40 The Law mandates the publication
of tenders41 and the equal treatment of qualified bidders.42
37 Search carried out of the list published at www.equator-principles.com/index.php/members-and-reporting

on 10 May 2017.
38 Article 29, Government Tenders and Procurement Law.
39 Id. at Article 1.
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The Law gives preference to national goods and services produced in the Kingdom.43
The bidding procedures mandated by the Government Tenders and Procurement Law
reflect common corporate practices, including the submission of sealed bids for opening
on a pre-specified date,44 the submission of bid bonds,45 and review by a specialised review
committee.46 Submitted bids must be valid for 90 days.47 The tendering government body
must consider the review committee considerations and award the tendered contract within
the bid validity period.48

The Kingdom of Saudi Arabia is a member of the World Trade Organization with a generally
permissive cross-border trade regime. Investors looking to establish a permanent presence
in the Kingdom of Saudi Arabia must be licensed by the Saudi Arabian General Investment
Authority (SAGIA).49 The Law allows 100 per cent foreign ownership of foreign investment
in most sectors, including contracting services and EPC.50 Of relevance is the exclusion from
the foreign investment allowance of real estate investment in the holy cities of Makkah and
Medina. Foreign investors in the Kingdom may conduct business using one of the following
forms of entity:
a a limited liability company;
b a branch;
c a joint stock company (open or closed);
d a temporary commercial registration;
e a professional company; and
f a technical scientific services office.
SAGIA licensing procedures classify foreign contractors according to their size and
capabilities, and this classification determines the contractors’ public tender participation.
Upon obtaining a foreign investment licence, the foreign investor proceeds to form the
commercial entity in the same manner as any local investor. The Foreign Investment Law
provides that foreign-owned entities shall receive the same benefits, incentives and guarantees
enjoyed by nationally owned entities pursuant to applicable regulations.51

The Saudi Arabian riyal exchange rate to the US dollar is fixed and maintained by the Saudi
government, providing for ease of cross-border transfers, liquidity and exchange rate stability.
This also allows for holding and transacting in foreign currencies in the Kingdom, and local
banks commonly maintain bank accounts in a number of major currencies such as the US
43 Article 6, the Foreign Investment Law.

44 Article 10, Government Tenders and Procurement Law.
49 Article 2, the Foreign Investment Law.
50 See Article 3, the Foreign Investment Law and the Negative List published by SAGIA.
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dollar, euro and British pound. Foreign investors are free to repatriate all profits, capital gains,
distributions and proceeds or use them as they see fit.52 Distributions of profits to a foreign
party, however, are subject to withholding tax at the rate of 15 per cent.
In addition, Saudi Arabia has signed more than 30 double taxation treaties that may
provide for lowering the effective tax rate with respect to distributed profits.53
X1 DISPUTE RESOLUTION
Construction and contractual disputes are considered commercial disputes within the
general jurisdictions of the commercial courts of the Kingdom (currently under the Board
of Grievances).54 The foregoing notwithstanding, the competent body to hear any dispute
related to banking activities by or against banks in the Kingdom is the Committee for
Banking Disputes, a committee operating under the Saudi Arabian Monetary Agency.55 The
Committee holds special jurisdiction to hear disputes relating to bank guarantees or bank
collateral enforcement in project financing; it does not, however, have jurisdiction to review
underlying contracts.56
Parties in large construction projects in the Kingdom often prefer to resort to arbitration
as the exclusive method of dispute resolution. Such a choice would be binding pursuant to
Article 11 of the Arbitration Law.57

Arbitration and alternative dispute resolution procedures are commonly utilised in the
Kingdom of Saudi Arabia, especially in large construction and project undertakings where
specialised knowledge and expertise is desired in the adjudicating tribunal. Arbitration clauses
in contracts are generally enforceable pursuant to the Arbitration Law.58 Parties should note,
however, that government bodies are restricted from using arbitration as a means to resolve
disputes in the absence of approval from the Prime Minister (a position held by the King).59
This restriction can impact construction and financing projects to which the government of
the Kingdom is a party.
The Kingdom recognises and enforces arbitral awards issued in a country signatory to
the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the
New York Convention)60 or other countries based on reciprocity principles including through
the GCC Convention on the Enforcement of Judgments and Judicial Representation and
53 Published by the Ministry of Finance at https://www.mof.gov.sa/english/DownloadsCenter/Pages/
Agreements.aspx.
54 Article 35, The Shariah Litigation Law issued by Royal Decree No. M/1 dated 22/1/1435 H
(corresponding to 25 November 2013 G).
55 Article 1, 3, Royal Order No. 729/8 dated 10/07/1407 H (corresponding to 10 March 1987 G).
56 Principle No. 8, 20.7, Committee for Banking Disputes Principles 1408 H–1424 H (1987 G–2003 G).
57 Issued pursuant to Royal Decree No. M/34 dated 24/5/1433 H (corresponding to 16 April 2012 G).
58 Article 11, the Arbitration Law.
59 Article 10, the Arbitration Law.
60 Saudi Arabia acceded to the New York Convention by Royal Decree No. M/11 dated 16/7/1414 H
(corresponding to 29 December 1993 G).
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Notices61 or the Arab League Convention for the Enforcement of Judgments of 1952. The
Kingdom is also a contracting state of the Convention on Settlement of Investment Disputes.
The enforcement of arbitration awards, foreign and domestic, by Kingdom courts is, however,
limited to the extent that the awards do not violate shariah principles or the public policy of
the Kingdom.62 In relation to these provisions, parties are commonly advised that an arbitral
award of interest or amounts corresponding to interest are not likely to be enforceable in the
Kingdom because the payment of interest violates the shariah principle prohibiting usury.

The Kingdom of Saudi Arabia has witnessed a construction boom for nearly a decade on
the back of high oil prices, but with prices more than halving in 2014, and remaining in the
US$30–50 per barrel range through 2016, the Kingdom’s development and construction
agenda was questioned in light of the significantly reduced oil revenues. The resultant increase
in risk was evidenced by the severe reduction in infrastructure spending and contract awards
witnessed in 2016. Nonetheless, because of a number of socio-economic factors, including
demographics and GDP diversification, Saudi Arabia is in the process of reorganising its
spending programmes and planning a new model for continued growth and development.
The Kingdom’s announced Vision 2030 and its NTP 2020 produced new plans for
government leadership in relation to growth, and resulted in calls for an increase in alternative
project financing and PPP arrangements. Over the coming year, we anticipate an acceleration
of PPP projects, especially in the transport and logistics, and power sectors, and significant
steps by government actors to solidify and set in place workable and bankable structures for
the deployment of projects outside the traditional government tender procedures.
Looking at the private sector, we also see a reassessment of contracting procedures to
account for a period of more restricted cash flow, including a move towards documentation
and the use of internationally recognised contract forms, such as those produced by FIDIC
and similar institutions. Risk assessment and management is increasingly on the radar of
employers, contractors and financing banks, and we expect this to result in a drive towards
better documentation, better contract management and, we hope, better project results.
Eyeing 2017 and the immediate future, we expect to see a return to higher levels
of public spending, with a spending budget of 890 billion riyals, and with the education
and military sectors leading with almost half of the planned spending, with 22.5 and
61 Acceded to by Royal Decree No. M/3 dated 28/4/1417 H (corresponding to 11 September 1996 G).
62 Article 55 of the Arbitration Law and Article 9 of the Enforcement Law.
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21.4 per cent, respectively. The construction-heavy infrastructure and transportation sectors
are also expected to be buoyed to significantly higher levels, with 52.1 billion riyals in planned
spending. The table below lists the government spending by sector for the fiscal year 2017.63
Sector Budget allocation in riyals (thousands) Percentage of total budget
Public administration 26,716,039 3%
Military 190,854,490 21.4%
Security and regional administration 96,867,000 10.9%
Municipality services 47,942,215 5.4%
Education 200,329,066 22.5%

Health and social development 120,419,691 13.5%
Economic resources 47,260,814 5.3%
Infrastructure and transport 52,164,000 5.9%
Public programmes unit 107,626,685 12.1%
Total 890,000,000 100%
63 Kingdom of Saudi Arabia, 2017 Budget: Kingdom of Saudi Arabia, p. 22. Published at
www.mof.gov.sa/en/budget2017/Documents/The_National_Budget.pdf.
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Chapter 18
SPAIN
José Guardo, José María Barrios, Alejandro León and Juan Ignacio Guillén1
I INTRODUCTION
Project finance has been one of the most widely used financing methods in Spain in recent
years. Without a doubt, the main reasons for the spread in Spain of this sophisticated financing
method have been, on the one hand, the ‘passion’ over these years for renewable energies
and, on the other hand, the construction of infrastructure ‘megaprojects’ (mainly highways,
railways and airports) under concession regimes. However, this trend suddenly changed since
2011 as a result basically of the restrictions on liquidity affecting the Spanish financial sector,
the pressing ‘tariff deficit’ (and resulting changes in the law applicable to renewable projects)
and the public deficit adjustments implemented in Spain over those years.
A new regulation regarding the renewable energy sector has been enacted in recent years.
As a result of this new regulation, many projects are still in the process of being refinanced to
reshape their debt profiles to conform to actual cash generation. Experts say, however, that
the latest reform has provided a more trustworthy picture on the feed-in tariffs payable to
projects in the long term.
We have seen very few projects appearing in the Spanish market this year, apart
from restructurings of renewable projects generally and certain infrastructures subject to
public–private partnership (PPP) collaboration schemes.

It is a fact that most Spanish engineering and construction companies have expanded their
investments in projects to foreign countries (United States, Latin America, Canada, central
and eastern Europe, and North Africa, among others) as the most suitable way to continue
their business. The outcome of this strategy has been so positive that it will very likely
continue in the coming years. As a new stage of that successful strategy, Spanish companies
are exploring new opportunities in other countries in Africa and Asia. The range of projects
is diverse, and includes energy and infrastructure-related projects.
This new strategy has been very much supported by international export credit agencies
and multilateral organisations (among others, the European Bank for Reconstruction and
Development, the International Finance Corporation and the Inter-American Development
Bank). Another noticeable trend has been the participation of funds through financing
schemes subordinated to senior lending, thus pursuing a higher remuneration.
1 José Guardo is a partner, José María Barrios and Alejandro León are senior associates and Juan Ignacio
Guillén is a junior lawyer at Clifford Chance.
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The state-controlled Spanish Export Credit Agency has again played a very relevant role
when Spanish companies have been involved in supply or construction overseas. The Europe
2020 Project Bond initiative sponsored by the European Investment Bank (EIB) is also a key
enhancement that will presumably help sponsors to attract additional private financing. We
have also seen the first project finance refinancing by Viario A31 through a senior secured
project bond issued on the Spanish Alternative Fixed Income Market.
Likewise, the 2020 EU renewable energy target aims to have 20 per cent of the energy
consumed in Europe coming from renewable sources. With this in mind, Spain’s Ministry
of Energy, Tourism and the Digital Agenda approved the call for a new energy auction for
a maximum of 3,000MW. The auction was held on 17 May 2017, with the biggest share of
the award going to Spanish company Forestalia. This is the second Spanish renewable-energy
auction since the financial crisis. It seems clear that auctions are the best way to ensure market
competition, that green energy is produced at the lowest price and that international energy
dependence is reduced.
It is also worth noting the decision adopted on 4 May 2017 by the International
Centre for Settlement of Investment Disputes (ICSID)2 following the claim filed by EISER
Infrastructure Limited (United Kingdom) and Energia Solar Luxembourg Sàrl (Luxembourg)
against Spain for damages arising from regulatory reforms approved in 2010 and 2011 in
relation to the economic regime applicable to renewable energy installations. The ICSID
directed Spain to pay an indemnification of €128 million plus interest to the claimants.
The arbitral tribunal considered that Spain, by approving several regulations that suppressed
Royal Decree 661/2007, did not preserve the right of the claimants to be treated in a fair and
equitable manner.
Notwithstanding the above, it is important to take into account that arbitral decisions
are tailor-made for each specific scenario and cannot be extrapolated to other similar
situations. For instance, there have been another two similar arbitral proceedings against
Spain that ruled in favour of Spain, and another one that was withdrawn. Consequently,
there is no certainty regarding the outcome of future claims before the ICSID.
In addition, notably, this arbitral decision does not question the regulatory reform,
given that the reform created a stable and predictable framework for the production of
electrical energy.
There have also been several restructurings of renewables assets conducted as a result of
the new regime on feed-in tariffs approved by the Spanish government.
Having recently passed through a period of great political instability because of Brexit
and the American and French elections, which have had an impact on investments, we expect
the coming year to be a good year for renewable energy. The most important deals in Spain
last year were the following:
a the first bond issuance announced by Vela Energy for the non-recourse financing of
photovoltaic projects amounting to €404.4 million – the largest operation of its kind
in Europe; and
2 ICSID Case No. ARB/13/36.
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b the restructuring of Spanish renewable energy company Abengoa, following its filing
for pre-insolvency under Article 5 bis of the Spanish Insolvency Law.3 The importance
of this transaction lies in the fact that had restructuring negotiations failed, this could
have been Spain’s biggest ever corporate bankruptcy.

Financing a project in Spain under a project finance structure is generally made through
a newly incorporated special purpose vehicle with private or public-to-private share capital.
In the case of projects under concession regimes (mainly for highway construction and
exploitation), Spanish authorities have opted for the build-operate-transfer or build-own-
operate methodologies. In Spain, highways have been often financed either through tolls paid
directly by the users or by ‘shadow tolls’ in which the remuneration is set depending on the
amount of traffic and is paid directly by the Spanish authorities to the concessionaire.
Occasionally, more innovative formulas such as build-lease-transfer have been
implemented, particularly for financing of prisons and healthcare construction projects.
Under this formula, the private sponsor leases the facility to the authority in exchange for
a fee or a periodic rent to be paid throughout the asset’s exploitation period.
ii Documentation
The suite of documents under a project finance structure in Spain comprises project
agreements and financial agreements.
Project agreements include all the non-financial agreements signed by the sponsor
and the project company with third parties for the construction, supply of materials,
commissioning, operation and maintenance of the project. Lenders are not often party to
such agreements. These agreements are generally drafted by the sponsor (and its legal advisers,
if applicable) and audited by the lenders’ independent (legal, technical-environmental and
insurance) advisers, who may propose certain amendments thereto.
Construction agreements are always negotiated between the parties on a ‘turnkey’ basis
(engineering-procurement-construction (EPC) agreements). Operation and maintenance
agreements are often signed at the beginning of the construction period, but they come into
force once the project has been commissioned. The underlying agreement might be a supply
or a sales agreement entered into by the project company with a private party (e.g., sale of
electricity) or even with a public administration (administrative concessions, leasing, etc.).
Insurance agreements also need to be signed by the project company with a reputable and
creditworthy insurer subject to the insurance independent adviser’s approval.
Financial agreements include all those entered into by the project company and the
sponsor with the lenders. The lender’s legal counsel, in contrast, takes the lead on the drafting
of such agreements. There is an increasing trend in Spain to conform financing agreements to
international deal-financing standards governed by the legal system of the United Kingdom or
the United States. As a result, legal counsel often suggest that direct agreements with project
counterparties or accounts agreements be considered part of the suite of finance documents.
3 In Spain, businesses are able to enter pre-insolvency proceedings and have four months to find an
agreement with creditors to avoid an insolvency process and potential bankruptcy.
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The intercreditor agreement is particularly important if the EIB acts as a lender along
with a commercial bank syndicate in the same transaction. In addition, the intercreditor
agreement is a core agreement for transactions being financed under a project bonds scheme
or by a variety of creditors (subordinated creditors, mezzanine creditors, etc.).
Insurance agreements signed with export credit agencies are also customary for
transactions with an international component. In the event that an export credit agency is
involved, a thorough review of the financial documents should be carried out by legal counsel
alongside the mandated lead arranger regarding the compliance of the financing with the
OECD Arrangement on Officially Supported Export Credits and the insurance agreements.
What sets Spain apart from common international practice is that financial agreements
have to be executed before a Spanish public notary by means of a public deed. This means
that every financial agreement must be signed simultaneously in Spain by all the parties, and
that each party, or their representative, must be present at the signing. Therefore, foreign
counterparties will very likely have to grant powers of attorney, notarised and apostilled
(if the country of residence of the foreign counterparty is a member of the 1961 Hague
Convention) or legalised, as applicable, prior to the financial closing. They will also have to
apply for a tax identification number for foreign entities as a requirement for notarisation
of any document. There are also certain new requirements on anti-money laundering and
terrorism financing that will have to be fulfilled. Compliance with these formalities may be
time-consuming so it is advisable to work on them from the very beginning of the transaction.
Notarial fees will also be considered a transaction cost that has to be borne by the sponsors
or the project company.

The standard delivery method is very often based on a turnkey structure. It is very unlikely
that lenders will accept delivery methods based on a design-bid-build structure. The most
important characteristics of construction agreements in Spain are fixed price and term,
application of penalties due to delays, shortfalls in profits for the project company and
termination events that would eventually require the contractor to reimburse the full amount
of the price paid by the project company. The last of these might not be standard in other
jurisdictions, but Spanish lenders will be reluctant to accept an alternative in the event of
termination due to a fault of the contractor.
Standard construction agreements (i.e., those sponsored by the International Federation
of Engineers (FIDIC), etc.) are not currently in use in Spain unless there is a Spanish version
available, but rather the sponsor or the contractor proposes the contract form that has to be
audited by the lenders’ independent (legal, technical-environmental and insurance) advisers,
who may in turn suggest amendments.

The main risks associated with project financing in Spain are those also common in
other jurisdictions.
Credit risk
Credit risk attached to sponsors relates to contingent funding obligations in addition to base
equity contributions to the project company to comply with the required gearing ratio.
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Contractors, operators, insurance companies and suppliers are generally assessed

in terms of their creditworthiness to make required payments under the relevant project
agreement. In addition, an assessment should also be made with respect to offtakers and their
creditworthiness to comply with their payment obligations during the life of the project.
Credit risk related to public bodies had been mitigated during the early years of the
rise of project finance in Spain by means of insurances provided by monoline international
insurance companies. These companies have, however, been some of those most affected by
the international financial and economic crisis. As a result, most projects originally backed
by such guarantees have been restructured to set those insurances aside. No guarantee
mechanisms have been implemented as a replacement, other than those provided by
corporations themselves or a third financial party (i.e., bank guarantees).
Construction and start-up risk

This type of risk relates to delays in the commissioning and start-up of the project. They
would imply an increase in the financial cost and, eventually, the project company’s lack of
funds to fulfil its payment obligations under the financing.
As a general rule, lenders do not assume any risk pertaining to the project’s construction
period. Mitigating measures are often implemented by lenders to avoid such risk to the extent
possible. In addition, corrective measures are usually demanded under the turnkey agreement
(i.e., by means of the regulation of ‘completion tests’ audited by the independent technical
adviser), under the financial agreements (i.e., by means of completion guarantees granted by
the sponsors, which might eventually be required to reimburse all outstanding debt under
the project financing) and, finally, under the insurance agreements (i.e., in the case of a force
majeure event). Lenders may also require the funding of special reserve accounts by the project
company for different purposes. These accounts might be funded against project cash flows,
contributions made by the sponsors or utilisations under the project financing.
Market and operating risk (project risk)

This risk relies on the project’s ability to honour commitments forecasted under the financial
model. This risk will generally be borne by the lenders from the expiration date of the
guarantee periods under the EPC agreement (i.e., those guarantees will normally lapse
around 24 months after the commissioning of the project).
Financial risk
This risk relates to interest rate (and exchange rate, if applicable) fluctuations inherent to the
project financing.
This risk is normally covered by lenders by means of financial derivatives (e.g., swaps,
caps, collars, floors) to be entered into by the project company.
Political, administrative and regulatory risk

In the past, lenders used to feel comfortable with this risk and, as a result, they did not request
sponsors to contribute funds or to provide bank guarantees as cover. However, recurrent
political interference in recent years to change the feed-in regime applicable to renewable
energies has very much undermined lenders’ trust. As a result, most lenders have been
demanding sponsors put enhancements in place until project completion.
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Lenders normally make use of (and sometimes even abuse) the sponsor’s and the
contractor’s financial condition to cover project-associated risks, and it is often categorised as
an enhancement in project finance deals in Spain. This, more efficient, reallocation of risks
among the parties involved in the project may be a consequence of the lack of development
of contractual structures, which, in contrast to Spain, are common in other jurisdictions.
No compulsory provision constrains the liabilities borne by the parties under a project
financing. It is customary, however, to agree on a maximum liability to be borne by the
contractor, supplier or operator limited to the full price (annual price for the operator) under
the relevant project agreement. Penalties and liquidated damages are normally based on the
financial model.
Indirect or consequential loss is a category not recognised by the Spanish legal system.
Therefore, it is not advisable to make a reference to them in the project agreements.
Force majeure in project agreements generally exempts the parties from fulfilling their
obligations thereunder. Parties usually agree that after an initial suspension period either party
is allowed to terminate the agreement after a period of roughly 180 days. On top of that,
adverse consequences arising from force majeure events should be insured by the insurance
policies. Other adverse consequences not covered by insurance policies are often borne by
the contractor or the operator (as the case may be) and the project company proportionally.
iii Political risks

As previously mentioned, political risk has not been a concern for lenders until recent years
in Spain. Nevertheless, ongoing regulatory changes in the past few years (in the electricity
sector, mainly) have probably undermined the Spanish state’s credibility in this regard. We
hope the enactment of the new – and hopefully definitive – regulation on the renewable
energy sector will help to improve the view that market players have of Spanish authorities.

The security package normally required by the lenders for project financing in Spain includes
the following:
a pledges over the project company’s shares;
b pledges over all the bank accounts related to the project (including the operating and
the special purpose reserve accounts);
c pledges over project agreements (construction agreements, operating and maintenance
agreements, insurance, supply, energy sales agreements, agreements regarding real
estate, etc.); and
d mortgages over real estate or concessions only in exceptional circumstances (this security
is often required by lenders when the asset to be mortgaged is essential in terms of cash
generation (e.g., mining or motorway concessions)); but rather it is customary for the
project company to undertake to grant security over project assets.
Pledges are typically taken with transfer of possession, thus (1) they do not incur stamp
duty in Spain, (2) they do not need to be registered at any public registry, and (3) they
become perfected by means of the transfer of possession of the asset under the security and
the execution of a public deed before a Spanish notary public.
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Mortgages must be registered with the Land Registry and will incur stamp duty. In
Spain, applicable stamp duty rate varies; depending on the region in which the security is
registered, it will range from 0.5 per cent to 1.5 per cent of the maximum amount secured
by the mortgage. As a result, it is customary that lenders agree to defer its creation until
the occurrence of certain events (e.g., the occurrence of an event of default or breach of
financial covenant).
Sponsors’ contributions to the project company are often made by means of share
capital and debt subordinated to the project finance (senior) debt, subject to compliance of
a subordinated debt-to-equity ratio.
Step-in rights are generally allowed in project finance under Spanish law, but are not
advisable. Under Spanish insolvency law, there is a risk that enforcement by the lenders of
those rights might eventually lead to them being considered shadow directors, resulting in the
subordination of their credits against the project company.

The guarantees normally required under construction agreements are the advance payment
and performance guarantees, both for an amount in the range of 10 to 15 per cent over the
agreement’s price. Both guarantees may be formalised by means of bank guarantees or surety
bonds, with certain minimum ratings often required by the lenders. The advance payment
guarantee will be returned to the contractor on the project’s provisional acceptance date, upon
delivery at the same time of the performance guarantee; while the performance guarantee is
returned to the contractor on the project’s final acceptance date.
Bonds and insurance are not contemplated by lenders as actual enhancements to
guarantee project completion. On the contrary, lenders rely on the creditworthiness of the
sponsors and contractor alike; we note that this is not standard in other jurisdictions.

Apart from insolvency implications that may arise, lenders may enforce their rights as secured
parties by filing the corresponding claim before the competent court in Spain. For that
purpose, it is essential that (1) all financing agreements (including any related assignment
agreements) are executed as public documents before a Spanish notary public, and (2) all
parties (in particular, any debtors) appoint the agent bank as the calculation agent for all
applicable purposes (for such calculations to be prima facie accurate). If these requirements
(among others specified in the Spanish Civil Procedure Law) are fulfilled, lenders will benefit
from an accelerated enforcement procedure against Spanish debtors.
There are also special procedures available for lenders to enforce security created in
Spain, provided that certain specifications are complied with. Lenders may also benefit from
an auction procedure organised by a public notary to sell pledged assets to third parties.
There is also an enforcement procedure pursuant to Royal Decree-Law 5/2005 with respect
to certain assets.
In insolvency proceedings, the general applicable rule is that a secured lender has
privilege over the security. However, if the asset subject to the security is considered necessary
for the debtor’s professional or business activity (excluding shares of companies owning
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a specific asset, and related liabilities, provided that the enforcement of security does not
result in the termination of agreements related to exploitation of the asset), the security may
not normally be enforced until one year has elapsed from the bankruptcy declaration.
Spanish insolvency law contemplates a two-year clawback period prior to the bankruptcy
declaration. All transactions carried out within this period that are detrimental to the debtor’s
assets can be rescinded, irrespective of the fact that there is no fraudulent intention. The
law provides a list of transactions that are presumed to cause damage and that may not
be rebutted by evidence to the contrary (e.g., transactions that extinguish non-secured
obligations maturing after the bankruptcy declaration) and other transactions in which
damage is presumed, unless evidence is provided to the contrary (e.g., creation of security
over pre-existing obligations, as well as transactions that extinguish obligations secured by
security maturing after the bankruptcy declaration). Spanish insolvency legislation also
provides the refinancing arrangement and the court scheme of arrangement as instruments
to drag along minority (blocking) lenders in the context of a refinancing.
Spanish insolvency law also provides a category of credits that benefits from a general
qualification in terms of reimbursement (credits related to employees’ salaries, tax credits and
social security credits), provided, however, that the credits will not affect the special privileged
nature of secured ones.
Loans provided by persons with any special relationship with the debtor will be
subordinated (e.g., loans granted by shareholders who, at the time the credit arises, held at
least 10 per cent of the share capital in the project company, or companies within its group
of companies).
Other credits not categorised under Spanish insolvency law as qualified or subordinated
will be considered ordinary.
Entities pertaining to the state’s territorial organisation, public bodies and other public
corporations cannot be declared insolvent pursuant to Spanish insolvency law.
Spanish insolvency law contemplates certain pre-insolvency arrangements that will very
likely be relevant in the context of current refinancing processes resulting from the renewable
energy sector reform. As a result of the implementation of those arrangements, a minority
of creditors might eventually be compelled to accept terms imposed by certain majorities
provided that some thresholds are reached and that the refinancing agreement is approved
by courts.

Construction of assets
The permits, licences and authorisations most commonly applied for in Spain for the
construction of assets under a project financing are the following.
Administrative authorisation and approval of the construction plans

Construction of installations that fall under the regulations of regulated sectors (such as the
energy sector) is normally subject to first obtaining an administrative authorisation, to be
granted by the relevant authority of the autonomous community in Spain where the building
or installations are to be located. The construction plans for the building or installations must
also be approved by the same authority.
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Declaration of public utility

This may be applied for at the same time as the administrative authorisation or the approval
of the construction plans. Although it is not compulsory, the declaration of public utility
implies the ‘need of occupation’ of the properties affected by the project and the ‘need to
acquire’ the affected rights, which would enable the sponsor to implement expropriation
procedures, if necessary.
Local licences
Local licences to be issued by the relevant city council include works licences, first occupancy
licences, activities licences and operating licences. The construction of a building or
installations generally requires a works licence and an activities licence, to be obtained in
advance. A first occupancy licence may also be necessary when the works are finished, to
verify that the conditions established in the works licence have been complied with.
Declaration of environmental impact

Buildings and installations may be subject to first obtaining an environmental decision
authorising their construction. This authorisation is governed in the relevant environmental
rules and regulations for each autonomous community, and usually consists of a declaration
of environmental impact (however, in the case of relatively new installations, a unified or
comprehensive environmental authorisation may be issued).
In any case, the declaration of environmental impact or unified or comprehensive
environmental authorisation, as the case may be, must be granted prior to the relevant
municipal licence.
Operation of assets
The permits, licences, authorisations and registrations usually required for the operation of
assets under a project financing in Spain are the following:
Start-up certificate
This certificate may be obtained once the construction has been completed in accordance
with the approval of the construction plans.
First occupancy and operating licences

These licences may also be necessary for the operation of installations.
However, depending on the type of premises or installations and their planned operation,
other permits, authorisations and licences may be required. For example, renewable energy
installations have to be recorded at an administrative registry to take advantage of the special
remuneration applicable to such installations.
A few financial entities in the Spanish market require, as a condition precedent to financial
close, the delivery of a report rating the project under the Equator Principles.
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One of the main risks borne in Spain by lenders is that of being characterised ultimately as
shadow directors of the project company. If characterised as such, they would bear as legal
entities the same liabilities as ordinary managers, and their claims with regard to the company
would be subordinated by virtue of law.

i PPP
The most common PPP structures for the construction of infrastructure in Spain are
the following:
a payments made by the public administration to the private company: these payments
may be made directly during the construction or the exploitation period (e.g.,
shadow tolls);
b construction carried out by the project company supported by private financing
and subsequent transfer of the installations to the public administration: the public
administration authorises the project company to develop the project in a public area,
so that the project company can carry out the construction of the infrastructure. As
from the date on which the infrastructure is erected, the public administration pays the
project company a rent in consideration for the use of the installations by it;
c creation of public–private capital companies for the development of projects; and
d financing granted by public administrations (e.g., by means of subordinated loans to
the project company), which will be reimbursed to the public administrations as debt
subordinated to the full reimbursement of amounts owed to the lenders.
Royal Legislative Decree 3/2011 (the Law on Public Sector Contracts) governs the private
financing of the concession of public works agreements in Spain. This law expressly foresees
‘collaboration agreements’ between the public and the private sector. In such agreements
a public administration or a public entity contracts a private entity, for a specific period, to
provide a global and comprehensive service that, in addition to including the financing of
the intangible investments, works or supplies necessary to fulfil certain public service, also
comprises some of the following services:
a the construction, installation or transformation of works, equipment, systems and
products or complex goods, as well as their maintenance, updating or renewal,
exploitation or management;
b the comprehensive management of the maintenance of complex installations;
c the manufacture of goods and the rendering of services incorporating specifically
developed technology, for the purpose of providing the most advanced and most
economically advantageous solutions, compared with those currently existing in the
market; and
d other services associated with the fulfilment by the public administration of the public
service or general interest objectives entrusted to them.
The consideration to be received by the contractor will consist of a price to be paid while
the agreement remains in force, which may be dependent upon the fulfilment of certain
performance objectives.
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These collaboration agreements are foreseen in the Planning for Infrastructures,

Transportation and Dwelling for the years 2012–2024, published by the Spanish government,
with investment as a key instrument in the coming years because of the expected decrease
in the budget allocated by the Spanish government for investing in infrastructure. Particular
mention is made of the intention to expand this methodology to other sectors as well as to
provide a stable and tax-efficient legal framework that promotes agreement of this kind.
In addition, public–private capital companies are authorised by the Public Sector
Contracts Law to raise funds as a result of capital increases procedures and to securitise
credit rights with regard to the Spanish authorities under the relevant public sector contract,
provided that certain conditions are fulfilled.
The law governing in Spain the awarding of agreements to third-party entities is the Law on
Public Sector Contracts.
The main aim of this law is to regulate the contracting of the public sector, with the
purposes of (1) ensuring that public sector agreements uphold the principles of freedom of
access to tenders, publicity and transparency of the procedures and non-discrimination and
equality of treatment among the candidates; and (2) regarding the budgetary stability and
spending controls objectives, ensuring the efficient utilisation of the funds allocated to the
execution of works, the acquisition of goods and the contracting of services, based on the
prior definition of needs to be met, the safeguarding of competition and the selection of the
most economically advantageous offer.
Public sector agreements established in the above-mentioned law are works agreements,
public works concessions, agreements for the management of public services, supplies, other
services and collaboration schemes between the public and the private sector.

In Spain, there are no general restrictions on foreign investment in relation to project
finance deals.
Foreign lenders should bear in mind that to register securities in Spain they must first
have obtained a Spanish tax identification number.
i Repatriation of profit and investments

In Spain there are no specific restrictions regarding the repatriation of profit earned by foreign
investors or lenders, except for the usual tax implications deriving from double taxation on
income. Thus, a case-by-case basis analysis must be carried out on those countries with which
Spain has signed treaties to avoid any double taxation.
The countries considered by the Spanish tax authorities to be ‘tax havens’ are listed in
Royal Decree-Law 1080/1991, as amended.
There are no specialised courts in Spain to which disputes under project finance or construction
agreements may be submitted.
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It is customary that disputes relating to financial documents will be subject to the

jurisdiction of the courts of the city of Madrid or Barcelona. In contrast, disputes under
project agreements will be submitted to arbitration.

The submission to arbitration is common practice in project agreements and this is also often
required by lenders to speed up dispute resolution.
The Madrid Civil and Mercantile Arbitration Court, the International Chamber
of Commerce and the arbitration courts dependent on regional chambers of commerce,
industry and navigation are the courts usually designated by parties.
There are no restrictions in Spain to submit disputes to arbitration, provided that
this submission is expressly stated. Spain is a signatory state to the ICSID Convention, as
well as to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral
Awards. Arbitration in Spain is domestically regulated by Law 60/2003 on Arbitration,
which aims to accommodate 1958 New York Convention rules to national principles and
facilitate international arbitration. As Spain has not enforced the reciprocity reservation in
Article 1.3 of the New York Convention, the Convention is applicable to any arbitral award
rendered in a foreign country, even if it is not a party to the New York Convention. In
addition, as Spain has not enforced the ‘commercial reservation’ in Article 13 of the New
York Convention either, the New York Convention is also applicable to any kind of award,
regardless of the subject it rules on.
According to the Arbitration Law, competence for the recognition of foreign awards is
attributed to regional high courts and competence for their enforcement is attributed to the
first-instance courts.
Usual restrictions in other jurisdictions may eventually apply to restrict the recognition
in Spain of arbitral rulings such as breaches of public policy (including economic public
policy) applicable in Spain.

The number of project finance transactions in Spain is still expected to increase as a result
of factors outlined in this chapter. Deals and structures will presumably become much more
complex and elaborate than ever before. M&A projects and related restructuring work streams
will continue expanding as long as the applicable feed-in tariff regime remains unchanged.
Traditional banking and long-term financing will presumably be progressively replaced by
other innovative structures imported by new participants in the market, including insurance
companies,4 pension funds and foreign investment funds.
We note once again the positive outcome that an amendment to the rules regarding
public bidding and awards may imply. The strengthening of public–private collaboration
schemes is also necessary. The reforms in capital markets regulations will presumably
increase flexibility and make capital markets a reliable source of funds for sponsors willing
to restructure (or even finance) projects through private bond issues or private placements to
institutional investors.
4 As a result of, among other things, relevant amendments regarding project assets in their portfolios that
have been very recently implemented through the Solvency II Directive (2009/138/EC).
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Chapter 19
SWITZERLAND
Thomas Mueller-Tschumi and Francis Nordmann1
I INTRODUCTION
Supported by low interest rates and immigration, construction activity in Switzerland remains
at a high level; this applies to both residential and commercial building sectors. In particular
the number of major construction projects has increased steadily over recent years. As regards
public sector investments, transport-related projects are the growth drivers. It is expected
that population growth and rising mobility will keep the demand high for infrastructure and
transport-related construction and will pose financing problems for the public sector.
The 2010 Neumatt Burgdorf project (the Burgdorf Project) was Switzerland’s first
public–private partnership (PPP) project to be carried out based on international project
finance standards. The project encompasses the demolition of old buildings at the site, as
well as the planning, financing, construction and operation of administrative premises and
a prison (with 110 beds), and successfully started operations in 2012. The Burgdorf Project
is a pilot project and it is expected that other public bodies will initiate projects of their own
in future.
In 2015, the Swiss Innovation Park – a PPP launched by the federal and the cantonal
governments – is beginning to take shape: the idea is to create a nationwide network for
research and development, linking various different locations together. This network-based
approach is a reflection of the federal and cantonal governments’ strategy for positioning
Switzerland as an appealing location in the global competition to attract innovative research
and development.
II DOCUMENTS AND TRANSACTIONAL STRUCTURES

In Switzerland, transactional structures of project financing commonly follow international
standards. Typically, the infrastructure is built and operated by a project company. The
project company is established in the form of a special purpose vehicle (SPV). In relation
to the legal form of the SPV, a Swiss company (Aktiengesellschaft ) is the preferred option;
however, a Swiss company with limited liability (GmbH) is also viable. If a foreign SPV is
used, the SPV is usually domiciled in a country having entered into a double taxation treaty
with Switzerland to avoid withholding tax and to facilitate an exit by means of a share deal.
1 Thomas Mueller-Tschumi and Francis Nordmann are partners at Walder Wyss Ltd. The information in this
chapter was accurate as of July 2016.
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Switzerland
To a large extent, the construction of the project is financed by lenders. For this purpose
the project company enters into a credit agreement with a syndicate of banks. The shares of the
project company are owned by the project sponsor. Several sponsors enter into a shareholders’
agreement governing their rights and duties as shareholders. The project sponsors provide the
equity needed for the balance of the finance in the form of share capital, contribution to the
general reserves of the project company and subordinated debt.
The project company has no employees of its own and will generally outsource its
constructional and operational duties to subcontractors, ideally to a general contractor to
avoid interface issues.
ii Documentation
Again, documentation in Swiss project finance transactions is consistent with international
standards. In major projects, in particular if syndication of the loan is intended, the credit
agreement is based on the standard form issued by the Loan Market Association. For smaller
projects, Swiss banks usually provide shorter standard forms of their own.
Project finance requires the mitigation of the completion risk. As a result, the project
company usually mandates a total or a general contractor, which takes sole responsibility for
the proper delivery of all construction work on a turnkey basis for a fixed price on the basis
of a construction contract. The design and planning work is either included in the contract
(total contractor) or is performed by a general planner.
A facility manager enters into an operating and maintenance agreement with the
project company. To mitigate all operational risks, such an agreement is usually concluded as
a general contractor agreement. In addition to the operating and maintenance agreement, the
parties may enter into service-level agreements.
In PPP projects, in many cases a governmental concession is required. The concession
is granted either in form of a unilateral decree or a contract governed by public law. Further,
as the case may be, the project company enters into agreements with (equipment) suppliers
and purchasers.
Other typical ancillary contracts include interest hedge agreements, insurance contracts,
direct agreements (between the project contractors and the lenders) and appointment of
independent experts.

In a Swiss domestic set-up, parties often use the standard form for general contractor issued
by the Swiss Engineers and Architects Association (SIA), which has also prepared various
general conditions of which SIA Rule 118 (General Conditions for Construction Works,
amended edition published in 2013) is widely used. These general conditions only apply if
specifically agreed by the parties. As an exception, the Swiss Supreme Court has ruled that
two Swiss construction companies were deemed to have tacitly accepted the SIA standards.2
As regards public procurement, the Coordination Conference of Building and Property
Bodies of Public Sector Developers (KBOB) provides a standard form for general and total
contractor agreement. The ‘KBOB contracts’ are nowadays used more often for private
projects too.
2 Judgment of 3 December 2007; 4A 393/2007.
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Switzerland
In the international context, the most frequently used standard forms are the various
sets of conditions issued by the Geneva-based International Federation of Consulting
Engineers (FIDIC).
III RISK ALLOCATION AND MANAGEMENT

i Management of risk
The management of risks is essential in the context of project finance and requires a tailor-made
analysis of each project to identify and assess these risks and determine who should bear
them. In general, the parties will have to deal with different types of risk.
Completion risk is the risk that the project will not be completed in time or at all. In
the case of cash-flow related lending (as is the case in project finance), completion in due time
is crucial, as interest continues to accrue and may not be covered by the projected cash flow.
Usually, the completion risk is mitigated from the project company to the total contractor
who must accept contractual penalties and provide a completion guarantee. In addition, the
lenders may insist on additional guarantees by the sponsors.
There can be a risk that governmental permits for a project will not be granted or will
be granted only subject to costly conditions; usually, the obtaining of all substantial permits
is a condition precedent to drawdown under the credit agreement.
Lenders are generally not prepared to take any environmental risks. With respect to
existing contamination of the site, environmental risks may be passed to the total or general
contractor (who will of course price in such risk) if it has been assessed in environmental
due diligence. Future environmental risks are usually transferred to the operator and must
be insured.
The risks related to the operation and the maintenance of the project are usually
transferred to the facility manager, which must secure the proper fulfilment of its duties by
providing performance guarantees.
Pursuant to the general provisions of the Swiss Code of Obligations, a party is liable for any
damages resulting from non-performance, unless it demonstrates that it has no responsibility
for the non-performance. Negligence is sufficient to trigger liability; a concurrent fault
of the injured party does not limit the non-performing party’s liability, but may result in
reduced damages.
Under Swiss law, the parties may agree upon a limitation of the contractor’s liability
(e.g., stipulation of a cap). However, liability for gross negligence and wilful intent cannot be
contractually excluded or capped.
As a general principle, liability of the contractor is limited in the event of force majeure.
However, the parties usually include some language to specify the scope of force majeure and
the consequences related to it (extension of timescales, compensation of the contractor for
additional costs).
In its relationship with the owner, the contractor is solely liable for the performance of
the contract and thus for the work of the subcontractors. If instructions given by the owner
risk causing delay or defects, or increase the costs of the work, it is incumbent upon the
contractor to immediately and specifically point out this risk to the owner; the contractor
may be liable for any consequences by failing to do so.
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No third-party contractual claims are possible against the contractor; if indirect

damages are not contractually excluded, the contractor may face a claim from the owner
trying to recover any damages it was obliged to pay because of third-party damages.
iii Political risks

Switzerland is known for its political stability. Hence, mitigation of political risk is not a main
issue in construction or financing contracts. Certain political risks such as war and strikes
are usually included in the force majeure provisions. However, because of the numerous
participation rights provided for by the Swiss political system, a project might be substantially
delayed or even halted. This risk can arise even at a late stage of the project. As a result, early
binding decisions regarding politically relevant issues are crucial.
Once the required permits or concessions are granted (in particular the building permit),
the owner may profit from a broad protection of its property rights on a constitutional level;
Article 26 of the Swiss Constitution grants full compensation in the event of expropriation.
Moreover, having realised a building project based on a building permit, an owner is protected
by means of the ‘principle of confidence’: such a building permit must not be revoked.
The protection of the property rights is granted irrespective of the nationality of
the principal.
IV SECURITY AND COLLATERAL

In project finance structures, the Swiss standard security package is made up from a number
of elements. Mortgages are the ‘classic’ security interest in real estate financing. However,
properties in administrative use are subject to a specific legal regime. In Switzerland, such
mortgages may be granted in the form of an actual mortgage or a mortgage note. The
mortgage note is issued in bearer form or registered form. Generally, the mortgage note is the
preferred security interest because of its nature as a tradable security that can itself be sold and
pledged. As from 1 January 2012, mortgages may also be established by means of a registered
mortgage certificate. Registered mortgage certificates are easily transferable instruments and
may also be pledged. Mortgages are established by a notarised deed and registration in the
land register.
Lenders must be aware that certain legal liens may arise that would rank ahead of any
contractual security right over the real property. These legal liens may exist to secure any unpaid
real estate capital gains tax, transfer tax or mechanics liens. As a result, contractual provisions
must be included in the documentation to avoid the creation of any such security interest.
Receivables are normally assigned by way of global assignment. The assignment is
non-accessory to the secured obligation. During the term of the agreement, the assignor
must, on a regular basis, deliver to the assignee its lists of receivables showing the assigned
receivables, as ongoing evidence of the claims assignment. Third-party debtors are often not
notified of the assignment until the borrower’s default. As long as third-party debtors are not
aware of the assignment, they can validly fulfil their obligations by payment to the assignor.
Global assignments are very often used.
Under Swiss law, future receivables can be assigned, but they would fall within the
bankruptcy estate of the assignor if they come into existence after the opening of bankruptcy
proceedings over the assignor. The assignment requires a written agreement between the
assignor and the assignee, clearly determining the claims that are allowed to be assigned,
especially with regard to any global assignment of future claims.
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Switzerland
If an SPV is involved, the standard security package also includes a pledge over the
shares in favour of the lenders. There are no special registration requirements with respect to
a share pledge; however, as a perfection formality, the share pledge requires a valid agreement
and the physical transfer of the relevant shares to the pledgee. In addition, in the case of
registered shares, the share certificate must be a duly endorsed share certificate (normally
an endorsement in blank is provided in blank to facilitate the enforcement). In the case of
registered shares, the pledge can be registered in the company’s share ledger.
Generally, there are no limitations on granting such security to a foreign lender,
provided that, pursuant to the articles of association of the company, the company does not
require a majority of Swiss shareholders. Further, the share pledge might trigger the need for
a Lex Koller permit (see Section IX.ii, infra).
Swiss law provides that the shareholder’s voting and participation rights remain with
the pledgor. Consequently, the features of a pledge agreement need to be examined to ensure
the exercisability of the voting and participation rights.
A bank account can be pledged pursuant to a pledge agreement or assigned pursuant to
a security assignment agreement to a domestic or foreign secured party.
Lenders must be aware that any rights the account bank might have over a bank account
pursuant to its general terms and conditions (e.g., set-off rights or pledge rights) rank ahead
of the security interest of the pledgee, unless waived by the account bank. Such a waiver
might be difficult to obtain in practice.
Bank accounts can be pledged by means of a written accounts pledge agreement. The
account bank must be given notice to create and perfect the second-ranking security interest.
The right to withdraw funds is not usually restricted as long as no default has occurred.
Swiss law does not specifically provide an instrument equivalent to the English-type
floating charge. Moveable assets need to be physically transferred to the pledgor or a third-party
pledge-holder to perfect the pledge. Therefore, the concept of a floating charge over moveable
assets that need to be available for the operations of the pledgor is not feasible.
Under Swiss law, subordination of debt is achieved contractually through an agreement
between the debtor and the subordinated creditor in which the creditor’s claims are
subordinated to certain other claims.
Further, multiparty agreements with a more complex ranking system of subordinated
debt are possible. The debtor and the creditor may agree that the creditor will rank as senior
to any other creditor of the debtor, provided that the creditors agree to be ranked junior.
If a company is overindebted, the board of directors must notify the relevant bankruptcy
court, which, on notification, will start bankruptcy proceedings. The notification duty can be
avoided if creditors subordinate their claims through a contractual agreement.
Principally, the lenders can reserve the right to ‘step in’ and take over the project
company’s position where the project company is not performing. Such a step-in right
requires an agreement with the shareholders of the project company (purchase option) if the
project company is to continue its business, or with the contractors (usually, by means of
a direct agreement) if a new company is to take over the project. Frequently, both forms of
step-in right are combined.
In the context of a PPP, there is a dispute as to whether the public procurement
regulations restrict the ability to stipulate step-in rights.
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V BONDS AND INSURANCE

i Performance guarantee and defects warranty
In construction contracts, the contractor (in the context of project finance – typically the
general contractor) must provide a performance guarantee. Upon completion, the contractor
must provide a warranty as regards the defects of the construction. The performance guarantee
as well as the defects warranty is secured, generally either by a bank guarantee or by a surety.
By means of a bank guarantee, the guarantor bank undertakes to pay to the beneficiary,
upon its first demand, any amount up to a defined maximum. This guarantee is irrevocable
and unconditional and may be exercised if certain obligations are not fulfilled properly.
Swiss law also recognises the concept of surety. In a surety contract, the grantor fulfils
the obligations of the principal obligor (borrower) if the latter is unable to do so. The main
difference between this and the guarantee is that the grantor has available to it all legal
defences available to the principal obligor, because the surety does not create an independent
contractual claim (unlike the guarantee). The surety must be limited to a maximum amount
and must be in writing to be valid. The grantor is only obliged to pay once the main obligor
is in arrears in relation to its performance and either has been issued with payment reminders
to no avail or is manifestly insolvent.
ii Insurance
Usually, an insurance adviser is appointed who will carry out the insurance due diligence and
define the minimal standard of insurance coverage.
Typically, the contractor must take out insurance coverage for civil liability relating
to damages arising from the construction. Tender conditions may require that the bidders
furnish proof of such insurance and maintain coverage throughout the project.
In addition, the project company, as the owner of the site, must ensure sufficient
insurance coverage for civil liability relating to damages resulting from the property.
VI ENFORCEMENT OF SECURITY AND BANKRUPTCY PROCEEDINGS

In Switzerland, enforcement of security and bankruptcy proceedings adhere to the rules set
out in the Debt Enforcement and Bankruptcy Act (DEBA). To a certain extent, the parties
can agree on specific enforcement mechanisms. However, pursuant to mandatory law,
the collateral must not immediately fall into the property of the pledgee if its claims are
not satisfied.
Under a Swiss standard security agreement, the lender may enforce the security (at its
option) by private sale (including self-acquisition), by a (privately organised) public auction
or by way of an official enforcement proceeding before any competent court or authority
pursuant to the DEBA.
Although most security agreements allow lenders to enforce them by way of private
sale on the occurrence of an event of default, it is recommended that enforcement is only
commenced when the secured obligations are due and payable. Lenders are under an
obligation to account for proceeds realised in enforcement and must repay any surplus to the
borrower (after deduction of all costs and so on).
With regard to mortgage notes, only a private sale would be possible, but not with
regard to the underlying real property (such real property may only be subject to enforcement
proceedings in the framework of the DEBA).
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Switzerland
In the case of assets transferred by way of security, enforcement, in a strict sense, is not
necessary, as ownership has already been transferred to the secured party. Enforcement in this
context means that the obligation to return the transferred assets under the security agreement
expires. This follows similar rules that apply to private enforcement (in particular, any surplus
remaining after the application of the proceeds of the secured debts must be returned to the
party that granted the security).
Under Swiss substantive law, future receivables, which have been assigned to the lenders
but have come into existence only after the opening of bankruptcy proceedings against the
borrower, fall into the borrower’s estate and do not pass to the lenders. However, the security
provided by mortgage notes includes all lease receivables that will come into existence from the
commencement of enforcement proceedings or from the opening of bankruptcy proceedings
against the borrower to the realisation (i.e., sale) of the property.3
The DEBA also includes composition proceedings.4 These provisions have been
substantially revised as of 1 January 2014. The legislature was guided in part by the US Chapter
11 and has specifically provided for a significantly facilitated access to composition proceedings.

Swiss authorities at federal, cantonal and communal level have various regulatory responsibilities
relating to zoning and public construction law. Generally, zoning and building regulations are
enacted by the cantons and implemented by communal building authorities. As a result,
Switzerland has 26 different cantonal zoning and construction regimes. Any change to an
existing building or construction requires a building permit.
Projects potentially having an environmental impact require an environmental impact
assessment demonstrating what specific measures must be taken to ensure the compliance of
the project with the environmental regulations.
ii Responsibility of financial institutions

If the control of the project company by the lenders is too tight, the financial institutions may
qualify as shadow directors and, as a result, become liable for the activities of the borrower to
a certain extent; therefore, structuring of the supervision of the project company in the credit
agreement is crucial to avoid the lenders’ liability.
Furthermore, lenders with subsidiaries, branches, offices or appointed representatives
in Switzerland must comply with the Federal Law on the Prevention of Money Laundering
and the Financing of Terrorism in the Finance Sector.
3 Article 806(1), Civil Code.

4 Article 293 et seq.
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Switzerland
VIII PPP AND OTHER PUBLIC PROCUREMENT METHODS

i PPP
In Switzerland, neither the federal nor the cantonal legislator has provided a specific formal
statutory and regulatory framework for PPP transactions. However, in 2009, the Federal
Ordinance on the Public Budget of 6 April 2006 (SR 611.01) was amended by inserting
Article 52a, which states that PPP projects must be considered for the fulfilment of public tasks.
In general, there are no major regulatory obstacles to realising public infrastructure
projects via PPP schemes. However, the PPP concession model for road infrastructure is not
feasible in Switzerland as the Swiss Constitution prohibits the levying of any taxes on the use
of national roads.
A general ban on negotiations imposed by the cantonal public procurement provisions
does impede the procurement process for PPP projects. However, the Burgdorf Project has
shown that a PPP process is feasible under total contractual competition, which contains rigid
requirements concerning the anonymity of participants. As negotiations are allowed under
federal procurement law, more flexibility in the PPP tendering process exists at a federal level.
Lenders may also have difficulties receiving the type of full security package that is
commonly received in international project finance structures. In relation to real estate,
it appears to be difficult for the private partner to obtain (full) ownership rights over any
real estate.
Lenders must also be aware that a specific legal regime applies to assets in administrative
use. While such assets may be privately owned, they must not be subject to mortgages.
The Confederation and each of the 26 cantons has its own procurement law. International
treaties ratified by the Confederation provide, however, the legal framework for both federal
and cantonal procurement legislation. In particular, Switzerland is a signatory state to the
General Procurement Agreement dated 15 April 1994 (GPA) and that treaties’ provisions are
adopted in the relevant legislation (basically for all public tender procedures, even beyond
the scope of the GPA).
The relevant legislation explicitly provides for the fundamental principles of public
procurement such as equal treatment, transparency and competition. Furthermore, the
Confederation and all cantons have implemented challenge procedures according to
Article XX of the GPA and the award is subject to appeal at an independent court (Federal
Administrative Court and cantonal administrative courts, respectively). To a limited extent,
such decisions may be appealed at the Supreme Court.
Generally, an application for review has no automatic suspensive effect blocking the
continuation of the procurement procedure or the conclusion of the contract. However,
courts generally grant suspensive effect (typically, solely on the request of the applicant).

Basically, Switzerland has not enacted major restrictions on the importation of project
equipment nor are there relevant licensing or other requirements specifically for
foreign investors.
Cross-border lending by a foreign lender to a borrower in Switzerland does not generally
require authorisation from the Federal Financial Market Supervisory Authority (FINMA) or
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Switzerland
from any other regulatory authority. However, a lender with a subsidiary, branch, office or
appointed representative in Switzerland is subject to supervision in Switzerland under the
Federal Law on Banks and Savings Institutions, and must possess a licence to engage in the
business of banking from FINMA.

Swiss law does not provide foreign exchange restrictions or substantial fees, taxes or charges
on currency exchange. However, claims in foreign currency will be enforced in Switzerland
only in Swiss currency.
There are no controls or laws in force that would prevent either the repatriation of
proceeds realised in Switzerland, payments to a foreign lender under security agreements
(including guarantees) or a loan agreement. However, interest payments by a Swiss debtor
may be subject to the federal withholding tax of 35 per cent if the number of creditors
exceeds a certain limit. As a result, it is crucial to include specific tax language in the credit
agreement to avoid withholding tax payments.
ii Lex Koller
In Switzerland the acquisition of real estate by persons abroad is restricted under the Federal
Law of 16 December 1983 on the Acquisition of Real Estate by Persons Abroad (the
Lex Koller).
A transaction is subject to a Lex Koller permit if (1) the real estate is acquired by
a person abroad (which also includes a company domiciled in Switzerland but dominated
by foreign nationals); (2) the real estate involved is a property that is subject to the Lex
Koller permit requirement regime, namely residential real estate; and (3) the acquired right
is deemed to be the acquisition of residential real estate in the sense understood in the Lex
Koller. These three conditions must be met cumulatively.
In simple terms, the realisation of commercially used premises is not subject to a Lex
Koller permit, as is usually the case in the context of private sector project finance. With
respect to PPPs, the analysis is more complex, since the Swiss Federal Tribunal ruled some
years ago that certain administrative activities do not have commercial character and hence
a Lex Koller permit is required. This decision is, however, highly disputed among scholars.
Nevertheless, it has to be considered in the structuring phase of a PPP.
Lex Koller provides that the purchaser must apply for a negative declaration (ruling)
by the competent Lex Koller authority stating that no approval is required if there is a doubt
whether such an acquisition is subject to a Lex Koller permit. A transaction requiring a permit
is invalid until a legally binding permit has been obtained.
Subject to certain conditions, financing of residential real estate may also be subject
to the Lex Koller restrictions if, because of the financing terms, the purchaser or borrower
becomes strongly dependent on the secured lender, granting excessive control rights to the
lender and resulting in an ownership-like position of the lender. As a result, the project
finance standard security package may raise Lex Koller questions.
Recently, the Swiss parliament rejected a parliamentary motion claiming to extend Lex
Koller restrictions applicable to Swiss residential properties to other properties as well.
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Switzerland
In Switzerland there are no state courts specialising in project finance or construction disputes.
However, commercial contracts can generally be subject to arbitration.
Contracts for domestic construction projects usually provide for the jurisdiction of
the local courts, especially if a public entity is involved. However, the Swiss construction
industry has established arbitration rules whereby disputes may be referred to specialised
arbitral tribunals.
Switzerland is a major seat of international arbitration, even for infrastructure projects
outside Switzerland. The most frequently used arbitration rules in Switzerland are the
uniform arbitration rules of the Swiss Chambers of Commerce and those of the International
Chamber of Commerce. Enforcement of foreign arbitral awards in Switzerland is governed
by the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(New York, 1958).
Recently, dispute boards have occasionally been established for larger infrastructure
projects, but this instrument is not widely used. Mediation is also not yet commonly used,
although recently industry associations have adopted mediation and arbitration rules.

In Switzerland, the future demand for infrastructure and transport-related construction is
expected to be high and will increase the need for structured finance. In addition, as from
2012, Switzerland has introduced a hospital financing system, known as the diagnosis-related
groups-based system. This system also includes investment allowances in case-based tariffs.
As a result, the cantons must cease providing government deficit guarantees and low-cost
loans to public hospitals. Project finance may become a valid solution to the provision and
financing of infrastructure investment in this area.
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Chapter 20
THAILAND
Chaipat Kamchadduskorn1
I INTRODUCTION
Ever since the period of rapid economic growth during the early 1990s, Thailand has seen
a constant stream of investments in infrastructure and construction projects, with particular
emphasis on the use of project financing in build-operate-transfer and build-transfer-operate
(BTO) projects. Thailand has gone through its share of economic and political interruptions
during this period, namely the 1997 Asian financial crisis (the Tom Yam Koong Crisis),
followed by the 2006 and 2014 coups d’état.
Irrespective of the type of government in power in Thailand (i.e., military or civilian),
infrastructure projects have always been given utmost importance and top priority. Some
of the key infrastructure projects that have been championed by current and previous
governments include:
a railway projects;
b subway and sky train projects;
c expressway, motorway and highway projects; and
d power generation projects.
With respect to railway projects, the current and previous governments have tended to
initiate plans to improve the national railway system, which is drastically outdated and in
need of a major overhaul. However, these plans are usually delayed, with more emphasis
being given to the expansion of inner-city transportation systems, by way of subways, sky
trains, roads, motorways and expressways to cover more areas in metropolitan and suburban
areas. As Bangkok is a city notorious for its traffic and vehicle congestion, the government
will try to promote public transport as a better means of getting into and around the inner
city compared with driving.
With respect to power projects in Thailand, one issue that Thailand faces is constant
changes to its national power development plan, generally depending on changes in
government and the sensitivities and objections of non-governmental organisations and
the public in the areas of potential power project developments. This constant change and
public sentiment have resulted in the shifting of project milestones for the development of
certain power projects in Thailand. For example, previous power development plans required
Thailand to build its first nuclear reactor unit by 2020, but at present this milestone has
been changed and no major steps have been taken to reschedule it; the construction of the
Krabi coal-fired power plant, located in the southern province of Thailand, which had the
1 Chaipat Kamchadduskorn is a partner at LS Horizon Limited.
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target commercial operation date of 2019, has also been suspended, as it would adversely
affect the health and livelihoods of local people, and would cause pollution problems. One
change that has been taking place in recent years, however, is the increase in and reliability
of the overall amount of renewable energy in the national grid (e.g., ground-installed solar
power generation projects (very small-scale power producers), jointly funded by government
and private sector investment, some of which have been on stream since the end of 2016,
and a biomass and biogas power generation project for the three southern border provinces).
There have also been efforts to promote local energy independence by reducing Thailand’s
dependence on its neighbours for energy and fuel supplies, especially as Thailand currently
relies on overseas gas suppliers for the majority of its power projects and has been purchasing
substantial power supplies from Laos. However, these efforts for energy independence have
not been successful so far.

One of the main methods used by the Thai government in 2016 to stimulate the economy
was the initiation of major infrastructure projects, with particular emphasis on construction,
and the creation of new industrial estates and special economic zones. Depending on the
type of infrastructure project, the Thai government has recently been trying to promote the
use of public–private partnerships (PPP) and shorten PPP development periods by means of
a ‘fast-track PPP’, amending relevant laws and regulations to speed up the whole process (see
Section XII, infra).
Recently, the Council of Ministers (the Cabinet) passed a resolution to promote and
support the set-up of economic development zones in various strategic economic areas along
Thailand’s border, with a view to enhancing the country’s competitiveness. This drive to
promote economic growth has very recently been given a particular focus with the creation
of Thailand’s Eastern Economic Corridor development project (EEC), incorporating
three provinces in the eastern part of Thailand (Rayong province, Chonburi province and
Chachoengsao province),2 the area that in the past has seen the successful eastern seaboard
developments. The EEC projects cover many infrastructure categories; for example, aviation,
maritime transportation, overland transportation and rail transportation. Priority projects
under the EEC are (1) the development of U-Tapao international airport, to be an eastern
part of Thailand’s aviation hub, and (2) a high-speed railway, to connect Thailand’s three main
international airports – Suvarnabhumi, Don Muang and the newly developed U-Tapao. The
EEC projects will be conducted by either PPP or public tender, as the case may be. Moreover,
to encourage and motivate them to invest in the EEC projects, investors shall obtain certain
privileges (e.g., EEC project operators who have been granted a promotion certificate would
benefit from an extended corporate-tax exemption period). The government plans to issue
the terms of reference with a view to selecting bidders to invest in the proposed EEC projects
by mid-2017.
From past experience in Thailand, however, high levels of political and bureaucratic
obstacles result in almost all infrastructure projects in Thailand failing to take off in a timely
manner, despite continuous pushes by the government. Some of the obstacles arise from
speculation over the financing of these major infrastructure projects, which technologies to
use and over which routes are to be given priority. As regards infrastructure financing, unlike
2 Cabinet Resolution dated 28 June 2016.
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previous governments, which had proposed seeking domestic funding from Thai banks, the
current government has been debating whether to seek external financing, perhaps in the
form of a soft loan from potential overseas technology providers and contractors. To avoid
any further delays, it is likely that, in 2017, the current government will finally settle on the
specific structure to be used. Needless to say, Thais are eagerly awaiting this, with high hopes
but with fingers crossed.

Ownership structures in project finance transactions in Thailand will vary from project
to project and depend on a number of factors. These factors include whether there is
any government participation in the project and whether there exist any specific laws or
regulations that govern the type of project being developed.
For example, Thailand has in the past used the BTO structure for a number of
its infrastructure projects, namely the projects for the construction of its expressways,
sky trains and many telecommunication projects for land lines and mobile phones.
Additionally, the government and state-owned enterprises have used build-own-operate and
build-own-operate-transfer structures for waterworks projects.
ii Documentation
The principal documentation used in the energy sector in project finance transactions in
Thailand are power purchase agreements, engineering, procurement and construction (EPC)
contracts and operation and maintenance agreements. Other supporting agreements and
documents used will depend on the nature of the power project; for example, in a gas-fired
power project, a gas sale and purchase agreement and gas pipeline construction agreement
may be necessary. In addition, if the land used in the project or land used for the transfer of
electricity is not owned by the project company, a land lease agreement or land utilisation
agreement may also be required. As for the financing, principal agreements include credit
facility agreements, which in most cases involve multiple types of credit facilities and security
agreements under the newly enacted Business Security Act BE 2558 (2015), which comes
into force in July 2016: pledges, mortgages, bank guarantees, assignment and novation of
project documents, assignment of proceeds and direct agreements.

The standard forms used for construction contracts in Thailand will vary depending on the
type and scale of the project. The EPC contract is generally the most widely accepted and
preferred form of construction contract, particularly in project finance transactions. The
form of EPC contract used is also usually based on the various FIDIC3 iterations. Owing to
the tax structure in Thailand, the EPC contracts for each project are normally separated into
a supply contract and a construction contract.
The reason for the wide adoption of the EPC contract for project finance transactions is
the preference of most lenders for a project agreement that is internationally recognised, with
sufficient precedent practices covering any issues that may arise. Parties to EPC contracts,
3 International Federation of Consulting Engineers.
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including the lenders providing financing for the project, are therefore more reassured
knowing that there are extensive precedents and many experts to deal with any potential
disputes; disputes under EPC contracts are generally referred to arbitration.

The key risks facing stakeholders with respect to project finance transactions and construction
contracts are delays, increased costs and potential non-completion of the works for such
projects. While it is common for the construction-related elements of the project finance
transaction to face delays, more recently the factors that have led to delays and non-completion
of the works have been external in nature rather than from within the project.
For example, there have been a number of legal and regulatory changes to Thai laws in
the past few years that have contributed to the delays and non-completion of projects. The
clearest example of this has been the increase in Thailand’s minimum wage. The immediate
impact when the increase in minimum wage was announced was the effect it had on the
contractors’ and subcontractors’ ability to continuously hire sufficient workers to complete
the works in projects they have been contracted for. Various contractors and subcontractors
have made it clear that they were not able to fulfil their commitments in the projects because
they were unable to afford a sufficiently skilled workforce. While the increase in the minimum
wage has resulted in an influx of labour from neighbouring countries seeking higher pay, these
workers generally fall into the unskilled labour category and are not sufficiently well trained
to carry out more complex construction contracts such as infrastructure and power projects.
As in other jurisdictions and in line with international practice, the lenders and
developers in such projects will try to ensure that the contractors or subcontractors are
required to maintain a sufficient work force for the duration of the EPC contract. In addition,
in the event that the contractors or subcontractors appear to be unable to meet the milestones
set in the EPC contracts, the lenders and developers will include mechanisms that will allow
for the developer to hire another contractor or subcontractor to complete the unfinished
works at the cost of the existing contractor or subcontractor.
With respect to project finance transactions, another risk is that the parent company
or shareholder of a developer will be required to provide a form of guarantee to the project
lenders. Ideally, shareholders (in most cases the overseas parent company of the local special
purpose vehicle (SPV) formed to develop the project) would choose project finance, as the
structure provides for non-recourse financing. However, owing to various factors, primarily
economic and commercial in nature, there has been an increase in lenders requiring the
parent company to provide a form of parent or corporate guarantee, or some kind of sponsor
support against any default or non-compliance by the SPV under the terms and conditions of
the financing agreements. Aside from the costs involved in procuring such parent or corporate
guarantees or sponsored support, these requirements make it difficult for developers to sell
their interest in these projects to other investors.
Under the Civil and Commercial Code of Thailand (the CCC), contracting parties are
allowed to establish limitation of liability clauses in an agreement to the extent that they are
not contrary to public policy or good morals, in which case the agreement shall be void in
accordance with the CCC. Once the parties successfully enter into an agreement, failure by
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either of the parties to perform their respective duties or obligations may constitute a claim
for damages against the breaching party. Pursuant to the general provision regarding the scope
of compensation for damages in the CCC,4 the breaching party is principally responsible for
two kinds of damages:
a direct damages; and
b indirect damages arising from special circumstances, which are only payable at the
discretion of the court if the non-breaching party is able to demonstrate that the
circumstances were foreseen or ought to have been foreseen by the breaching party.
It is important to note that under Thai law punitive, contemptuous and aggravated damages
are not covered under the category of compensatory damages and it is unlikely that Thai
courts will award these types of damages to the claiming party.
iii Political risks

Political risk with respect to investment in Thailand is one topic that has been quite
contentious in a period spanning over a decade, with causes and mitigating factors varying
constantly. In both 2006 and 2014, the Thai military orchestrated a coup d’état, taking over
control of the government from a civilian government on both occasions, and installing
a temporary military government tasked with writing a new constitution, initiating several
reforms and organising a general election to return power to a civilian government. The
justification for these coups was to return stability to the nation, as there were numerous
protests against the governments in charge at the time. Furthermore, the present temporary
government installed by the military completed the draft of a new constitution to replace
Interim Constitution BE 2557 (2014) and, latterly, this draft was promulgated and became
effective on 6 April 2017 as the Constitution of the Kingdom of Thailand BE 2560 (2017)
(Constitution BE 2560 (2017)). Constitution BE 2560 (2017) provides the process that will
lead to a general election to return power to a civilian government.
On the macro-economic level, because of the above-mentioned political instabilities
the economy tends to move at a slower pace than expected, with foreign investment in
certain sectors moving to more stable jurisdictions, and, more importantly, interruptions to
large-scale infrastructure and construction projects initiated by previous governments being
delayed or even cancelled. To mitigate these risks and to provide reassurance to investors,
for the most part the new governments have attempted to allow projects initiated by
a previous government to continue, with only necessary changes to their structure should
any irregularities be found (particularly relating to corrupt practices), and have sought to
resolve them in a satisfactory manner. Additionally, the new governments have attempted
to provide alternatives to those projects that were cancelled, while giving priority to the
investors involved in the cancelled projects on a case-by-case basis.
With respect to the risk of nationalisation, businesses and investments in Thailand
that have obtained investment promotion privileges from the Board of Investment (BOI)
are covered by the provision in the Investment Promotion Act BE 2520 (1977) (the BOI
Act), which provides that the state shall not nationalise the activity of any promoted person
under the BOI Act.5 In addition, Constitution BE 2560 (2017) specifies that persons shall
enjoy rights in property, without differentiating between the property rights of locals and
4 Section 222 of the CCC.

5 Section 43 of the BOI Act.
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foreigners, provided that the rights are obtained and are governed by the relevant laws.6
Constitution BE 2560 (2017) also provides that expropriation of immoveable property shall
not be made except by virtue of any law specifically enacted for affairs of the state, and for fair
compensation to be paid in the event of any expropriation under such laws.7
As Thailand is a Member State of the Multilateral Investment Guarantee Agency
(MIGA), cross-border investments made in Thailand by any other Member State may apply
for its investment to be insured by MIGA.

Security for loans and other types of credit facilities are generally and presently governed by
the CCC and the Business Security Act. Under the CCC, security can take three forms:
a mortgage;
b pledge; and
c guarantee.
The mortgage and pledge are types of security backed by assets, while the guarantee is
security backed by a guarantor’s credit, irrespective of whether the guarantor is an individual
or a business entity. While the mortgagee and the pledgee who take assets as security have
a preferential right over the mortgaged or pledged assets, creditors who take the guarantee as
security have no preferential right over the assets of the guarantor.
Assets that can be mortgaged are all kinds of immoveable property and certain kinds of
moveable property, provided that they are registered according to relevant specific laws, such
as machinery under the Machinery Registration Act BE 2514 (1971). For the mortgage to be
legally valid and enforceable, the mortgage contract must be made in writing and registered
with the competent officials.
A guarantee is evidenced by a guarantee agreement whereby the guarantor agrees to
pay to the creditor if the borrower fails to perform its obligation. A recent amendment to
the CCC8 in relation to guarantees and mortgages was issued to increase the rights and
protection of guarantors and mortgagors. Key amendments include:
a joint and several liability provisions in a guarantee being void for guarantors who
are individuals;
b requirements to specify details of guaranteed obligations in the guarantee agreement for
the guarantee of future debts;
c requirements for creditors to serve notices on guarantors and third-party mortgagors in
cases of default by primary obligors;
d the third-party mortgagor’s liability will be limited to the mortgaged property only
and will not be liable for any shortfall in the enforcement proceeds and the secured
debts; and
e contract provisions that are contrary to certain provisions of the CCC Amendment Act
will be void.
6 Section 37, Paragraph 1 of Constitution BE 2560 (2017).

7 Section 37, Paragraph 2 of Constitution BE 2560 (2017).
8 Civil and Commercial Code Amendment Act BE 2557 (2014) and BE 2558 (2015).
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For the pledge of assets in physical form to be legally valid and enforceable, the pledgor
must deliver the pledged assets to the pledgee or its authorised representative. The pledged
property can be either kept by the pledgee or by a third party on behalf and for the benefit
of the pledgee. Although there is no legal requirement, a written pledge agreement should be
executed by both parties to the pledge.
In addition to the security package available under the CCC, security by way of
assignment is a security typically used in project financing, and which, despite not having
specific provisions prescribed to it, is subject to certain requirements set out in the CCC. An
assignment of rights under specific contracts must be made in writing, and can be set up in
relation to the party to the contract or a third party only if a written notice is delivered to the
party to the contract or the party to the contract agrees to the assignment in writing. To assign
the rights and, in most cases, the obligations of the contracting party, the creditors and the
borrower will enter into an assignment agreement (which in many cases will involve a form
of novation of obligations of the contracting parties), either absolutely or conditionally. In
practice, these assignments include the right to receive monetary claims, the right to receive
proceeds and step-in rights.
Apart from securities under the CCC, additional forms of security have become
available under the new Business Security Act. Under the Business Security Act, a security
provider may provide security to a security receiver in the form of a business security contract.
The following forms of security can be provided under the Business Security Act:9
a the ongoing business of the security provider;
b rights of claim;
c moveable property used by the security provider in its business operation, such as
machinery, inventory or raw materials used in the manufacture of goods;
d immoveable property, if the security provider directly operates the business relating to
immoveable property;
e intellectual property; and
f other properties as prescribed by the ministerial regulations.
The security receiver in the business security agreement must be a financial institution
or other person as prescribed in the ministerial regulations (e.g., a financial institution as
determined in the Thai laws and regulations governing financial institutions, a trustee on
behalf of a trust pursuant to the Trust for Transactions in Capital Market Act, or a securities
company pursuant to the Securities and Exchange Act).10
Moreover, unlike the pledge under the CCC, assets provided as security under the
Business Security Act do not have to be delivered into the possession of the security receiver
or its authorised representative.11 Therefore, the security provider still retains the flexibility
in its business operations while securing its debt obligations with the creditor. The security
provider may not pledge the secured property under the Business Security Act as a security
against payment of further debt, otherwise the said pledging shall be void.12 The business
security contract must, however, be registered with the registration officer and contain the
9 Section 8 of the Business Security Act and the ministerial regulation regarding the determination of persons
to be a security receiver BE 2559 (2016).
10 Section 7 of the Business Security Act.
12 Section 22. Paragraph 2 of the Business Security Act.
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details as prescribed under the Business Security Act.13 Once registered, the security receiver
will be deemed a secured creditor under Thai laws, including bankruptcy laws, and shall have
the right to receive repayment of debt from the secured property prior to unsecured creditors,
whether or not the right in the property has been transferred to a third person.14
In addition to the security package mentioned above, the shareholders or the holding
company (also, in practice, generally referred to as the sponsor) of the project company are
usually required, in addition to a guarantee, to provide sponsor support in favour of the
creditor by entering into a sponsor support agreement. The sponsor support agreement will
assure the creditor that should any cost overrun or cash shortfall occur in the project, the
sponsor will provide financing to the borrower. The financing provided by the sponsor is
made either by equity support or subordinated loan support. This sponsor support agreement
may also provide some other specific covenants required by creditors in each project, such as
a covenant to maintain a certain shareholding in the project company and special support
for specific circumstances, such as flooding, which may not be sufficiently covered by
insurance packages.

With respect to the construction contract, it is common in Thailand for the project company
to require the contractor to provide the bid bonds, advance payment bonds, performance
bonds and retention of money or warranty bonds. The amount of bonds may vary from 5 to
20 per cent of the value of the work and will also depend on the period and the type of the
project. These bonds are normally in the form of parent guarantee, bank guarantee from
a reputable bank or a standby letter of credit.
In general, the project company or the contractor (as the case may be) is required
to obtain construction and erection all risks insurance, third-party liability insurance,
inland transport insurance, marine cargo insurance, workmen’s compensation insurance or
employee’s liability insurance. The lenders providing financing for the project usually require,
on a case-by-case basis, the project company or the contractor (as the case may be) to obtain
additional insurance such as business interruption insurance and flood insurance, depending,
among other things, on the type of the project.

i Enforcement of security
The enforcement of a guarantee can be carried out by the creditor simply sending a written
notice to the guarantor to perform its obligations under the guarantee once the debtor
is in default.15 While a pledge is enforced by public auction only,16 if the proceeds from
enforcement are insufficient to pay its debt, the debtor will remain liable to the creditor
for the remaining balance unless the parties agree otherwise.17 As for the enforcement of
a mortgage, the creditor can either file for court judgment (1) for the mortgaged property to

14 Section 17, Paragraph 2 and Section 29 of the Business Security Act.
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be seized and sold by public auction or (2) to claim foreclosure of the mortgaged property
if the conditions specified in the CCC are met.18 Moreover, without a court judgment, the
enforcement of a mortgage can be carried out by public auction if there are no registered
mortgages or preferential rights on the mortgaged property
As regards the enforcement of property secured as a security in a business security
agreement, the security receiver may, without a court judgment:
a foreclose on the secured property if:
• the debtor owes payment of debt that is of the principal equivalent to or more
than the value of the secured property; and
• the debtor has not paid interest for five years and there is no other registered
security or other preferential rights on the secured property;19 or
b sell the secured property by public auction for payment of debt.20
In addition, if the security is an ongoing business, the enforcement shall be conducted by

a security enforcer licensed by the Business Security Registration Officer.21
ii Bankruptcy proceedings
The Bankruptcy Act BE 2483 (1940) (as amended) (the Bankruptcy Act) prescribes
that a secured creditor does not need to file a claim to participate in proceeds sharing in
a bankruptcy proceeding since it has priority over the security provided to it prior to the
order of receivership.22 However, a secured creditor may elect to file a claim to participate in
proceeds sharing in a bankruptcy proceeding under certain conditions.23 Any creditor filing
a claim in a bankruptcy proceeding must file its claim with the receiver within two months of
the date of publication of the order of absolute receivership.24 If the debtor has fraudulently25
or preferentially,26 as the case may be, transferred its assets during the period as specified
under the Bankruptcy Act prior to or after the filing of application for bankruptcy, the court
is empowered to cancel transfer of assets or any acts carried out with the intention of giving
undue preference to a creditor.

The main regulations and legislations that govern social and environmental issues when
undertaking project finance transactions and construction contracts are the Enhancement
18 i.e., there are no other registered mortgages or other preferential rights over the mortgaged property; the
debtor has failed to pay interest for five years; and the mortgagor has proven to the satisfaction of the
court that the value of the mortgaged property is less than the amount of indebtedness (Section 729 of
the CCC).
22 Section 95 of the Bankruptcy Act.
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and Conservation of National Environmental Quality Act BE 2535 (1992) (as amended)
(the Environment Act) and the Factory Act BE 2535 (1992) (as amended) (the Factory Act).
Pursuant to the Environment Act, several environmental assessments and reports are applied
especially to certain activities or projects, including:
a Environmental impact assessment (EIA): for the purpose of environmental quality
promotion and conservation, some of projects or activities are required to prepare an
EIA for submission to the relevant authorities for approval prior to the construction
or operation or at the stage of conducting a feasibility study for any projects that
a government agency jointly undertakes with private enterprises.27 For example, projects
that require the preparation and submission of an EIA include rail transportation, air
transportation, state highway projects and irrigation projects.28
b Initial environmental examination (IEE): IEEs are usually required for smaller-scale
projects that may affect the environment. Most of the projects that require the
preparation of an IEE are usually located on land in the reserved forest areas, such as
land in Phuket province, Krabi province and Chonburi province.
c Environment and health impact assessment (EHIA): projects or activities that may
have a severe impact on a community are required to prepare an EHIA and shall
arrange a public hearing for people and stakeholders; the report contains comments
from an independent agency. Projects or activities deemed to have a severe impact
on a community include mining according to the mining law, an air transportation
system where a runway is constructed or expanded to 3,000 metres or more, thermal
power plants such as coal power plants with a total capacity equal to 100MW or more,
biomass power plants with a total capacity of 150MW or more, natural gas power
plants with a total capacity of 3,000MW or more and all sizes of nuclear power plants.29
With respect to the Factory Act, an environment and safety assessment is a measure that
stipulates that any person requesting a certain type of factory operation permit or a certain
type of factory expansion permit (e.g., for a solar power plant that generates, transmits and
distributes electricity with a generation capacity of up to 1MW or a thermal power plant
with any generation capacity) shall prepare a report on preventive and mitigation measures
relating to the impact of the operation or expansion on environmental quality and safety,
and submit it together with the application form for the factory operation permit or factory
expansion permit, as the case may be.30
27 Sections 46-48 of the Environmental Act.

28 Notification of the Ministry of Natural Resources and Environment: Re: The determination of type
and size of project or business required to prepare the environmental impact assessment report and
criteria, process, regulation and the guideline for preparing the environmental impact assessment report
(as amended).
29 Notification of the Ministry of Natural Resources and Environment: Re: Type, size and implementing
procedure of project or activity that may cause a severe impact to quality of environment, natural resources
and health of a community that requires a government agency, a state enterprise, or a private enterprise to
prepare an environmental impact assessment report BE 2553 (2010).
30 Notification of the Ministry of Industry: Re: Preparation of report on the study of prevention and
mitigation measures on the impact to environmental quality and safety BE 2552 (2009) and Notification
of the Ministry of Industry: Re: Preparation of report on the study of prevention and mitigation measures
on the impact to environmental quality and safety (No. 3) BE 2559 (2016).
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As of the end of 2016, Thai banks have not yet adopted the Equator Principles and as such
project finance transactions and construction contracts are not required to comply with
them. There have, however, been instances of Thai banks providing cross-border financing
for the development of infrastructure projects that require the projects to comply with the
Equator Principles. The reasoning behind this requirement seems to be the possibility of the
projects being refinanced in the future by financial institutions that require compliance with
the Equator Principles.

Financial institutions, as lenders in project finance transactions, may be responsible for any
administrative, civil or criminal liabilities if they are regarded as an administrative agency.
In general, the administrative procedure only applies where at least one of the parties in an
agreement is an administrative agency or state official, which is deemed an administrative case
under the administrative laws. State financial institutions are designated as administrative
agencies (e.g., Krung Thai Bank Public Company Limited, Export-Import Bank of Thailand,
Government Savings Bank and other government-owned financial institutions established
under specific laws).

i PPP
PPP projects in Thailand are governed by the Private Investments in State Undertakings Act
BE 2556 (2013) (as amended). The project proposal shall be prepared by the host agency;31
the process and implementation of each project will depend on the project’s value, which can
be summarised as follows:
a for projects having a value of at least 5 billion baht,32 the Cabinet is empowered to
approve the private entity selection result from the bidding and draft investment
contract;33 and
b for projects with a value of between 1 and 5 billion baht for medium-sized projects and
less than one billion baht for small-sized projects, the relevant ministry is empowered
to consider the private investments in state undertakings.34
31 In Section 4 of the Private Investments in State Undertakings Act BE 2556 (2013) ‘host agency’ means
a government agency having the status of a department or its equivalent, other state agency or local
administrative organisation that invites private investment in a state undertaking.
32 Ministerial Regulation regarding the Determination of an Additional Value of Project That Has To Comply
with the Private Investments in State Undertakings Act BE 2556 (2013) BE 2559 (2016).
33 Section 42 of the Private Investments in State Undertakings Act BE 2556 (2013).
34 Notification of the Private Investments in State Undertakings Policy Committee: Re: The criteria and
procedures for private investments in state undertakings in projects having a lesser value than Section 23 of
the Private Investments in State Undertakings Act BE 2559 (2016), BE 2558 (2015).
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The PPP project shall comply with the strategic plan, which is proposed by the responsible
Ministry.35 At present, there is a project pipeline under the PPP strategic plan for 2015–2019,
which categorises PPP projects into two types: projects that require private sector investment
and projects in which the private sector should be encouraged to invest.
Recent PPP transactions include the development of an urban rail transit system, which
is in the process of construction, and the development of toll roads in major metropolitan
urban areas, which are undergoing feasibility studies.36
The general public-bidding law in Thailand is the newly enacted Public Procurement and
Administrative Act BE 2560 (2017) (the Public Procurement Act), announced in the Royal
Gazette on 24 February 2017. The Public Procurement Act is scheduled to become effective
on 23 August 2017.37 During the transition period, the current public bidding laws.38 Once
the Public Procurement Act becomes effective, the current public-bidding laws shall be
revoked by virtue of law.39
The Public Procurement Act has been issued to set a standard by focusing on public
disclosure for transparency and opening up to fair competition. The draft also states that
the fundamental principle for tender procedures by the state for procurement should be
to provide the most benefit to the public and ensure the following: quality of materials,
transparency of the procurement process, efficiency and effectiveness of the procurement
process, and assessment of the procurement and its verification.40 The authority with
responsibility for carrying out reviews of applications will depend on the procurement entity,
and upon selection of the candidate, the parties shall enter into an agreement approved by
the Office of the Attorney General.41

The main law governing foreign investments and businesses in Thailand is the Foreign
Business Act BE 2542 (1999) (as amended) (FBA). As a general rule, the term ‘foreigner’ used
in the FBA refers to both foreign individuals and foreign companies, whereby a company is
deemed to be a foreign company in the event more than 49 per cent of the registered capital
in the company is held by one or more foreign individuals or foreign companies. The FBA
sets out the rights and limitations of foreigners with respect to business activities in Thailand,
which can be divided into the following three categories:
a business activities in which foreigners are unconditionally prohibited from engaging;
35 Section 19 of the Private Investments in State Undertakings Act BE 2556 (2013); Notification of the
Private Investments in State Undertakings Policy Committee: Re: The strategic plan for private investments
in state undertakings BE 2558-2562 (2015–2019).
36 Information from the Project Pipeline under the PPP Strategic Plan 2015–2019, dated 12 June 2015.
37 Section 2 of the Public Procurement Act.
38 i.e., the Regulation of the Office of the Prime Minister on Procurement BE 2535 (1992) and the
Regulation of the Office of the Prime Minister on Electronic Procurement BE 2549 (2006)) will
be applied.
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b business activities that may affect national security or safety, art, culture, custom, native
manufacturing or handicraft production, natural resources, or the environment; and
c business activities in which Thai nationals are not sufficiently equipped to compete
with foreigners.
The business activities at (b) above may be engaged in by foreigners upon obtaining specific
permission from the Minister of Commerce with the approval of the Cabinet, and the business
activities at (c) by obtaining permission from the Director-General, with the approval of the
Foreign Business Board. In addition, exemption from the FBA restrictions mentioned above
may be available if the foreigner has been granted investment promotion status by the Board
of Investment or has been granted permission with respect to certain business activities by the
Industrial Estate Authority of Thailand.

According to Ministerial Regulation No. 13 (BE 2497) (as amended) issued under the
Exchange Control Act BE 2485 (as amended), there are no restrictions on an authorised agent
(a commercial bank licensed in Thailand to operate exchange control transactions) providing
loans to a Thai entity in foreign currency, provided that relevant rules and regulations as
prescribed by the exchange control officer are complied with. Any profits received by the
project company in Thai baht may also be converted into foreign currency provided that there
is an underlying transaction that requires payment to be made in the foreign currency and
documentary evidence to this effect is provided to the authorised agent. If no such evidence is
provided, the foreign currency can be deposited into the project company’s foreign currency
deposit account provided that the outstanding amount at the close of the business day does
not exceed US$5 million or its equivalent.42
Transfers of funds from Thailand may be made on the condition that the project
company submits the relevant required documents to the authorised agent for each type
of transaction as specified under the Notice of the Competent Officer: Rules and Practices
regarding Currency Exchange to the authorised agent together with a foreign currency
transaction form in cases where the foreign currency sold or exchanged for the transfer
exceeds or is equivalent to US$50,000. Generally, the documents required to be submitted
are those that evidence or support the underlying transaction for the transfer. For example,
the transfer of profits to the head office abroad will require an audited financial statement for
the current fiscal year of the project company.
In cases where the project company receives proceeds from the exportation of goods, the
project company is required to take receipt of the foreign currency proceeds within 360 days
of the date of exportation and, once received, the company must bring these proceeds into
Thailand and immediately sell or deposit the foreign currency with an authorised agent.43
The foreign currency must be sold or deposited with the authorised agent within 360 days of
the date the authorised agent notifies the project company that the foreign currency proceeds
have been received into the account of the project company.44 The project company may
42 Article 23(3) of the Notice of the Competent Officer: Rules and Practices regarding Currency Exchange.
43 Article 20 of Ministerial Regulation No. 13.
44 Article 9 of Notification of the Ministry of Finance: Re: Directions of the Minister to authorised agents.
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request an exemption from the above requirements from the Bank of Thailand, and should
submit the required evidence and documents;45 if the project company is exempted from the
above requirements, it need not bring the foreign currency proceeds into Thailand.
In Thailand there are no specific courts or tribunals when dealing with project finance
transactions or construction contracts. However, if a dispute arises from any transaction in
Thailand relating to a specific law, that specific law shall be complied with and the dispute shall
be conducted under specific court procedures; for example, the Central Intellectual Property
and International Trade Court, the Administrative Court or the Central Labour Court.

Alternative dispute resolution can be divided into three types: arbitration, mediation and
other forms of alternative dispute resolution such as expert determination.
Most of arbitration cases in Thailand are handled by the Thai Arbitration Institution
(TAI), under the Alternative Dispute Resolution Office, Office of the Judiciary, Ministry of
Justice. The TAI provides arbitration services under the TAI Rules of Arbitration. It also offers
facilities and administration for ad hoc arbitration such as arbitration under the UNCITRAL
Arbitration Rules, and arbitration conducted under the auspices of other institutions, such as
the International Chamber of Commerce.
In Thailand, the Arbitration Act BE 2545 (2002) (as amended) (Arbitration Act)
states that in the contract between a government agency and a private entity, regardless
of whether it is an administrative contract, the parties may agree to apply the arbitration
procedures to settle the dispute and the said arbitration contract shall be binding on the
parties.46 The enforcement and enforceability of arbitral awards in Thailand is also governed
by the Arbitration Act. Since Thailand is a party to the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (New York, 1958), a court is required to enforce an
arbitral award made in a signatory country of the convention.
The request for enforcement of an arbitral award can be made to the court having
competent jurisdiction. However, the Arbitration Act also specifies circumstances in which
an arbitral award may be set aside or a court may refuse to enforce an arbitral award, which are
in line with the UNCITRAL Model Law on International Commercial Arbitration. Those
circumstances include issues regarding capacity to arbitrate, validity of arbitration agreement,
improper notice of the appointment of arbitrators or the commencement of arbitration,
scope of arbitration, compliance with an arbitration agreement (for example, number of
arbitrators), non-arbitrable subject matters, finality of arbitral awards and conflict with
public policy. The Arbitration Act does not provide the courts with authority for a review on
the merits of a decision.47
With respect to contracts entered into between the state and the private sector, the
Cabinet passed a resolution that prohibited specifying arbitration as the dispute resolution
45 Article 9 of Notice of the Competent Officer: Rules and Practices regarding Currency Exchange.
46 Section 15 of the Arbitration Act.
47 Section 43 of the Arbitration Act.
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mechanism in all such contracts, whether domestic or international. The Cabinet does
permit parties to submit contracts requiring an arbitration provision for consideration on
a case-by‑case basis.48
However, a subsequent resolution of the Cabinet dated 14 July 2015 resolved that
arbitration may not be specified as the dispute resolution mechanism if contracts entered into
between the state and a private entity – whether domestic or international, and irrespective of
whether they are administrative contracts – fall into either of these categories:
a contracts that need to comply with the Private Investments in State Undertakings Act
BE 2556 (2013); or
b concession agreements where the public sector is the concessionaire.
The Cabinet, however, agreed once again to consider requests to include an arbitration
provision on a case-by-case basis.

In any discussion of Thailand’s outlook for the future, it is impossible to avoid political
developments, which have in the past had major repercussions on the nation’s economic
development and on investment. As previously mentioned, Thailand is currently governed by
a military-installed government following the coup d’état in 2014. The recent promulgation of
Constitution BE 2560 (2017) moves the country towards a general election and the election
of a civilian government, tentatively, by the end of 2018.
One of the strengths of having a non-civilian government is the military government’s
ability to bypass red tape and unnecessary bureaucratic procedures to approve and expedite
large-scale projects. The existing government has already demonstrated this by the use of
special powers granted to the National Council for Peace and Order (NCPO) under Interim
Constitution BE 2557 (2014)49 to cut through red tape and fast-track certain types of
projects. Examples of the use of this power include allowing certain types of power projects
to be constructed without taking into account requirements and restrictions against such
buildings under town planning laws;50 or allowing certain infrastructure projects, especially
transport mega projects and development projects, to be opened up to bidding before an EIA
has been carried out.51 Even though Constitution BE 2560 (2017) has become effective, all
announcements, orders and acts, including those of the NCPO or the head of the NCPO,
shall also continue to be in force under Constitution BE 2560 (2017) until repeal by way
of an act or order of the prime minister or a resolution of the Council of Ministers, as the
case may be.52 At present, the use of these special powers is far-reaching and sometimes
causes negative public sentiment and objections because of the perceived lack of careful
consideration or of public hearings and scrutiny by any authority.
While the government and some investors intend these powers to be used to allow
large-scale projects, particularly infrastructure projects, to proceed without delay, the
immediate effect is, in general, a negative reception from the public, as the use of these
48 Cabinet Resolution dated 28 July 2009.

49 Section 44 of Interim Constitution BE 2557 (2014).
50 NCPO Order 4/2559 (2016).
51 NCPO Order 9/2559 (2016).
52 Section 279 of Constitution BE 2560 (2017).
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powers can be interpreted as allowing investors to flaunt important regulations that were
put in place to protect the rights of local communities and the public. Taking into account
the scale of some of the projects that are being fast-tracked, it is inevitable that these projects
will be project-financed, involving syndicates of both domestic and international lenders.
Owing to the sensitivity of environmental and social issues, there is an obvious reluctance
from potential lenders and financial institutions when it comes to lending in large-scale
infrastructure projects.
In future, the key for Thailand will be the approach taken by the current government
in initiating and successfully following through with the reforms it has announced to make
Thailand more competitive and able to attract more investment in large-scale projects. Aside
from tax reforms and adjusting the investment promotion status afforded to investors, the
government will have to initiate and implement reforms with a long-term plan to ensure
Thailand has a sustainable economy that is less reliant on being an industrial economy heavily
dependent on the export of products, but rather is an economy with a strong domestic market
that can innovate and adapt to changing environments and economic platforms in a more
globalised world.
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Chapter 21
UNITED KINGDOM
David Brynmor Thomas and Hannah McCarthy1
I INTRODUCTION
The United Kingdom’s sophisticated but uneven infrastructure networks are the product of
fragmented and reactive development over hundreds of years. Transport, communications
and power generation networks face pressing capacity and quality issues that must be
addressed against a background of ongoing instability in the financial markets and stringent
environmental and planning regulation.
Project finance structures have been used in the United Kingdom for many years. In the
early 1990s, the government introduced private finance initiatives (PFI) as a way of funding
a range of infrastructure projects. Since then, the PFI scheme has funded projects in the
United Kingdom with a capital value estimated to be hundreds of billions of pounds.
Various UK government institutions, under the general auspices of the Treasury, have
sponsored PFI, although the relevant contracting authorities have been a range of government
ministries, local authorities and other public bodies. Banks in the United Kingdom have
readily funded PFI and other public–private partnership (PPP) transactions. As well as
‘simple’ project financing, the City of London has produced PPP-focused investment funds
and a secondary market in interests in project companies, allowing equity stakes in project
companies to be sold on as investments, as they then bear, in effect, a government-backed
income stream. In particular, the secondary market in project company equity stakes has
provided an exit route for investors in PFI or PPP transactions, especially parties wishing to
participate in the development or construction phase of projects but not wishing to maintain
an interest in the project once it is built, during the service delivery phase.
The UK PFI scheme has attracted political controversy. This is for three reasons: the
additional cost of PFI finance, relative to the cost if the government borrowed on its own
1 David Brynmor Thomas and Hannah McCarthy are barristers at 39 Essex Chambers.
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account; the concern that ‘accounting incentives’2 may sometimes cloud the evaluation of
whether a PFI scheme represents good value for money; and the level of ‘profits’ generated by
investors in the secondary market in project company equity.3

Over the past few years, the projects and construction sectors have felt the effect of the UK
government’s deficit reduction policy. In July 2011, the UK government announced plans
to deliver £1.5 billion of savings across operational PFI projects in England. By June 2013,
government departments had reported £1.6 billion of formally agreed savings to the Treasury,
as well as a pipeline of further expected savings.4 In March 2015, the government announced
that the savings initiative had secured £2.1 billion in savings and that another £2 billion in
savings was possible.5 Consequently, investment in new PFI projects has seen a decline in
recent years: the combined capital value of PFI projects that reached financial close between
31 March 2014 and 31 March 2015 was £0.7 billion, down from £1.4 billion over the same
period in 2013–2014 and £1.6 billion over the same period in 2012–2013.6
Despite the somewhat bleak picture that is suggested by the annual investment figures
and focus on public sector savings over the past few years, government policy has recently
shifted to a renewed focus on economic stimulus through infrastructure investment. The
infrastructure pipeline underpinning the National Infrastructure Plan 2014 sets out over
£460 billion of planned public and private investment to the end of the current decade and
beyond. Of this, £55 billion of investment is planned for 2015–2016 alone.7 The most recent
update to the Plan, released in December 2016,8 combined the infrastructure and construction
plans with a total value of more than £500 billion of public and private investment.
In this regard, the outcome of the 2017 UK parliamentary elections – in which the
Conservative Party lost its overall majority – is significant. The Conservative Party manifesto
pledged to deliver on the National Infrastructure Plan and also promised significant
investments in core infrastructure construction, with an emphasis on the railway and road
networks.9 This pledge ties in with a number of ongoing priority railway projects, including
2 See, for example, the conclusions of the House of Commons Treasury Committee in its report ‘Treasury
– Seventeenth Report: Private Finance Initiative’ (19 August 2011) that ‘most PFI debt is invisible to the
calculation of public sector net debt (PSND) and is therefore not included in the headline debt and deficit
statistics’. According to the Fiscal Sustainability Report published by the Office for Budget Responsibility
in July 2015, ‘this generates a perception that PFI has been used as a way to hold down official estimates
of public sector indebtedness for a given amount of overall capital spending, rather than to achieve value
for money’. This is especially so given the not-insignificant role played by PFI: ‘if all capital spending
under PFI were to have been carried out through conventional debt financing, PSND would have been
1.9 per cent of GDP higher at end-March 2014’.
3 See for example the observations made by the briefing paper titled ‘PFI: costs and benefits’ published by
the House of Commons Library on 13 May 2015, which observed (at page 9) that some of the earlier PFI
projects had expected returns as high as 20 per cent.
4 ‘HM Treasury: Savings from Operational PFI Contracts’, published by the National Audit Office,
November 2013.
5 Page 14 of ‘PFI: costs and benefits’ published by the House of Commons Library on 13 May 2015.
6 ‘HM Treasury PFI Data Summary’, December 2013, December 2014, March 2016.
7 Page 11 of the National Infrastructure Plan 2014, published by HM Treasury, December 2014.
8 The National Infrastructure and Construction Pipeline 2016, published by HM Treasury December 2016.
9 Pages 14 and 15 of the Conservative Party Manifesto 2015.
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HS2, a high-speed rail network that will link London to a number of key cities, and Crossrail,
an ambitious project that is aimed at increasing London’s rail capacity by 10 per cent.10
Following the election, it is not clear how the direction of the National Infrastructure Plan
may yet be affected by the outcome.
While there have been significant developments in public policy relating to projects and
construction in recent times, the legal landscape has remained largely stable. An important
exception is the coming into force of the Public Contracts Regulations 2015 (PCR 2015) as
a result of which the Public Contracts Regulations 2006 (PCR 2006) stand repealed.11 The
measures included in the PCR 2015, which implement EU Directive 2014/24 on public
procurement into UK domestic law with prospective effect from 26 February 2015, are
aimed at clarifying and simplifying the existing procurement regime to make it more efficient
and flexible. These include changes to the competitive dialogue procedure that is used by
contracting public authorities when entering into particularly complex projects. The United
Kingdom has also implemented two further EU Directives relating to procurements: EU
Directive 2014/23 implemented by way of Concession Contracts Regulations 2016; and
EU Directive 2014/25 implemented by way of Utilities Contracts Regulations 2016. The
legal landscape remains unchanged as of June 2017 notwithstanding the United Kingdom’s
formal notice of its intention to leave the EU, tendered in March 2017; it is anticipated
that the status of EU directives will be clarified in the course of negotiations throughout
2017 and 2018.

Project finance structures take various forms, depending upon the nature of, and revenue
generation model for, the project. Infrastructure projects that generate income from end
users, such as toll roads and bridges, will commonly be structured on a build-operate‑transfer
or build-own-operate-transfer basis.
In these structures the completed project should generate sufficient income over
the concession period for the project company (the private sector consortium that will be
responsible for the overall delivery of the project) to cover repayment of borrowings, operation
and maintenance costs for the facility and the generation of an equity return for investors.
Where the completed project will not generate sufficient revenue to satisfy this financial
model, the government may take an equity stake or provide grants to plug the funding gap.
In the United Kingdom, the PFI model has been used extensively for the delivery of
public sector projects, most notably in health, roads, prisons and education. Private Finance 2
(PF2), a new approach to PPP announced by the UK government in late 2012, is still in its
infancy and only a small number of projects have been agreed via PF2.12
10 ‘Top 40’ annex to the National Infrastructure Plan 2014, published by HM Treasury, December 2014.
11 With the exception of defence and security public contracts, the PCR 2015 will directly apply only to
England, Wales and Northern Ireland and will not extend to Scotland.
12 Page 15 of ‘PFI: costs and benefits’ published by the House of Commons Library on 13 May 2015.
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ii Documentation
As would be expected, project finance generates a large number of transactional documents.
The precise requirements will depend upon the type of the project, the ownership structure,
the regulatory environment and the nature of public sector involvement.
Typically, the project company will be a limited liability company. The relationship
between its shareholders will be governed by the company’s articles of association and
a separate shareholders’ agreement. The project company will enter into the project agreement,
sometimes known as a concession agreement, with the public or government body. Under
this agreement, the project company will accept responsibility for the construction of the
project and for the operation and maintenance of the facility and the delivery of associated
services during the concession period. The project company will look to pass down all
construction-related risks to the construction contractor under a fixed-price design-build
contract. A separate operation and maintenance (O&M) contract will be entered into for the
concession period following completion of the works.
The capital funding for the project will generally be provided through non-recourse
lending, secured against the income streams of the project company. As the funder will not
have security over the asset itself, the bank will require step-in agreements with the project
company as well as step-in rights in respect of construction and O&M contracts so that the
funder itself is able to take control of the project if there is any failure in delivery.
Offtake agreements will be required where the output of a project, such as oil or
electricity, is to be supplied to a particular customer. Minimum revenue generation through
offtake agreements may be a key requirement of the project company for it to service its debt.
Separate support agreements may be required where specific licensing or financial support
is required.

Engineering-procurement-construction and design and construction contracts are primarily
used for project finance-based transactions to deliver maximum risk transfer to construction
contractors. Under such contracts, the contractor will be responsible for the entire design
and construction of the works, usually on a lump-sum basis, with the contractor liable for
liquidated damages in the event of delayed completion.
Engineering-procurement-construction-management (EPCM) has developed more
recently in certain markets, including petrochemical, mining and power. It is a type of
management contract pursuant to which the contractor manages the design and construction
that is carried out by others. However, a key distinction between EPCM and traditional
construction management is that the EPCM contractor actually carries out the detailed
design and engineering for the project as well as the management of trade contractors and
the construction process.
The specific form of construction contract utilised will depend upon the nature and
location of the project. Where standard forms such as FIDIC (International Federation of
Consulting Engineers) or NEC3 are used, these are often subject to substantial amendment
to reflect the required risk profile. Many construction contracts used in transactions involving
project finance are, however, drafted on a bespoke basis.
The UK government has taken steps to compel the standardisation of the contracts
pursuant to which PPP and PFI projects are undertaken. This has been done by way of
government guidance and standard documentation that may apply depending on the nature
of the project and funding arrangements.
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The following risks may be encountered in project finance transactions:
a construction risks – including the risk of design or construction difficulties, unforeseen
conditions and project delay;
b operation risks – failure of the completed project to meet performance requirements
and ongoing operation and maintenance issues;
c revenue risks – the risk that the project does not produce the required output or that
the anticipated market for the facility does not materialise;
d insolvency risks – the risk of insolvency of a key player in the delivery or operation of
the completed project;
e environmental risks – environmental liabilities that arise out of construction or
operation of the facility; and
f political risks – risks associated with political instability or policy changes brought
about as a result of change in governments.
Where possible, the project company will look to pass down risks to its subcontractors.
Construction risks can be offset through the terms of the construction contract, with the
contractor taking responsibility for defects in the works and delays in completion. Damage
to the works themselves will generally be the responsibility of the construction contractor and
covered by insurance. Once the project has been commissioned, the O&M contractor will be
responsible for any shortfall in its services. Limitations on liability may, however, affect the
ability of the project company to recover any costs or losses it incurs or suffers.
Generally, the parties will need to look to the insurance market to cover risks that are
not within the direct control of those involved in the delivery of the project. As the project
company is likely to have little capital, it will not be able to provide any form of meaningful
protection in respect of uninsured risks for which it is solely responsible.
ii Limitations on liability
Project companies and their subcontractors will frequently negotiate limitations on their
liability – albeit losses arising from death and personal injury, fraud and wilful default will
generally be carved out from sum caps.
Construction contractors will also look to limit their overall liability. The level of cap
under the construction contract is usually agreed on the basis of a percentage or multiple of
the contract sum. The construction contractor may require a separate cap on its liability for
delay damages, often set as a percentage of the contract sum. O&M contracts will usually
include an overall cap based on a multiple of the annual fee payable to the contractor.
Both the project company and the construction contractor will usually look to limit or
exclude their liability for consequential losses.
Project agreements usually provide the parties with relief from liability in respect of
force majeure. If a force majeure event occurs the parties will generally look to agree alternative
means of delivering the project. If the event continues for a specific period, the parties to the
project agreement will usually have the right to terminate. Force majeure events are dealt with
separately from relief events. Relief events may entitle the project company to an extension
of time for completion of the project and possibly also financial compensation but not
to terminate.
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iii Political risks

Project finance transactions in the United Kingdom have not historically been exposed to
significant political risks. As a free market economy, foreign investment in UK projects is not
subject to significant restrictions. While recent deficit reduction measures have seen some
PFI projects scaled back or cancelled, they have not affected projects that have achieved
financial close.
The outcome of the United Kingdom’s decision to leave the EU in 2016 continues
to create unprecedented political and economic uncertainty. The process of withdrawal
from the European Union was triggered on 29 March 2017, with an anticipated two-year
process of negotiation prior to withdrawal from the European Union. The outcome of the
UK parliamentary elections may well affect this process, but in any event, European law
will continue to apply in the United Kingdom until formal withdrawal. There are, however,
question marks as to which European regulations and directives will be maintained once the
withdrawal is complete. It is currently impossible to predict how the regulatory framework
applicable to project finance (which is heavily intertwined with Europe’s) will be affected in
the event of complete British withdrawal from the European Union, although the question
is currently being closely investigated. In May 2017, the European Parliament published the
first report on the possible effects of Brexit, which considered various potential models for
a UK–EU public procurement model.13
Furthermore, the results of the referendum reopened questions about the future
of Scotland and, to a lesser extent, Northern Ireland as constituent units of the United
Kingdom. While it had been thought that the decision by Scottish voters to remain within
the United Kingdom in a referendum in 2014 had settled the issue of Scottish independence
for some time to come, the issue has now been revived, although following the outcome of
the 2017 parliamentary election, it is still not clear to what extent.
Political risk guarantees have not historically been required for project finance
transactions in the United Kingdom. Those investing in the United Kingdom will need to
watch this space in the near future.

Funders commonly take rights over the income stream from a project and in relation to
significant contractors and subcontractors. In addition, funders will frequently take parent
company guarantees from the investors in project companies and take security rights over the
project company itself.
The income from projects (e.g., generated from offtake agreements in energy projects
or availability payments from government authorities) is commonly paid through a project
bank account at funding institutions. The money will ‘cascade’ through those accounts,
enabling funding institutions to be assured that they will receive their payment first from the
income generated by the project financed asset. In addition, the project company’s accounts
may be assigned to the funders or funders may have floating charges over receivables.
The funders will generally have a charge over shares in the project company held by
investors. In addition, the investors may give parent company guarantees to funders.
13 ‘Consequences of Brexit in the Area of Public Procurement’, published by the European Parliament in
May 2017.
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There are commonly ‘direct agreements’ between funders and significant contractors
(in particular major engineering or equipment supply contractors) and, for example, offtake
purchasers in energy contracts. This in theory enables funders to continue with a project
without the participation of the project company, by exercising step-in rights in direct
agreements, which are generally enforceable under English law.

Contractors and subcontractors frequently provide bonds to employers in both project
finance and other construction transactions in the United Kingdom.
Bonds may be ‘first presentation’ or ‘on-demand’ bonds. These bonds are commonly
used to secure payments made by the employer to the contractor or subcontractor; for
example, against the release of retention monies or to support a bid to a public authority
by a contractor. The bonds are payable upon presentation of the stipulated documentation
during the period of validity of the bond. Banks and the courts are generally reluctant to
interfere in their payment and they have been described as being akin to cash in the hands
of beneficiaries.
As alternatives to first presentation bonds, performance bonds are also used on projects.
They differ from on-demand bonds insofar as they require some stipulated default to be
asserted and evidenced by the beneficiary on their demand. Some performance bonds require
that there has first been a judgment or arbitration award that has not been complied with.
However, employers tend to resist such stipulations.
As indicated above, the financing banks may also take parent company guarantees from
project company sponsors against default by the project company.
Projects are commonly funded by project bonds issued to the London market. Indeed,
the timing of such bond issues can drive the timing of completion of the negotiation of
project documents, so as to allow financial close for transactions at times favourable to the
issue of bonds in the market.
VII ENFORCEMENT OF SECURITY BANKRUPTCY PROCEEDINGS

English law requires that security interests over land and floating charges over a company’s
property or undertaking be registered. Failure to register security interests where required
make those interests unenforceable against parties not on notice of the security interest.
Many security interests, for example, step-in rights and charges of receivables, may be
enforced outside insolvency proceedings.
In the event of insolvency, secured creditors’ security will crystallise in relation to the
relevant asset. Secured creditors will rank ahead of others. Unsecured creditors, in contrast,
will rank behind various preferred creditors, including tax authorities and, to an extent,
employees and pension interests. However, those preferred creditors will not have interests in
relation to secured assets.

The United Kingdom is subject to increasingly onerous national and EU environmental
regulation (though this may change depending on the terms of British withdrawal from the
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European Union as a result of the 2016 referendum). Many environmental considerations will
be dealt with through planning permission procedures, including requirements to produce
environmental impact assessments where appropriate. Specific licences may be required in
relation to the construction or operation phases of the project. Projects of any size, once built,
are also increasingly caught by carbon-reduction legislation and emissions trading schemes.
Potential environmental liabilities may be significant and affect the overall bankability
of the project. Banks will therefore need to understand the nature and scope of potential
direct and indirect liabilities before committing finance to the project as these may ultimately
affect the project company’s ability to repay the loan. Environmental liability attaches to the
polluter, which is likely to be the owner or occupier of the land. If a bank were to have security
over the project itself and to enforce this, the bank could itself assume environmental liability.
The Equator Principles are internationally recognised principles used in assessing and
managing environmental and social risk in project finance transactions as well as project-related
corporate loans and bridge loans. EP III is the current form. Financial institutions that adopt
the principles commit to not providing loans to projects where the borrower will not or is
unable to comply with social and environmental policies that comply with these broader
principles. The Equator Principles are not mandatory and have no legal status, but have been
widely adopted by funding institutions. In excess of 70 financial institutions in a number of
countries have adopted them.

i PPP
PPP financing models have been used for a broad range of infrastructure and other public
sector projects in the United Kingdom, including for health, education, transport, prisons,
waste and defence projects. PFI has been by far the most common form of PPP structure in
the United Kingdom in recent years.
There is no special legal or statutory framework for PFI, although some sector-specific
legislation has been enacted to facilitate PFI arrangements, primarily in the health sector. PFI
projects are subject to the general principles of English law. Non-statutory guidance has been
published for many sectors and the government has developed standardised documentation
that can be used for PFI transactions. PFI projects will invariably be caught by the public
procurement regime in the United Kingdom, meaning that they must be tendered in
accordance with the procurement rules.
The main features of PFI are similar to those of other project finance arrangements.
The project company – a special purpose vehicle (SPV) for the project – is responsible for
constructing, operating and maintaining the project and providing ancillary services. Funding
will be provided from the private sector, comprising predominantly non-recourse lending but
with equity provided by participants in the project company, which may include the UK
government. The project company will be paid a fee (or unitary charge) to cover its costs,
including the servicing and paying off debt, and to deliver a return to the equity investors.
The fee will, to an extent, be dependent upon required service levels being achieved.
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The PFI model was amended in 2012 by the introduction of PF2 on 5 December 2012.14
PF2 allows the public sector to participate in projects as a minority equity co-investor15
and facilitates funding models that make use of institutional investor capital. While PF2 is
still relatively new and only a small number of projects have been agreed under it, it has
been employed for schools and hospitals projects, including the UK government’s privately
financed Priority School Building Programme.
Public procurement in the United Kingdom was until very recently governed by the PCR
2006, which implemented the EU Consolidated Directive16 on public procurement.17 The
regulations governed the award of contracts for public works and contracts for services and
supplies by contracting authorities, including central government, local authorities and other
bodies governed by public law. In April 2014 three new Directives were adopted,18 which
streamlined existing processes and added flexibility. Of these, EU Directive 2014/24 on
public procurement – which repeals EU Directive 2004/18 – was implemented as part
of national law by way of the PCR 2015. As noted above, the other two Directives were
implemented in April 2016 by way of the Concession Contracts Regulations 2016 and the
Utilities Contracts Regulations 2016.
Contracts caught by the regulations, which will generally include most PFI contracts,
must be advertised by the contracting authority in the EU’s Official Journal and must follow
a specified award procedure. The procedure will vary depending on the nature of the contract.
Since its inception, the competitive dialogue procedure has been used for many PFI projects
for capital works, and some clarifications have been made to it by way of the PCR 2015.
Once the award decision has been made, the contracting authority must notify all
bidders of its decision. This must be followed by a standstill period during which any
unsuccessful bidder may challenge the award and apply for it to be set aside. The English
courts have power to grant injunctions preventing the parties from entering into contracts
and to order the setting aside of awards. They can also award damages in the event of breach
of the regulations.
In addition to the procurement regulations, public procurement in the United Kingdom
(until withdrawal from the European Union) is subject to general principles of European law,
including non-discrimination, equal treatment, mutual recognition and transparency.
PF2 projects are subject to a streamlined procurement process. The competitive
tendering phase is limited to 18 months, measured from the issuance of project tender to
the appointment of a preferred bidder. Projects that do not reach the preferred bidder stage
within this period may be terminated.
14 ‘HM Treasury: A new approach to public–private partnerships’, December 2012.

15 The equity investment is to be managed by a central unit located in the Treasury and separate from the
procuring authority.
16 Directive 2004/18.
17 There are also the Utilities Contracts Regulations 2006 (from Directive 2004/17).
18 Directives 2014/24, 2014/25 and 2014/23 (the latter being a new Directive on concession contracts).
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The United Kingdom does not have special licensing or other requirements for foreign
contractors. From a practical perspective, while it is necessary for contractors to comply with
local requirements in relation to health and safety (in particular in relation to construction,
design and management regulations) and tax regulations, there are no particular compliance
registration issues that must be addressed by foreign-based contractors.
The United Kingdom does not offer particular incentives for foreign investments. Until
the United Kingdom’s formal withdrawal from the European Union, all UK investment must
be satisfactory from the perspective of EU procurement regulations and wider EU law. EU
law will, for example, prohibit incentives that might be characterised as state aid. In terms of
investor protection, the United Kingdom is a party to the Convention on the Settlement of
Investment Disputes between States and Nationals of Other States (the ICSID Convention).
The United Kingdom is party to a large number of bilateral investment treaties (BITs) with
a range of other states. There is some question at present as to whether investment treaty
competence now resides at EU level following the Lisbon Treaty. However, UK BITs remain
in place at present and afford protection to investors. Those treaties will give the normal treaty
protection to investors, including protection against expropriation without compensation,
the right to fair and equitable treatment and the right to repatriate profits.
The United Kingdom does not generally impose restrictions on foreign investments in
particular industries. There are, for example, significant foreign investment holdings in UK
infrastructure, including airports and military dockyards.
The regime in relation to the repatriation of profits is unrestricted. The United
Kingdom does not impose currency exchange restrictions, nor are there any laws that
preclude the removal of profits or investments from the United Kingdom. Other than the
normal incidents of taxation, there are no particular restrictions on remittances of investment
returns. While the United Kingdom may impose withholding tax on repatriated profits, it
also has a comprehensive regime of double taxation treaties.
Disputes arising from construction and engineering works in projects are commonly dealt
with in the United Kingdom by three separate regimes: adjudication, arbitration and High
Court litigation.
i Adjudication
All construction contracts must, under statute,19 include provision for the adjudication of
disputes. If a construction contract does not include provision for adjudication then statute
will imply an adjudication regime into it.
A construction contract is, broadly, one that provides for the carrying out of construction
operations. It includes a contract that provides for the provision of advice or other services
in relation to the conduct of construction operations. It was a requirement that construction
19 Part II of the Housing, Grants, Construction and Regeneration Act 1996, as amended by Part 8 the Local
Democracy, Economic Development and Construction Act 2009.
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contracts had to be in writing to be covered by the statute. This is no longer the case,20
and statutory adjudication will now apply to construction contracts made orally. Unless the
adjudication provisions of the contract are compliant with the requirements of the statute,
the adjudication scheme21 stipulated by the statue will apply.
There are exceptions to the statutory adjudication regime, even if the underlying contract
is for the carrying out of construction works in a commercial context. Three exceptions are of
importance in the context of projects. First, construction contracts in relation to some energy
and process plants are exempt from the statutory regime. Second, offshore construction
works, in particular in the North Sea are exempt. Third, the main concession agreement
between the government or government entity and the SPV in a PFI or PPP project will,
even though it will provide for construction operations, be exempt from the provisions for
statutory adjudication. That third exemption can cause commercial difficulties in relation to
dispute resolution on PPP projects as, although the main PPP agreement will be exempt from
required statutory adjudication, construction contracts between the SPV and contractors
will not be exempt. This can expose SPVs in such transactions to the commercial risk of
a mismatch (either of timing or results) in the event that the dispute arises.
The statutory adjudication regime requires that a dispute in relation to a construction
contract can be referred to adjudication at any time. The construction contract must provide
that an adjudicator will be appointed within seven days of the referral of the dispute to
adjudication, following which the adjudicator must make his or her decision within 28 days.
That 28-day period may be extended by the agreement of the parties or by 14 days only
with the agreement of the referring party. As such, it can be a very compressed, summary
procedure. A decision is often made by the adjudicator on the basis of the written material
before him or her, without an oral hearing. While originally conceived for payment disputes,
there is nothing that precludes more complex disputes, such as to the quality of design or
workmanship or delays, or professional negligence matters, being referred to adjudication.
The decision of an adjudicator is binding but has only temporary binding effect. This
means that the decision must be complied with, but either party can subsequently litigate or
arbitrate the same dispute without restriction.
The decisions of adjudicators are enforceable through the English courts. Since the
introduction of adjudication as a statutory dispute resolution mechanism in 1998, while
there has been much jurisprudence in relation to adjudicators’ decisions, English courts are
generally reluctant to refuse to enforce adjudicators’ decisions. The courts will only refuse
to enforce where there is a clear lack of jurisdiction (e.g., where the contract concerned falls
within one of the exceptions or, until recently, where there was no contract in writing) or
20 Since the coming into force of the Local Democracy, Economic Development and Construction Act
2009 on 1 October 2011.
21 This scheme is contained in a statutory instrument and sets out default terms for adjudication: The Scheme
for Construction Contracts (England and Wales) Regulations 1998 and The Scheme for Construction
Contracts (England and Wales) Regulations 1998 (Amendment) (England) Regulations 2011. The
latter applies to construction contracts covered by the Local Democracy, Economic Development and
Construction Act 2009. Similar schemes apply to Scotland and Northern Ireland.
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United Kingdom
where there has been a clear breach of the rules of natural justice (e.g., when an adjudicator
purported to act as a mediator between the parties and then proceeded to act once again
as adjudicator).
Actions to enforce adjudicators’ decisions are generally brought by way of application
for summary judgment before the Technology and Construction Court (TCC).
ii Arbitration
There is a long tradition of construction arbitration in the United Kingdom. Much of this is
conducted by industry specialist arbitrators, including individuals whose original professions
are as engineers, architects or chartered surveyors, who subsequently train and qualify as
arbitrators. The Royal Institution of Chartered Surveyors is one of the largest nominating
bodies for arbitrators and adjudicators in the United Kingdom. However, construction
arbitration has diminished significantly in the United Kingdom since the implementation of
statutory adjudication.
iii High Court litigation

Disputes arising from project finance transactions or construction contracts are generally heard
in one of two specialist courts in England and Wales: the TCC or the Commercial Court.
The TCC is a specialist court dealing with technical matters, in particular building
and construction disputes and IT disputes. While it is formally a part of the Queen’s Bench
Division, the judges in the TCC have significant day-to-day experience of technical disputes,
both as judges and, frequently, in practice at the Bar before becoming judges. The TCC deals
with project-related disputes where those disputes relate to the execution or conduct of the
project or in relation to alleged defects.22
The Commercial Court is also part of the Queen’s Bench Division. Once again, the
judges in the Commercial Court have significant relevant experience, both as judges and in
practice at the Bar. Disputes arising on project finance transactions, in particular if they are
related to financing or other issues around the transaction or its structure, rather than its
technical implementation, may be heard by the Commercial Court.
In addition, both the Commercial Court and the TCC hear applications in relation
to commercial arbitration proceedings. If a project finance transaction or a construction
contract is subject to arbitration then, if a challenge is brought to the arbitration or the award,
that application may be heard either in the Commercial Court or in the TCC.
iv International dispute resolution

As indicated already, the United Kingdom is a party to the ICSID Convention and to a large
number of BITs.
Parties to project finance disputes in the United Kingdom may submit their disputes to
arbitration outside the country (albeit such disputes may well first be subject to adjudication).
The United Kingdom is a party to the 1958 Convention on the Recognition and Enforcement
of Foreign Arbitral Awards (the New York Convention). The enforcement of awards made
outside the United Kingdom pursuant to the New York Convention is given effect in England
and Wales by the Arbitration Act 1996.
22 The TCC also runs a scheme called the Court Settlement process, which is a mediation process run by
TCC judges. It provides parties with access to a TCC judge to assist with settlement.
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United Kingdom
While within the United Kingdom, arbitration proceedings may be ad hoc, and so
subject only to the provisions of the Arbitration Act 1996, parties frequently subject
their disputes to arbitration under the rules of one of the arbitration institutions. While
institutions such as the Royal Institution of Chartered Surveyors are frequently named in
domestic construction contracts, international project finance transactions frequently rely
upon arbitration under the rules of the London Court of International Arbitration or the
International Chamber of Commerce.
Parties to disputes in England and Wales are also now encouraged by the courts to
use other non-binding dispute resolution techniques, in particular mediation. Where parties
refuse to use mediation and instead insist on litigating, the court can apply costs sanctions
to that refusal to mediate. Mediation is available from a range of professional providers,
including a number of independent mediators. However, mediation services are also provided
by the Centre for Effective Dispute Resolution and the Chartered Institute of Arbitrators.

The United Kingdom has a sophisticated market for project finance projects, across all of
the public sector and in relation to significant privatised infrastructure. The City of London
remains a significant source of funding for both domestic and international projects and will
continue to be in the future. Helpfully, English law remains one of the laws that are preferred
by parties to govern project and project finance documentation. Domestically, the use of new
public procurement methods, such as PF2, will increase as parties become more comfortable
with them over time.
While political constraints in the United Kingdom will limit capital expenditure
in certain sectors, the United Kingdom has committed to spending significant sums
on infrastructure projects over the course of the next decade. It remains to be seen if the
Conservative Party, now without a majority, will deliver on this commitment.
However, the prospect of Britain withdrawing from the European Union has introduced
unprecedented political and economic uncertainty. Although Brexit has been triggered, the
negotiations on the terms of the British exit have still not commenced at the time of writing
and the fallout may continue for some time to come. An outcome that sees the United
Kingdom leaving the European Union completely, without any specific carve-outs, will have
a significant impact on the legal framework relevant to project finance since much of it draws
from EU procurement rules and wider EU law.
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Chapter 22
UNITED STATES
Carolina Walther-Meade, Karen Wong, Henry Scott and Miguel Duran1
I INTRODUCTION
The project finance market in the United States benefits from a well-developed legal
framework and sophisticated financial markets. The US legal system is generally viewed as
clearly codified, stable and efficient, as well as one that is enforced in a regular and open
manner.2 Contractual agreements between parties are recognised by law with few exceptions
related to public policy concerns. The project finance sector has strong access to both the
public and the private financial markets and is in some limited areas even supported – directly
or indirectly – by government policies.
This combination of a strong legal framework and financial markets has facilitated
the development of a robust project finance sector in the United States. Project finance is
premised on the ability of the parties to contractually allocate risks among themselves and
to enforce those contractual obligations in a reliable manner. A successful project finance
regime is also dependent on commercial laws that allow developers to protect themselves
through special purpose entities that benefit from non-recourse financing, and that, similarly,
allow lenders and investors to obtain security in the project assets and to enforce their claims
against the project. Likewise, a sophisticated private financial market has the flexibility to
allow the developer and the financing providers to create complex financing structures and to
tailor those structures to the specific needs of a particular project.
This chapter discusses various transactional structures available to projects and the legal
documentation frequently used to implement them. It reviews the various risks associated
with project finance transactions and how parties allocate these risks. It also examines how
the US legal framework supports the ability of lenders and investors to protect their interests,
including obtaining, perfecting and enforcing security interests in a manner that permits
lenders to enforce their rights in the event that a project encounters financial problems.
This chapter also considers how the legal framework is influenced and impacted by social
and environmental considerations. The role of a complex legal framework and sophisticated
private financing providers and the public sector is also addressed, followed by a summary
of the impact of taxes on investment, which may be of particular interest to foreign lenders
and investors. The framework for how dispute resolution is processed in the United States is
discussed at the end of this chapter.
1 Carolina Walther-Meade and Karen Wong are partners, Henry Scott is a senior associate and Miguel Duran
is an associate at Milbank, Tweed, Hadley & McCloy LLP.
2 See WJP Rule of Law Index 2015, by the World Justice Project available at the World Justice Project
website: http://worldjusticeproject.org/sites/default/files/roli_2015_0.pdf.
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United States
II RECENT TRENDS
The nature and complexion of project finance in the United States has been shifting mostly
as a result of the expiration of certain governmental incentives, regulatory changes related
to power plant emissions, declining prices of distributed generation technologies and
lower natural gas prices due to increased domestic production. Renewable energy projects
remain a significant component of the market. After a few years of slow growth, the sector
experienced a significant acceleration in 2015 and achieved a level of over 39 per cent of
the total value of project finance transactions in the country in 2016 (almost on par with
the peak levels in 2011).3 For example, 8,203MW of wind energy (similar to the amount in
2015)4 and 14,762MW (including over 10GW of utility-scale installations) (a 97 per cent
annual increase) of solar energy were installed in 2016.5 Approximately 9,025MW of wind
capacity is still under construction in 2017,6 and approximately 13,200MW of solar capacity
is expected to be completed in 2017.7 Additionally, hydroelectric capacity could grow from
101GW to approximately 150GW by 2050, not only by constructing new power plants,
but also by upgrading and optimising existing plants and by increasing the pumped storage
hydropower capacity.8
The American Recovery and Reinvestment Act of 2009 made available certain
cash grant, tax incentive and loan guarantee programmes for developers, especially in the
renewable energy sector, and some of these incentives are still available. Throughout 2016,
much of the project financing activity in the United States involved energy projects that were
able to qualify for the production tax credit (PTC)9 or the 30 per cent investment tax credit
(ITC)10 by meeting certain requirements. Additionally, developers of clean energy projects
employing new or innovative technology that is not in general use yet were able to request
loan guarantees pursuant to Section 1703 of the Department of Energy’s Loan Guarantee
Program.11 In recent years the Department of Energy has published an US$8 billion
solicitation for advanced fossil energy projects that avoid, reduce or sequester greenhouse
3 These statistics do not include public–private partnership transactions and were researched and extrapolated
from data available at the Infrastructure Journal website: www.ijonline.com/league-tables.
4 See American Wind Energy Association, ‘US Wind Industry Fourth Quarter 2016 Market Report – AWEA
Public Version’, available at the American Wind Energy Association website:
http://awea.files.cms-plus.com/FileDownloads/pdfs/4Q2016%20AWEA%20Market%20Report%20
Public%20Version.pdf.
5 See the Solar Energy Industries Association website: www.seia.org/research-resources/solar-market-insight-
report-2016-year-review.
6 See US Wind Industry First Quarter 2017 Market Report – AWEA Public Version, by the American Wind
Energy Association, available at the American Wind Energy Association website: http://awea.files.cms-plus.
com/FileDownloads/pdfs/1Q2017%20AWEA%20Market%20Report%20Public%20Version.pdf.
7 See footnote 5.
8 See Hydropower Vision, A New Chapter for America’s 1st Renewable Electricity Source, prepared by the
US Department of Energy Wind and Water Power Technologies Office, available at the US Department of
Energy website: https://energy.gov/sites/prod/files/2016/10/f33/Hydropower-Vision-10262016_0.pdf.
9 Section 45 of the Internal Revenue Code of 1986, as amended.
10 Section 48 of the Internal Revenue Code of 1986, as amended.
11 Section 1703 of the Energy Policy Act of 2005.
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United States
gases,12 and a US$4 billion solicitation for renewable or efficient energy technologies,13 and
in January 2017 both solicitations were supplemented to clarify that the deployment of
infrastructure for alternative fuel vehicles that use alternative fuels may be eligible under
those programmes.14 In December 2016, the Department of Energy announced a conditional
commitment to guarantee up to US$2 billion of loans to construct a methanol production
facility employing carbon capture technology in Lake Charles, Louisiana, which would
represent the first loan guarantee made under those solicitation programmes.15
Furthermore, the Protecting Americans from Tax Hikes Act of 201516 extended
the PTC programme for certain eligible facilities for which construction began before
1 January 2017 and for otherwise qualifying wind facilities for which construction began
before 1 January 2020 (with a progressive phase-out reduction if construction begins
after 31 December 2016) and the ITC programme for qualified solar facilities for which
construction began before 1 January 2022. Despite these extensions, the proposed reduction
in the corporate tax rate from 35 per cent to 15 per cent, recently announced by the Trump
administration, could make these tax credits less attractive for investors and reduce the
availability of tax equity financing in the market.
Propelled by extended federal incentives, advances in green technology that decrease
investment costs, state incentives and regulatory policies implementing renewable energy
portfolio standards (RPS) on utilities, and the positioning of renewable energy as a key
component for strategic energy independence for the nation, the development of renewable
projects is expected to continue moving forward. As of February 2017, 29 states, the District
of Columbia and three US territories have enacted RPS programmes and eight additional
states and one US territory now have voluntary goals for generation of renewable energy.17
For example, California’s RPS programme, one of the most ambitious in the United States,
required that utilities derive 20 per cent of their energy from renewable sources by the end
of 2013, and established targets of 25 per cent by the end of 2016, 33 per cent by the end
of 2020, 40 per cent by the end of 2024, 45 per cent by the end of 2027 and 50 per cent by
the end of 2030.18 While all three of the largest California utilities satisfied the initial target
and have enough renewable energy capacity under contract for 2020 to meet that year’s and
the 2024 threshold, only one of them already has enough contracted capacity to reach the
2027 target,19 and as a result there is a need for additional renewable energy generation.
Recent regulations from the US Environmental Protection Agency (EPA) aimed at
limiting greenhouse gas emissions from existing fossil fuel-fired electric generating units also
have the potential to spur substantial renewable project growth. The rules set state-specific
12 See the Department of Energy’s Loan Programs Office website: http://lpo.energy.gov/resource-library/

solicitations/advanced-fossil-energy-projects-solicitation/.
13 See the Department of Energy website: www.energy.gov/sites/prod/files/2014/07/f17/Renewable%20
Energy%20and%20Efficient%20Energy%20Projects%20Solicitation%20FINAL.pdf.
14 See the Department of Energy website: https://energy.gov/sites/prod/files/2017/01/f34/FactSheet_Vehicle_
Announcements_01_9_17.pdf.
15 See the Department of Energy website: https://energy.gov/articles/energy-department-offers-conditional-
commitment-first-advanced-fossil-energy-loan-guarantee.
16 Pub. L. No. 114-113, Div. Q, 129 Stat. 2242 (2015).
17 See the NC Clean Energy Technology Center website: http://ncsolarcen-prod.s3.amazonaws.com/
wp-content/uploads/2017/03/Renewable-Portfolio-Standards.pdf.
18 See the California Energy Commission website: www.energy.ca.gov/portfolio/.
19 See the California Public Utilities Commission website: www.cpuc.ca.gov/RPS_Homepage/.
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United States
goals for reducing emissions from the power sector.20 The wind and solar sectors are poised to
help states meet the proposed compliance plans.21 The final rules were released in August 2015
(Clean Power Plan) but were confronted with immediate legal challenges by a large number
of affected states and state agencies, utility companies and energy industry trade groups, and,
after an emergency stay was granted by the US Supreme Court, the US Court of Appeals
for the DC Circuit heard oral arguments on the merits of the case in September 2016. In
March 2017, President Trump issued an executive order setting forth his administration’s
policy to promote energy independence and economic growth and ordering the EPA to
review the Clean Power Plan for consistency with the new policy. Subsequently, upon request
by the EPA, the US Court of Appeals held the case in abeyance for 60 days.22 The review
of the Clean Power Plan by the EPA is currently under way23 and a decision to initiate
proceedings to revise, suspend or rescind the Clean Power Plan is expected soon. Revisions to
the rules may delay anticipated retirements of coal-fired power plants.
Going forward, most renewable energy projects will increasingly rely upon commercial
banks and capital markets to satisfy capital demands. For larger projects, mixed bank–private
placement transactions with two or more tranches of funds may provide a preferred
financing structure. New financing tools are also expected to become increasingly important
for renewable energy projects, particularly in the field of structured finance. For instance,
SolarCity Corporation has completed during the past years the securitisation of thousands of
residential and commercial solar energy contracts in six separate offerings with an aggregate
value of approximately US$683 million, Sunrun completed its first issuance in 2015, and
Mosaic and Sunnova closed their first securitisations during the first months of 2017.
As other solar developers increase their portfolios, they may choose to follow this lead to
secure financing.
The ‘yieldco’ model, which started achieving prominence in 2013 for energy companies
and increased its presence exponentially through the beginning of 2015, has been under
increased scrutiny during the past couple of years. A yieldco is a publicly traded corporation
similar to a publicly traded master limited partnership (MLP) vehicle except that its assets
do not qualify for MLP status. In the renewable energy sector, a yieldco is expected to obtain
stable cash flows from ownership of operating projects that have entered into long-term
power purchase agreements, and minimise corporate-level income tax by combining recently
built projects that are still producing tax benefits with older projects. After the initial success
of NRG’s yieldco in 2013,24 entities such as Abengoa, SunEdison, NextEra Energy and
SunPower/First Solar created US-traded yieldcos. The yieldco boom fuelled competition
for development assets, with yieldco sponsors actively seeking to acquire projects to include
20 See the US Environmental Protection Agency website: https://www.epa.gov/cleanpowerplan/clean-power-

plan-existing-power-plants.
21 See ‘A Handbook for States: Incorporating Renewable Energy into State Compliance Plans for
EPA’s Clean Power Plan, by the American Wind Energy Association and the Solar Energy Industries
Association’, available at the American Wind Energy Association website: http://awea.files.cms-plus.com/
FileDownloads/pdfs/Handbook%20for%20States%20final.pdf.
22 See the Environmental Defense Fund website: https://www.edf.org/sites/default/files/content/2017.04.28_
order_granting_abeyance_cpp.pdf.
23 82 FR 16329 (April 4, 2017).
24 NRG Yield was priced in July 2013 at US$22 per share and the price increased to over US$55 per share.
See ‘US Project Finance: Key Developments and Trends from 2014 and the Outlook for 2015’, by Practical
Law Finance, available at the Practical Law website: http://us.practicallaw.com/3-585-7745.
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United States
within their portfolios. Nonetheless, the downfall and recent bankruptcy filing by prominent
sponsors of yieldcos such as SunEdison (TerraForm Power Inc and TerraForm Global Inc)
and Abengoa (Atlantica Yield, formerly known as Abengoa Yield), have turned investors’
attention to, and increased investors’ concerns about, yieldcos. As a result, no new yieldcos
have been formed recently and, since late 2015, shares of yieldcos have suffered significant
declines.25 Recently, First Solar and SunPower announced separate strategic reviews of their
yieldco joint venture.
Outside the renewable energy space, retirements of coal and nuclear facilities generated
renewed interest by sponsors in the development of new gas-fired power plants. The slump
in oil and gas prices experienced since mid-2014 has increased the pressure on oil and gas
producers, leading to bankruptcy filings by dozens of US oil companies and significant
reductions in production. Nevertheless, energy generation by gas-fired power plants has
continued to grow, albeit at a slower pace. In 2016, natural gas-fired generation in the
United States surpassed coal generation on an annual basis for the first time in history.26
By 2020, new natural gas-fired projects are expected to add 65,095.4MW of generating
capacity,27 and natural gas-fired electric generation is expected to grow by over 48 per cent
through 2050, up to a forecasted level equal to 38 per cent of the total generation.28 The
introduction of new capacity markets may further spur investment in gas-fired projects,
which in recent years have been challenged by lower wholesale electricity prices in some
markets, such as Texas. Additionally, in recent years project developers have devoted increased
attention to gasification facilities, which convert feedstock into a synthetic gas, which is
used as fuel or further converted into a variety of products, including hydrogen, methanol,
carbon monoxide and carbon dioxide. These projects have commonly used fossil materials
like coal and petroleum coke as feedstock, although there are several gas-to-liquid projects
in development and there is an intensified interest in the use of biodegradable materials,
including municipal solid waste and forestry, lumber mill and crop wastes. The bankruptcy
filing of Westinghouse Electric Company in March 2017 may be a harbinger of further
headwinds in the nuclear sector.
In addition, constrained state and local fiscal budgets, limited federal transportation
funding, decreased tax revenue and the considerable need for new infrastructure assets and
the refurbishment, repair and replacement of existing assets may hasten the further use of the
public–private partnership (PPP) project finance structure (further described below). While
most large infrastructure projects in the United States, at least since the introduction of the
interstate system in the 1950s, have been completed using public funds rather than through
the participation of private entities, a confluence of factors may be creating a fertile ground
25 For instance, the following are the declines in stock prices experienced by certain significant yieldcos
between 5 May 2015 and 5 May 2017: (1) over 68 per cent for TerraForm Power, Inc., (2) over 65 per cent
for TerraForm Global, Inc (starting on 3 August 2015), (3) over 39 per cent for Atlantica Yield plc, (4) over
38 per cent for 8point3 Energy Partners LP, the yieldco formed by SunPower and First Solar (starting on
19 June 2015) and (5) over 19 per cent for NextEra Energy Partners, LP. These statistics were researched
and extrapolated from data available at the Yahoo! Finance website: http://finance.yahoo.com/.
26 See the US Energy Information Administration website: https://www.eia.gov/electricity/monthly/update/
archive/april2017/.
27 See the US Energy Information Administration website: https://www.eia.gov/electricity/annual/html/
epa_04_05.html.
28 This is based on the ‘reference case’ scenario under the US Energy Information Administration, Annual
Energy Outlook 2017 (January 2017).
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United States
for the development of increased governmental and public acceptance of PPPs. According
to the latest report card by the American Society of Civil Engineers, the infrastructure of the
United States has a D+ grade point average,29 and it will require an estimated investment of
over US$1.3 trillion by 2025 and almost US$5 trillion by 2040 to maintain a state of good
repair.30 The Trump administration has announced the intent to invest US$1 trillion on
infrastructure,31 although a specific plan has yet to be presented. Given that in recent years
legislation has been insufficient to satisfy the country’s needs for infrastructure funding, state
and local governments started to turn to the private sector to fill the gap. Recent significant
PPP projects include the almost US$1 billion Vista Ridge water project in San Antonio,
Texas, which recently reached financial close,32 the approximately US$1.5 billion stadium for
the Atlanta Falcons of the National Football League,33 and the US$4 billion redevelopment
of the Central Terminal Building at the LaGuardia Airport in New York.34 While in some
jurisdictions developers will need to navigate uncharted legislative and regulatory waters, and
may also have to overcome negative public perception regarding the private management of
public infrastructure, the opportunities for growth may be unprecedented.
III TRANSACTION STRUCTURES AND DOCUMENTS

i Transaction structures
The one basic structural feature common to almost all project finance transactional structures
is that the project is operated by a single, non-recourse special purpose vehicle (SPV)
(the project company). Beyond that, the transactional structures are subject to a number
of permutations based on the type of project, tax considerations, risk allocation, equity
requirements and debt financing demands.
Limited liability companies (LLCs) have become the popular business organisation
used for project companies. LLCs have the same limited liability protection that traditional
corporations offer, but LLCs offer some advantages in the project finance area. LLCs have the
option to be treated as a pass-through tax entity for US tax purposes, and gains, losses and
depreciation can be passed through to its owners, which are known as ‘members’. LLCs allow
for considerable flexibility in management and ownership structure, which is advantageous
for partnership or joint venture transactions. Management rights can be vested in the primary
developer, but can be shifted to a co-sponsor or equity investor upon the occurrence of
certain events. Gains and losses for tax purposes can also be allocated to suit the business deal,
which is key to the ‘partnership-flip’ structure discussed further below.
29 A ‘D’ grade means that: ‘The infrastructure is in poor to fair condition and mostly below standard, with
many elements approaching the end of their service life. A large portion of the system exhibits significant
deterioration. Condition and capacity are of significant concern with strong risk of failure.’ See American
Society of Civil Engineers, ‘2013 Report Card for America’s Infrastructure’, available at the American
Society of Civil Engineers website: http://2013.infrastructurereportcard.org/.
30 See American Society of Civil Engineers, ‘Failure to Act: Closing the Infrastructure Investment Gap for
America’s Economic Future’, available at the American Society of Civil Engineers website:
www.infrastructurereportcard.org/wp-content/uploads/2016/10/ASCE-Failure-to-Act-2016-FINAL.pdf.
31 See the White House website: https://www.whitehouse.gov/the-press-office/2017/02/28/president-trump-
working-rebuild-our-nations-infrastructure.
32 See the San Antonio Water System website: www.saws.org/latest_news/NewsDrill.cfm?news_id=3298.
33 See the City of Atlanta website: www.atlantaga.gov/index.aspx?page=896.
34 See the LaGuardia Gateway Partners website: http://laguardiagatewaypartners.com/project/.
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A common ownership structure involves a project sponsor owning the project

company directly or indirectly through a holding company. In a joint venture structure, the
ownership of the project company35 is allocated between the project sponsor and another
equity participant.
Developers will often be simultaneously developing multiple projects owned by
different project companies. Most often, developers will arrange for separate financing
transactions for each project. Some developers will seek to engage in a portfolio financing for
multiple projects through a holding company. In these portfolio transactions, the projects are
typically cross-collateralised and cross-default against each other.
Broadly speaking, there are two different sources of debt financing available in the
United States: the bank market and the private placement market (including the bond market).
The bank market provides loan facilities and letter of credit facilities to a project
company. Banks offer a broad variety of financial products. Most of the project finance
transactions involve traditional construction and term loan facilities for the development,
construction and operation of a project. Banks can also provide more specialised products.
In the wind energy sector, some banks have offered turbine supply loan facilities to provide
funds for the purchase of wind turbine generators from the turbine manufacturer prior to
the completion of development and permitting of specific projects. These turbine supply
loan facilities, which are sometimes provided on a portfolio basis, are extended with the
expectation that they are refinanced by a construction and term loan facility. Banks have
offered similar loans in respect of solar equipment. To the extent that project sponsors lack
sufficient funds to meet their equity contribution commitments, some banks may be willing
to provide equity bridge loans to support the project. Some project companies may qualify
for reimbursements or repayments for the construction of network upgrades or for cash grant
proceeds, and some banks have extended loans based on these expected cash receipts. In
addition, back-leveraged term loans made to the holding company of a project company have
been used in lieu of traditional term loans in some transactions, including the partnership-flip
structure discussed below.
The private placement market is another potential source of debt financing. Institutional
investors participating in a private placement will typically offer only a fixed interest rate and
will not provide specialised financial products that are available in the bank market. Project
financing can also be accomplished through issuances of bonds in the capital markets. Project
bonds can be offered pursuant to Section 4(2) or Rule 144A of the Securities Act of 1933. Most
private placements under Section 4(2) transactions are made to accredited investors, which
are often insurance and pension companies. An offering under Rule 144A is only made to
qualified institutional buyers – which are sophisticated purchasers with over US$100 million
of qualifying assets. Section 4(2) private placements are generally made directly to a very
small number of accredited investors, but in mixed bank-private placement transactions, an
administrative agent will be involved. Rule 144A transactions are typically sold to a larger
number of investors and are administered by a trustee pursuant to an indenture, on behalf of
the qualified institutional buyers. The covenant package and level of oversight and consent
requirements under a Rule 144A transaction are often less onerous than either a Section 4(2)
transaction or a standard bank transaction.
35 We note that investors sometimes prefer to own interests in the holding company that is the owner of
the project company, rather than the project company itself, as another layer to limit their liabilities with
respect to the project company.
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In larger transactions, sophisticated arrangers may opt to use two or more tranches of
funds for a mixed bank-private placement financing.
In the renewable sector, federal renewable energy tax credits, such as PTCs and ITCs,
have helped shape transactional structures. PTCs offer designated tax credit amounts for
certain classes of renewable projects that may be offset against income tax liability.36 ITCs offer
reductions in federal income taxes depending on the resource type that is placed in service,
and primarily benefit solar and geothermal projects.37 Developers have taken advantage of
these tax-driven incentives to attract investors with sufficient taxable income who are able to
utilise these federal renewable energy tax credits (tax equity investors). Prior to the inception
of the Section 1603 programme that was established under the Recovery Act to fill the gap in
the market place when the pool of tax equity investors dried up during the financial crisis of
2008 and 2009, these were the dominant drivers for the development of renewable projects.
With the expiration of the Section 1603 programme, PTCs and the ITCs once again became
increasingly important for the development of renewable projects.
The partnership-flip structure has been a popular vehicle for financing wind energy
projects in which the project sponsors are unable to fully utilise the available tax benefits.
As mentioned before, given the pass-through election available to LLCs, tax equity investors
that are members, directly or indirectly,38 of the project company are able to benefit from
the tax credits. For projects in the construction phase, a tax equity investor will enter
into an equity contribution agreement committing to acquire a membership interest in
a project company at the time the project has been completed and placed in service, and the
proceeds of the equity contribution are applied to repay the construction debt. A variation
of the partnership-flip structure is the pay-as-you-go (PAYGO) structure in which the tax
equity investor contributes roughly half of the initial equity that would be required under
a traditional partnership-flip deal and, during the operational period of the project, will
make periodic payments with respect to the remaining equity that would have been required
under a traditional partnership-flip transaction. The PAYGO structure provides the tax
equity investor with an ability to defer the timing of its equity contributions and ties its
contributions to the amount of PTCs actually generated (rather than projected).
Another alternative financing structure is to utilise a single investor lease or a leveraged
lease transaction. Many energy assets have been financed using lease structures whereby
a tax equity investor acquires the power project and the tax attributes of ownership, such as
depreciation and investment tax credits, and leases back the asset to the project developer who
36 Section 45 of the Code identifies a number of resource types, including wind, closed-loop biomass,
open-loop biomass, geothermal energy, landfill gas, municipal solid waste and large scale marine and
hydrokinetic projects and designates a credit amount for each type. To qualify, closed and open-loop
biomass facilities, geothermal facilities, landfill gas facilities, trash facilities, qualified hydropower facilities,
and qualified marine and hydrokinetic renewable energy facilities must meet the ‘begun construction’
requirement before 1 January 2017, and wind facilities must meet the ‘begun construction’ requirement
before 1 January 2020 (subject to a phaseout of the credit between 2017 and 2020).
37 Section 48 of the Code provides credits that could offset 10 per cent to 30 per cent of federal income
tax liability. Small wind projects, fuel cells, combined heat-power, solar, geothermal and microturbine
technologies are covered under Section 48.
38 To the extent that the holding company is the investment vehicle, the holding company would also be an
LLC and any intermediary companies would also need to be an LLC to allow the tax attributes to flow to
an entity that is taxable under federal tax laws.
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assumes operational responsibility. The lease structure has been popular with solar projects as
it is complementary with the ITC mechanics,39 and since 2010 there have been a number of
single investor and leveraged lease transactions in the wind and solar sectors.40
In some jurisdictions, utilities and developers have applied a build-transfer structure.
This typically involves a developer agreeing to develop and construct a project that, upon
commercial operation, would be transferred to the utility for a designated purchase price.
Given the number of independent power producers (IPPs), however, utilities do not have as
strong a need to own their electrical generation sources and have often elected to enter into
economically feasible offtake agreements with IPPs.
ii Transaction documents
The transaction documents for a project finance deal can be classified broadly into three
categories: project documents, financing documents and equity documents.
The project documents provide for the development, construction and operation of
the project. The specific project documents depend on the type of project and how risks
are to be allocated in the particular project. Project lenders typically prefer a turnkey
engineering-procurement-construction (EPC) contract entered into with a creditworthy
contractor that has the requisite resources, capabilities and experience to engineer and
design the project, procure all the necessary materials and components and to construct
and assemble the project. In certain sectors of the energy industry, a turnkey contract may
not always be available and the project developers have sought to allocate responsibilities
among parties who are capable of performing the relevant obligation most efficiently and
at the lowest cost. For example, in wind generation projects, wind turbines are customarily
procured directly from a turbine manufacturer under a turbine supply agreement and, in
situations where the project sponsor does not have internal operating personnel, accompanied
by a service maintenance agreement. The construction of the balance of the project, such as
the turbine foundations, collection system, substation and transmission lines are performed
by a contractor under a balance of plant contract.41 The operation and maintenance of the
project may sometimes be performed by an affiliate of the project sponsor that is in the
business of performing operations and maintenance services for all the project sponsor’s
projects. The offtake agreement is crucial for the viability of a project, as the lenders and
investors rely principally on the revenues generated by the project. The offtake agreement
mitigates the potential fluctuations of spot market transactions and allows for the project to
provide a more reliable base case model to its lenders and investors. For electrical generation
projects, an interconnection agreement will be required to interconnect the project to the
relevant electricity grid. Projects that require fuel, such as coal-fired, biofuel, biomass or
natural gas-fired plants, will need a reliable source of fuel that can be procured on a fixed-price
basis under a long-term fuel supply or feedstock agreement.
39 To benefit from these federal tax credits, the tax equity investor must be an owner prior to the placed-in-
service date.
40 These transactions include Terra-Gen’s Alta Wind projects, Pattern Energy’s Hatchet Ridge Wind project,
the Ridgewind Wind project, the Lakefield Wind Project, the Pacific Wind project, and the Shiloh IV
Wind Project.
41 In some instances, even the balance of plant obligations are sometimes even further subdivided to include
an electrical installation or engineering and design contract for the balance of the plant.
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The financing documents for a project finance transaction will generally depend on the
type of financing structure being implemented. For a traditional bank financing transaction,
the documents consist of a credit agreement that will provide a construction and term
loan facility, often with a letter of credit facility or working capital facility, and the set of
collateral security documents described below. A private placement transaction will include
a purchase or subscription agreement entered into by the financial institutions for funding
and an indenture to provide for the covenants that the project company must follow, along
with the same set of collateral security documents typically utilised for bank financings. For
transactions that combine bank and private placement sources, a master agreement or common
terms agreement will typically govern the principal terms of the financing such as conditions
precedent, covenants, representations and warranties, events of default, indemnities, and
miscellaneous boilerplate provisions, with separate credit agreements and note purchase
agreements or indentures for the respective tranches. A lease transaction will include a lease,42
and, for a sophisticated leveraged lease transaction, a financing agreement and a participation
agreement, along with customary tax indemnity agreements. The security for a financing
will be provided under the security or collateral documents, as discussed in further detail
below. Lenders will also often seek to have direct agreements with the counterparties to the
material project documents that provide for the consent by the counterparties to the collateral
assignment of the particular project document, an agreement by the counterparty to deposit
amounts payable under the project agreement to a designated collateral account, a right to
receive default notices and other material notices, an ability to step in and cure events of
default on behalf of the lenders, as well as an agreement not to amend, modify, assign or
terminate the project document.
The equity documents represent the commitment of the sponsors and owners of the
project to make equity contributions to the project company under a variety of circumstances.
Basic equity contribution agreements cover cost overruns and provide for minimum equity
required to maintain the debt-equity ratio prescribed by the lenders. A project company
seeking tax equity will often enter into either a membership purchase and sale agreement
(MIPA) or an equity capital contribution agreement (ECCA) with a tax equity investor. Tax
equity investors do not typically assume construction risks and their investment is conditioned
on the satisfaction of a number of requirements, including that the project has achieved, or is
about to achieve, commercial operation as required under the offtake agreement and subject
to satisfaction of performance and other testing requirements under the relevant construction
contracts. For ITC transactions, it is important that the tax equity investor become an owner
before a project has been placed in service and reached commercial operation. A form of
revised limited liability company agreement for the project company will be negotiated at the
time of execution of the MIPA or ECCA to govern the relative rights and obligations between
the developer and the tax equity investor, and to set out the respective allocations of cash,
distributions and tax benefits, as well as to detail the governance rights prior to and after the
date on which the tax equity investor has received its net economic return on its investment.
42 Some lease transactions will separate the personal property and real property into a facility lease and
a ground lease, respectively.
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Project finance ideally allocates risks to the party that is best able to manage and mitigate the
particular risk, and the relevant risk allocation can vary from project to project depending on
the specific details of a project and the relative negotiating leverage of each party.
A basic project finance transaction can be broadly divided into two different time
periods: the construction period and the operational period.
To understand the construction period, it is helpful to understand the importance
of the operational period and its associated risks. A lender or investor to a project finance
transaction relies on the cash flow generated by the project during the operational period
for repayment or recovery of investment, as applicable. To give lenders and investors some
degree of certainty about cash-flow generation, lenders and investors analyse a project’s base
case projections based on the price of the offtake and the expected production, the two keys
to generating cash flow.
An offtake agreement, between the project company and an offtaker, is the key
project document that will mitigate the risk of fluctuating prices and give some degree of
certainty as to what price is paid for the product generated by the project. A typical offtaker,
however, requires some level of assurance that it will receive a minimum amount of product
commencing by a date certain – essentially requiring minimum production guarantees. The
offtaker will often obtain the right to receive liquidated damage payments for insufficient
production. A production and performance guarantee is often provided under the equipment
or construction contracts to provide the project company with some assurance that these
minimum production levels can be met and are often evaluated as ‘back-to-back’ mitigation
measures to protect the project company from failures by the contractor to complete the
facility in accordance with technical specifications.
Each type of facility will also have a different risk profile. A baseload project, such as
nuclear, coal or natural gas facilities, will be able to meet minimum production, but will be
reliant on fuel supply, and project developers of these types of facilities attempt to mitigate
the risk of commodity price fluctuations by entering into long-term fuel supply contracts. An
intermittent project, such as wind or solar facilities, will require projections of wind resource
or solar resource that are probabilities assessments based on historical resource reports for the
specific region.43 Equipment warranties from construction and supply contracts also play a key
role in ensuring that the facility will be protected against defects in design and manufacture.
Although lenders will be granted a security interest in all assets of the project company,
the lenders cannot fully rely on this collateral package to repay their loans given that at the
inception of construction, the only real assets of the project company are the project documents
and the rights in real estate, which in many transactions, are often only leasehold interests.
As such, it is fundamental to project lenders that the facility is constructed on a timely basis
and in accordance with expected and agreed-upon technical specifications. Given the reliance
of lenders and investors on the ability of the project to produce enough energy or other
product to generate sufficient cash flow, the risk allocation for the construction period is vital
to the viability of a project and to ensure that the project sponsors are duly incentivised to
43 These resource reports provide metrics based on probability scenarios. A P50 production means that there
is a 50 per cent probability that the facility will produce the amount expected in a P50 production scenario
for the designated period, and a P99 production means that there is a 99 per cent probability that the
facility will produce the amount expected in a P99 production scenario for the designated period.
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complete the project. Lenders in debt transactions will typically require equity contribution
funding obligations in the range of 10 to 30 per cent of total project costs,44 depending on the
perceived construction and operational risks of the particular asset being financed.
In addition to the need to cover the increased interest costs during construction caused
by a delay in completion of the construction of a project, offtakers will often impose liquidated
damages for delays in commercial operation and a termination date if the delay goes beyond
a date certain. To offset the risk of delays in construction, developers will demand delay
liquidated damages from suppliers and construction contractors to ensure that components
are delivered on a timely basis and that the facility is erected and constructed on schedule. In
certain cases, where new technology is being deployed, construction completion guarantees
may also be required of project sponsors if the lenders are not comfortable with the allocation
of risk to the EPC contractor, as well as in other cases where the completion deadline is
critical (e.g., the delay may result in a loss of the offtake contract, key tax benefits or critical
operating permits).
Standard project documents will contain limitations on liability to the project
counterparties. These limitations will customarily exclude special, exemplary, indirect or
consequential losses (including lost profits) and punitive damages from the scope of the
counterparty’s liability. A limitation on the aggregate liability of the counterparty under the
project document will also be imposed and, to the extent liquidated damages are payable,
there are often sublimits for delay liquidated damages and performance liquidated damages
that are lower than the aggregate liability for liquidated damages.
Project documents are also negotiated to allocate the risk of force majeure events
between the project participants. A force majeure event is generally defined as an event that is
reasonably beyond the control of the party affected, such as acts of God, floods, wars, riots,
and other similar events.
Depending on the nature and size of the project, the parties may also need to address
political risks. Certain projects, such as nuclear projects, must overcome local political and
public concerns about safety and handling of waste materials. On the other hand, even
renewable projects, including wind and solar projects, have encountered public opposition
for a number of reasons.45 PPPs, as discussed below, face their own unique challenges in terms
of public and political opposition.
44 For technology that is well-proven and construction risks that are not perceived to be high, the debt-equity
ratio can be as low as 10 per cent; and for new technology that is being utilised or has not been fully
commercialised, the level of equity contributions required can be even higher than 30 per cent.
45 Large wind and solar projects have significant ‘footprints’ across hundreds and even thousands of acres
of land, even though the foundation for each individual wind turbine generator or solar module is not
that substantial. Some members of the public have objected for aesthetic reasons, claiming that the wind
turbines or solar arrays obstruct the residents’ view of their surroundings. Others have raised concerns that
wind turbines or solar arrays may affect endangered animals, particularly certain types of birds in the case
of wind projects, and desert wildlife in the case of solar projects. The Shepherds Flat project in Oregon
also faced an objection from the Department of Defense, which argued that, because of the proximity of
the project to a military base, the blades of the wind turbines could interfere with radar. Similar objections
have been raised with respect to solar projects near military installations and test facilities. We note that
the objections of the Department of Defense in the Shepherds Flat project were settled. Most of these
socio-political objections for wind and solar projects have not resulted in the closing down of projects, but
these are risks that developers, lenders and investors must take into account.
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As noted earlier, many renewable energy projects benefit substantially from federal
tax grants or credits. These tax credits and benefits were designed to offer an incentive to
developers, but these incentives are typically limited in time and subject to periodic renewal.
Currently, PTCs will only be available for qualifying renewable projects that have begun
construction before 1 January 2017 or, in the case of wind projects, before 1 January 2020.
ITCs are available for solar facilities that have begun construction before 1 January 2022.

i Security interest and priorities
In the United States, secured transactions are primarily governed by state law. Given the
potential variation among the 50 states, the National Conference of Commissioners on
Uniform State Laws and the American Law Institute46 have sought to harmonise the commercial
laws among the states through the promulgation of the Uniform Commercial Code (UCC).
Each state has more or less adopted the UCC with few substantive modifications.47 Secured
transactions with respect to personal property are covered under Article 9 of the UCC
(Article 9). Real property transactions, however, have not been uniformly codified and are
subject to the particular laws of the state and jurisdiction where the real property is located.
A lender or other secured party can obtain a security interest in the personal property
of an obligor upon the execution of a security agreement, which will include a clause granting
a security interest in favour of the secured party.48 The personal property of the obligor will
cover the ‘hard’ or physical and tangible assets (e.g., wind turbines, solar panels, transmission
lines, substations) and ‘soft’ or intangible assets (e.g., rights under material project documents
and accounts). To the extent that the owner of the obligor is required to pledge its ownership
interests as security for the benefit of the secured party, it will be required to execute and
deliver an equity pledge agreement.
To protect the position of a secured party against other creditors, the security interest
must be perfected under Article 9. The vast majority of personal property can be perfected by
filing a financing statement49 in the ‘location’ of the obligor, and for an organisation registered
under state law,50 its location would be the state where it is registered. Article 9 provides that
certain forms of personal property cannot be perfected merely by the filing of a financing
46 The National Conference of Commissioners on Uniform State Laws and the American Law Institute are
private, non-profit institutions.
47 The State of Louisiana has enacted most of the provisions of the UCC, though we note that it did not
adopt either Article 2 or 2A. See Cornell University Law School’s Legal Information Institute’s Uniform
Commercial Code Locator at www.law.cornell.edu/uniform/ucc.html.
48 See Section 9-203 of the UCC. We note that for a security interest to be enforceable, the following
conditions must be satisfied: (1) value must be given, (2) the grantor must have rights in the collateral,
and (3) the debtor has authenticated a security agreement that provides a description of the collateral
(or, with respect to certain assets that can be perfected by possession or control, the assets are possessed
or controlled).
49 See Section 9-301 and 9-502 of the UCC.
50 For purposes of the UCC, a registered organisation means a corporation, limited liability company or
limited partnership (see Uniform Commercial Code Comment #4). For entities registered with the federal
government, including foreign organisations, their location is in the state that the law of the United States
designates or the state designated by the registered organisation if the law of the United States so authorises;
however, if neither of the foregoing apply, the default location would be the District of Columbia.
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statement and applies a different rule to perfection of such property.51 For certificated
securities, tangible negotiable documents, instruments, money or chattel paper, perfection is
obtained by actual possession of the documents.52 At the closing of a project financing, the
originals of the documents are delivered to the secured party. A security interest in deposit
accounts or letter of credit rights may be perfected by ‘control’.53 Control of a deposit account
is established pursuant to a tripartite agreement54 among the obligor, the secured party and
the bank where the deposit account is maintained. The most basic ‘control agreement’ is
an acknowledgment by the depository bank that it will comply with the instructions of
the secured party without further consent of the obligor. A project finance transaction will
involve a more complex depository agreement that provides detailed instructions as to the
application of construction loan proceeds and operating revenues. For letter-of-credit rights,
control is obtained through a consent by the issuer to an assignment of proceeds.55 In addition
to Article 9, the choice of law for the validity, perfection and priority of a security interest
in securities held by an intermediary is also governed by the Hague Convention on the Law
Applicable to Certain Rights in Respect of Securities Held with an Intermediary, which came
into legal force and effect in the United States on 1 April 2017.56
Security interests in real property interests are obtained pursuant to the execution of
a deed of trust or mortgage. Each state has its own special requirements, but generally requires
that the obligor grants its rights in the real property to the secured party and clearly identifies
the real property interests involved. The security interests in real property are perfected by
filing a mortgage or deed of trust with the local county recorder’s office.
ii Credit support
Project companies will often be required to deliver credit support in favour of third parties,
including construction contractors, suppliers and offtakers. Likewise, project companies will
sometimes be able to obtain credit support from such counterparties to the extent that the
counterparties are not creditworthy. The credit support will often take the form of a letter of
credit or a guarantee from a creditworthy entity.
Despite the non-recourse nature of project financing, lenders will typically seek a limited
guarantee from the project sponsor. This limited guarantee will usually cover specified risks,
such as cost overruns or minimum equity contribution amounts. For loan facilities that are
contingent on the receipt of cash grant proceeds, reimbursement amounts or cash rebates
from a governmental agency, a guarantee might be required to cover a potential shortfall.
Also certain risks allocated to the project that are viewed as ‘non-market’ by lenders may be
expected to be covered by a limited guarantee of the project sponsor.
For partnership-flip transactions, the tax equity investor is typically a special purpose
entity and credit support from the tax equity investor’s creditworthy parent will be required
51 This chapter discusses investment property, deposit accounts and letter-of-credit rights. Article 9 also
imposes specific rules on the perfection of agricultural liens, goods covered by a certificate of title,
electronic chattel paper and other narrow types of personal property.
52 See Section 9-305 and 9-313 of the UCC.
53 See Section 9-312 of the UCC.
56 See the Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an
Intermediary, available at https://assets.hcch.net/docs/3afb8418-7eb7-4a0c-af85-c4f35995bb8a.pdf.
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to backstop its capital contribution obligations. In some instances, a tax equity investor’s
capital contribution can be reduced under the terms of the ECCA and lenders will often seek
a ‘shortfall’ guarantee by the project sponsors to cover any such reduction.
VI INSURANCE AND PERFORMANCE BONDS

Insurance represents a highly specialised and regulated area of contract law. The allocation
of insurance requirements among the parties in a project financing transaction follows the
general project finance proposition that the party that is best able to manage the risk that is
covered by a particular insurance policy should procure and maintain such insurance.
The project company will be required under the terms of financing documents to
carry at all times commercial general liability insurance, worker’s compensation insurance,
pollution liability and umbrella or excess liability coverage. Areas that are subject to floods,
earthquakes or other natural hazards will also require appropriate coverage. During the
construction period, the project company will typically maintain all risk builder’s insurance,
and delay in start-up insurance and, to the extent applicable, marine transit insurance. The
project company will also be required to maintain business interruption insurance during
the operational period. These insurance requirements represent a combination of standard
industry practices and insurance requirements under project documents.
Lenders and investors will not carry their own insurance but rather will be added as
‘additional insured’ parties to the project company’s insurance. Additionally, they will require
that they are named the ‘loss payee’ and that the proceeds of insurance policies be deposited
into collateral accounts.
Construction contractors will be required under the terms of the relevant construction
contract to carry commercial general liability insurance, worker’s compensation insurance,
professional liability, contractor’s equipment and pollution liability and umbrella or excess
liability coverage. It is also customary for construction contracts to provide that the project
company and its lenders be additional insured parties under these insurance policies.
During the operational period, to the extent an operator57 is retained to operate the
project, the operator will also be required to maintain commercial general liability insurance,
worker’s compensation insurance and umbrella or excess liability coverage.
Lenders and investors will retain an insurance consultant to review the insurance
programme and to ensure that the insurance requirements for the project will meet market
standards, the specific requirements of the project and the project company’s obligations
under project documents.
Unlike insurance, performance bonds are not always required for every project finance
transaction. A performance bond is a contract between the contractor and a surety to provide
assurance to the developer of a project that if the contractor defaults under its construction
contract that the surety will perform the obligations under the construction contract. The
surety also has a few other options available, including to buy back the bond, to substitute
another contractor to perform the construction contract or to deny the bond if permitted
under the terms of the performance bond. The owner must not be in default under the
construction contract to make a claim under the performance bond. In addition, state
law may impose certain statutory requirements for a performance bond. The cost of the
performance bond is a project cost and is sometimes not required if the contractor is well
57 In many instances, these operators are not third-party operators, but an affiliate of the developer.
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established with a strong track record for completing projects on a timely basis. In addition,
in certain geographical areas or markets, the availability of a number of proven construction
contractors make substitution and replacement of a defaulting contractor an option with
a strong developer. Some construction contracts may also be supported by payment bonds.
In most construction contracts, liquidated damages for delays are payable by a contractor and
a payment bond can be issued, in lieu of a letter of credit, to support the payment obligations
of the contractor.

Upon the occurrence and continuation of an event of default under the financing documents,
the lenders, as secured parties,58 may elect to exercise remedies against the project company
and its assets. The remedies provided under a customary financing agreement will include
the right to suspend making additional loans, to accelerate the outstanding obligations, to
cure breaches of the project company under the project documents, to possess the project,
to marshal the project’s assets and to conduct a private or public sale of the project company
and its assets. The financing documents will also provide that the lenders are also permitted
to exercise all rights available to them under Article 9.
Chapter 6 of Article 9 is devoted to setting out the rights of creditors against personal
property after a default in situations outside bankruptcy. A secured party may deliver notices to
account debtors of the project company, including the counterparty to the offtake agreement59
and enforce obligations of an account debtor to make payment or render performance.60
The secured party may take possession of the collateral and dispose of the collateral with
or without judicial process.61 The disposition of collateral may be conducted privately or
publicly, but in all instances, must be undertaken in a commercially reasonable manner.62
Foreclosure on real property is subject to individual state laws. A foreclosing lender
must also be aware that each state may have a special or unique statutory provision with
respect to enforcement proceedings. For instance, California has the ‘one action rule’ under
58 In most transactions, a collateral agent is appointed to act on behalf of the lenders and the other secured
parties under the credit agreement. Under customary financing documents, a collateral agent may only
undertake actions that have been consented to by the majority lenders.
59 As indicated above, it is typical for lenders to obtain consents to collateral assignment or direct agreements
with counterparties to material project documents. A consent or direct agreement will set forth the
collateral account to which payments must be directed, and as a result, a post-default notice is unnecessary
since there is an existing agreement to deposit proceeds into the collateral account for which the secured
party has rights to in an event of default.
61 See Section 9-609 of the UCC. The taking of possession and disposal of collateral without judicial process
may be done so long as it can be accomplished without a breach of the peace. A secured party may also
agree with the debtor to have the debtor assemble the collateral and make it available to the secured party.
62 See Section 9-610 of the UCC. The factors for determining whether conduct is commercially reasonable is
a function of statutory provisions, such as Section 9-627, and case law. The UCC provides for certain ‘safe
harbour’ provisions to demonstrate that a secured party has acted in a commercially reasonable manner.
Section 9-612 offers one such safe harbour: ‘a notification of disposition sent after default and 10 days or
more before the earliest time of disposition set in the notification is sent within a reasonable time before
the disposition’.
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Section 726 of the California Code of Civil Procedure, 63 which requires that a secured party
exhaust all of its remedies against the debtor’s collateral before suing a debtor for deficiency,
and a failure to do so may result in the loss of the secured party’s liens on both personal and
real property.
The proceeds of foreclosure are applied as follows: first, to reasonable expenses of
collection and enforcement, including reasonable attorneys’ fees; second, to interest and bank
fees; third, to principal; and fourth, to any remaining outstanding obligations.
Most lenders in project finance transactions prefer to enter into work-out arrangements
with defaulting borrowers in lieu of exercising Article 9 foreclosure remedies because of the
flexibility available under a workout arrangement coupled with the basic reality that in
a non-recourse project deal, the principal source of repayment is revenue generation rather
than asset disposition. Federal bankruptcy of a project company is generally the least attractive
scenario for lenders; a debtor is more likely to obtain some sort of relief under a bankruptcy
proceeding than private workouts or Article 9 foreclosure.
Federal bankruptcy law64 pre-empts state law creditor laws, including Article 9.
A bankruptcy case for a debtor may be voluntary (filed by the debtor) or involuntary
(filed by creditors).65 Once a bankruptcy petition is filed, it creates a bankruptcy estate and
imposes an ‘automatic stay’ against creditors that prevents any creditor from taking action
against the debtor or its assets.66 The rights of a lender to exercise any of its remedies under
the finance documents or Article 9 is prohibited after the imposition of an automatic stay
notwithstanding its senior secured position. In addition, some liens, such as unperfected
security interests, may be invalidated under Section 544(a) of the Bankruptcy Code.67 There
are two basic types of bankruptcy cases for corporations and other business organisations:
Chapter 7 and Chapter 11 cases.
Chapter 7 of the Bankruptcy Code covers a liquidation bankruptcy in which all
personal property68 is converted to cash and distributed among the creditors. The bankruptcy
court will appoint a bankruptcy trustee to oversee the liquidation of the debtor’s estate.
Chapter 11 of the Bankruptcy Code applies to reorganisation of the debtor’s assets,
rather than liquidation. A debtor retains custody of its assets and is considered a ‘debtor-in-
possession’. A debtor will be subject to a Chapter 11 plan pursuant to which a debtor will
operate in the post-petition period. The debtor initially has an exclusive period in which
to propose a Chapter 11 plan, but if the debtor fails to propose a plan that is accepted by
creditors, any party in interest may file a plan and more than one plan may be filed.69 After
63 The purpose of Section 726 of the California Code of Civil Procedure was to protect defaulting debtors
against multiple suits and harassment from secured parties by requiring ‘one form of action for the recovery
of any debt or the enforcement of any right secured by mortgage upon real property’, but failing to comply
with this provision has serious consequences for lenders.
64 Federal bankruptcy law is a composite of the Bankruptcy Act of 1898, the Bankruptcy Reform Act of
1978 and The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
65 Section 301 of the Bankruptcy Code addresses voluntary bankruptcy petitions and Section 303 of the
Bankruptcy Code provides for involuntary bankruptcy filings.
66 See Section 362 of the Bankruptcy Code.
67 Section 544(a) may only invalidate the lien of a creditor, but does not extinguish the underlying claim.
A creditor with an invalidated lien will be treated as an unsecured creditor.
68 There are exceptions for exempt property, but this generally does not apply in project finance.
69 See Section 1121 of the Bankruptcy Code. The substantive terms of the Chapter 11 plan are set out in
Section 1123 of the Bankruptcy Code.
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confirmation of the Chapter 11 plan, the debtor must perform under the approved plan.
The liens of a pre-petition lender will not extend to personal or real property acquired after
the filing of Chapter 11.70 In some instances, where a debtor can obtain financing from
a post-petition lender, that post-petition lender may be granted, by order of the bankruptcy
court, priority over pre-petition lenders.71 A debtor-in-possession may continue to use, sell
and lease encumbered property in the ordinary course of business in accordance with the
Chapter 11 plan.

A number of licensing and permit requirements are relevant to project finance transactions
in the United States. The project company will need to comply with federal permits as well
as state, county and municipal permits applicable to projects in its jurisdiction. Permitting
obligations are customarily spread among the project company and the counterparties to
various project documents, ideally allocated to the parties best suited to perform and manage
the obligations.
For the construction period, a number of permits will need to be obtained by the
construction contractor in connection with the performance of its obligations, including
building permits, air quality permits and construction permits with respect to any demolition,
erection or construction of facilities. The project company will customarily obtain permits
that will need to be issued in the name of the project owner during the construction period,
as well as permits that may need to be in place during both construction and operational
periods. These permits include local permits (such as any facility site permits and road
use agreements) as well as federal permits (such as a Federal National Pollutant Discharge
Elimination System permit if storm water is likely to cause discharge from a construction
site). Certain types of projects will need to obtain specialised permits. For example, since
wind turbine generators will exceed federal obstruction standards, a wind energy generating
facility must demonstrate there is no substantial adverse effect to obtain a ‘Determination of
No Hazard to Air Navigation’ from the Federal Aviation Administration for each of its wind
turbine generators.
Certain permits will need to be obtained at or around the time of commercial operation.
Emissions and noise permits in certain jurisdictions are obtained during the testing period
based on the results of the test performance of the facility. Other permits for use and operation
will need to be obtained by the project company or its operator. To the extent feedstock or
other fuel is used to supply the facility, one or more permits will need to be obtained to allow
the project company to transport and consume the fuel.
It is customary for lenders and investors to obtain a Phase I environmental site
assessment (ESA) from an environmental consultant. A Phase I ESA will include a physical
inspection of the site, examination of public records for environmental liens, prior land usage
70 To the extent that a security agreement includes a provision to cover property acquired after the execution
of the security agreement, Section 9-204 provides that such after-acquired property will be part of the
collateral covered under the security agreement. Section 522(a) of the Bankruptcy Code overrides this state
law by making it clear that property acquired by debtor after the Chapter 11 filing will not be subject to
liens pursuant to any pre-petition security agreement.
71 See Section 364(d) of the Bankruptcy Code. Section 364(d) sets out requirements as to when
a post-petition lender can ‘prime’ the priority of a pre-petition lender.
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and permits, and other investigations to determine whether any hazardous materials have
been released or could potentially be released on the site. To the extent that a Phase I ESA
reveals any recognised environmental condition or a potential environmental condition,
a Phase II ESA will be undertaken and involve more intrusive sampling and measurements.
In addition, a number of studies may be needed to demonstrate that the environmental and
site impact does not adversely affect cultural resources or wildlife.72
Importantly, compliance with the Equator Principles73 may not be a legal requirement
for financial institutions participating in project finance transactions, but it is an internal
requirement for many banks participating in the project finance market. Accordingly, many
financing agreements require that the borrower comply with the Equator Principles.
IX PPP
The PPP structure is used in a subset of the project financing transactions where a governmental
entity and private sector entity are collectively engaged in the development, construction and
operation of a public project. In the United States, the federal government does not usually
engage directly in PPP transactions, but plays an important role through legislation and
allocation of funding to states for infrastructure projects. The PPP market can be supported
with legislation promoting infrastructure projects, together with funding to states. States
and local governmental agencies are the principal players in the PPP market. Unfortunately,
legislation for PPP projects is not uniform throughout the 50 states and private sector
developers and investors must understand the differences in both process and substance in
the state where they seek to bid for a PPP project. The bidding process itself varies from
state to state, but the underlying tenet of establishing an open and competitive process is
a common theme. The review and acceptance process for bids differs substantially as each
state has differing statutory requirements as to the evaluation criteria.
One of the major considerations for PPP transactions is the level of public support
for the project, the potential private investor and its corresponding bid. Public support can
directly or indirectly affect both legislation with respect to PPPs and the bid and approval
process for any potential PPP project.
The vast majority of PPP transactions in the United States to date has been primarily
focused on transportation infrastructure projects.
X FOREIGN INVESTMENT AND TAX ISSUES

An investor in the United States must consider the application of federal, state and local
income taxes, franchise taxes, transfer taxes, and intangible taxes. There is considerable
variation in different state and local tax regimes, which makes it difficult to generalise about
state and local tax considerations, which are therefore not addressed.
72 The nature of the studies needed will depend on the type of project. For example, bat and avian studies are
needed to assess the impact of wind turbine generators.
73 The term ‘Equator Principles’ is described in ‘An industry approach for financial institutions in
determining, assessing and managing environmental and social risk in project financing’, dated
4 June 2003 and developed and adopted by the International Finance Corporation and various other banks
and financial institutions.
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A non-US lender to a US project will generally be subject to US federal withholding

tax at a rate of 30 per cent on interest payments. This withholding may be reduced if the
lender is entitled to the benefits of an applicable income tax treaty, many of which provide
for an exemption from, or reduction in, withholding tax on interest. However, almost all US
tax treaties include fairly mechanical anti-treaty shopping tests, and there are a number of
other anti-abuse rules that make it very difficult for a non-treaty lender to access the US treaty
network. Nevertheless, certain non-bank lenders that are not treaty eligible may qualify for
an exemption from withholding on interest if they are not otherwise related to the borrower,
and the loan is in ‘registered form’ for US tax purposes (which is generally easy to ensure).
The tax consequences of an equity investment in a US project will depend on whether
the investor invests in the project through a partnership or corporation for US tax purposes.
In either case, project income will generally be subject to net income tax, although in the
case of a partnership this may be imposed on the partners (collected by partnership advance
withholding). In addition, where the investment is made through a corporation, distributions
that constitute dividends will be subject to US federal withholding tax at a rate of 30 per cent.
Where the investment is made through a partnership, an equivalent branch profits tax may
be imposed on the non-US partners on amounts they are deemed to have repatriated. These
withholding or branch profits taxes may be reduced or eliminated by an applicable income
tax treaty. There can be substantial variation in tax consequences depending on the structure
for the project and the relevant investment vehicles.
In US project finance transactions, the historical preference of lenders is to have the financing
documents governed by the law of New York State and to require borrowers and other
counterparties to financing documents to consent to the jurisdiction of the courts of New
York. The comparatively straightforward issues raised in disputes involving loans and other
credit facilities have been viewed as rendering those disputes more suitable to judicial as
opposed to arbitral determination.
Nonetheless, US courts follow the strong policy in favour of arbitration to enforce
agreements that have elected arbitration. There are a number of project documents that
provide arbitration as the avenue for settling disputes. Parties choose from a large variety of
institutions and rules, or ad hoc arbitration under rules of the parties’ own design. Arbitral
proceedings can be tailored by contract to modify the institutional rules and meet the
specific needs of the particular transaction. Parties in US transactions typically designate the
American Arbitration Association for their project finance disputes. Parties frequently choose
New York as the place of arbitration.
The United States is also a party to the New York Convention and the 1975 Inter-American
Convention on International Commercial Arbitration, which requires courts of contracting
states to give effect to private agreements to arbitrate and to recognise and enforce arbitration
awards made in other contracting states. Other enforcement mechanisms are available,
including multilateral treaties, bilateral friendship, commerce and navigation treaties and
traditional principles of comity among nations.
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Over the long term, project finance is expected to continue to be a popular vehicle to finance
the necessary energy and infrastructure assets in the United States, particularly to replace
the ageing fleet of coal-fired plants, nuclear plants and other public infrastructure, given the
support of the strong legal framework and a strong, sophisticated private financing market
(in addition to political support and other factors).
The US Energy Information Administration (US EIA) estimates that energy
consumption, across all sectors, will increase by 5 per cent in the aggregate from 2016 to
2040.74 While additions to power plant capacity are expected to slow from the construction
boom years in the early 2000s, we expect to see more long-term growth in certain sectors,
such as projects from renewable sources and natural gas.75 For example, the US EIA projects
that electricity generation from renewable sources will grow so that its share of total US energy
generation will increase from almost 15 per cent in 2016 to 31 per cent in 2050 in the reference
case, or as high as 34.6 per cent based on a high oil price case.76 Additionally, projections from
industry sources foresee that the United States may need close to US$5 trillion to support its
standard infrastructure needs in the coming years.77 With the enduring need for energy and
infrastructure, the United States will look to project finance structures as one of the tools for
satisfying this need.
74 See footnote 28.

75 Ibid.
76 Ibid.
77 See footnote 30.
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Chapter 23
URUGUAY
Beatriz Spiess1
I INTRODUCTION
In Uruguay, infrastructure investment has traditionally been structured through public work
concessions or financed through standard collateral secured loans, with occasional large-scale
finance fostered by development banks, international financing institutions and export
credit agencies.
During the past six years, however, Uruguay has received an unprecedented flow of
direct foreign investment; unprecedented because of the number of projects, their expected
cash flow and the various industries in which these projects are taking place (oil explorations,
liquefied natural gas (LNG) regasification plants, wind farms, photovoltaic farms), which
are far from traditional industries, and also because investors are entering from the furthest
reaches of the globe.
Additionally, new projects are being developed under the Public–Private Partnership
(PPP) Law No. 18,786 of 8 August 2011, which allows the participation of private enterprises
during the early stages of a project and allows them to make contributions and adjust the
project. This Law only deals with private sector and government joint ventures in certain
areas – mainly infrastructure works (roads and railways) energy infrastructure and social
investment (prisons, health centres, hospitals and education centres). A Large-Scale Mining
Law (the LSM Law) was approved in September 2013, regulating this specific kind of mining
activity for the first time and setting forth the contents of the mining exploitation agreements
between, and to be signed by, miners and the executive; these agreements also regulate the
assignment of exploitation rights as security in favour of the financing parties.

Large investment projects are expected to take place in the years ahead, especially in the
energy and infrastructure areas.
Uruguay has been diversifying its energy matrix and although most solar and wind
plants have already been financed and are under construction, new projects include
electricity transmission lines and international connecting systems with Brazil. Most
recently, the government closed a deal with a private developer for the construction of more
than 200 kilometres of a new transmission line to connect the Melo converter with the
Tacuarembó substation. This was structured under an operation lease and construction is
about to begin. During 2015 and 2016, renewable energy projects (wind farms and solar
1 Beatriz Spiess is a senior associate at Guyer & Regules.
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farms mainly) have drawn increasing flows of project finance with the participation of
international banks, multilateral agencies, development banks and equity investors.. Finally,
most expectation is centred on the possibility of the Uruguayan government signing an
agreement by mid-2017 with UPM for the installation of a second pulp mill, a project
with estimated costs totalling approximately US$6 billion. Negotiations are ongoing, but it
has been confirmed that UPM would require the government’s commitment to update the
country’s infrastructure, and railways in particular.
The government and the private sector are still working to ensure that the PPP
Law fosters large projects. Several PPP projects are currently under way, mainly for roads
and schools.
The mining industry has seen less activity; the government failed to reach an agreement
with the private sector regarding the first mining exploitation agreement to be governed by
the recently approved and much-discussed LSM Law.

Traditionally, projects have been structured through public work concessions or financed
through standard collateral secured loans. Physical assets owned by the project company are
provided as collateral. Other standard models such as build-own-operate-transfer (BOOT),
build-operate-transfer and build-operate-lease are not frequently seen since project companies
often own the assets and may or may not provide a service.
This was the case, for example, with a pulp mill construction project, where no public
services were to be provided. Financing was secured by mortgages on the real estate properties
where the mill was to be contracted and pledges on each of the spare parts to be used to
build the plant. Further, supply agreements with raw material suppliers were executed and
simultaneously conditional assignment agreements of the supply agreements were granted
in favour of lenders. The aim was to place lenders in such a situation that, in the event of
foreclosure, the whole project could somehow be sold or offered to a new developer.
Wind and solar farm projects, as well as construction lines, are also being structured
under project finance methods, using direct and indirect agreements, and operation and
maintenance agreements. In other scenarios, the developer promises to pledge the wind
generators once they have been constructed and the property transferred to the developer;
and mortgages the land or executes conditional lease assignment agreements.
In the past, the Uruguayan state and companies developing large projects have entered
into investment agreements covering different project areas, from tax benefits to transport,
permits, etc. Agreements of this type are usually executed under Law No. 16,906 and Decree
No. 455/007, which refer to the investment promotion regime. It is not clear whether Law
No. 16,906 validates the full scope and obligations that these agreements may include;
however, some or all obligations may nevertheless be valid.

Common risks include the following:
a Commercial risk: in past deals, sponsor’s guarantees and share retention agreements
have been requested.
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b Operational risk: monitoring agreements have been used in, for example, toll
road projects.
c Political risk: this is a low risk since Uruguay has been a stable democracy for most of
the 20th century (interrupted only by a military government from 1973 to 1985) and
has no recent record of creeping expropriation. Insurance may be requested to mitigate
this risk.2 On occasions, lobbying has occurred to obtain investment treaties addressing
these matters.
d Inflation and exchange rate risk: although exchange rate fluctuations occur, this risk
can be mitigated by the fact that many agreements (including supply agreements)
and loans can be agreed on any foreign currency. Sale of collateral in the event of
foreclosure can also be carried out in a foreign currency. US dollars are widely used for
all transactions, even in the power purchase agreements (PPAs) signed by renewable
generators with UTE and the operation leasing arrangements entered into by UTE
with private constructors.
e Environmental risk: these are usually offset by providing an environmental impact
assessment (EIA) and requesting compliance with not only local environmental laws,
but also international standards in the relevant industry.
Under Uruguayan law, actual damages and lost profits may be recovered. Under contract
law, the victim may also recover all other damages that a negligent breaching party could
have foreseen, and if the breaching party acted intentionally, the victim may also recover
unforeseen damages.
The concept of damages includes patrimonial and extra-patrimonial damages and
a defendant is liable for the harmful results that have been caused by its acts. If no harm is
caused by the negligent act, it is not liable. Recently, the courts have changed their stance
and have granted moral damages to legal entities (such as companies). Prior to this, moral
damages were only granted to individuals.
The general liability system of the Civil Code (CC) allows parties to arrange exemption
from or limitation of liability, although restrictions apply in cases of wilful and gross negligent
behaviour, in which it is understood that no limitation may apply. Gross negligence implies
any verified breach of contract that, because of the extremely careless manner in which it
happened, cannot be excused. ‘Extremely careless manner’ implies neither preventing nor
considering that which any other party would have prevented or considered: in other words,
failing to take the most obvious or evident actions, or failing to act in the most basic way
necessary, to prevent the damage.
Further, under the CC regime, force majeure is always a justified cause for non-compliance
and works for both parties to a transaction.
iii Political risks

The state does not usually grant guarantees or letters of comfort for private entrepreneurs.
However, Uruguay has ratified investment treaties with certain countries (the United
States and Finland, for example) that comply in terms of arbitration and compensation for
damage caused to investors. Recently, an investment promotion and protection treaty was
2 Multilateral Investment Guarantee Agency (MIGA) guarantees have been granted in the past.
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signed with India, under which investments in Uruguay by Indian nationals shall not be
nationalised or expropriated (directly or indirectly) except for public purposes and pursuant
to non-discriminatory laws, and in which case fair compensation (i.e., the market value of the
expropriated investment) shall be paid immediately.
Property rights are expressly recognised in the Constitution for both nationals and
foreign nationals. Furthermore, specific procedures are legally set out for expropriation,
which establish that fair and due compensation has to be paid by the state to the former
owner in all cases.
MIGA has also participated in projects in Uruguay, providing guarantees, most recently
in 2007, regarding the construction of a pulp mill project.
The LSM Law states, particularly in relation to the mining industry, that exploitation
agreements signed with the executive may be renegotiated should the public administration
change the cost-benefit parameters in force at the time of execution of the agreement
(invoking national interest and provided certain conditions are met).

A common form of security required is collateral on the various assets of a project, since
floating charges on the overall assets of an entity are not accepted.
The PPP Law authorises the contractor to institute pledges over the cash flows generated
by the PPP project, as well as to institute guarantee trusts, and all other real or personal
guarantees over the goods and rights – whether existing or future – in favour of creditors
(other than the administration), for the execution of the PPP contract. It expressly allows
for a pledge over the rights originated under the PPP contract (concession pledge), but this
is limited to obligations assumed with third parties for the financing of the operation or
maintenance of the projects, as well as those resulting from a trust created for this purpose.
A wide range of collateral is available including the following:
a Bank accounts: a pledge or a registrable pledge can be created. For the pledge, the
agreement must be made in writing, signed by the title-holders of the account and the
creditor and notified to the bank; dispossession of the funds of the account may be
effective or symbolic. In the case of the registrable pledge, the agreement must be made
in writing, signed by the title-holders of the account and the creditor and signatures
must be certified by a notary public; and registration thereof is made by the applicable
national registry granting priority over any other security perfected thereinafter and
enforceable against all third parties (this applies to all registrable pledges, regardless of
the assets being pledged).
b Equipment: this can be created by a pledge or a registrable pledge depending on the
interests of debtor and creditor. In both cases, the agreement must be made in writing,
signed by debtor and creditor. For the pledge, dispossession of the equipment from the
debtor to the creditor (or third party) must take place. For the registrable pledge, the
debtor maintains possession of the equipment.
c Real estate: a mortgage may be created. A public deed must be signed by debtor and
creditor before a notary public and registration thereof is made with the corresponding
public registry granting priority over any other security perfected thereinafter and
enforceable against all third parties. The same applies to mining exploitation permits.
d Receivables: either an assignment of contract rights as security, or a registrable pledge
can be created. In the first case, an agreement must be done in writing, signed by
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assignor and assignee and the document (title) of the credit must be handed to the
assignee. The parties must notify the obligor for payment to be made to the assignee. In
the second case, an agreement must be made in writing, signatures must be certified by
a notary public, and registry (file) of the agreement must be made in the corresponding
public registry. For example, under the current PPA template signed by renewable
generators, assignment of the agreement and its credit is already covered.
e Shares (in book-entry and certificate form and other securities): a pledge can be created
over shares held in certificate form. An agreement must be made in writing between
debtor and creditor and dispossession of the shares from the debtor to the creditor or
to a third party (depositor) must occur. If the shares or securities are held in book-entry
form, a registered pledge applies. An agreement must be made in writing between
debtor and creditor. Registry of the agreement must be made before the entity that
holds book entry of said shares or securities, which will make the proper note in
the book.
Under Uruguayan law, a lender is not entitled to exercise self-help remedies (a court order is
mandatory) and, in principle, step-in rights in favour of creditors without court process are
not provided for in our jurisdiction.
The PPP Law, however, expressly states that in cases of early termination of the PPP
contract upon default of the contractor or abandonment, the administration may step in for
no more than 24 months, to guarantee continuity of services. Upon expiration of this term, it
must be resolved whether the administration will continue to render the services or whether
a private entity will take over, using the mechanisms set out in the PPP Law.
The LSM Law, in turn, states that clauses may be included in the exploitation agreement
signed with the executive regulating the assignment of the exploitation permit to financing
parties as security so that said financing parties may assign it in turn to a third party with
the executive’s prior authorisation (to be granted if said third party complies with the legal
requisites to be a holder of the mining exploitation permit).

As far as bonds are concerned, their use in construction contracts and project finance
transaction is not widespread. Standby letters of credit are not regulated under Uruguayan
law. However, standby letters of credit are considered independent obligations of the issuing
bank and are frequently used as a form of payment guarantee in the event of non-performance
by the applicant of a contractual or other obligation with the beneficiary. The most common
bonds are bid bonds and performance bonds. Bank guarantees are similar to standby letters
of credit, the main difference being that they are regulated by local laws and regulations.
They are also issued to cover an underlying transaction or contractual obligation. The most
common guarantees are customs guarantees, lease guarantees and bid guarantees.
To engage in insurance business in Uruguay – for national or foreign individuals or
legal entities and for any risk located in Uruguay – it is necessary to establish a corporation
with registered shares (which may belong entirely to a foreign insurance company), having as
its sole purpose insurance or reinsurance activities, and it must be authorised by the executive
on the advice of the Superintendency of Insurance and Reinsurance within the Central Bank
of Uruguay.
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Further, foreign reinsurance companies that want to operate in Uruguay must have
a risk rating equal or superior to A- determined by a risk rating agency selected from the
entities established by the Superintendency of Financial Services.

Similarities in the judicial enforcement of pledges, registrable pledges and mortgages have
been reinforced with the recent amendment to the General Procedure Code brought about
by Law No. 19,090.
These proceedings begin with the filing of the creditor’s enforcement plea furnished with
the corresponding title and usually requesting attachment (embargo). Once the attachment
is in place, the debtor is notified and summoned to appear within 10 days. The debtor’s only
defences are payment of the debt or invalidity of the title.
One or more hearings may take place if defences are raised. Once the judgment has
been affirmed on appeal (or in the event the debtor fails to file a defence or appeal), the
mortgaged or pledged assets are appraised (unless this was waived in the agreement) and
following the appraisal, the title deeds to the assets are demanded from the debtor (mortgages
and vehicles only), and finally the assets are auctioned at a public bid. The lender may appear
at said auction and bid against the lender’s unpaid credit.
For registered pledges, judicial enforcement applies unless the parties expressly agree
upon an extrajudicial enforcement, in which case there is no need for attachment of the
assets; the creditor sells the assets directly.
According to the Reorganisation Act No. 18,387 (the Act) there are two types of
reorganisation or bankruptcy procedure: voluntary reorganisation (when the debtor acts
upon its own insolvency) or necessary reorganisation (when the same is requested by any
creditor or by the debtor but its assets amount to less than its liabilities). The first stage is an
automatic stay of all enforcement procedures (including automatic stays of the enforcement of
secured credits by means of pledges or mortgages for 120 days) during which a reorganisation
procedure is negotiated; if not, the court will order the sale of the company’s ongoing concerns
as a whole, or if this scenario fails (no bidding is made) the company’s assets are sold in parts.
The Act also calls for a private reorganisation agreement in which the debtor and 75 per cent
of the creditors may enter a reorganisation agreement (this does not affect secured creditors,
who may pursue the recovery of their debts by enforcing their pledges or mortgages).
The Act provides that once bankruptcy has been declared, no creditor may initiate
enforcement procedures against the debtor; however, in the case of credits guaranteed by
pledges or mortgages, this prohibition (automatic stay) will terminate 120 days after the
declaration of bankruptcy, in which case enforcement must be sought from the bankruptcy
judge. Further, contractual provisions that declare agreements automatically terminated
or enable any party to terminate the agreement in cases of insolvency or declaration of
bankruptcy shall be null and void.
Termination in a non-Uruguayan currency is permitted. Upon the declaration of
bankruptcy, however, the insolvent party’s unsecured obligations shall be automatically
converted into Uruguayan pesos at the exchange rate applicable on the date the bankruptcy
was declared. Obligations secured by pledges or mortgages must be collected in the original
currency, up to the amount of the security.
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Prior environmental approval (AAP) is required for certain projects such as construction
of ports, terminals for the manipulation of oil or chemical products, electric generators of
more than 10MW, plants for production and transformation of nuclear energy and energy
transmission lines of 150kV or more. The procedure involves the following steps:
a the project is notified to the Ministry of Housing, Land and Environment (DINAMA)
by providing information such as identification of the holder of the project, of the
landowners of plots affected and the responsible contractors; the location and
description of the area of execution and influence; and a description of the possible
environmental impact stating any applicable pre-emptive or mitigating measures to be
taken; and
b classification of the project by DINAMA as category A, B or C. DINAMA has
10 business days to confirm or correct the classification proposed by the holder of the
project. An environmental classification certificate is issued and communicated to the
applicable competent authority.
A project is classified as category A if its execution has a non-significant negative environmental

impact, category B if its execution has a moderate negative environmental impact, whose
effects may be easily eliminated or minimised, or category C if it may cause significant negative
environmental impact, whether or not preventive or mitigation measures are included.
If the project is classified as category A, the AAP is granted with no need for any further
steps. Parties whose projects have been classified as category B or C need to carry out an EIA
at their own cost and file a request for the AAP with DINAMA. Details of the project (except
for information deemed to be of a commercially or industrially confidential nature) and the
EIA are then made available to interested parties for comments for 20 business days. A public
hearing follows if the project has been classified as C or if DINAMA believes that the project
will have a significant cultural, social or environmental impact.
Finally, DINAMA issues a resolution stating whether the AAP has been granted. The
AAP will only be granted if the project is considered to cause only acceptable residual negative
effects. Also, DINAMA may grant the AAP subject to the introduction of amendments to the
project or the adoption of preventive or mitigating measures deemed necessary. The AAP will
be valid for a term determined by DINAMA.
In Uruguay, application of the Equator Principles is not common practice.

In principle, under Uruguayan law, financial institutions have no administrative, civil or
criminal liabilities when participating as lenders in a project finance transaction.
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i PPP
Uruguay’s PPP Law limits the application of PPP projects to the activities indicated therein.
Infrastructure projects include:
a road works (including rural), railways, ports and airports;
b energy projects (except for monopolised activities);
c waste disposal and treatment; and
d social infrastructure, including prisons, health centres, educational centres,
public housing, sports centres and urban projects (improvement, equipment and
development works).
Contracting of educational, health, or security services is expressly forbidden as is contracting

services relating to the rehabilitation of prisoners, and the implementation of educational and
health centres or prisons. The exploitation of monopolies is also excluded.
The PPP Law expressly sets out the principles that PPP contracts should follow, including:
transparency and publicity, public interest, economic efficiency, proper distribution of risks,
transfer of assets to the government when required, equanimity, temporality (not more than
35 years), fiscal responsibility, control, sustainable growth and regard for labour conditions. It
further defines the ‘economic efficiency principle’, stating that the value-for-money concept
includes the reduction of costs, risk levels and availability.
The content of PPP contracts is also regulated. They should include:
a purpose;
b risk-sharing conditions;
c performance objectives;
d remuneration; causes and procedures to modify the remuneration and maintenance of
the contractual financial-economic equation;
e payment terms;
f control regulations;
g penalties;
h conditions for amendments and termination;
i ultimate purpose of the works and equipment after the termination of the contract;
j contractor guarantees;
k mechanisms applicable to liquidation of the contract, including compensation;
l reference to the relevant general terms and conditions or particular ones; and
m other contractor obligations such as the presentation of audited financial statements.
The contractor may assume different forms and be paid by the users, the administration or both.
Compensation and retention rights in favour of the administration for the implementation
of penalties under the PPP contract are granted. It also provides that the administration will
be able to receive certain income whether from the contractor or users. Furthermore, it is
stated that the administration will be able to give minimum revenue guarantees, but it is not
allowed to ensure profits or levels of returns. When required, the executive should grant some
of these contributions.
The contracting procedure as regulated in the PPP Law is divided into different stages.
A contract can be initiated ex officio by the administration, or by a private initiative
submitted by a proponent. The administration should receive the assessment document
referring to the feasibility and suitability of the project concerned. Based on the characteristics
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of each project, the subsequent initial evaluation will be based on the pre-feasibility, feasibility
and impact studies. These studies will be presented to the Planning and Budget Office and
the Ministry of Economy and Finance for their consideration and the preparation of reports.
The proponent of a private initiative (which must be submitted to the National
Development Corporation) will have certain rights and preferences: it can obtain the
reimbursement of certain costs incurred in feasibility studies if it is not awarded the contract,
and can also obtain an advantage of up to 10 per cent of its offer with respect to the best offer;
the promoter of the initiative will not pay for the terms and conditions of the bid documents.
All the information regarding a private initiative is confidential.
Once reports from the relevant bodies have been obtained, the contracting administration
can start the competitive dialogue, which is one the most innovative aspects of the PPP system
and consists of a debate held between the administration and the interested entities that fulfil
the technical and economic solvency requirements. This allows the parties to discuss all the
relevant aspects of the PPP contract and define the special terms and conditions. This phase
is essential for the private sector to be able to introduce modifications or adjustments.
After the competitive dialogue and notification to participants, the administration will
call for the submission of offers. The call can only be directed to those that have participated
in the competitive dialogue. However, if only one party participates, other interested entities
should be admitted. The call should also state whether the participants in the competitive
dialogue will receive any preference or compensation. Upon the completion of the stages
and approvals mentioned in the PPP Law, and the institution of the relevant guarantees, the
administration will award the PPP contract and execute the relevant agreements according to
the terms and conditions discussed during the competitive dialogue.
The general public bidding law of Uruguay is set out in the Coordinated Text of the State
Accounting and Financial Management Law (TOCAF), which states that tender procedures
shall be ruled by the following principles: (1) publicity, so that the largest number of
competitors can be attracted; (2) equal treatment of bidders, and impartiality of the public
administration; and (3) stability, resulting from strict compliance with all applicable rules
and regulations. Other general principles include flexibility, materiality and truthfulness.
Under TOCAF, however, preference may be given to national products provided they
are of the same quality as foreign ones. In public work contracts, preference may be given to
offers that imply a larger use of domestic raw materials and labour.
Administrative acts in bidding procedures or public work contracts may be challenged
before the Court of Administrative Litigation, the body in charge of annulling or maintaining
all administrative acts. Under the legal regime in force, the submission of a request for review
in some cases has an automatic suspensive effect on the act being challenged, unless the
administration, by a duly grounded decision, declares that said suspension would affect
urgent needs of service or would cause serious damage.

The Uruguayan authorities encourage all investment, without discrimination between local
and foreign investors; incentives for investments are available for both. Furthermore, and
under the Investment Law, the remittance of profits and repatriation of capital are guaranteed.
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Specific restrictions on ownership do apply to foreign nationals, however, regarding

certain industries such as aeronautics, the maritime industry and the media.
The tax system does not discriminate against nor favour foreign investment. However,
the tax burden is influenced by the legal vehicle adopted to perform activities in Uruguay.
Further, there is a general system for promoting industrial activities (along with special
promotion systems for specific activities and sectors such as fishing, merchant marine,
national aviation and hydrocarbons, with varying benefits).
The Industrial Promotion Law makes it possible to grant national interest status
(ex officio or at the request of the interested parties) to any activity, specific project or company
fulfilling objectives such as:
a increasing and diversifying exports of processed goods incorporating the greatest
possible added value;
b establishment of new industries and expansion or reform of existing industries, when
this implies better use of raw materials and labour; and
c technological research geared to exploitation of non-exploited local raw materials,
training of technicians and workers.
National interest status implies promotional benefits in terms of credits (to buy assets, cover
establishment expenses, imports, raw materials, etc.) and in terms of taxes (total or partial
exemption from taxes, assessments, contributions and rates or public prices, as well as total or
partial exemption from taxes and duties on imports or in connection with imports).
With the exception of certain generic benefits regarding imports of equipment, all
other tax benefits must be requested by the interested parties and must be expressly granted
or recognised by the authorities in each case.
Under Regulatory Decree 455/007, provision is made for a direct income tax
exoneration based on two parameters: the project scale (determined according to the invested
amount) and the ‘score’ obtained by the project, which will be determined on the basis of
a matrix of objectives determined by the executive.

The Uruguayan exchange market operates under complete freedom of transaction and
holdings in currency and metals; there are no exchange control laws in force. Similarly, there
is total freedom regarding transfers and remittances to and from the country in any currency.
In principle, there are no restrictions, controls or fees on remittances of investment
returns or loan payments to parties in other jurisdictions, but taxes do apply. In the case
of dividend distributions from Uruguayan corporations to non-resident entities without
permanent establishment in Uruguay, a tax of 7 per cent applies on the amount of results
distributed that constitute taxable income subject to corporate income tax.
If a reduction in the paid-in capital was resolved, and the capital was repaid to the
shareholder, the 7 per cent will apply also to the amount that exceeds the face value of shares
of Uruguayan corporations, as this payment will be assimilated to a dividend distribution and
will be treated equally.
Payments of capital under loans are not taxable; payment of interest to non‑resident
entities without permanent establishment in Uruguay will, however, be taxable at a rate of
12 per cent.
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There are no specific courts or tribunals in Uruguay dealing with project finance transactions
or constructions contracts.
A foreign investor will not need to establish a place of business or be permanently
domiciled in the country to appear before a court or arbitration committee; however, it is
compulsory to establish a ‘special domicile’ in Uruguay for the purpose of serving any notices,
court papers or writs within any procedure.

Although judicial proceedings are still the primary manner in which disputes are settled, ADR
is widespread. The fact that courts are overburdened and judicial proceedings time-consuming
contributes to the success of ADR, the costs of which, however, are substantially higher.
Mediation bodies are created by the Supreme Court of Justice. Parties consenting to
mediate discuss their issues and are encouraged to arrive at an agreement by the mediating
bodies, which do not issue decisions or have power to impose them upon the parties.
Mediation is generally limited to small claims.
Conciliation constitutes the most popular form of ADR. It entails one or more
hearings before a judge to attempt settlement and is provided for by the General Code of
Procedure (GCP), which determines that a party willing to take legal action must first engage
in conciliation. Conciliation is also compulsory during proceedings at the first hearing. If
the parties settle, any such agreements are binding upon the parties and directly enforceable.
Arbitration is laid down by the GCP, which includes thorough procedural regulations
that apply in the absence of determination thereof by the parties. In principle, arbitration is
decided in equity, but parties may agree that the arbitrators apply statutory law. All disputes
– including project finance and construction disputes – can be resolved through arbitration,
with the sole exception of matters that cannot be settled by the parties (namely criminal
matters, family law and proceedings involving rights that cannot be waived or public policy).
Usually, parties to arbitration will agree to resolve their disputes according to the
Arbitration Regulation of the Conciliation and Arbitration Centre, International Court
of Arbitration for MERCOSUR, of the Uruguayan Stock Exchange, or even submit their
disputes to the said Court. In complex commercial agreements, parties also resort to
international arbitral institutions such as the ICC.
Uruguay is signatory to a number of international treaties regarding arbitration and
enforcement of arbitral awards. In the absence of a treaty, the rules of enforcement of
foreign judgments also apply to foreign arbitral awards (the procedure for recognition and
enforcement can take between one year and 18 months). Further, Uruguay is party to the
New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Uruguay must take advantage of the great interest that foreign investors are showing by
identifying and promoting the opportunities it has to offer.
Construction of infrastructure (improvement of roads in particular) is needed to
accompany economic growth and the development that various industries are experiencing.
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This is now evident with UPM’s request for the country’s railway system, which is currently
practically non-existent, to be updated as a condition for investment. The PPP Law could
finally be used by the government to foster infrastructure projects.
The national policies on large-scale mining will have to be clearly stated and the LSM
Law should be correctly regulated.
Acknowledging the growth that the renewable energy industry is experiencing,
regulations should be passed so that Law No. 18,362 on wind farm easements can be applied,
and legislation should be drafted to address the ‘wake effect’.
Finally, although it is still not clear whether Uruguay has oil resources, it is imperative that
a new, updated and coherent national policy on hydrocarbons is adopted, for the sustainable
development of the oil industry and the protection of all other sectors of the economy.
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Chapter 24
UZBEKISTAN
Shukhratjon Yunusov, Ulugbek Abdullaev and Diyora Abdurakhmanova1
I INTRODUCTION
Uzbekistan is a unitary republic with a continental legal system. The head of state is the
president, the legislative branch is a two-chamber parliament and the executive functions are
carried out by the Cabinet of Ministers. With a population of around 32 million, Uzbekistan
is the most populous country in Central Asia. The country is also rich in natural resources,
including hydrocarbons, gold, copper and uranium.
In the 2016 election campaign, the current president campaigned to double GDP by
2030 and to increase the industrial sector’s share of GDP to 40 per cent (from 33.5 per cent
in 2015).
To achieve these ambitious plans, the country is investing heavily in infrastructure
projects, including with the help of development banks and multilateral agencies (such as
the Asian Development Bank (ADB), World Bank (WB), Islamic Development Bank and
many others).
The two highlight project finance examples are the Surgil (US$2.54 billion debt
financing) and Kandym (US$500 million debt financing) gas-field projects.

In the coming years, we expect a number of important legislative changes and new project
finance transactions.
In this context, a ‘Law on Public–Private Partnership’ is being developed, the draft of
which is currently under public discussion.2 The government has been instructed to simplify
the rules of tendering and approval of design documentation, and to revise planning and land
allotment regulations.
Another unprecedented idea for the country is the critical analysis of public functions
and services with a view to transferring some of them to the private sector. In June 2017,
private companies will begin operating gas supply facilities in 14 districts as a pilot project.
We expect that this pilot-project model will be extended to other public utility services, such
as electricity supply. We expect more detailed information to be available later this year.
1 Shukhratjon Yunusov is a counsel, Ulugbek Abdullaev is a senior associate and Diyora Abdurakhmanova is
an associate at Dentons Tashkent.
2 Russian text available at www.chamber.uz/forum/viewtopic.php?f=23&t=69.
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In recent years, private companies, acting as investors or operators, or both, have been widely
involved in the construction and operation of economic and social infrastructure projects. This
practice allows increased access to private investment and increases the economic efficiency of
infrastructure. At the same time, since infrastructural objects are usually classified as natural
monopolies and operate in the public interest, the state maintains its presence in this area as
an owner, regulator and controller of the activity of private companies.
Because of the lack of a legal framework for public–private partnerships (PPP), models
such as build-operate-own-transfer, build-operate-transfer and build-operate-lease are not
utilised in Uzbekistan. Although the Law on Concessions has been in place since 1995,
absence of a detailed selection process and lack of experience in carrying out PPP projects
has limited the adoption of PPP structures in the country. However, recently the Uzbek
government has included the development of a draft of a Law on Public–Private Partnership3
in the government programme for 2017, which is expected to provide a regulatory framework
for the aforementioned PPP schemes.
Despite the lack of a regulatory framework, a few projects have been implemented
under the build-operate-own (BOO) model. Usually, contractors under BOO contracts
operate through joint ventures (JV) set up by both a foreign and a local company. The JV
then attracts financing for the project, builds, operates and owns the project. High-profile
examples are the Uzbekistan–China gas pipeline and Surgil projects.
ii Documentation
Considering its complexity, a project finance transaction may generate a large number
of transactional documents. The precise requirements will depend upon the type of the
project, the ownership structure, the regulatory environment and the nature of public
sector involvement
Taking complex investment projects in the Uzbek market as an example, the following
documents constitute the principal documentation:
a government resolutions outlining the sources of funding, executing bodies, tax and
customs benefits;
b tender documentation, which is comprised of general, technical and commercial parts;
c loan agreements between the owner and borrowers (e.g., generally international financial
institutions, such as ADB, WB, and the Japan International Cooperation Agency, as
well as local organisations such as the Fund for Reconstruction and Development of
the Republic of Uzbekistan);
d pre-feasibility studies or pre-cost analyses, or both;
3 A programme of complex measures for ensuring the accelerated development of entrepreneurship and
quality improvement of business climate in the Republic of Uzbekistan (Annex to the Decree of the
President of the Republic of Uzbekistan No. UP-4848 dated 5 October 2016), as well as the Decree of
the President of the Republic of Uzbekistan No. UP-4849 dated 14 February 2017 ‘On organisation of
measures for the implementation of the action plans for realising the development strategy of Uzbekistan in
five directions’.
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e contract documents (shareholders’ agreements, joint venture agreements, investment

agreements, contract agreements, off-take agreements, supply agreements, concession
or licensing agreements, product sharing agreements, operation and maintenance
agreements, technical service agreements, etc.);
f feasibility studies or cost analyses, or both;
g design documentation, including agreements with local design institutes for review and
adaptation of design documentation to local standards; and
h security documentation (bonds and insurances).

In the Uzbek construction industry, the choice of delivery methods and standard forms
mainly depends on whether or not the construction works are financed from centralised
sources, such as budgetary appropriations, or state trust funds or loans from international
financial institutions, or both. If the funding is made from such sources, any construction,
expansion, reconstruction and technical re-equipment must be delivered on a turnkey
basis.4 Therefore, engineering-procurement-construction and engineering-procurement-
construction-management contracts are the most commonly used method as they offer
maximum risk transfer to contractors. Because of frequent involvement of international
financial institutions, their standard forms – which are usually based on the International
Federation of Consulting Engineers (or FIDIC) suite of contracts – have become increasingly
widespread in Uzbekistan in the past decade.
In relation to privately financed projects, the standard form provided by Uzbek
legislation remains the most commonly utilised agreement for construction works.5

There are different types of risk that may be encountered in a project finance transaction.
Normally, parties tend to identify all risks and regulate these risks contractually before they
arise. Typical risks are construction risks, operation risks, revenue risks, insolvency risks,
environmental risks and political risks.
Generally, the employers tend to pass all the risks on to the contractors, and contractors
pass them on to the subcontractors.
Typically, insurance is obtained to address the risks outside the direct control of the
contracting parties.
4 Regulation on the Procedure of Organisation, Financing and Credit Provision for Construction Executed
from Centralised Sources (Annex No. 2 to the Resolution of the Cabinet of Ministers of the Republic of
Uzbekistan No. 395 dated 12 September 2003), Clause 33.
5 Annex No. 3 to the Resolution of the Cabinet of Ministers of the Republic of Uzbekistan No. 395 dated
12 September 2003.
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Project companies and their subcontractors will frequently negotiate limitations on their
liability in the contracts. Naturally, mandatory rules on liability under Uzbek law have to be
considered while negotiating the limitation rules and caps. The level of caps is usually agreed
on the basis of a fixed percentage, fixed sum or formula.
Project agreements usually provide the parties with relief from liability in respect of
force majeure circumstances. If a force majeure event occurs, the parties will generally look to
agree alternative means of delivering the project. If the event continues for a specific period,
the parties will usually have the right to terminate.
iii Political risks

Under Article 3 of the Law on Foreign Investments, ‘foreign investments’ can refer to almost
any asset, and the definition is broadly interpreted. A similarly broad approach is adopted in
relation to the definition of ‘foreign investor’. Foreign public bodies, international organisations
and foreign legal and natural persons are, inter alia, recognised as foreign investors.
National law applies the national treatment standard in relation to foreign investments,
and foreign investments are treated no less favourably than domestic investments. Other
standards of treatment (for instance, ‘most favoured nation’) can be found in more than
50 bilateral investment treaties (BITs) to which Uzbekistan is a party.
The Foreign Investments Law protects investors from political and other risks, such as:
a expropriation or any other alienation of property;
b restrictions on the transfer of foreign currency outside the country;
c changes in law that discriminate against particular groups of investors;
d any intervention of the government and its officials in the contractual relations of
investors; and
e any other kinds of political and legal risks associated with foreign investors and
their investments.
However, events in 2012 raised concerns over the efficacy of that guarantee clause. Also, it is
frequently stated that the country has a strict currency control regime. Despite there being
an express profit repatriation guarantee under the law, it is acknowledged that in practice it
might be difficult to apply this because of foreign currency restrictions. In practice, foreign
creditors and investors frequently request direct agreement with the central government and
apply for political-risk guarantees for large-scale projects.
Currently, the successful succession to power of the newly elected president demonstrates
Uzbekistan’s continued political stability. The new government is showing positive signs on
strengthening protection of private property and on liberalising the foreign exchange market,
among other key reforms. We expect that a number of key positive policy changes will be
seen in the next few years.

Creditors may accept a pledge by means of a general security agreement, or by concluding
a general pledge agreement for moveable and immoveable assets and property rights. The
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pledge agreement should specify the objects of security and their value, as well as the nature
and terms of the obligation that is being secured. Negotiation of pledge agreements should
take into account different perfection requirements for different types of assets.
Uzbek law also allows for security be taken over cash deposited in bank accounts, and
over shares in companies incorporated in Uzbekistan.

i Bonds
Generally, the Civil Code of Uzbekistan provides for the possibility of issuance of guarantees
to ensure proper execution of a principal’s obligations in relation to the beneficiary of the
guarantee. Such guarantees may be issued by banks or other credit organisations and are
irrevocable and non-transferable by default.6 However, because of restrictions in Uzbek
legislation, requiring companies to freeze guaranteed amounts in their accounts, bank
guarantees, in particular the ‘on-demand’ type, are non-existent in local transactions.
Corporate guarantees are also not typically used in Uzbekistan.
By contrast, in large-scale investment projects, involving international contractors
and financed by international financial institutions, various types of guarantees are widely
utilised, including bid bonds, advance payment bonds, interim payment bonds and
performance bonds.
ii Insurance
Under Uzbek legislation, the contractor has an obligation to insure the object of construction,
as well as the construction works, at the contractor’s own expense.7
In the case of construction projects financed by the state budget or through loans
from international financial institutions guaranteed by the government of Uzbekistan, the
property interests of the contractor and other interested persons, as well as the liability of the
contractor for harm to life, health and property of third persons as a result of construction
and installation works, must be insured.8
In addition to that, the following types of insurance are frequently stipulated in
contract agreements:
a automobile liability insurance – covering use of contractors’ and subcontractors’
vehicles (whether or not owned by them);
b employer’s liability – covering employer’s liability for bodily injury or death to any local
person with whom it has an employment relationship or a service agreement;
c workers’ compensation; and
d cargo insurance – covering loss or damage occurring while equipment and materials are
in transit from the point of shipment until their arrival at the construction site.
6 Civil Code of the Republic of Uzbekistan, Articles 299–303.

7 Civil Code of the Republic of Uzbekistan, Article 669.
8 Regulation on Compulsory Insurance of Construction Risks for Erection of Objects from State Budget and
Loans Under the Governmental Guarantee (Annex to the Resolution of the Cabinet of Ministers of the
Republic of Uzbekistan No. 532 dated 20 December 1999).
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If a project company fails to perform its contractual obligations, a project lender can
enforce its rights over the collateral based on a pledge or mortgage agreement. A project
lender enforces its rights through a court. It may enforce its rights over collateral without
engaging a court if such enforcement (outside the adjudication) was envisaged in the pledge
or mortgage agreement. A project lender and a project company may also enter into an
agreement that entitles a project lender to a right to enforce its rights over collateral beyond
the walls of the court after grounds for enforcement arise (non-performance or failure to
perform duly the obligations of the project company or any other event of default established
in a facility agreement). The agreement should be certified by a notary office.
Once a court makes a decision in favour of the project lender, the collateral will be sold
at public auction. The project company may ask a court to defer the enforcement for up to
a year.
The starting price of the sale at auction is determined by a court or by the parties
themselves. The collateral will be sold to a person who offers the highest price.
If the public auction does not take place, a project lender may receive the collateral and
set off the claims secured by the collateral against its purchase price.
If a project lender does not exercise its rights to keep the collateral within one month
after the public auction is declared not to have taken place a second time, the pledge or
mortgage agreement will be deemed as discharged.
Thus, the steps to enforce the rights over collateral can be summarised as follows: the
project lender files a claim to a court in connection with the collateral. The court will make
a decision in favour of the project lender. The collateral subject matter will be put on sale at
public auction. It will be sold to a person who offers the highest price and the proceeds will
be distributed to the project lender to the extent of the liability of the project company. If an
auction does not take place because of lack of interest from buyers in the subject matter of
the collateral, the project lender will have a discretion to receive it and set off its claim against
the purchase price of the collateral. If the project lender does not exercise this discretion, the
agreement over collateral will be rendered as discharged.
Once a project company is insolvent, a project lender enforces its rights over the
collateral through a meeting or committee of creditors. A project lender may not enforce
its rights individually after an application for bankruptcy has been accepted by an economic
court. All actions on behalf of the creditors will be made by the meeting of creditors.
The project lender will be paid from proceeds received as a result of the collateral sale.
The collateral will be put up for sale at auction. If it is not sold, the collateral will be offered
to the secured creditor as payment in kind. If the collateral costs more than the liability of the
project company, the difference will be reimbursed by the project lender in cash.
If the subject matter of the collateral consists of the entire property of a project company
and the proceeds from its sale are not sufficient to meet the total claims of the secured
creditors, distribution of the proceeds will be made to the creditors after the following have
been met:
a court expenses;
b fees of the receiver or liquidator;
c utility payments and operation costs;
d insurance of the debtor’s property;
e liabilities of the debtor that have arisen since the insolvency; and
f claims of citizens arising out of damage caused to their health and property.
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There are several instruments regulating social and environmental aspects of project finance
transactions and construction contracts. These are the Construction Code of Uzbekistan, Law
on Ecological Expertise, Regulation on Ecological Expertise, Law on Environment Protection,
Regulation on Preparation, Review and Expertise of Investment Project Documentation and
other delegated acts. While transacting and constructing, project companies, lenders and
contractors should bear in mind the main requirements of Uzbek law in connection with
social and environmental aspects of deals. Participants have to comply with provisions on
the safety and protection of the environment, ecological safety and sanitary norms and rules.
They should refrain from actions affecting the environment, cities, regional landscape, civil
engineering works, transport and social infrastructure.
All projects under state programmes (investment), construction documents, entities
affecting the environment and designs are subject to ecological expert evaluation. The
authorised ecological expert body is the State Committee on Ecology and Environmental
Protection. Furthermore, projects included in a national investment programme should
contain an environmental impact assessment and a feasibility study to be examined and
approved by authorised state bodies.
Contractors need to register the object of the construction with the regional
inspection unit of the State Committee for Architecture and Construction and obtain
a construction permit.
Project finance transactions and construction contracts are subject to standards set by
environmental laws of Uzbekistan. Financial institutions review and ensure compliance
with Uzbek environmental law while reviewing finance documentation. Project finance
transactions and construction contracts are not subject to the Equator Principles under
Uzbek law. However, banks are free to adopt international banking practices and to ensure
compliance with the Equator Principles in their lending policies.

Uzbek law does not provide for criminal liability of legal entities, including banks. Civil
liability may be applied to banks and administrative liability to senior management for
violation of provisions of contractual or commercial law and for some regulatory matters
respectively. The most common liabilities that banks may face are penalties for breach of
environmental law and payment disciplines.

i PPP
It is estimated that nine infrastructure projects with a total value of US$3.985 billion have
been implemented with private participation in the period 1990–2014.9 The institution of
9 The World Bank, Private Participation in Infrastructure Database, http://ppi.worldbank.org/snapshots/

country/uzbekistan.
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PPPs in Uzbekistan is still in its infancy. There is no comprehensive legal basis on which
to establish the principles and operational essentials of PPPs; only laws on concessions,
production sharing agreements, privatisation and attraction of foreign investment may be
regarded as a form of PPP.10 Importantly, as noted above, the Uzbek government has included
the development of the draft of a Law on Public–Private Partnership in the government
programme for 2017.
Uzbek public procurement legislation distinguishes between two types of procurement
procedures: competitive bidding and tendering. As a general rule, procurement of goods,
works and services for construction works financed from centralised sources is made only
through competitive bidding, unless otherwise provided by governmental resolutions.11
However, procurement of foreign and local materials, components and equipment exceeding
US$100,000 per contract and financed by the state budget, off-budgetary trust funds, foreign
grants or funds from international financial institutions is executed by means of tendering.12
Bidding may be open or closed, with or without pre-qualification. Closed bidding is
usually chosen when the works and services are characterised by high levels of complexity or
narrow specialisation.13
Notably, during implementation of investment projects financed from foreign loans
and grants, executed by foreign contractors and paid for in freely convertible currency,
bidding documentation must include a condition on participation of local Uzbek companies
in execution of no less than 50 per cent of the works, unless otherwise provided for in loan
agreements with international and foreign financial institutions.14 Moreover, selection of
contractors for execution of works for less than 500 million som is made exclusively among
small businesses.15
Disputes arising out of the bidding procedure and claims arising from the actions and
decisions of the owner, organisers and other bidding participants are generally filed with local
economic courts, whereas the state anti-monopoly authority has administrative responsibility
for participants’ compliance with Uzbek competition laws.16
10 Sardor Akobirov, ‘Development of Public–Private Partnership in Uzbekistan’ (2014); Nurmuhammad

Yusupov and Farrukh Karabaev, ‘Theory and Practice of Public–Private Partnership’ (UNDP Uzbekistan
and Chamber of Industry and Commerce of Uzbekistan, 2013).
11 Resolution of the Cabinet of Ministers of the Republic of Uzbekistan No. 302 dated 3 July 2003 ‘On
measures for development of the system of competitive bidding in capital construction’, Clause 2.
12 Resolution of the Cabinet of Ministers of the Republic of Uzbekistan No. 456 dated 21 November 2000
‘On measures for improvement of organisation of tendering’, Clause 1.
13 Regulation on Competitive Bidding in Capital Construction on the Territory of the Republic of
Uzbekistan (Annex to the Resolution of the Cabinet of Ministers of the Republic of Uzbekistan
No. 302 dated 3 July 2003), Clauses 18–23.
14 Resolution of the Cabinet of Ministers of the Republic of Uzbekistan No. 302 dated 3 July 2003 ‘On
measures for development of the system of competitive bidding in capital construction’, Clause 3.
No. 302 dated 3 July 2003), Clause 27-1.
No. 302 dated 3 July 2003), Clauses 108–109.
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Uzbek public procurement legislation does not specifically state or restate the
fundamental principles for tender procedures, such as equal treatment, transparency, and fair
competition, which are usually stipulated in relevant BITs and other international treaties. At
the same time, application of Uzbek procurement laws can be excluded if loan agreements with
foreign and international financial institutions provide for another procurement procedure.17

Foreign financial institutions and design or construction companies can act as lenders
and contractors in project finance transactions. Foreign lenders are not required to obtain
permits or licences to finance projects. Uzbek banks undertaking refinancing, or other Uzbek
commercial banks attracting foreign loans, have to notify the Central Bank of Uzbekistan
within five days of receiving such foreign loans, for the purpose of identifying the total
amount of Uzbekistan’s liability in respect of external loans.
Generally, Uzbek law does not require a foreign company to obtain a licence to construct
in the territory of Uzbekistan. However, construction works in certain areas or sectors are
subject to licensing. The main sectors where contractors (irrespective of nationality) need to
obtain a licence are:
a design, construction, operation and maintenance of gas or oil pipelines;
b design, construction, operation and maintenance of bridges and tunnels;
c design, construction, operation and maintenance of objects of high risk and potentially
dangerous production;
d design of architecture and construction documents; and
e expertise of design of construction;
Uzbek law envisages the issuance of licences in connection with the aforementioned activities
only to legal entities incorporated in Uzbekistan. Nevertheless, in practice, authorised bodies
issue licences in respect of the project goal or object of construction, and in turn foreign
contractors perform their contractual obligations on the basis of these licences. There may
be instances where a special government resolution on a particular project is adopted to
provide for, along with other related matters, the issuance of licences, and which accelerates
the licensing process.
Foreign contractors do not have to register or file with government authorities to
carry out works on a project. The object of construction should be registered and a permit
for construction works should be obtained. These are usually obtained by the customer
(the project company). Foreign contractors may be required to obtain certain licences, as
mentioned above.
Uzbek law affords quite a good level of protection and a wide range of guarantees for
foreign investments. The state guarantees and protects all rights of foreign investors. Foreign
investments are afforded fair and equitable treatment, full protection and security. Foreign
investments are not subject to nationalisation.

No. 302 dated 3 July 2003), Clause 4.
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Uzbekistan

Foreign investors can change operating funds or profits from one currency to another
currency without any restriction. There is no control or law restricting repatriation of profits
from Uzbekistan. Uzbek law on foreign investments expressly guarantees foreign investors’
rights to repatriate profits without any restriction. Payment of profits or repayment of loans
to parties in other jurisdictions is not subject to any restriction, control, fees or taxes, except
for the bank commission that may arise as a result of funds transfers.
Project companies may also repatriate foreign earnings, and foreign earnings deposited
in bank accounts in Uzbekistan may be subject to mandatory sale, the amount of which
depends on the sector. Generally, 25 per cent of proceeds in foreign currency received from
export of goods and services are subject to mandatory sale; 50 per cent of proceeds in foreign
currency received from export of certain items (most of which are natural resources) are
subject to mandatory sale. There are no restrictions on the use of proceeds in hard currency to
the extent that it is permitted to make settlements in US dollars. Project companies may sell
hard currency to commercial banks and use Uzbek som for local supply of goods and services.
i Arbitration and ADR
As a general rule, ADR is not typically practised in Uzbekistan. However, dispute avoidance
mechanisms do enjoy much support in large-scale government projects.
Uzbekistan does not have in place specialist courts whose sole function is to hear
and resolve project finance and construction disputes, and such disputes usually fall under
the jurisdiction of local commercial courts. Nevertheless, nothing in Uzbek legislation
precludes the parties from opting for international arbitration. That is, there are no project
finance and construction disputes that are not arbitrable or that are subject to automatic
domestic arbitration.
In 1994, Uzbekistan ratified the ICSID Convention, and in 1995, it joined the
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New
York Convention). Hence, Uzbekistan recognises awards of international courts and arbitral
tribunals as binding and enforces them in accordance with its procedural rules. Further,
this issue is also regulated by international agreements on the provision of legal assistance
concluded by Uzbekistan with other countries.
The process of recognition is initiated by the submission of a petition to the local court,
together with the authenticated original award and arbitration agreement (or duly certified
copies). If the award and agreement are not made in an official language of Uzbekistan, the
party applying for recognition must produce the required translation. After receipt of the
necessary documents, the court shall, within five days, notify all interested parties about the
judicial proceedings, call witnesses and take other relevant actions. Based on the result of
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Uzbekistan
examination, the court gives its ruling and immediately issues an execution writ.18 Such a writ
may be presented for enforcement within three years from the date of entry into force of the
decision of the local court.19
Regarding the grounds for rejection of awards, national legislation of Uzbekistan
does not establish any additional restrictions for recognition and enforcement except for
those provided in Article V of the New York Convention and other relevant international
conventions and treaties.
Recognition of awards of international or foreign courts and arbitral tribunals does not
usually encounter much difficulty – unlike their enforcement. Because of certain currency
conversion issues, the party seeking enforcement may struggle with the collection of debts.

The current shift in state policy towards modernising most of the existing infrastructure and
building new infrastructure is likely to trigger a need for project finance in the near future.
Uzbekistan is actively seeking to build new capital-intensive infrastructure, such as a toll road
connecting Tashkent and Bukhara (through Samarkand) by 2020, bridges, power plants in
regions to supply people and manufacturers with electricity, and other infrastructure projects.
The government understands that a regulatory framework plays a crucial role in
boosting the confidence of investors and lenders in extending funds into capital-intensive
industries. Therefore, it is reviewing substantial laws and regulations with the aim of
improving the business environment and introducing certain changes. These changes have
started with the regulation of foreign currency and the government is actively continuing to
undertake reforms in the foreign exchange realm. The government has set itself the objective
of loosening the regulatory framework substantially.
The combination of the need to modernise infrastructure dating from the previous
century and to reform economic laws dealing with a wide range of issues – starting with the
establishment of companies, the conversion of national currency into hard currency and the
free repatriation of capital – and the need to build new infrastructure is likely to bring project
finance to the forefront in the industrial sector.
18 Resolution of the Plenum of the High Economic Court of the Republic of Uzbekistan No. 248 dated
24 May 2013 ‘On some issues of application of legal acts concerning the recognition and enforcement of
decisions of foreign courts and arbitral awards, as well as the foreign court orders’.
19 Law of the Republic of Uzbekistan No. 258-II dated 29 August 2001 ‘On enforcement of decisions of
courts and other state bodies’, Article 6.
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Chapter 25
VIETNAM
Nguyen Trung Nam1
I INTRODUCTION
In both developed and emerging markets, project financing has long been an essential part
of financing options for infrastructure projects. One of the requirements for Vietnam joining
the World Trade Organization (WTO) was to improve the legal framework in favour of
foreign investors. Recent years witnessed key development in Vietnamese jurisdiction with
the introduction of exhaustive statutory legal framework to regulate investment in public
infrastructure sector. Among these, Decree No. 15/2015/ND-CP (effective on 10 April 2015)
plays the most outstanding role in the governance of various kinds of projects, including
build-operate-transfer, operate-transfer, build-transfer-operate and build-transfer as well
as the public–private partnership (PPP) scheme. This Decree outlines the procedures for
executing a PPP project as well as preparing the project proposal, governmental approval and
making an announcement. Moreover, it also enables investors in a PPP project to mortgage
concession rights under the contract and allows lenders to a PPP project to appoint a qualified
third party to exercise the step-in rights of the lender. In brief, this legislative integration
provides Vietnamese PPP projects with an environment of global flexibility through an open
mechanism. Great improvement has been seen, giving better support to foreign investors
in terms of getting project funding, partnerships and improving rights of foreign investors.
In most Vietnamese power and infrastructure financing, funding by international
financial institutions2 contributes a considerable proportion, in which both export credit
agency-backed loans and commercial loans are very common. However, lending to a project
entails a high level of risk, so these institutions usually pay particular attention to project
feasibility, as well as credit risk evaluation. Moreover, some development banks also offer
financial advisory mechanisms in the project, and some seek to have a particular level of
control over the borrower’s assets (i.e., some kind of guarantee or security). By and large,
the evolving trend of financial institutions in project finance has not only facilitated project
cash flow and flexibility but also allows them to proactively diversify and hedge risks with
their portfolio.
1 Nguyen Trung Nam (Tony) is managing director at EPLegal Limited.

2 Mainly including commercial banks, export credit agencies, multilateral institutions, development banks,
and other finance companies.
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The year 2016 and the first six months of 2017 have seen significant developments in
Vietnamese law. For instance, the Civil Code and the Law on the State Budget 2015 came
into force on 1 January 2017; Circular No. 39/2016/TT-NHNN sets out new policies on
lending transactions of credit institutions or foreign bank branches with customers and came
into force on 15 March 2017; and a decision on a mechanism for encouraging solar power
development in Vietnam comes into effect on 1 June 2017, with a term that runs until
30 June 2019. These new regulations will have a significant effect on the construction and
projects sector.
Generally, investor appetite remained strong through 2016, with foreign direct
investment (FDI) rising sharply. As reported by the Ministry of Planning and Investment,
in 2016, actual foreign investment inflows rose by 9 per cent compared with 2015, reaching
a record high of $15 billion.
Vietnam is committed to the COP21 agreement signed in Paris in late 2015, and
as a result, is dedicated to the development of renewable energy at scale in the form of
wind and solar. The Vietnamese government has set out targets of generating 800MW by
2020 and 6,000MW by 2030. In particular, in September 2016, the first Phu Lac 1 wind
power project, with a capacity of 24MW, was put into operation by the joint-stock company
Thuan Binh Wind Power Company. Its next wind power project, Loi Hai 2, located in Ninh
Thuan province with a capacity of 30MW, is registered for ODA financing from German
bank KfW. Furthermore, the 800MW Phu Cuong Wind Farm, a project with an investment
injection of approximately US$2 billion, will be executed by a working partnership between
Phu Cuong Group, Mainstream Renewable Power and GE Energy Financial Services. The
Phu Cuong project is located in the Soc Trang province in Vietnam and the first phase
(150MW–200MW) is expected to reach financial close in 2018.
To satisfy the increasing demand for power, in 2016, a number of power generation
projects were put into operation such as Huoi Quang HPP (Unit 2), Lai Chau HPP
(Units 2 and, 3), Trung Son HPP (Units 1 and 2), and Duyen Hai 3 TPP. In addition to
this, the Vinh Tan 4 Extension TPP project began construction. This stands as a remarkable
achievement by Vietnam Electricity.
Nevertheless, 2016 was also a difficult year for the construction and projects sector.
According to the summary report from Petrovietnam – Vietnam Oil and Gas Group, 2016 was
regarded as the hardest year ever for the Vietnamese oil and gas industry. With an average oil
price of US$45 per barrel in 2016, PetroVietnam Exploration Production Corporation had
to maintain some mines below break-even price. Because of a lack of funds, the exploitation
of gas fields such as the Block B–Omon gas megaproject, Ca Voi Xanh and the Ca Rong Do
field development project has been delayed. These delays also led to delays in gas-fired power
projects. Consumption of products of Dung Quat refinery and petrochemical factory has
encountered many hardships.
The real estate market showed signs of slowing down in 2016, highlighting potential
risk factors in this sector. One of the factors is the phenomenon of the mismatch between
supply and demand, largely in the luxury real estate and resort tourism segment. Indeed,
a huge number of resort projects have been built and developed in many provinces and
cities such as Da Nang, Phu Quoc, Nha Trang, Hoi An and Quy Nhon. Another risk factor
is that a huge amount of credit capital from banks and social capital (mainly homebuyers)
poured into the real estate market with a tendency for this to concentrate in a few large
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firms. However, it should be acknowledged that real estate has been one of two of the most
attractive sectors for investments from international investors, which is largely attributable to
the relatively strong domestic economic growth figures in 2016.
Regarding PPP and other public procurement projects, the leading megaprojects,
namely Metro Ben Thanh–Suoi Tien and Ben Thanh-Thanh Luong, have been facing a risk
of delays to the construction process due to a lack of funds.
Another notable event in a difficult year for the construction and projects sector was the
suspension of plans for Vietnam’s first nuclear power plant, in Ninh Thuan.

In addition to the traditional funding methods widely used in private infrastructure projects
and public procurement projects, different funding PPP structures have been increasingly
applied to projects in the construction, transportation, energy and water system sectors, with
a great effort by the Vietnamese government to promote the application of PPP financing
in public infrastructure. Decree No. 15/2015/ND-CP on Investment in the Form of
Public–Private Partnership lists seven types of PPP structure (build-operate-transfer (BOT),
build-transfer-operate (BTO), build-transfer (BT), build-own-operate (BOO), build-lease-
transfer (BLT), build-transfer-lease (BTL) and operation and maintenance (O&M) contracts)
and allows parties to opt for the most structures of those suitable or a similar structure,
depending on the size of the project and the sophistication of the parties involved. In practice,
the transportation sector typically utilises the BOT and the BT structure, while the structure
of most projects in the energy sector (thermoelectric power plant and hydroelectric plant)
and the water management system is the BOO structure.
The private investor in a PPP project may need to obtain an investment registration
certificate before entering into a contract with the authority if the certificate is required by
law. After the contract is signed by the parties, a project company will be established for
the construction, management and operation of the project. In some cases, the guarantee
and undertaking agreement may be issued by the authority to secure the loan of the project
company or the investors for the purposes of carrying out the project.
The ownership structures of project financing can vary. For some highly specialised
and sensitive subsectors, the control from the government is high, some can be divided in
a 51:49 ratio, and some can be mainly private investors with no restrictions.
ii Documentation
The documentation for a particular project depends on its set-up. However, the most
important documents in project finance transactions are no different from those used in
similar transactions worldwide. These include a set of project documents (e.g., an agreement
between the authority and the investors, a land lease agreement, a construction contract,
consulting agreement for project management, corporate documents of the project company)
and financial documents (e.g., facility agreement, security documents, guarantee and an
undertaking agreement from the authority body). Investors need to obtain a licence from the
government body in securing the contract before setting up its organisation management.
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In Vietnam, EPC and EPCI forms of construction contract are largely based on the
International Federation of Consulting Engineers (FIDIC) forms and must comply
with the requirements under Decree No. 37/2015/ND-CP, Circular No. 09/2016/
TT-BXD and Circular No. 30/2016/TT-BXD. Construction contracts by state bodies,
enterprises funded with at least 30 per cent of state capital, or enterprises using at least
30 per cent state-owned capital or state-owned capital exceeding 500 billion dong must
use the specimen forms incorporated in Circular No. 09/2016/TT-BXD, and follow the
guidance of Decree No. 37/2015/TT-BXD. In the EPCM form (often referred to as turnkey
contracts), the client selects the contractor to provide ‘management services’ for the whole
project on behalf of the client. The contractor shall not only provide the management
services, but also simultaneously provide the actual EPC contract and management. The
form depends on the client’s requirements or on the nature of the contract, and is to be
negotiated between the contracting parties. AIA, NEC3 or JCT forms are not commonly
applied, but their basic structures may be included in certain contract forms. Notably, under
Circular No. 30/2016/TT-BXD, an EPC contract applies solely to construction projects
and contract packages whose execution time is required to be shortened; or those with high
requirements for engineering, technology and uniformity from the engineering design,
procurement and construction phases to the training-in, commissioning and project-transfer
phases. In addition, the EPC contract’s costs shall be managed in such a manner as not to
exceed the EPC contract price.3
In circumstances involving foreign contractors, consortiums are also used where
there is more than one contractor jointly engaged on the contract or supporting the local
workforce. They collaborate, with each taking responsibility for their respective areas of
work and expertise. Normally, in the consortium there will be one contractor taking the lead
(consortium leader) and the EPC contract will be signed by all parties.
On the other hand, the DDB contract is not as popular in Vietnam, and it may vary
from time to time, depending on the contract type. The use of different contract models will
vary according to the parties’ wishes and according to previous favourable experiences.

In construction contracts, risk allocation, which defines the roles and responsibilities for
risks, has a tremendous effect on cost, time, quality and the potential for disputes, delays and
claims. In fact, the contractual misallocation of risk has proved to be a pre-eminent cause of
construction disputes in Vietnam.
There are certain risks involved in construction projects that are normally classified in
our jurisdiction as follows:
a construction risk (geological, subsurface condition; changing in scope of work, design;
accident or damage to people and property; performance of contractor; labour issues);
b environment, health and safety risk (affection of the construction project to the
environment, health, safety of people, especially to labour and third parties);
3 Article 3, Circular No. 30/2016/TT-BXD.
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c contractual and legal risk (jurisdiction, negotiation interpretation and of contract,

insurance coverage, changes in law requirement, dispute resolution, payment);
d political risk (corruption, terrorism, policy enactment);
e force majeure (act of God and other uncontrollable unforeseeable risks); and
f financial and economic risk (mostly inflation, capital investment, interest rates and
other macroeconomic risks).
The above risk categories enable risk management planning. In other words, normally, for the
above risks, the project development team is able to contemplate and identify which strategy
is suitable for each kind of risk, then design specific actions to implement that strategy.4 These
strategies typically comprise:
a avoidance: including changes in plan, resource expansion, time extension, insurance
coverage to reduce risks;
b risk transfer and allocation;
c diversify the investment portfolio to reduce risks;
d mitigation: reduce probability and consequences of risk by accepting threshold,
analysing risks and taking preventive actions;
e localisation: alliance, corporate with Vietnamese entity; and
f bargaining power: to negotiate good contract to reduce risks.
A fundamental principle of risk management is to allocate the risks to the party best able
to manage them (i.e., risk allocation). Normally, contracts are formed such that they have
a cap on the contract’s overall limitation of liability and liquidated damages instead of actual
damages, and ‘the court respects what the contract says’. The cap is negotiated between the
employer and the contractor, following the FIDIC form and standard form of the Ministry of
Construction Department (according to Decree No. 37/2015 on Contracts in Construction
Activities; the Law on Construction; Circular No. 09/2016 from the Ministry of Construction;
the FIDIC forms; the Civil Code; and Decree No. 48/2010 on Construction). Notably,
however, under the specimen EPC contract provided by Circular No. 30/2016/TT-BXD, the
maximum rate of penalty shall not exceed 12 per cent of the breached contract value.5 This
is a departure from the FIDIC principles, where there is no penalty but liquidated damages
shall apply as the only damages recoverable with regard to delays. In addition, third-party
liability shall be applicable to the party at fault or who through negligence, tort or damage
gives rise to the claims of third parties, or the matter shall be decided by the courts.
Moreover, specifically, neither party shall be liable to the other party for loss of any
part of the construction work, loss of profit, loss of any contract or for any indirect or
consequential loss or damage that may be suffered by the other party in connection with the
contract, except the payment on termination and for indemnity. The total liability of one
party to the other party will not exceed the sum stated in the contract price or the contract
value stated in the construction contract.
In the case of force majeure, the contract will relieve the parties’ responsibility from
losses or damages or performing their contractual obligations because force majeure is defined
4 Patrick Mead, ‘Current Trends in Risk Allocation in Construction Projects and Their Implications for
Industry Participants’, Construction Law Journal (2007).
5 Clause 22.2, Penalty for breach of contract – Specimen EPC Contract, Circular No. 30/2016.
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as circumstances that are beyond the control of the parties, as well as making performance
impracticable or impossible. Construction contracts usually define and classify force majeure
events clearly and to a certain level. In the case of force majeure, employers or contractors shall
not be responsible for losses or delays in work. The contractor, however, shall make its best
efforts to minimise losses for the employer if a force majeure event occurs. Both parties shall
endeavour to return to normal operation straight after the force majeure event.
iii Political risks

Political risks are those that investors may face when investing in a particular country,
including political events, law and policies by the government, the monetary system, inflation,
war, strikes. All of these should be taken into account by foreign investors prior to investing
in a country. In Vietnam, investors should consider all of the above risks before investing, as
these can affect the project. Even since Vietnam joined the WTO, policies in Vietnam have
been generally unstable and many obstacles in the political system will make it difficult for
investors. Inflation and corruption are also important factors that merit investors’ serious
attention. Political risks can affect the operation and profitability of a construction as directly
and quickly as any other financial, legal or market risk factors. The impact of political risk is
considered to be long term and unpredictable, as the risk rises over time, resulting in greater
potential risks for investors. It is advisable that investors examine and understand the political
risks by closely examining the location’s history, political institutions, incentives given to
foreign contractors, and political forces in the country.
For the time being, in terms of political risk, another truly serious and sensitive issue
in Vietnam is the dispute that erupted in South East Sea with the invasion of Vietnamese
territory by China. This issue has had a domino effect on other economic and politic factors
in Vietnam, which may destabilise the country’s political system.
Export credit agencies and credit institutions have provided key support to Vietnamese
power and other infrastructure financings. Notably, in 2016, the World Bank and the State
Bank of Vietnam signed agreements for loans and credits worth US$560 million for two
projects to support urban development, climate resilience and sustainable livelihoods in the
Mekong Delta.

In project finance, lenders would involve certain types of security over the project to secure
the debt repayment. In fact, this is essential and significantly involved in every project finance,
and lenders would need to take it into account as one of the main factors in deciding whether
to provide the loan.
Security and collateral typically used by lenders take a number of common forms
such as:
a mortgages over the project site, buildings, equipment, accounts and debt claims;
b assignment of project contracts and any bonds or guarantees for these contracts;
c assignment of insurance policies; and
d guarantee from the borrower’s parent company or another party over the borrower’s
liabilities under the facility contract.
Note that a debt claim is regarded as a property right and can be mortgaged without the
consent of the debtor. Under Vietnamese law, a mortgage is security interest and can be
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registered with the National Registration Agency for Secured Transactions (NRAST).
For specific mortgage transactions, such as land use rights or sea-going ships, registration
is compulsory under the law. However, assignment is an exception and in some domestic
and small-scale financings, lenders would choose mortgage over assignment because of its
protection from state authority when registered. In the case of mortgages, all the property
rights of the borrower under project contracts shall be mortgaged to the lenders. The new
Civil Code 2015 makes express provision regarding two critical features of a secured asset:
the right to reclaim collateral and payment priority of the secured party on the condition
that the security is valid against third parties.6 This validity is determined from the time of
registration of the security or from when the secured party keeps or possesses the collateral,
which is distinctly different from the old provision, which only took account of the time
of registration.
Moreover, in terms of security enforcement, drawbacks of the old law have been
addressed to harmonise with Decree No. 163/2006/ND-CP on Security Transactions. The
new Civil Code 2015 provides for the separation of land use rights and the property attached
to the land during security enforcement, should the parties have mutually agreed thereon.7
This, serves, to some extent, as a breakthrough by the new civil law, in that it eradicates many
obstacles and difficulties in enforcing the secured asset in the event that only the land use
right is mortgaged but not the property attached to the land, and vice versa.
Enforcement priority is based on the time of registration with NRAST, with early
registration prioritised over the later; registered over non-registered; and early over later for
agreements entered into. Even though Vietnamese law accepts future assets for the purpose
of setting up a mortgage, the registration of such assets may be troublesome depending on
the type of assets and under the authority of which state body they fall. For example, vessels
shall be registered at the Maritime Department, aircraft shall be registered with the Aviation
Department with specific regulations and requirements.
A guarantee from the borrower’s parent company or corporate guarantee is often
obligatory in project finance. If the borrower does not have a parent company then a third
party, which could be a financial institution or a company, may take on the role. Vietnamese
law allows the beneficiary to enforce the seizing of the guarantor’s assets in the event that the
guarantor does not fulfil its payment obligations, and to file a lawsuit against the guarantor if
the enforcement cannot be effected.

In public contracting, performance security is compulsory. It is a condition precedent to
setting up construction contracts, except for internal lump-sum contracts, contracts in
projects carried out by households and self-performed construction contracts. The value of
performance security runs from 2 per cent to 10 per cent of the contract value and can be
higher in high-risk contracts but no greater than 30 per cent of the contract value.
6 Article 297.2, the Civil Code 2015: ‘When the security takes effect against a third party, the secured
party is entitled to reclaim the collateral and the payment prescribed in Article 308 of this Code and
relevant laws.’
7 Article 326.1, the Civil Code 2015: ‘With respect to the mortgage of property on land without a mortgage
on land use rights but the owner of the property on the land is also the land user, such land use rights shall
also be part of the realised property, unless otherwise agreed.’
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Performance security may be in the form of a deposit, escrow, or bond, but the
government encourages the use of performance bonds. The performance bond is provided by
the contractor to secure its obligations during the performance of the construction contract
and only becomes null and void when the obligations are completely fulfilled or when the
employer has received warranty security for a construction and equipment provision contract.
An advance payment bond (APB) is another important security in construction
projects. In the public sector, it is mandatory for an employer to obtain an APB from the
contractor before making any advance payment if the construction contract requests advance
payment equivalent to more than 1 billion dong. The APB’s value is equivalent to the advance
payment. The minimum value of an advance payment in an EPC contract is 10 per cent but
no greater than 50 per cent of the contract price.

Vietnamese legislation gives creditors three main tools to protect their rights over property
obligation: litigation or arbitration, enforcement of security and bankruptcy proceedings.
While litigation or arbitration can be applied for most transactions, the applicable scope
of the remaining tools is to be limited. For instance, the existence of an unsecured debt or
partially secured debt is a prerequisite for a bankruptcy petition filed by the debtor or, of
course, the existence of secured debt for enforcement of security.
Recently, there have been many major changes in Vietnamese bankruptcy law with the
release of the Law on Bankruptcy 2014, which took effect on 1 January 2015. In particular,
there are three outstanding changes:
a An insolvent enterprise is an enterprise having failed to meet a debt obligation for
three months from the deadline for payment. Accordingly, after three months from the
deadline, creditors can apply for bankruptcy proceedings.
b The valid requirements for creditors’ meetings are more favourable for creditors: ‘The
attending creditors represent at least 51 per cent of the total unsecured debts.’
c New regulations on asset management officers being individuals specialised in the
management and liquidation of the assets of an insolvent entity during the process of
a bankruptcy settlement.
According to the Law on Bankruptcy 2014, secured debts shall be settled independently
and outside the sequence of redistribution of assets after the decision to open bankruptcy
proceedings has been issued by the court. The sequence shall be applied as follows:8 (1) cost
of bankruptcy proceeding; (2) unpaid salaries, severance pay, social insurance and medical
insurance to employees, other benefits according to the labour contracts and collective
bargaining agreements; (3) debts incurred after the initiation of bankruptcy that are used for
resuming the business operation; (4) financial obligations to the government; (5) unsecured
debts payable to the creditors on the list of creditors; (6) secured debts that are not paid
because the value of the collateral is not enough to cover the debts.
In terms of debt security, secured transactions are to be registered on a case-by-case
basis with secured transaction registries, such as NRAST, the Office for Registration of Land
Use Right, Civil Aviation Authority of Vietnam and Vietnam Maritime Administration. The
secured lender should firstly file a notice of enforcement of security to the secured transaction
8 See Article 54 of the Law on Bankruptcy.
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registries to enforce its rights over the collateral or security. Unless otherwise agreed by the
parties involved, some secured assets will be disposed of via auction. Normally, the main
contract and security contract clearly specify the methods as well as the rights and obligations
of the parties regarding the disposal of secured assets.

The Law on Environment Protection dated 23 June 2014, and Vietnam Law on Construction
dated 18 June 2014, which were approved by National Assembly of Vietnam in January 2015,
beside ordinary rules and requirements, core amendments and modifications, regulate
investors and contractors especially in sectors that have an impact on the environment.
In accordance with the Law on Environment Protection, investors are required to submit
a strategic environment review, environment impact review and an environment protection
plan to local authorities for ratification and certification within 10 days (which used to be
five days in the previous version). In addition, project investors must obtain the Operation
Ability Conditions Certificate in accordance with the Law on Construction. Although
the Law on Environment Protection governs all territories of Vietnam, regional provinces
may also establish supplementary legal documents on construction licensing and permits
for surveys and exploitation. In addition, investors should also be aware of the new Decree
No. 155/2016/ND-CP dated 18 November 2016, which determines the penalties for
administrative violations against regulations on environmental protection, including
not only warnings, fines and additional penalties (such as licence suspension), but also
remedial measures.
The Equator Principles have not been adopted by any financial institution in Vietnam.
However, Circular No. 39/2016/TT-NHNN, which came into effect on 15 March 2017,
stipulates the requirement for lending transactions to be in conformity with the legislation
on environmental protection. This stipulation is made on the basis of the possibility of an
event of force majeure.

Currently in Vietnam, financial institutions do not have criminal liability, only individuals
can plead guilty to committing a crime. However, they may have administrative liability if
they violate administrative provisions relating to financing activities that are stated in the Law
on Financial Institutions. Civil liability may also be applied if they breach their obligations in
agreements or contracts with sponsors.
Remarkably, the new Criminal Code 2015 (effective from 1 July 2016) now concerns
criminal liability for legal entities (including financial institutions). According to Article 76 of
the Criminal Code 2015, legal entities shall only bear criminal responsibility for specific
criminal offences, such as monopolising the security market, committing insurance fraud and
violating competition regulations.
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i PPP
PPP is one of the sectors that has undergone many intensive reforms in 2015. Accordingly, the
supreme laws governing PPP transactions include the Law on Public Investment and the Law
on Bidding. The Law on Public Investment continues to focus on the state’s investment in
business organisations and public infrastructure, such as roads, transit, schools and hospitals.
Meanwhile, the process and bidding procedures to select appropriate bidders for public or
state-owned projects are subject to the Law on Bidding.
As regards the role of related parties in PPPs, concrete legislation9 has created more
incentives and attraction for non-government parties (i.e., private investors or bidders).
Thanks to this legislation, PPPs in Vietnam are basically more open, flexible, equal and in
line with international practice. For example, Decree No. 15 covers not only traditional
projects (i.e., BOT projects, BTO projects or BT projects), but also expressly provides
additional project structures not typically seen under old PPP regimes (i.e., BOO, O&M,
BTL and BLT).
The Law on Bidding 2013 (in force on 1 July 2014) is the major source of law governing
public procurement to establish general rules for the selection of tenderers, responsibilities
of concerned parties and the bidding process. Besides, a number of legal documents guiding
the Law on Bidding have also been issued by the government and its bodies.10 Accordingly,
public procurement may be conducted through open bidding or limited bidding, although
open bidding is more popular.
Despite recent advancement in the legal framework specifying that public procurement
shall adhere to the principles of openness, transparency, fair competition and impartiality,
restrictions on foreign bidders’ participation in bidding process in public procurement still
exist. For example, ‘A foreign bidder must engage in a partnership agreement with domestic
contractors or use sub-contractors when participating in international bidding in Vietnam,
unless domestic contractors are not fully able to participate in any part of the procurement.’11
In a particular bid, the competent authority shall be the employer itself or empower
a state-owned company to organise the bidding and review applications. For instance, the
Ministry of Transportation approved the investment plan for the Ho Chi Minh City–Long
Thanh–Dau Giay Expressway project and empowered Vietnam Expressway Corporation
(VEC, the 100 per cent state-owned company) to be the project employer.
In the near future, the National Assembly is expected to issue a new law that specifically
addresses PPPs and other public procurement methods instead of relying on the Law
on Bidding.
9 i.e., the Law on Investment, Law on Bidding, Decree No. 15/2015/ND-CP on Investment in the Form
of Public–Private Partnership, and Decree No. 30/2015/ND-CP dated 17 March 2015 Guiding the
Implementation of a Number of Articles on Investor Selection of the Law on Bidding.
10 Decree No. 63/2014/ND-CP, Decree No. 37/2015/ND-CP, Circular No. 01/2015/TT-BKHDT,
Circular No. 05/2015/TT-BKHDT, Circular No. 11/2015/TT-BKHDT, Circular No. 07/2015/
TTLT-BKHDT‑BTC.
11 See more at Article 5.1.h of the Law on Bidding 2013.
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i Foreign contractors
Under Decree No. 59/2015 on Construction Project Management, a foreign contractor may
only conduct construction activities in Vietnam after obtaining a construction operation
licence from the construction management authority. If bidding is required according to
the bidding law of Vietnam, the foreign contractor must have won the bidding or contract
award. If a tender is not required but the foreign contractor wishes to bid, the following
conditions must be satisfied:
a it has the bidding winning decision or contract award from the project owner; and
b it meets capacity conditions to fulfil the contract according to the laws on construction.
Under the Law on Construction, the foreign contractor must file the report with the relevant
authorities as indicated in its licence and register the details of its management office (e.g.,
the address, fax and telephone number, the seal, the representative and tax code) and apply
for work permits for its foreign experts or workers in accordance with the Law on Labour, for
quality inspection of imported machinery and equipment and for inspection of construction
equipment safety and means of transportation relating to its business in Vietnam. The
foreign contractor must enter into a consortium agreement with a Vietnamese contractor
or subcontract to a Vietnamese contractor unless there is no Vietnamese contractor who
is qualified to execute any tasks of the bidding package. The consortium agreement or
the agreement in principle with a local subcontractor (if any) shall be a component of
the application pack for a construction operation licence from the Vietnamese authority.
Foreign contractors are required to follow all standard construction requirements under
Vietnamese law.
ii Foreign investment
Generally, foreign investors may engage in the Vietnamese market in several ways, including
establishing a branch or a new company (subsidiary or joint venture), entering into business
cooperation contracts or purchasing the shares of an existing company. The procedure for
a particular foreign investor shall depend on the way it chooses to enter the market and shall
be found in the Law on Investment together with relevant guidance documents.
Different policies will be applied to the particular industry that the foreign investors
are entering into. In several sectors where foreign investment is encouraged by law – such
as high-tech production, IT products, software products, digital content, production of
new materials, new energy, clean energy and renewable energy, production of energy-saving
products, etc. – the foreign-owned company may be entitled to tax incentives such as
exemption or deduction of tax. On the other hand, restrictions (in respect of the ownership
ratio, type of the subsidiary company, method of investment, permitted business activities,
etc.) have been imposed on investment in several industries, such as advertising; courier
services; equipment repair and maintenance (excluding ships); travel agencies and tour
operators; film production, distribution and screening; telecommunication services;
distribution; education; e-gaming; maritime transport; container handling and related
services; road and rail transport; and aircraft maintenance and repair. The industries that
have limits on foreign ownership are those classified as of economic importance, such as civil
aviation, banking, agriculture, audio-visual services, transportation, telecommunications,
and the publishing and press sectors. Investment in services or commercial sectors not listed
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in the Vietnam’s WTO Commitments on Services are generally rejected by the competent
authorities. Restrictions on the ownership ratio for foreign investors in listed and other public
companies have recently been lifted. Instead of a 49 per cent cap, foreign investors now are
allowed to hold an unlimited proportion of voting shares in Vietnamese public companies,
including listed companies, except for those in specific sectors.
iii Removal of profits and investment

There are no special fees or taxes on foreign investment or ownership of a project company,
other than those in the general Vietnamese taxation regime. Some projects such as BOT or
special PPP projects are entitled to favourable tax treatment.
The current foreign exchange regulations of Vietnam require that all transactions,
payment, advertisement, listing price and recording price in contracts within the territory
of Vietnam must be in Vietnam dong except for certain permitted exceptions regulated in
the Ordinance on Foreign Exchange, or approved by the Prime Minister. However, foreign
investors or foreign-invested companies can convert operating funds or profits from one
currency into another currency for the payment of imported goods and services, repayment
of a foreign loan and accrued interest and repatriation of investment (profit and investment
capital after payment of relevant corporate income tax) overseas subject to the submission
of the required evidence to the banks. The foreign earnings of investors in Vietnam must be
converted into the foreign currency before being repatriated in the investors’ home country.
An FDI company is entitled to remit the profits to a foreign shareholder after it has
fulfilled its financial obligations, submitted an audited financial report and finalised tax
declaration to the tax authority. The foreign investor or the FDI company must notify the tax
authority of the profit remittance plan at least seven working days before the remittance date.
No fees or taxes are imposed on remittances of investment returns or loan payments, except
for bank fees and charges.
There are no special courts or dispute resolution proceedings covering disputes arising from
construction or project finance. There are currently seven specialised courts, including
Criminal Court, Civil Court, Economic Court, Administrative Court, Labour Court,
Juvenile and Family Court, Administrative Handling Court.12 In practice, such disputes are
usually brought before an economic court or civil court.

Thanks to the recent development of a progressive legal framework and improved levels of
attainment regarding international standards for domestic arbitration centres, more and more
complex and sophisticated disputes arising from construction and project finance are being
brought to arbitration. Moreover, the fact that Vietnam is a signatory to the 1958 New York
Convention13 encourages parties involved in international construction disputes to bring
their cases to arbitration.
12 According to Article 3 of Circular No. 01/2016/TT-CA issued by the Supreme People’s Court.
13 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
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Vietnam
The Supreme People’s Court has stated that: ‘A dispute shall be settled by arbitration
if the parties have an arbitration agreement.’14 Accordingly, a project finance or construction
dispute shall not be subject to automatic domestic arbitration. In particular, the parties shall
bring the dispute before a competent court if they have not concluded an arbitration agreement.
Recent developments in both regulatory reforms and practical processes have shown that
the judiciary is more and more ‘arbitration-friendly’. In particular, Resolution No. 01/2014/
NQ-HDTP has limited the scope of the term ‘in contradiction to the fundamental
principles of the Vietnamese law’ to be interpreted as ‘violating the fundamental principles
of the act having the overall effect in making and enforcing the Vietnamese law’. This new
interpretation would arguably exclude any court interference seeking to avoid unfavourable
arbitral awards, as well as minor violations outside the spectrum of ‘fundamental principles
of the Vietnamese law’. In practice, 2015 was the first year in which there were no Vietnam
International Arbitration Centre (VIAC) arbitration awards set aside by competent courts,
although the number of requests for setting aside arbitration awards was 13, the highest
number in the past five years.
Since Vietnam is as yet not a signatory to the ICSID15 Convention, foreign investors
may only sue the Vietnamese government pursuant to bilateral investment treaties (BIT) or
multilateral investment treaties (i.e., BIT Vietnam–United States, BIT Vietnam–Singapore,
etc.) or the UNICITRAL Arbitration Rules.
VIAC16 is currently the most well-known arbitration institution, with 155 cases
handled in 2016, the highest number since its establishment. The construction cases heard
by VIAC accounted for 15 per cent of the total number of VIAC cases in 2016.
With regards to ADR, the introduction of Decree No. 22/2017/NDCP on Commercial
Mediation can be seen as a great step forward in the establishment of dispute resolution
in Vietnam.

In brief, current projects and construction in Vietnam are generally reflective of an emerging
market. Although most aspects of the jurisdiction are basically in line with international
practice, there are certain deviations. For instance, regular contract forms in Vietnam are
not comparable to the standardised FIDIC form. Moreover, there are particular issues
that have not yet been recognised by the Vietnamese jurisdiction, such as the provision of
liquidated damages.
In Vietnam, the PPP project is considered as a saviour for the improvement of
infrastructure since the state’s budget is weighed down by the national debt. The government,
especially the Ministry of Planning and Investment, has recently devoted a great deal of
effort to formulating a policy on supporting the parties in PPP projects. Therefore, potential
domestic investors, as well as probable foreign investors, are now willing to join PPP projects.
Many projects are currently being managed by the Ministry of Transport, most of which
deal with the building of new highways, and are worth thousands of billions of dong.17 In
14 According to Article 5.1 of the Law on Commercial Arbitration.

15 International Centre for Settlement of Investment Disputes.
16 http://eng.viac.vn/.
17 Ministry of Transport, 2016, www.mt.gov.vn/vn/tin-tuc/40416/nam-2016--bo-gtvt-du-kien-trien-kh
ai-23-du-an-dau-tu-theo-hinh-thuc-ppp.aspx.
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other words, the involvement of private investment is clearly playing an important role in
the development of construction in Vietnam. At present, the country is looking forward to
remarkable changes in infrastructure and other areas of the public sector.
Nevertheless, Vietnam still faces various problems. In practice, there are certain obstacles
for investors in PPP projects. For instance, investors are facing difficulties working with the
authorities, as local authorities do not have much experience in PPP projects and there is little
guidance on selecting investors. Moreover, in many PPP projects, investors have claimed that
they had to bear more risks in carrying out the projects. They seemed to be in a disadvantaged
position when negotiating with government bodies on contracts relating to PPP. To attract
more investors and improve the PPP regime, the state ought to identify as many risks as
possible and find suitable methods to allocate them legitimately and transparently so that the
risks to investors can be reduced.
Provided these major issues can be addressed in the future, more and more foreign
capital will be put into PPP projects in Vietnam.
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Appendix 1
ABOUT THE AUTHORS
ULUGBEK ABDULLAEV
Dentons Tashkent
Ulugbek Abdullaev is a senior associate with Dentons Tashkent’s corporate and real estate
practice. He is also actively involved in the firm’s commercial, technology and media,
international trade and intellectual property projects. He has recently advised clients and
managed the negotiation of major construction projects in the chemicals, mining and
telecoms industry sectors, as well as share and asset purchases by a foreign investor company.
Ulugbek is a graduate of the University of Westminster (United Kingdom) and the
University of Oslo (Norway).
DIYORA ABDURAKHMANOVA
Dentons Tashkent
Diyora Abdurakhmanova is an associate at Dentons Tashkent law firm. She is involved in the
firm’s corporate, construction and international trade projects.
Ms Abdurakhmanova is a graduate of Westminster International University in Tashkent.
DARKO ADAMOVIC
Linklaters LLP
Darko Adamovic is a managing associate in Linklaters’ project finance practice in Paris,
with a particular focus on the financing of energy and infrastructure projects (including
public infrastructure projects). Darko advises both sponsors and lenders on project and
finance documentation.
JAMES ARKLAY
McCullough Robertson
James Arklay is a senior associate in McCullough Robertson’s projects group, where he practises
in construction dispute resolution. He provides strategic advice to owners, contractors and
government clients in the construction and resources sectors about the administration of their
contracts to reduce the risk of claims and disputes, as well as the resolution of such disputes
when they arise. Mr Arklay has acted for clients in federal and state court proceedings, as well
as in various alternative dispute resolution procedures, particularly adjudication.
335
About the Authors
MARK BARGES
Linklaters LLP
Mark Barges is a counsel in Linklaters’ project finance practice in Paris. He has acted on
major infrastructure and energy projects in the past 10 years in France, Europe and Africa
for both sponsors and lenders. Mark advises on project and finance documentation, with
a specific focus on infrastructure and energy.
JOSÉ MARÍA BARRIOS

Clifford Chance
José María specialises in the public procurement, urban development, public infrastructure
and energy sectors. He joined Clifford Chance as an associate lawyer in March 2007, after
previously working in the administrative law department at the firm of Pérez-Llorca Abogados
(2002–2006) and as an in-house lawyer with the ACS Group (2006–2007).
He has a law degree from the Complutense University of Madrid (1999) and a master’s
degree in corporate legal advisory services (MAJ) from the Madrid Business Institute
(2001–2002). A frequent speaker at various conferences on energy, José María specialises in
the energy, environmental, public infrastructure, public procurement and urban development
sectors, among others.
His recent relevant experience includes advising Asociación Empresarial Fotovoltaica on
the legislative changes approved by the government affecting PV plants and on legal avenues
for challenging those changes, advising Ardian on the acquisition of a 10 per cent stake in the
Spanish oil distribution and storage company CLH, and advising financial institutions on the
potential placement in the market of the right acquired from Enagas to recover the indemnity
paid to the former concessionaire of Project Castor.
HAYDEN BENTLEY
An expert tax practitioner, Hayden acts for corporate groups, both listed and privately held,
on a range of structuring and taxation issues. He has an industry focus on the mining, energy,
resources and infrastructure sectors, advising on inbound and outbound international tax
structures and corporate transactions such as mergers, acquisitions and disposals. He also offers
bespoke structuring and commercial advice in conjunction with advising on taxation aspects
of structures. He is experienced in obtaining rulings and favourable exercises of discretion
from the Australian Taxation Office on a timely basis for both public corporate transactions
and privately held groups. Described by Australian Legal Business as having a ‘cool head in
complex matters’, Hayden is also ranked in the Chambers Asia-Pacific 2017 guide for tax law.
RAFAEL BERNAL
Brigard & Urrutia
Rafael Bernal holds a law degree from Del Rosario University, Colombia, where he further
specialised in commercial law and is a member of the University’s industrial property and
commercial arbitration institutional research groups.
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About the Authors
Mr Bernal is a member of the infrastructure and public utilities practice group at

Brigard & Urrutia and focuses his practice on advising Colombian and international clients,
both public and private entities, in structuring and developing infrastructure projects and
project finance transactions.
At Brigard & Urrutia, Mr Bernal has participated in the structuring of private initiative
PPPs for the construction of health centres in the city of Bogotá – one of the first PPP initiatives
in the healthcare field in Colombia. He has also provided assistance in connection with the
structuring of a public infrastructure PPP for the design, construction and maintenance of
two urban avenues in Bogotá. He is currently involved in the contractual management of the
Perimetral del Oriente de Cundinamarca 4G road concession project (estimated investment
of US$339 million).
MATT BRADBURY
Matt Bradbury is a partner in McCullough Robertson’s projects group. He is an infrastructure,
construction and engineering lawyer who has advised on civil, building, mechanical, resources
and structural projects in each state and territorial jurisdiction of Australia and throughout
South East Asia. Mr Bradbury advises on all aspects of construction, infrastructure and
major engineering projects, where he works side by side with his clients and their external
consultants to successfully deliver their projects. He advises clients on risk mitigation
and administration of contracts so as to avoid disputes. He also currently acts on behalf
of state and local governments, government-owned corporations, owners, contractors and
consultants and advises a number of professional bodies and industry associations. He is
currently advising a number of major contractors with respect to the various LNG projects
that are being completed in Queensland and Western Australia. Mr Bradbury has practised
in both Australia and the United Kingdom.
DAVID BRYNMOR THOMAS

39 Essex Chambers
David Brynmor Thomas is a barrister at 39 Essex Chambers who specialises in commercial,
energy, oil and gas, power generation and construction and engineering law. David is
regularly instructed as counsel or appointed as arbitrator in complex, high-value international
commercial arbitration and litigation. He has appeared before a range of tribunals, including
those conducted under the auspices of the ICC, LCIA, ICDR and AAA, SCC, SIAC and the
UNCITRAL Arbitration Rules and others.
He has dealt with disputes across a wide range of industry sectors, including water
and desalination plants, waste disposal, transportation (including rail and aviation), rig
hire and related disputes, natural resources, and bonds, guarantees, pensions and other
financial instruments.
Mr Brynmor Thomas has also advised on matters ranging from issues arising under
treaties, sanctions issues (in particular under United Kingdom and EU sanctions regimes),
the drafting and amendment of industry-wide dispute resolution provisions, the ability of
governments to sue on behalf of their citizens for alleged mass torts, and arbitration in the
context of licences of intellectual property rights.
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About the Authors
JÚLIO CÉSAR BUENO

Pinheiro Neto Advogados
Júlio César Bueno has been a partner at Pinheiro Neto Advogados since 2001. He is based in
São Paulo and has considerable national and international experience focusing on the practice
of construction law and engineering contracts (including the use of FIDIC standard forms),
project finance, public procurement, as well on arbitration and mediation proceedings, and
dispute boards.
He represents some of the world’s largest organisations (owners, multilateral agencies,
financial institutions, contractors and developers) in their global infrastructure and
construction projects located throughout Brazil and the rest of Latin America, and in Africa.
He assists clients across the entire project spectrum and recent examples include gas facilities,
power plants (nuclear, coal-fired, gas-fired, combined cycle and hydro), wind farms, steel
manufacturing facilities, copper mining facilities, coal mining facilities and ports.
He is the president of the Brazilian Society of Construction Law. He is also a member of
the board of directors of Region 2 of the Dispute Resolution Board Foundation, and a former
officer of the International Bar Association’s Latin American Forum and the International
Construction Projects Committee. He is also a fellow of the Chartered Institute of Arbitrators
and the Royal Institution of Chartered Surveyors. He is a fellow of the International Academy
of Construction Lawyers, the coordinator of the Dispute Board Commission of the Center
for Arbitration and Mediation (CAM/CCBC), a co-coordinator of the Brazilian Arbitration
Committee’s working group dealing with arbitration in infrastructure contracts, a board
member of the International Construction Law Association and a member of the Mediation
and Arbitration Chamber of the Institute of Engineering of São Paulo and the Brazilian
Institute of Civil Procedure Law.
He holds a law degree from the University of São Paulo Law School (LLB, 1991),
a master’s degree from the University of Cambridge (LLM, 1995) and a doctorate from
the University of São Paulo Law School (PhD, 2001). He has published several articles on
matters relating to civil procedure law, energy, engineering contracts, infrastructure and
construction law.
He is recommended in Who’s Who Legal (for construction, project finance, government
contracts and public procurement); Chambers Latin America (for construction and projects,
and dispute resolution); IFLR1000 (for project finance); by Practical Law Company (for
construction and projects); and Brazilian directory Análise Advocacia 500 (for construction
and projects, dispute resolution and contracts).
LIAM DAVIS
Liam Davis is a senior associate in McCullough Robertson’s projects group. As a dedicated
resources environmental regulation and approvals specialist, he has been involved in
the delivery of approvals for some of the largest projects in Australia. He specialises in
environmental approvals, native title and cultural heritage, land access and tenement issues.
In addition to advising a range of clients, Mr Davis has also worked in-house for both mining
and gas companies, advising on the complex regulatory environment, identification of areas
of risk and provision of solutions that assist with the on-time delivery of projects while
ensuring compliance with procedural requirements.
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About the Authors
MIGUEL DURAN
Milbank, Tweed, Hadley & McCloy LLP
Miguel Duran is an associate in Milbank’s global project finance group and is based in the
Los Angeles office. He has experience representing both financing parties and sponsors in the
development and financing of solar and wind power projects, gasification facilities and other
infrastructure projects in the United States and Latin America.
TERESA EMPIS FALCÃO

VdA Vieira de Almeida
Teresa was born and raised in Lisbon and graduated in law in 1995 from the School of Law
of the Catholic University of Portugal, Lisbon. She obtained an LLM in banking and finance
law from the London School of Economics and Political Science in 1998.
Teresa joined the London office of Allen & Overy LLP as a member of the projects
group in September 1999, where she held a variety of positions (from junior to senior
associate) until November 2008. In that capacity, she participated in various banking and
project finance transactions, in Portugal and worldwide. During her time at Allen & Overy
LLP, she was seconded to VdA Vieira de Almeida, from November 2004 to November 2008.
Teresa joined VdA Vieira de Almeida in December 2008 as managing associate in
the projects–energy, infrastructure and natural resources practice group. At VdA Vieira de
Almeida, she has been actively involved in or led several transactions, mainly focused on
the infrastructure and energy sector and acting as legal adviser to either the sponsors or
the lenders.
In August 2011, Teresa left VdA Vieira de Almeida to join the Cabinet of the Secretary
of State for Infrastructure, Transport and Communications, as a deputy.
She has been back with the firm since May 2014 and is currently a partner in the practice.
Teresa is admitted to the Portuguese Bar Association, the Law Society of England and
Wales, as solicitor, and the Brazilian Bar Association.
PHILLIP FLETCHER
Phillip Fletcher is a partner in Milbank, Tweed, Hadley & McCloy LLP’s global project finance
group. He focuses on representing parties in the acquisition, development and financing of
oil and gas, natural resources, independent power, satellite and other infrastructure projects
across Europe, the Middle East and Africa. He has particular expertise in multi-sourced
financings, including those through official credit agencies, the capital markets and Islamic
institutions. Mr Fletcher has been recognised as a leading project finance lawyer by a number
of journals, among them Who’s Who Legal (which has twice designated him the world’s ‘Most
Highly Regarded’ projects lawyer), Chambers UK (which ranks him among the first tier
of projects lawyers in London), Chambers Global (which ranks him among the first tier of
projects lawyers in the Middle East, and as a leader in African projects markets), Euromoney
(which ranks him among the top 30 projects lawyers in the world), Best Lawyers UK (which
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About the Authors
designated him as the ‘Project Finance Lawyer of the Year’ for 2017) and The Legal 500.
Mr Fletcher is a co-author of the Oxford University Press guide International Project Finance:
Law and Practice, he serves on the advisory board of the International Financial Law Review
and is a member of the Council on Foreign Relations. He is qualified to practise under both
English and New York law.
MARIANNA FRISON-ROCHE
Linklaters LLP
Marianna Frison-Roche is a managing associate in Linklaters’ public law and PPP practice
in Paris. She acts on international and national project financings and is notably involved in
public law transactions, as well as in renewable energy, power regulations and environmental
and town planning projects.
DAVID GILHAM
David Gilham is a partner in McCullough Robertson’s finance group. He acts for financiers
and corporate borrowers on a broad range of debt financing transactions including real
estate investment and development financings, leveraged and acquisition financings, project
financings and general corporate financings. He has significant experience in advising foreign
financiers and corporates on their participation in Australian projects. He is currently advising
Dalian Wanda on the financing aspects of its redevelopment of Gold Fields House, Fairfax
House and the Rugby Club at Circular Quay in Sydney and its Project Jewel development
on Queensland’s Gold Coast.
JOSÉ GUARDO
Clifford Chance
José Guardo is a partner and head of the banking and finance department at Clifford Chance’s
office in Madrid. He obtained his degree in law from the University of Valencia (1992) and
his master’s degree in EU law from the Carlos III University of Madrid (1993). He speaks
English and Spanish.
José Guardo joined Clifford Chance as partner in September 2011, after 18 years at
the Spanish law firm Garrigues, where he was appointed partner in 2003. He specialises in
structured finance and energy and infrastructure projects.
JUAN IGNACIO GUILLÉN

Clifford Chance
Juan Ignacio Guillén is a junior associate in the banking and finance department at
Clifford Chance’s office in Madrid. He specialises in structured finance and energy and
He obtained his degree in law (2013) from the Autonomous University of Madrid,
after expending the final six months of study at the University of Sussex (United Kingdom).
He commenced his career at Clifford Chance in 2013, in the real estate department, and
moved to the banking and finance department in 2016.
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About the Authors
RODOLFO GUTIERREZ
Brigard & Urrutia
Rodolfo has been a member of Brigard & Urrutia for two years as part of the infrastructure
and public utilities practice group. He has more than seven years of experience in public law,
infrastructure and public procurements. He has been adviser in public procurements and
administrative law in the coordination of tenders and contracts in the Ministry of Foreign
Affairs, and in the same area of practice in the Ministry of Education, among other public
and private entities.
He holds a law degree with a specialisation in administrative law from the Pontifical
Xavierian University. Additionally, he completed a master’s degree (LLM) in competition law
at King’s College London, United Kingdom, with an emphasis on public–private partnerships
(PPP), and which he obtained with merit.
As a member of the infrastructure team, Rodolfo provides legal advice on public
procurements, structuring of PPPs, contractual development and infrastructure projects.
He has also been involved in providing contractual advice and in the structuring of some
of the most important road projects in the country, as well as in the structuring of social
infrastructure PPP projects, in areas such as education and health.
ABDULRAHMAN M HAMMAD
Hammad & Al-Mehdar Law Firm
Mr Hammad is a member of the New York State Bar. He earned his juris doctor degree
with magna cum laude honours from the University of Miami, United States, concentrating
on securities, finance and business law. Before that, Mr Hammad obtained a Bachelor of
Science with cum laude honours from Southern Illinois University, majoring in finance –
investments. Mr Hammad worked for a major US law firm in New York concentrating
on energy, infrastructure and project finance work. Mr Hammad also worked at the Saudi
Aramco law department with a practice concentrating on projects and project finance.
Among Mr Hammad’s major work he has been a legal adviser to the Ministry of
Petroleum and Mineral Resources in redeveloping the Saudi Energy Efficiency Center and the
establishment of the Saudi National Energy Services Company; lead counsel to Saudi Aramco
with regard to negotiating and structuring the formation of a fuels retail joint venture with
a major international oil company. He was also counsel to Saudi Aramco and subsidiaries
with regard to negotiating and structuring the formation of the GCC Electrical Equipment
Testing Laboratory joint venture, and advised on the negotiation and structuring of several
power generation plants covering both traditional and renewable energy production. He was
also legal counsel to a major construction contractor with respect to the construction of
a US$2 billion project in Riyadh, Saudi Arabia.
TIM HANMORE
Tim is a planning and environment law expert, acting on project approvals, project delivery
and regulatory advice for major projects at all stages of the life cycle. He helps his clients
navigate the multiple regulatory regimes required to get their projects approved and
operational. His deep understanding of state and federal environmental regulation enables
him to deliver seamless advice throughout every stage of a resources or infrastructure project.
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Tim’s broad scope of work includes all aspects of project delivery and government liaison
on regulatory and strategic matters, impact assessment processes, compliance and incident
response and project acquisition and divestment. He has prepared and implemented legal
environmental risk mitigation strategies for projects across Australia, including for some of
the world’s largest, such as BHP Billiton’s Olympic Dam.
OWEN HAYFORD
Clayton Utz
Owen Hayford is a leading infrastructure, major projects and construction lawyer, with
over 20 years’ experience in the procurement, delivery and through-life support of major
Having acted for owners (both government and private sector), financiers, contractors,
consultants and subcontractors, Owen has advised extensively on project structuring and
funding, contract drafting and has advised during project implementation and dispute
resolution for major infrastructure matters, including roads and rail projects, energy projects,
military facilities and defence equipment acquisitions. Owen has devised innovative ways of
successfully bidding for and closing major infrastructure deals. Owen teaches a public–private
partnership law course at Melbourne University as part of its Master of Laws programme.
Owen was recognised as one of the leading lawyers for construction and infrastructure
in 2015 in the Best Lawyers report published in The Australian Financial Review.
TETSUYA ITOH
Anderson Mōri & Tomotsune
Tetsuya Itoh is a partner at Anderson Mōri & Tomotsune. He studied at the University
of Tokyo (LLB) and the University of Washington (LLM), and is a lecturer at the Kyoto
University law school. He is admitted to practise in Japan (Dai-ni Tokyo Bar Association)
and in New York.
ANDREW JONES
Dentons
Andrew Jones heads up the construction practice at Dentons in Doha. He specialises in the
resolution of engineering and construction disputes. His practice involves all forms of dispute
resolution varying from litigation in the Technology and Construction Court to statutory
and contractual adjudication, ADR (including mediation and expert determination) and
national and international arbitration.
Most recently Andrew has been involved in cases regarding issues arising from delay to
projects, loss and expense, termination issues, final account disputes, professional negligence
and defects.
CHAIPAT KAMCHADDUSKORN
LS Horizon Limited
Chaipat’s practice focuses on banking and finance (with the main focus on project
finance), corporate restructuring and business rehabilitation. He also specialises in research,
providing opinions and analysis of legal issues particularly in the areas of partnerships and
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About the Authors
companies, public and private limited companies, laws and regulations on commercial
banks, finance companies, securities companies, stock exchanges, drafting of project finance
and finance-related contracts and business contracts, security documentation, concession
contracts and other related documents.
Chaipat obtained his LLB (with honours) from Chulalongkorn University and his
LLM from Columbia University, New York. He has also obtained his Thai barrister-at-
law certificate.
MICHAEL KENNEDY
Maples and Calder
Michael Kennedy has broad expertise in commercial litigation with a particular focus on
contract law, construction law, debt collection and injunctions. He also advises in professional
negligence, maritime law, planning and environmental law, as well as dispute resolution.
Mr Kennedy joined Maples and Calder in 2010. Prior to that, he practised as a barrister
at the Irish Bar.
ALEJANDRO LEÓN
Clifford Chance
Alejandro León is a senior associate in the banking and finance department at Clifford
Chance’s office in Madrid.
He obtained his degrees in law (2005) and in business administration (2006) from
the Comillas Pontifical University. He took an executive master’s course organised by the
Garrigues Study Centre in collaboration with Harvard Law School. He is a lecturer on the
executive master’s degree course in project financing organised by the IE Business School and
Carlos III University of Madrid. He speaks English and Spanish.
Alejandro León joined Clifford Chance as a senior associate in 2011. Previously,
he worked as an associate in Garrigues in the projects and infrastructure department. He
specialises in structured finance and energy and infrastructure projects.
Alejandro León’s relevant experience includes acting as international project finance
legal adviser to Banco Santander and Uruguayan pension fund AFAP SA on the structuring
of a project bond issue by Unidad Punta Rieles, SA, for the financing of the construction
of the new Unidad de PPL No. 1 prison in Montevideo, Uruguay, and advising sponsors
on the financing for Generacion Andina SAC for the construction and operation of two
hydroelectric power plants, HEP El Carmen (8.4MW) and HEP 8 de Agosto (19MW)
in Peru.
PAUL LIGNIÈRES
Linklaters LLP
Paul Lignières is the partner in charge of Linklaters’ public law and PPP practice. He has over
20 years’ experience. He recently advised the French government on the Economic Stimulus
Plan and has worked on the vast majority of major French PPPs, as well as on energy projects.
He is the author of several books, including Partenariats public-privé (2005) and Le Temps des
Juristes (2012).
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About the Authors
OLIVIA DE LOVINFOSSE
Stibbe
Olivia de Lovinfosse is a junior associate in Stibbe’s construction and real estate team. Olivia
primarily advises on complex PPP projects (in particular DBFM structures) in the transport
and infrastructure sectors. Olivia obtained her master’s degree in law from the Katholieke
Universiteit Leuven, and was admitted to the Brussels Bar in 2015.
MAYGAN MIKE LUNDGAARDE

Plesner Law Firm
Maygan Mike Lundgaarde is part of Plesner’s disputes and projects team, as well as being on
the energy, infrastructure and construction team.
Mr Lundgaarde has more than 10 years of experience in areas of corporate law,
M&A and energy, infrastructure and construction-related matters, and he advises both
Danish and international contractors, employers, consultants and insurance companies.
Mr Lundgaarde assists during contract negotiations, project execution and disputes
relating to energy, infrastructure and construction based on, inter alia, the General Conditions
for the Provision of Works and Supplies within Building and Engineering (AB92), the
General Conditions for Turnkey Contracts (ABT93), the General Conditions for Consulting
Services (ABR89) and FIDIC. He also advises clients on insurance law, guarantees and
performance bonds.
HANNAH MCCARTHY
39 Essex Chambers
Hannah McCarthy is a barrister at 39 Essex Chambers. Ms McCarthy specialises in
commercial, construction and infrastructure disputes. She has advised and appeared as an
advocate in the TCC in London and before a range of arbitral tribunals. She has worked on
various, high-value arbitration proceedings arising out of construction and infrastructure
disputes in the United Kingdom, acting for governments and private investors.
TETSURO MOTOYOSHI
Tetsuro Motoyoshi is a partner at Anderson Mōri & Tomotsune. He studied at Kyoto
University (LLB) and is admitted to practise in Japan (Dai-ni Tokyo Bar Association). He is
primarily engaged in litigation and disputes. He is also involved in financial transactions such
as securitisation and regulatory issues, and handles general corporate matters.
THOMAS MUELLER-TSCHUMI
Walder Wyss Ltd
Thomas Mueller-Tschumi was educated at Basle University (lic iur 1990, Dr iur 1996,
summa cum laude) and completed his studies as Certified Specialist SBA Construction and
Real Estate Law. He gained working experience as a law clerk (District Court of Laufenburg,
Administrative Court of the Canton of Argovie), a research and teaching assistant at Basle
University and as a lawyer in an Argovie and a Basle law firm. He advises clients in matters
relating to PPP, real estate law (construction, planning, environment and infrastructure
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About the Authors
including real estate financing), public procurement, administrative law and privatisations.
He joined Walder Wyss Ltd in 2006 and became a partner in 2012. Mr Mueller-Tschumi is
a lecturer in the administrative law master’s programme of Basle University and a member of
the Swiss PPP Association experts panel.
ZAHER NAMMOUR
Dentons
Zaher has practised law in the Middle East for over 14 years, including 12 years in Qatar. Zaher
has extensive experience in corporate joint ventures, mergers and acquisitions, restructuring,
corporate governance, public offerings, private placements and the related regulatory
framework. Zaher has advised on restructuring and acquisition of multimillion-dollar
companies in Qatar and abroad. He is also specialised in the field of regulatory compliance
associated with funds, sukuk, IPOs and state bonds.
In addition to his corporate expertise, Zaher is also recognised for his real estate
experience. Over the years, he has counselled both foreign investors as well as local entities
(private and governmental) on a number of large-scale infrastructure projects including the
Pearl, Lusail and the Qatar Integrated Railway Project.
NGUYEN TRUNG NAM (TONY)

EPLegal Limited
Tony practises in the area of project finance and commercial contracts with a heavy
emphasis on international trade law, contract/tax planning for cross-border transactions and
energy-related transactions.
Tony has over 15 years’ experience in the energy industry. Prior to co-founding EPLegal,
Tony worked in managerial and legal positions with the leading oil and gas operators and
contractors in Vietnam, such as PTSC, Cuu Long JOC and PVTrans. He has legal and
contracting experience through various projects related to drilling campaigns; oil and gas
production operations; sales and purchasing and technical services contracts; chartering
of vessels/FPSO/FSO; production services; and EPC/EPIC contracts. He also acts as lead
counsel and works on both contentious and non-contentious matters in onshore energy and
infrastructure construction contracts and related dispute settlement proceedings, including in
relation to hydropower plants, thermal power plants, refineries and solar energy installation
projects, etc.
Tony played the driving legal role in various multimillion-dollar financing projects and
investment projects within the energy, aviation and infrastructure sector.
Tony is the author of numerous articles relating to legal contract risk management and
banking and finance. He won the Best Memorial Award at the Asia Cup 2001 International
Law Moot Court Competition, and was a candidate for the Clive M Schmitthoff Essay
Competition held by Pace Law School.
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About the Authors
PEDRO NICHOLSON
Estudio Beccar Varela
Pedro Nicholson is the head of Estudio Beccar Varela’s real estate and hospitality department.
He has extensive experience in real estate, hospitality, tourism, mergers and acquisitions
and corporate finance, and he has advised local and foreign clients in all sorts of local and
international deals.
Pedro has lectured at conferences in Argentina and abroad, and has been recognised
as a ‘Leading Real Estate Lawyer’ by the Practical Law Company publication from 2007 to
2017; by Chambers and Partners from 2008 to 2017; and by Best Lawyers for 2010 to 2017.
Pedro has been further recognised as a ‘Recommended M&A Lawyer’ by the Practical
Law Company every year from 2003 to 2017, and by Best Lawyers for 2012.
He is a former president of the Alumni Association of the Real Estate Business Centre
of the University of San Andrés, co-chair of the Real Estate Committee of the American
Chamber of Commerce in Buenos Aires, member of the Executive Committee at the
Housing Entrepreneurs Association, officer of the Real Estate Committee at the International
Bar Association and officer of the Latin American Law Committee of the International
Council of Shopping Centres. From 2002 to 2005, Pedro held the position of Professor
of Modern Contracts at the postgraduate corporate law programme at the University of
Palermo, in Buenos Aires. Pedro is currently professor of the hotel business management
and hotel investment postgraduate courses at Torcuato Di Tella University. Pedro obtained
a postgraduate degree in real estate transactions from the University of San Andrés (2006),
a postgraduate degree in hotel investments from the University of San Andrés (2009), an
LLM from the University of Illinois at Urbana-Champaign (1993), and worked as a foreign
associate at Hogan & Hartson, Washington, DC (1995).
REN NIEMANN
Ren specialises in the areas of construction, infrastructure and procurement and has advised
clients on major projects in Australia and across the Asia–Pacific region. He has more than
15 years of experience working across the transport, water, resources, social infrastructure,
defence and logistics sectors. he has advised on all forms of contracting, including relationship
contracts, public–private partnerships, all forms of traditional procurement, and other related
agreements. Ren is head of McCullough Robertson’s government services team and is one of
the firm’s lead partners in the renewables sector.
FRANCIS NORDMANN
Walder Wyss Ltd
Francis Nordmann was educated at the University of Zurich and Basle University (lic oec
publ 1993, lic iur 1995, Dr iur 1996) and at the University of Melbourne (LLM 1999).
He gained working experience as a clerk at Basle Civil Court, as a trainee in a Basle law
firm and as an associate in law firms in Zurich and London. He advises institutional and
private investors as well as owners of real estate in all aspects of real estate law including real
estate financing. Another focus of his practice is legal advice relating to financial services
and all types of national and international corporate finance (including structured finance)
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About the Authors
and capital markets transactions. Mr Nordmann joined Walder Wyss Ltd in 2001 and
became a partner in 2007. Mr Nordmann is recognised as a leading real estate practitioner by
Chambers and Partners and PLC, and is a member of RICS.
CONOR OWENS
Maples and Calder
Conor Owens specialises in property, construction, insurance, product liability and
professional negligence dispute resolution. He has advised on numerous commercial disputes
involving mediation, conciliation, adjudication, arbitration and litigation, including disputes
before the Supreme Court.
Mr Owens joined Maples and Calder in 2009. He previously worked for a large Irish
corporate law firm and prior to that, for Pinsent Masons in London. He has also worked
in-house for a large construction company. He is recommended in The Legal 500.
ROBERT S PECKAR
Peckar & Abramson PC
Robert S Peckar is a founding partner of Peckar & Abramson PC, one of the largest and
leading construction law firms, with eleven offices in the United States and affiliated offices
in the United Kingdom, China, India, Mexico, Brazil and Peru. He has been a leading
construction practitioner for 46 years. He has been integrally involved as a legal adviser and
advocate for major contractors and projects throughout the world. He is highly respected
for his unique ability to guide project participants through troubled projects and difficult
relationships to solutions that do not require formal dispute resolution, while having major
success as a litigator of construction disputes when efforts to avoid formal dispute resolution
are not successful. In addition to providing project specific advice, in recent years, Mr Peckar’s
practice has focused on counselling both international and US contractors in the formation
of joint enterprises, including consortia and other collaborations in the United States and
abroad, and guiding construction companies in the formation, implementation and oversight
of corporate integrity programmes that comply with domestic and international requirements.
Mr Peckar is a fellow of the American College of Construction Lawyers and a member of
industry and professional associations, including serving as general counsel of several US
associations as well as a legal adviser to others. He is an author and a frequent lecturer.
ANDREW PENDLETON
Andrew Pendleton is a senior associate in the project finance group based in the Tokyo office
of Milbank, Tweed, Hadley & McCloy LLP. He has experience advising lenders and sponsors
on a variety of international project financings. His sector and regional representations include
petrochemicals, oil and gas, natural resources, power, satellites and other infrastructure
projects in Asia, Europe, the Middle East and Africa. Mr Pendleton has also contributed to
various legal publications. He is a co-author of the Oxford University Press guide International
Project Finance: Law and Practice. Mr Pendleton is qualified to practise under English law.
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About the Authors
KRISTEN PODAGIEL
Kristen Podagiel is a partner in McCullough Robertson’s resources group and has worked
closely with the Australian mining and resources industry for the past 17 years. She has
considerable experience in the area of structuring and establishment of major projects and
joint ventures in the resources industry, including financing for a wide range of resource
projects and structures. Ms Podagiel has acted for a range of clients in the resources sector,
including listed and large private companies involved in exploration and operational projects
in coal, coal seam gas, conventional oil and gas, mineral sands and metals.
MANUEL PROTÁSIO
Manuel Protásio was born and raised in Lisbon and graduated in 1984 from the School of
Law of the Catholic University of Portugal, Lisbon.
He worked on secondment at investment bank Deutsche Bank’s subsidiary in Lisbon
for approximately one year and has been involved in project finance matters since 1992.
He joined VdA Vieira de Almeida in 1991 and is currently one of the partners in charge
of the projects–infrastructure, energy and natural resources practice group. In this capacity,
he has participated in or led the teams involved in the most significant transactions carried
out in Portugal to date in the power (including renewables), oil and gas, road, transport,
water and waste sectors. He has also been actively engaged in the areas of regulation and
public procurement procedures in those sectors.
FREDERICO QUINTELA
Frederico Quintela was born and raised in Lisbon and graduated in law in 2001 from the
Faculty of Law of the University of Lisbon.
He obtained his postgraduate degree in corporate law in 2004 from the School of
Law of the Catholic University of Portugal, Lisbon, and in 2012 he completed an LLM in
international business law at the Global School of Law at the same university.
He joined VdA Vieira de Almeida as a trainee in September 2001 and is currently
a managing associate in the projects–energy, infrastructure and natural resources and oil and
gas practice groups. At VdA Vieira de Almeida, he has been actively involved in or led several
transactions, mainly focused on the infrastructure, healthcare and oil and gas sectors, and
acting as legal adviser to either the grantor, the sponsors or the lenders. Between 2012 and
2013, he was seconded to Pinheiro Neto Advogados, in Brazil.
Frederico is admitted to the Portuguese Bar Association and to the Brazilian
Bar Association.
VASANTH RAJASEKARAN
Seth Dua & Associates
Vasanth Rajasekaran is a partner at Seth Dua & Associates. He has considerable expertise
in relation to international arbitration, infrastructure projects (roads, power, airports, ports,
railways, water and sanitation), defence, aerospace and aviation, PPP projects, procurement
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About the Authors
law and general litigation. He has advised many foreign companies on Indian procurement
law and policies in several key infrastructure PPP projects across various sectors. He has also
has been appointed as a member to the high-powered committee for drafting model contracts
for PPP in the housing sector for unveiling the Prime Minister’s flagship programme of
affordable housing by the Ministry of Housing and Urban Poverty Alleviation. He has
drafted the first of its kind financial management and procurement manual for the National
Skill Development Corporation, a sui generis socio-economic PPP company sponsored by
the GOI and the Indian industry and formed as an SPV to implement the Prime Minister of
India’s prestigious project, the National Skill Development Mission. He has been retained by
the Ministry of Housing for advice on various constitutional and administrative law issues
including drafting the Real Estate (Regulation and Development) Bill 2012.
FERGAL RUANE
Maples and Calder
Fergal Ruane is a senior associate in Maples and Calder. He has spent over 15 years advising
both private and public bodies on a variety of public procurement, construction, PPP,
infrastructure, commercial and transport matters including consultancy and construction
contracts, development agreements, framework agreements, tender documents, operation,
maintenance and commercial contracts and related security documents.
He joined Maples and Calder in 2015 having previously worked as head of legal of the
Railway Procurement Agency and for a well-known Irish corporate law firm.
SARAH SAGE
Dentons
Sarah Sage is a senior associate in the construction team at Dentons’ Doha office. She previously
worked in London prior to moving to Doha in 2013. Sarah principally specialises in construction
and infrastructure development and also advises on local and international arbitration.
Sarah has acted for many UK-based clients, including funders and finance institutions,
private sector developers and public sector bodies. She also has experience acting for
contractors, developers and consultants in the Middle East (Dubai and Doha) on infrastructure
development projects, as well as in bringing and defending claims in arbitration.
HENRY SCOTT
Henry Scott is a senior associate in Milbank’s global project finance group in the Los
Angeles office. Mr Scott’s experience includes project finance, asset-based financing and
general corporate work. He has experience representing both financing parties and sponsors
in debt and equity financing transactions involving wind, solar and geothermal generation
projects, coal gasification facilities and onshore LNG terminals, as well as rail and road PPP
infrastructure projects. He regularly advises buyers and sellers in the acquisitions, workouts
and dispositions of energy and infrastructure assets.
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About the Authors
DENIS SERKIN
Peckar & Abramson PC
Denis Serkin is a partner in the construction law practice at Peckar & Abramson. Mr Serkin
represents construction managers, general contractors, specialty contractors, owners,
developers and subcontractors in contentious and non-contentious dispute resolution. He
regularly provides project support to clients in a number of market segments including
construction management, general and EPC contracting, real estate development, power and
energy, and infrastructure. A large part of Mr Serkin’s practice is devoted to implementation
and oversight of corporate integrity programmes that comply with domestic and international
requirements. In addition, Mr Serkin advises clients in the drafting and negotiation of various
levels of construction agreements. Prior to entering the legal profession, Mr Serkin worked
as a project engineer.
SUNIL SETH
Seth Dua & Associates
Sunil Seth is a co-founder and senior partner at Seth Dua & Associates with professional
experience that spans over 25 years of advising multinational and Indian corporations in
setting up business operations in India as joint ventures or wholly owned subsidiaries, either
as greenfield projects or through the M&A route. He has advised clients in sectors as diverse
as aerospace, defence, automotive, industrial, engineering, consumer goods, infrastructure,
construction, real estate, hospitality, healthcare, power, oil and gas, water, roads and transport.
He has rich and extensive experience in advising clients on procurement laws, policies and
regulations across various sectors. He has delivered papers at various international conferences
and has contributed articles to leading international publications and journals. He has been
retained by the Ministry of Housing for advice on various constitutional and administrative
law issues with respect to real estate. He has helped in drafting the Real Estate (Regulation
and Development) Bill 2012 to ensure orderly growth and development of the real estate
sector across India.
BEATRIZ SPIESS
Guyer & Regules
Beatriz Spiess is a senior associate at Guyer & Regules. A notary public, she joined the
firm in 2004 and she specialises in structuring and financing of urban and rural real estate
investments. Her area of practice further involves advising banks, international agencies and
multilaterals in the granting of collateral for facility agreements. She also has experience in
mining, having advised national and international clients on mining easement processes as
well as due diligence, lease and mortgages of mining permits. She participates prominently
in the energy practice group, advising both sponsors and lenders in the purchase, sale and
project financing of renewable energy projects, mainly photovoltaic and wind. She graduated
from the faculty of law at the University of the Republic, Montevideo in 2004. In 2009, she
obtained her LLM in banking and financial law from Boston University and was appointed
LLM scholar of the Graduate Program in Banking and Financial Law, Morin Center, Boston
University (2009). She worked as a foreign attorney in the New York and Buenos Aires
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About the Authors
offices of Cleary Gottlieb Steen & Hamilton LLP from July 2009 until May 2010. She is also
a certified English translator, graduating from the University of the Republic, Montevideo
in 2001.
REIJI TAKAHASHI
Reiji Takahashi is a partner at Anderson Mōri & Tomotsune. He studied at the University
of Tokyo (LLB) and the University of Virginia (LLM), and is a lecturer at the University of
Tokyo Graduate Schools of Law and Politics. He is admitted to practise in Japan (Dai‑ni
Tokyo Bar Association) and in New York.
CARLOS UMAÑA
Brigard & Urrutia
Carlos Umaña, managing partner of the firm, holds a law degree from Del Rosario University
(1983) and a master’s degree in comparative jurisprudence from the New York University
School of Law (1985). He advises national and international clients on matters relating to
public services law, administrative law, free competition, commercial law and insurance.
Mr Umaña has been a partner at Brigard & Urrutia since 1990 and has more than
25 years of experience. Moreover, he has advised national and international clients such as
Siemens, Johnson & Johnson, 3M, Iberia, Votorantim, Endesa SA (Spain), LAN Chile and
Monsanto, among many others, in connection with public services law, administrative law,
energy projects, commercial law and insurance.
RONY VERMEERSCH
Stibbe
Rony Vermeersch is an internationally recognised construction and real estate lawyer,
working for all sides of the construction and real estate industries. His practice is a mix of
both contentious and non-contentious construction, projects and dispute resolution work.
He is well versed in the leading forms of contracts used domestically and internationally,
including the forms published by FIDIC. Rony moreover advises on innovative ways of
successfully bidding for and closing PPP and PFI project delivery. Rony has experience on all
types of projects, including airports, ports, roads and rail projects, power generation, waste
facilities, warehousing and accommodation.
CAROLINA WALTHER-MEADE
Carolina Walther-Meade is a member of Milbank’s global project finance group and the firm’s
Latin America practice group in the New York office. A partner since 2007, Ms Walther-Meade
has extensive experience in cross-border financings and international project finance and
development, with an emphasis on infrastructure, mining and energy projects throughout
Latin America. She has also been involved in numerous acquisition financings and structured
financings in the region. Her practice includes representation of commercial bank syndicates,
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About the Authors
multilateral and export credit agencies and other lenders, as well as corporate developers and
industrial groups. She spent one and a half years with Milbank based in Brazil and continues
to spend a significant amount of time in Milbank’s São Paulo office.
Ms Walther-Meade is consistently recognised as a leading project finance lawyer by
Chambers Latin America. She grew up in Mexico and speaks Spanish and Portuguese fluently.
She is an advisory board member of the Women in Law Empowerment Forum.
PETER WENGLER-JØRGENSEN
Plesner Law Firm
Peter Wengler-Jørgensen’s areas of work include infrastructure projects, arbitration and
mediation, company law, construction law, litigation and contract law. He provides advice
to Danish and international businesses, public institutions and state-owned companies; he
also acts as a certified arbitrator and mediator. He is a board member of various Danish
companies, foundations and associations.
Mr Wengler-Jørgensen has extensive and long-standing expert knowledge in
infrastructure projects and construction law conflicts, with experience drawn from a large
number of national and international litigation and arbitration cases.
Mr Wengler-Jørgensen is widely recognised for his skills, particularly in relation to
dispute resolution, real estate and construction. He is ranked as a leading individual as regards
dispute resolution by Chambers Global and Chambers Europe. He has notable experience in
handling arbitration proceedings and litigation in relation to construction and infrastructure
projects (2017). He is recommended by The Legal 500 (2014) for dispute resolution, real
estate and construction, by Legal Experts: Europe, Middle East and Africa (2013), by Chambers
Global (2017) for dispute resolution, and by IFLR1000 (2017) in the fields of energy and
infrastructure, as well as project development and disputes.
MITCH WINDSOR
Stibbe
Mitch Windsor is a junior associate in Stibbe’s projects team. Mitch is qualified as a solicitor
in England and Wales, and is also admitted to the Brussels Bar. He practised in the United
Kingdom focusing on major energy and infrastructure projects from 2014, before moving to
Brussels in early 2017 to join Stibbe. Mitch advises on the procurement of construction and
engineering works, as well as whole-life support services required for large projects (security,
facilities management, and transport). Mitch advises on common international standard
forms of contract (in particular the FIDIC and NEC suites), in addition to advising on
PPP projects.
KAREN WONG
Karen Wong has been a partner in Milbank’s global project finance group since 1996 and
is resident in the Los Angeles office. Ms Wong focuses on the representation of sponsors
and financing parties in connection with the development, acquisition, financing and
restructuring of power, petrochemical and other infrastructure facilities in Asia and North
America. In the past few years, she has represented a number of financing parties in debt
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About the Authors
financings, leveraged lease and single-investor lease transactions involving wind, solar, hydro
and biomass projects, as well as representing the project sponsor of several coal and petroleum
coke gasification projects in the United States.
In 2014, Euromoney Legal Media Group named Ms Wong as ‘best in energy, natural
resources and mining’ and she was selected as one of the Daily Journal ’s ‘top 25 clean-tech
lawyers’ in California and also featured as one of the state’s ‘top 75 women lawyers’. She is
listed as one of the leading project finance lawyers in IFLR1000, Chambers USA and Chambers
Global for projects, and Who’s Who Legal, and has been recommended in PLC Which lawyer?
for banking and finance.
KENICHI YAMAMOTO
Kenichi Yamamoto is a partner at Anderson Mōri & Tomotsune. He studied at the Keio
University (LLB) and the University of California Berkeley (LLM). He is admitted to
practise in Japan (Dai-ni Tokyo Bar Association) and in New York.
SHUKHRATJON YUNUSOV
Dentons Tashkent
Shukhratjon Yunusov is a dual-qualified lawyer (Uzbekistan and England and Wales),
and heads Dentons Tashkent’s banking and finance practice. He has advised international
financial institutions and currently advises extensively foreign banks in their transactions
with Uzbekistan entities. His main practice focuses on cross-border banking, project finance,
corporate and compliance matters.
Shukhratjon Yunusov is a graduate of Durham Law School, United Kingdom.
ZHANG JIONG
Zhong Lun Law Firm
Zhang Jiong is a partner at Zhong Lun Law Firm. He graduated from Beijing Foreign Studies
University (BA) and Renmin University of China (LLM).
Specialising in real estate and construction law, Mr Zhang has extensive experience in
construction, private equity real estate and construction project transactions. He has also
participated in a range of litigation and arbitration proceedings in respect of engineering
construction contracts, equity transfers, joint venture contracts and real estate development.
In 2017, 2016, 2015 and 2014, Mr Zhang was ranked in Band 3 for construction law
in China by Chambers and Partners. In 2016, Mr Zhang was highly recommended in the
construction law area by The Legal 500 – Asia Pacific. In 2015 and 2013, he was voted one of
‘China’s 60 most recommended lawyers’ by ENR/Construction Times. In 2014, Mr Zhang was
awarded the title of Chartered Construction Manager by the Chartered Institute of Building
(CIOB). In 2014, Mr Zhang was named as one of ‘China’s top rising lawyers’ by Asian Legal
Business. In 2013, Mr Zhang was recommended as an ‘up-and-coming construction lawyer in
China’ and one of the ‘Asia-Pacific outstanding younger partners’ by Chambers and Partners.
In 2013, Mr Zhang was awarded the title of Chartered Builder by the CIOB and qualified as
a Chartered Member of the Institute (MCIOB).
353
About the Authors
ZHU MAOYUAN
Zhong Lun Law Firm
Zhu Maoyuan is a senior partner at Zhong Lun Law Firm. He graduated from Peking
University (LLB), and is a visiting professor at Peking University and Renmin University of
China. He is also an arbitrator for the China International Economic and Trade Arbitration
Commission, the Shenzhen Court of International Arbitration, the Beijing Arbitration
Commission and the Shanghai International Economic and Trade Arbitration Commission.
Since Mr Zhu started practising real estate and construction law in 1992, he has created
the service mode of providing a full package of real estate and construction advice. The nearly
200 legal professionals of the law firm’s real estate practice group, led by Mr Zhu, provide
comprehensive and specialised legal services for clients.
The Zhong Lun Law Firm real estate practice has been ranked as Band 1 for 10 consecutive
years, ever since Chambers and Partners started ranking legal service providers in Asia in
2008. Mr Zhu has been recommended as a Band 1 real estate lawyer in China by Chambers
and Partners for the past nine years and has also been ranked as a Band 1 construction
lawyer in China from 2010 to 2016. In 2017, Chambers also recognised Mr Zhu as a Senior
Statesman in real estate and construction. The firm’s real estate practice group, headed by
Mr Zhu, has won the Chambers Asia-Pacific award for Real Estate Law Firm of the Year
from 2009 to 2017 consecutively and has been nominated for awards in the Chambers
Asia-Pacific construction category from 2010 to 2016. In November 2013, Zhong Lun Law
Firm (Zhu Maoyuan team) was recognised as one of the ‘most recommended 10 Chinese
professional construction law firms’ by ENR/Construction Times and Mr Zhu was voted one
of the ‘most recommended 60 Chinese construction lawyers’. In November 2013, Mr Zhu
was voted one of the ‘client’s choice top 20 Chinese lawyers’ by Asian Legal Business (ALB).
In November 2011, Zhong Lun Law Firm (Zhu Maoyuan team) was recognised as one
of the ‘most recommended 30 Chinese professional construction law firms (or teams)’ by
ENR/Construction Times. In 2010, Mr Zhu won ALB’s awards for Real Estate Lawyer of the
Year and Construction Lawyer of the Year.
354
Appendix 2
CONTRIBUTING LAW FIRMS’

CONTACT DETAILS
39 ESSEX CHAMBERS CLAYTON UTZ

81 Chancery Lane Level 15
London WC2A 1DD 1 Bligh Street
United Kingdom Sydney
Tel: +44 20 7832 1111 NSW 2000
Fax: +44 20 7353 3978 Australia
[email protected] Tel: +61 2 9353 4604
www.39essex.com Fax: +61 2 8220 6700
www.claytonutz.com
ANDERSON MŌRI & TOMOTSUNE

Akasaka K-Tower CLIFFORD CHANCE
2-7 Motoakasaka 1-chome Paseo de la Castellana 110
Minato-ku 28046 Madrid
Tokyo 107-0051 Spain
Japan Tel: +34 91 590 75 00
Tel: +81 3 6888 1054/1068/1097/1140 Fax: +34 91 590 75 75
Fax: +81 3 6888 3054/3068/3097/3140 [email protected]
[email protected] [email protected]
[email protected] www.cliffordchance.com
www.amt-law.com/en
BRIGARD & URRUTIA

Calle 70a No. 4–41
Bogotá
Colombia
Tel: +571 346 2011
Fax: +571 310 0609
[email protected]
[email protected]
[email protected]
www.bu.com.co
355
Contributing Law Firms’ Contact Details
DENTONS ESTUDIO BECCAR VARELA

Dentons Edificio República
Floor 15, Al Fardan Office Tower Tucumán 1, 3rd Floor
61 Al Funduq Street C1049AAA Buenos Aires
West Bay, PO Box 64057 Argentina
Doha Tel: +54 11 4379 6835
Qatar Fax: +54 11 4379 6860
Tel: +974 44 598 960 [email protected]
Fax: +974 44 598 961 www.ebv.com.ar
[email protected]
[email protected]
[email protected] GUYER & REGULES
Plaza Independencia 811
Dentons Tashkent 11100 Montevideo
50/59A Oybek Street Uruguay
Tashkent Tel: +598 2 902 1515
100015 Uzbekistan Fax: +598 2 902 5454
Tel: +998 71 150 3105 [email protected]
Fax: +998 71 120 6185 www.guyer.com.uy
[email protected]
[email protected]
[email protected] HAMMAD & AL-MEHDAR LAW
FIRM
www.dentons.com King Road Tower, Level 12,
Office 1209
King Abdul-Aziz Road
EPLEGAL LIMITED Jeddah
Suite 501, Phuong Tower Saudi Arabia
31C Ly Tu Trong Street Tel: +966 92 000 4626
Ben Nghe Ward, District 1 Fax: +966 12 606 9190
Ho Chi Minh City [email protected]
Vietnam www.hmco.com.sa
Tel: +84 8 3823 2648
Fax: +84 8 3823 2657
[email protected] LINKLATERS LLP
[email protected] 25 rue de Marignan
www.eplegal.com 75008 Paris
France
Tel: +33 1 56 43 56 43
Fax: +33 1 43 59 41 96
[email protected]
[email protected]
[email protected]
[email protected]
www.linklaters.com
356
LS HORIZON LIMITED MILBANK, TWEED, HADLEY &

14th Floor, GPF Witthayu, Tower A MCCLOY LLP
93/1 Wireless Road, Lumpini 21F Midtown Tower
Phatumwan, Bangkok 10330 9-7-1 Akasaka, Minato-ku
Thailand Tokyo 107-6221
Tel: + 66 2 627 3443 Japan
Fax: +66 2 627 3250 Tel: +813 5410 2801
www.lshorizon.com
2029 Century Park East
33rd Floor
MCCULLOUGH ROBERTSON Los Angeles, CA 90067-3019
Level 32 United States
MLC Centre, 19 Martin Place Tel: 1 424 386 4000
Sydney Fax: +1 213 629 5063
NSW 2000 [email protected]
Australia [email protected]
Tel +61 2 8241 5600 [email protected]
Fax +61 2 8241 5699
[email protected] 28 Liberty Street
[email protected] New York
[email protected] NY 10005-1413
[email protected] United States
[email protected] Tel: +1 212 530 5000
[email protected] Fax: +1 212 530 5219
[email protected]
www.mccullough.com.au 1850 K Street, NW
Washington, DC 20006
United States
MAPLES AND CALDER Tel: +1 202 835 7513
75 St Stephen’s Green [email protected]
Dublin 2
Ireland www.milbank.com
Tel: +353 1 619 2000
Fax: +353 1 619 2001
[email protected] PECKAR & ABRAMSON PC
[email protected] 41 Madison Avenue
[email protected] 20th Floor
www.maplesandcalder.com New York
NY 10010
United States
Tel: +1 212 382 0909
Fax +1 212 382 3456
[email protected]
[email protected]
www.pecklaw.com
357
PINHEIRO NETO ADVOGADOS VDA VIEIRA DE ALMEIDA

Rua Hungria 1100 Av Duarte Pacheco 26
01455-906 São Paulo 1070–110 Lisbon
Brazil Portugal
Tel: +55 11 3247 8667 Tel: +351 21 311 3400
Fax: +55 11 3247 8600 Fax: +351 21 311 3406
Mobile: +55 11 98214 7443 [email protected]
[email protected] www.vda.pt
www.pinheironeto.com.br
WALDER WYSS LTD

PLESNER LAW FIRM Seefeldstrasse 123
Amerika Plads 37 PO Box 1236
2100 Copenhagen 8034 Zurich
Denmark Switzerland
Tel: +45 33 12 11 33 Tel: +41 58 658 58 58
Fax: +45 33 12 00 14 Fax: +41 58 658 59 59
www.plesner.com www.walderwyss.com
SETH DUA & ASSOCIATES ZHONG LUN LAW FIRM

601–603, 607–608, 6th Floor 31, 33, 36, 37/F, SK Tower
DLF South Court 6A Jianguomenwai Avenue
Saket Chaoyang District
New Delhi 110017 Beijing 100022
India China
Tel: +91 11 416 44700 Tel: +86 10 5957 2020
Tel: +91 11 416 44400 Tel: +86 10 5957 2223
Fax: +91 11 416 44800 Fax: +86 10 6568 1022
Fax: +91 11 416 44500 [email protected]
[email protected] www.zhonglun.com
STIBBE
Central Plaza
Loksumstraat 25
1000 Brussels
Belgium
Tel: +32 2 533 52 58
Fax: +32 2 533 53 84
[email protected]
[email protected]
[email protected]
www.stibbe.com
358

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Published in the United Kingdom

THE RESTRUCTURING REVIEW

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THE INVESTMENT TREATY ARBITRATION REVIEW

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Chapter 1 INTERNATIONAL PROJECT FINANCE��1

Chapter 2 DISPUTE RESOLUTION IN CONSTRUCTION PROJECTS��12

Chapter 3 RELATIONSHIP CONTRACTING��23