IS SECURITY THE PANACEA FOR DEFAULT IN PROJECT FINANCE?

Ugochi Isobel Nnadika*

ABSTRACT: Project finance due to its nature is used in financing capital intensive projects. Most of these projects have long lead times and the loan will not be repaid until the project starts operations and realising some cash flow. The project is usually exposed to a lot of risks pre-completion and operating. If not properly managed, these have the potentials of interfering with the project cash flow and the lender will bear the brunt of this. Ab initio, the lender is in the transaction for profit and will take steps to secure the cash flow in the event of default of the loan agreement by the Project Company or counterparties to the project. It does this by means of security techniques. The laws governing security are intricate and can inhibit the lender having total control of the Project Companys assets.

The author is concluding an LLM programme in Energy Law and Policy at the CEPMLP, University of Dundee (Scotland, UK). She holds an LLB from the University of Nigeria, Nsukka and a BL from the Nigerian Law School. She is a member of the International Bar Association, International Federation of Female Lawyers, Nigerian Bar Association, the Society of Petroleum Engineers and an associate member of the Chartered Institute of Arbitrators, UK. She practises with Aelex Legal Practitioners in Abuja Nigeria. E-Mail : isobel1okorie@yahoo.com

TABLE OF CONTENTS

Page Abbreviation 1. 0 2.0 Introduction. 4

Rudiments of Project finance......................................................................................4 2.1 2.2 Structure of project Finance....................................................................6 Stakeholders/parties to a Project finance. ................................................8

3.0

Risk analysis .............................................................................................................10 3.1 3.2 3.3 Commercial risk ...............................................................................................10 Political Risk ..................................................................................................12 Mitigation .........................................................................................................13

4.0

Security.....................................................................................................................14 4.1 What is the role of Security? ...........................................................................14 4.2 4.3 Forms and application of security ..................................................................15 Problems associated with legal Security. ......................................................17

5.0

Conclusion ..................................................................................................................19 List of Tables Bibliography

TABLE OF ABBREVIATIONS

LDCs SPV BOT

Less Developed Countries Special Project Vehicle Build-Operate-Transfer

1. INTRODUCTION The acute shortage of infrastructural development and the capital to build them makes it imperative for external sources of funding to be sought to enable the building of these infrastructure. This is particularly true of the less developed countries as their large populations ensure that there is a return on investments. Project finance provides the perfect means of securing the funds for capital intensive projects that have a long lead time but have an isolated and identifiable cash flow. In project finance, the lender, having verified the bankability of the proposed project, advances money to the special project and will look to the proceeds of the project for the repayment of the loan.2 Project finance is also used to finance oil and gas projects and power plants. However, the huge capital required to finance a project means that all the risks inherent in a project must be mitigated or avoided through a careful structuring of the project finance matrix. Any risk which remains unallocated resides in the Project Company and thus affects the lender. Hence, the lender will look for ways of protecting itself from these risks and ensure that the sponsors of the project are committed and will not jump ship in the event of any difficulties arising. This it can do by taking security over the assets of the company within the boundary of the laws of the host government.3 This paper will examine the risks inherent within a project finance matrix and ways of mitigating them. The assumption in writing this paper is that the Special Purpose Vehicle is an incorporated company. The Lenders in Project finance are in some cases offshore and may not be seized with the laws of the host community as security laws change from one jurisdiction to another.4 This paper further analyses the role of security techniques in cushioning the effects of defaults from the project company or any of the other players in the matrix. It will seek to ascertain which security will avail a lender, their mode of enforcement and overall usefulness in

Denton Wilde Sapte, A guide to Project Finance, http://www.gcontractor.ir/files/General%20Contracting/Guide%20tp%20Project%20Finance.pdf?id=69 th (visited on 15 May 2009)
3

Clifford Chance Project Finance ( London: IFR Publishing Limited ,1991)23 See Denton Wilde Sapte, supra note 1

ensuring that the project and by extension, the cash flow survives any events of default by the project company itself or the other parties within the matrix.

2. Rudiments of Project Finance Project Finance can be described generally as a sequence of financial structures with all of them having a common attribute. Neither the liquidity of the sponsors nor the value of the physical assets involved in the project will be looked upon as the principal source of repayment. Ideally, the financing will depend on the viability of the project itself and on its ability to generate a cash flow. This is decided on the basis of a financial and economical balance that will be self-supporting in the medium to long term. The function of this cash flow will be to achieve repayment of the debt and to maintain the operation of the project. There have been many attempts at defining project finance by different authors. One of them is as follows; Project Finance is the raising of funds to finance economically separable capital investment project in which the provider of the funds look primarily to the cash flow from the project as the source of funds to service their loans and provide the return of and a return on the equity invested in the project.5 Another is that; Project Finance is the financing of a particular economic unit in which a lender is satisfied to look initially to the cash flow and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan.6 4. The concept of Project finance presupposes that there is an asset to be developed and that this asset being financed will be the key source of generating the funds for the repayment of the debt. This usually applies when the asset is the development of oil or gas field or other

Finnerty, J., D., Project Financing: Asset-Based Financial Engineering, (Hoboken, John Wiley & Sons, Inc 2007)

2
6

Nevitt, P., K., Fabozzi, F., J., Project Financing,(7 ed, London: Euro-Money Books 2000) 1

th

natural resources or construction and development of infrastructural projects such as power generation stations, roads, bridges or housing estates.7 The main distinction between Project Finance and other forms of financing does not only lie in the limited recourse to sponsors,8 but in the intricacies of the project, the technical

feasibility and the economic viability of the project. It is the assurance that the project will generate income that gives the lenders impetus to release funds to the project. This is important because in most cases, the value of the assets will be a puny sum compared to the cost of the development. There is also very clear allocation of inherent risks to the party (ies) who is most able to bear it. 9

2.1

Structure of project Finance

Project financing is organized through a special project vehicle (SPV), specific to the project to be financed. The nature of the vehicle will depend on the jurisdiction where the project is situated and the nature of the project.

The SPV could be any one of the following:

i. ii. iii. iv.

Incorporated Company Limited Partnership General Partnership Unincorporated joint venture10 The incorporated company appears to be the best choice for project financing due to its peculiar attributes. It is a separate and distinct legal entity from it promoters or shareholders. The share holders liability is limited to the extent of their unpaid shares and the company

See Denton Wilde Sapte supra note 1

Some forms of loans are structured in a manner that there is no recourse to the borrower. Repayment will be from the proceeds of sale of the asset/property or from its lease. See Clifford Chance, supra note 2 at 4 Ibid at 4 Vinter, G., Project Finance, A Legal Guide (2nd ed. London: Sweet & Maxwell, 1998). See Generally chapter

10

outlives the shareholders.11 The writer will assume that the SPV in this paper refers to an incorporated company The SPV as a separate entity raises the loan in its name and uses its assets, creating a charge over them. This is why projected finance is said to have non recourse or limited recourse to the sponsors of the project.12

The structure of project finance is such that the loan is advanced to the SPV and it deals directly with all the other components of the project- contractors, operators, offtakers who will purchase the products. 13

The essence of structuring in Project finance is to ensure that all the risks that are likely to occur are allocated to the party who is best able to bear it. It will also ensure that there are safety nets which will provide adequate cover in the event of any party defaulting on its obligation.14 Careful structuring could also be used to avoid showing the debt on the sponsors balance sheet. This will ensure sustenance of institutional credit ratings.15

11

ibid

12

Esty, B., C., Modern Project Finance: A Casebook, (Newyork: John Wiley& Sons Inc. 2006).20
See Denton wilde Sapte supra note 1 ibid ibid

13

14

15

Figure1. A typical Project finance structure for an LNG Plant16

Multilateral, Bilateral,

Bank Syndicat

Sponso r

Sponso r

Sponso r

Non recourse Debt

Equity
Shareholder

70
Labou Gas Input
under a supply Techno Equipment Contract

30

Project Company

Construction Contract

Construction Contract

Operating & Maint. Contract

2.2 i.

Stakeholders/parties to a Project finance.

Sponsors These are the owners/shareholders of the project company and are sometimes called equity funders. The sponsor could be one company or a consortium of interested parties for example; the contractors or suppliers.17 They contribute the required funds (equity) which is sometimes utilized at the riskiest part of the project-at construction. The equity is provided as a show of their commitment to the project.

ii.

Project Company This is the SPV set up for the specific project. Its ownership will depend on the legal framework and tax regime for foreign investment in the host country.18

iii.

Government - this participant is responsible for creating an enabling environment for Project Finance transactions through its legal system and other associated legislation (e.g.

16

Momoh, H., O., The Role of Lawyers in Project Finance, a paper submitted in fulfilment of the award of Master of Laws (LLM) in United States and Global business Law, Suffolk University Law school,2008 See Clifford Chance, supra note 2 at 9 Ibid

17

18

stabilization agreements, expropriation of funds regulations, tax regime, permits, property rights, etc). iv. Lenders - these are the providers of Long - Term loans to the transaction. It is usually a

group of banks due to the size of most projects. They usually provide the bulk of the total funding of the transaction. These are usually Commercial Banks, Development Finance Institutions, Multilateral Institutions, Bilateral Institutions and Export Credit Agencies. The multilateral institutions play a very important role as catalyst lenders or to provide some measure of comfort to international investors who may be wary of the political risks associated with certain jurisdictions.19 v. Operator - this is usually the Engineering Firm that is in control of the construction and operations/management of the project (e.g. Power Plant). The nature of operator differs from one project to the other. vi. Security Trustee The security trustee could be the agent bank where there is a syndicate of lenders. If there are other competing interests, an independent Trust Company could be appointed as security trustee.20

vii.

Experts These are experts in different areas like law, engineering, finance, insurance, geology, environmental impact assessment, who may be called in to advise the lenders and the sponsors to ensure that documentation is based on informed opinion. They will advise on how best to mitigate the risks and these mechanisms are then built into the contracts. These contracts ensure that risks are passed to the best party or residual risks mitigated.

Some other stake holders are the communities that are affected by the project either directly by relocation or indirectly, when their source of livelihood is affected by a project. Examples are the construction of a power plant or the damming of a river. Failure to address the effect of the project on the community may lead to delays and cost overrun. The Suppliers of gas, technology, equipment or software that are significant to the project are also stakeholders in project finance structure.

19

Ibid See Clifford Chance supra note 2 at 13

20

3. Risk analysis Project finance by its nature is more common to the Less Developed Countries (LDCs) where there is dearth of infrastructure and the capital required to remedy the situation is in very limited supply. Risk refers to the chance of something going wrong.21 Risks could present to either the lender or the sponsor. In other to avoid or mitigate the dangers inherent in project financing, these risks must be carefully identified and distributed amongst all the players in the project. Each project has its own unique set of risks. The United Nations Guidelines for Infrastructure Development through Build Operate Transfer Projects (1996) noted as follows: All the risks need to be allocated and managed efficiently to ensure the success of a .. project.22 Such risks, although not limited to but include: political risks, commercial risks, legal risks, development risks, operating risks, etc. They are likely to occur at different stages of the project. It may be prior to or post the commissioning of the project. The writer has grouped the associated risks into 2 broad groups for ease of analysis. These are: 3.1 Commercial risk

This is the umbrella that covers all aspects of risks that are related to the buying and selling of goods or services. This cuts across both pre and post-development risks such as: i. Construction and development risk Cost overruns caused by suppliers or machinery or for any reason. Delays in completion of the project may result in making the project more expensive or to lose money from the product in the period by which completion is extended or in the extreme, the buyer of the product may call off the agreement. This will depend on if there is a mismatch between the contractors agreement and the off take or purchase agreement.
21

http://encarta.msn.com/encnet/refpages/search.aspx?q=risk (visited on 7 April 2009)

th

22

United Nations Guidelines for Infrastructure Development through Build Operate Transfer Projects (1996) http://www.unido.org/index.php?id=oview/3426 (visited 14th May 2009)

10

ii.

Market and operating risk The demand for the product cannot always be guaranteed. This depends on the nature of the project. This is particularly true in contracts where there are no long term offtake agreements and in flow-type projects.23 The existence of a market for the service or product, the possibility that the project output will be less than anticipated by the loan agreement, the use of untested technology are issues the lenders will consider as they are usually reluctant to lend where the technology is untested or the expertise of the operators is not trusted.24

iii.

Credit Risk Project financing is not necessarily non-recourse to the project sponsors.25 Usually, the project company is unknown and unproven so the lenders will look at the credibility of the sponsors and sometimes acquire guarantees from them before releasing funds for the project. The lender will also depending on the particular project look at the credit rating, management skills and track records of other components of the structure such as the contractor (in a turnkey arrangement), the operators and so on.26

iv.

Financial Risk Trends in global commodity and financial markets indirectly affect projects, particularly where international lenders are involved in the structure. Fluctuations in interest and exchange rates also influence the cash flow from the project.

Bruner, R., Langhor, H., Campbell, A., Project Financing: An Economic Overview https://store.darden.virginia.edu/business-case-study/project-financing-an-economic-overview-741 (visited 15th May, 2009)
24

23

See Denton Wilde Sapte supra, note 1

25

Hoffman, S., The Law and Business of International Project finance: a Resource for Governments, sponsors, nd Lenders, Lawyers and Project Participants (2 Edition, The Hague: Kluwer Law International, 2001) 12
26

See Clifford Chance supra, note 2 at 41

11

3.2

Political Risk

There is an acute shortage of infrastructure in most of the Less Developed Countries (LDCs).Many Governments have introduced new laws and regulations to create an enabling environment for private sector and foreign direct investment in their countries.27 However, due to the volatile nature of political terrain in most LDC, the players in any crossborder project are wary of investing in these areas. The risks to watch out for are: i. Acts of Government The government can frustrate a project in many ways. It could refuse to grant a concession, licence or permit, where the feasibility of the project depends on it.28 There is the possibility of expropriation of the project by the government. The government may interfere with the project if there is a socio-political angle to it, for instance, the building of hospitals or power plant. In this case, the project is not entirely for its commercial importance, but to make the government look good in the eyes of the citizenry and to improve the lives of its populace.29 There is also a possibility that the government may lack the political will to implement tariff adjustments. In this case, the government will do well to incorporate some form of stabilization clauses in the contracts. This will mitigate some of the political risks and enhance the bankability of the project. ii. Legal Risk A project may be influenced by the legal system of the host government. If the laws do not encourage foreign investment, assure repatriation of funds, offer a responsive tax regime (tax breaks or tax holidays), and make it easy to take and enforce security (particularly where recourse is limited), then the risk to the project is heightened. This makes it more expensive as the lenders will insist of different security and hedging techniques. The judicial system should offer judges and lawyers who understand the rudiments of project finance in the event of a dispute arising out of there. Certain problems may arise over the
27

Nigerian Investment Promotion Commission Act, Chapter N117(Decree No 16) Laws of the federation of Nigeria no 16 of 1995, http://www.nigeriath law.org/Nigerian%20Investment%20Promotion%20Commission%20Act.htm (Assented to on 16 January th 1995) (visited on 15 May 2009)
28

See Clifford Chance, supra note 2 at 44

29

Hainz, C., Kleimeier, S., Political Risk in syndicated Loaning: Theory and Empirical Evidence regarding the Use of Project Finance, http://ideas.repec.org/p/rtv/ceiswp/197.html (visited 15th May 2009)

12

choice of law to be used in alternative dispute resolution and the enforceability of arbitration awards.30 The effect of the project on the environment and the likely costs that will be incurred to carry out environmental impact assessments will be factored into the financing structure. Environmental best practices must also be incorporated into the project plan. Banks and other multilateral organisations now apply the Equator Principle31 in financing or co-financing projects. The project must conform to these environmental guidelines to attract the cheaper funds offered by these organisations.32 Failure of the project to conform to standard environmental procedures and regulations may result in delay to the project and possible loss of earnings or cost overruns.33

3.3

Mitigation

In every project, there is a latent possibility that one of the parties may default on its obligations within the contractual matrix. Those risks that remain unallocated, unmitigated or minimal in consequence determine the extent of this risk of default.34 They are mitigated by considering what these risks are and allocating them to the party best able to bear it. This is done through a series of matching contracts, fixed term and price purchase agreements, supply contracts, issuance of guarantees and performance bonds, host government support, use of derivatives and expert advice.

Esty, B., C., Megginson, W., L., Legal Risk as a Determinant of Syndicate Structure in the Project finance Loan Market, http://ideas.repec.org/a/fip/fedhpr/y2002imayp335-363.html (visited 15th May, 2009)
31

30

Wright. C., Rwabizambuga. A., Institutional Pressures, Corporate Reputation, and voluntary Codes of Conduct: An Examination of the Equator Principles http://www.scribd.com/doc/504851/WrightRwabizambuga-Corporate-Reputation?autodown=txt (Visited on 10th May 2009)
32

See Clifford chance supra note 2 at 33 ibid at 48

33

Risk Analysis in Project Finance, http://www.scribd.com/doc/7193805/Risk-Analysis-Project-Finance (Visited on May 10th, 2009)

34

13

4. Security It is trite that in project finance, there is no recourse (at best limited recourse) to the sponsor for the repayment of the debt. Rather, the lenders look to the cash flow from the project. It is imperative that the project continues operations successfully because in most cases, the projects are very capital intensive and may not have enough assets to ensure repayment of the debt if these assets are sold. In spite of this, security over the project assets continues to be important hence, the lenders must procure it to ensure that they are involved at an early stage if the project starts to go wrong.

4.1 What is the role of Security?

Security in a normal financing agreement is an asset deposited to guarantee fulfilment of an obligation, especially repayment of a loan. It becomes the property of the creditor if the loan is not repaid.35

However in Project finance, the function of security is to give the lender priority over all the creditors of the project company.36 In the event of the borrower becoming insolvent, the creditor can use the asset over which a charge was created to recoup his investment or a part thereof, while the unsecured creditor will only get a proportionate share of the assets left subject to a court order.37 This function of security is most suited to fully marketable assets with ascertainable value and which the lenders can realise without incurring liability to third parties.38 It will not apply to infrastructural development. A partly finished railway line, for instance, is of little use and there may be government restrictions on such sales39 but an airplane or ship will be easier to sell.

35

See Encarta Online dictionary supra note 20

36

Shevchenko Didkovskiy & Partners, Project Financing. Risk Allocation and Security Structure http://www.hg.org/articles/article_335.html (visited 15th May 2009)
37

ibid See Vinter, supra note 9 at 149 Wood, P., Project Finance: Subordinated Debt and State Loans (London: Sweet & Maxwell 1995) 30

38

39

14

The position of the international lender is slightly different in that it applies security as a defence against any default by the project company and in some instances default by some of the other parties like where the sponsor has certain obligations to the project.40

Security also ensures that the lenders are involved at an early stage if the project is threatened in any way and to ensure that project assets are not disposed of without the lenders consent.41

4.2

Forms and application of security

The form of security will depend on the laws applicable in the host country. The aim for the lenders will be Control of cash flow The ability to step in to the project under direct agreement Mortgages and assignment of the project companys assets and contracts Security over the project companys shares.42 The application of a particular type of security kicks into effect upon an event of default occurring. Security over all of the project companys assets is the most desirable for the lender. This involves both physical assets and the intangibles in an ideal situation. The laws of the host government governing mortgages and assignment of land, real estate and moveable goods (plant and machinery) of the project company will determine the extent of security that can be created. The essence is for the lenders to be able to take possession of the property in the event of default by the project company. The Lenders will want an assignment of the project companys rights under contracts with counterparties. This will allow them (where the applicable law supports) to step into the position of the project company if the need arises. This may be in the event that the project
40

Glinavos. I., An introduction to International Factoring & Project Finance September 1, 2002 http://mpra.ub.uni-muenchen.de/854/1/MPRA_paper_854.pdf (visited 15th May 2009)
41

Yescombe, E., R., Principles of Project Finance, (Carlifornia: Academic Press 2002) 308 ibid

42

15

company defaults in its obligation to the counterparty. This form of security will allow the lender to step in and avoid any thing that will disrupt the project or the projected cash flow.43 The lenders may also enter into direct agreements with counterparties (where applicable). This will allow them to step in and take such measures as to prevent the counterparties from exercising their rights to move against the assets of the project company in the event of Project Companys default of the contract with its contractors and host government.44 This is particularly useful where the laws of the host government do not allow the lender to appoint a receiver. Another form of security is assignment of licences and permits of the Project Company to the Lenders. This is possible where the law of the host government permits it and the project is not sensitive to the security of the government.45 The essence of this form of security is to give the lenders the right to reassign the interest so as to maintain the cash flow required for repayment of the loan. Security can be in the form of guarantees or letters of comfort. The guarantee can be obtained from the host government to mitigate some political risks. It can be in the form of a stabilization clause46 to state that the laws will not be changed in a way that will affect the project negatively. This is most practicable for projects in LDCs where there is a high risk of expropriation, nationalism or fluctuation in tariffs. The enforceability of stabilization clause is not always assured.47 It could also be by comfort letters. The enforceability of this type of security will depend on the wordings and the intendment of the government.48

43

See Denton Wilde Sapte supra note 1 See Vinter, supra note 9 at 159 See Denton Wilde Sapte, supra, note 1

44

45

Waelde, T., and Ndi, G., Stabilizing International Investment Commitments: International Law Versus Contract Interpretation [1996] 31 Tex Intl LJ 216
47

46

Verhoosel, G., Foreign Direct Investments and Legal Constraints on Domestic Environmental Policies: Striking a Reasonable Balance between Stability and Change. th http://findarticles.com/p/articles/mi_qa3791/is_199807/ai_n8788210/pg_2/ (visted 15 May 2009) Kleinwort Benson (KB) v Malaysia Mining Corporation BHD (MMC BHD) [1989] 1 W.L.R. 379 Court of Appeal th at http://www.e-lawresources.co.uk/forum/viewtopic.php?f=36&t=79 (visited on 12 May 2009)
48

16

When a contractor in a turnkey agreement gives a performance bond against delays or cost overrun, then if the contractor defaults, the lender can enforce the security by bringing an action in damages against the contractor. Where this is not the case, the lender will seek a completion guarantee from the sponsors. In the event of delays, the lenders will look to the sponsors to bear it.49 The lenders will also want an assignment of the rights of the project company under a Management agreement and in the event of default by the sponsor, the lenders having been assigned the rights in the agreement can bring an action against the sponsors.50 There will also be an assignment of the Project Companys right to receive any payment if the interest swap is unwound, insurance policies and in general all other agreements entered into by the project company and other parties regarding the project.

4.3

Problems associated with legal Security.

While the lenders aim is to structure security over all the assets, chattel and rights of a Project Company, this is for the most part impossible in many jurisdictions.51 Security laws vary greatly from place to place.

The problem that may arise is the inability of certain jurisdictions to allow the creation of a floating charge which allows the lender to create a charge over the moveable and intangible assets of the company and its future acquisitions.52 This is common in most civil law jurisdictions.

On the other hand, creating a charge over fixed assets of the Project Company can prove very cumbersome in most jurisdictions. There may be very tedious procedure for registration of charges over real property (where foreigners are allowed to own land) and exorbitant fees to be paid. It will be impossible to create a charge over the land where the project is situated if
49

See Denton Wilde Sapte, supra note 1 Ibid See Glinavos supra note 39

50

51

52

See Denton Wilde Sapte supra, note 1

17

the land is leased under a Build-Operate-Transfer (B.O.T) arrangement.53 Also due to the sensitive nature of the project, the host government may have to give consent before the right of sale can be exercised.

It is sometimes impossible to assign the Project Companies rights under some agreements like the supply agreement if the supplier has exercised his right of retention over the goods supplied pursuant to a retention clause in the agreement. In the case of assignment of rights under third party contracts, the remedy open to the Lender in the event of default is to sue for damages. This will undermine the main purpose of project finance which is repayment from the cash flow accruing from a viable project.

Generally, the aim of taking security is to ensure that the lender can step into the shoe of the Project company to ensure that the cash flow is not disrupted or that where there is default by 3rd parties, that the security is enforced to recover from the guarantors. However, the remedy open to the lender in most cases is to sue for damages which will further delay the project and may not be sufficient.54

Where it is not possible to appoint receivers to manage the affairs of the Project Company in the event of a default by the Company, then the lenders may take over by enforcing direct agreements. This has the effect of exposing to other creditors of the project company and may be counter productive55 Security trusts are used in certain jurisdictions to pool together all security from creditors into a common pool where a trustee administers. The effect of this is to remove insolvency risks by the holders of the security interests. Where this is not applicable, then the security will be administered by one of the lender banks and this will increase the insolvency risk56.

53

ibid ibid ibid See Glinavos, supra note 50

54

55

56

18

5. Conclusion The role of project finance in infrastructure and natural resource development, particularly in the LDCs is crucial. It is typified by an intricate web of parties and stakeholders brought together by myriad contracts. It is hugely capital intensive, requiring that experts in various fields are brought in to oversee feasibility studies. It becomes pertinent in the circumstance to ensure that the lenders investment is well protected by securing the cash flow through the use of various security techniques. It is obvious from our analysis of the forms and application of security that the taking of security is effective in evincing the intention of the parties to be committed to the project and not abandon it if problems arise with the project. It makes the lenders debts more marketable and may limit any defaults by the parties as the consequence of default is dire. Notwithstanding these highpoints, the lender is mostly unable to take effective security over all the assets of the Project Company. The laws governing enforcement of security, host governments policies on ownership of land and assignment of rights in a contract also contribute to make the enforcement of security conditional, thus retaining some elements of uncertainty in it. Security as the panacea for default in project finance may yet be achieved by the modernisation of legal frameworks, increased support from institutional and private organisations and comprehensive insurance.

19

LIST OF FIGURES A typical project finance structure for an LNG plant.8

20

BIBLIOGRAPHY PRIMARY SOURCES National Legislation Nigerian Investment Promotion Commission Act, Chapter N117( Decree No 16) Laws of the federation of Nigeria no 16 of 1995, http://www.nigerialaw.org/Nigerian%20Investment%20Promotion%20Commission%20Act.htm (Assented to on 16th January 1995) (visited on 15th May 2009)

Judicial Decisions Kleinwort Benson (KB) v Malaysia Mining Corporation BHD (MMC BHD) [1989] 1 W.L.R. 379 Court of Appeal at http://www.e-lawresources.co.uk/forum/viewtopic.php?f=36&t=79 (visited on 12th May 2009)

SECONDARY SOURCES Books Clifford Chance Project Finance (London: IFR Publishing Limited ,1991)

Esty, B., C., Modern Project Finance: A Casebook, (New York: John Wiley& Sons Inc. 2006).20

Finnerty, J., D., Project Financing: Asset-Based Financial Engineering, (Hoboken, John Wiley & Sons, Inc 2007)

Hoffman, S., The Law and Business of International Project finance: a Resource for Governments, sponsors, Lenders, Lawyers and Project Participants (2nd Edition, The Hague: Kluwer Law International, 2001) 12 Nevitt, P., K., Fabozzi, F., J., Project Financing,(7th ed, London: Euro-Money Books 2000)

Vinter, G., Project Finance, A Legal Guide (2nd ed. London: Sweet & Maxwell, 1998).

Wood, P., Project Finance: Surbordinated Debt and State Loans (London: Sweet & Maxwell 1995)

21

Yescombe, E., R., Principles of Project Finance, (California: Academic Press 2002) Articles In Journal Waelde, T., Ndi, G., Stabilizing International Investment Commitments: International Law Versus Contract Interpretation [1996] 31 Tex Intl LJ 216

Others Thesis Momoh, H., O., The Role of Lawyers in Project Finance, a paper submitted in fulfilment of the award of Master of Laws (LLM) in United States and Global business Law, Suffolk University Law school,2008

Internet Sources Bruner, R., Langhor, H., Campbell, A., Project Financing: An Economic Overview https://store.darden.virginia.edu/business-case-study/project-financing-an-economicoverview-741 (visited 15th May, 2009) Denton Wilde Sapte, A guide to Project Finance, http://www.gcontractor.ir/files/General%20Contracting/Guide%20tp%20Project%20Finance. pdf?id=69 (visited on 15th May 2009)
1

Encarta online reference http://encarta.msn.com/encnet/refpages/search.aspx?q=risk (visited on 7th April 2009)

Esty, B., C., Megginson, W., L., Legal Risk as a Determinant of Syndicate Structure in the Project finance Loan Market, http://ideas.repec.org/a/fip/fedhpr/y2002imayp335-363.html (visited 15th May, 2009)

Glinavos. I., An introduction to International Factoring & Project Finance September 1, 2002 http://mpra.ub.uni-muenchen.de/854/1/MPRA_paper_854.pdf (visited 15th May 2009) Hainz, C., Kleimeier, S., Political Risk in syndicated Loaning: Theory and Empirical Evidence regarding the Use of Project Finance, http://ideas.repec.org/p/rtv/ceiswp/197.html (visited 15th May 2009)

Risk Analysis in Project Finance, http://www.scribd.com/doc/7193805/Risk-AnalysisProject-Finance (Visited on May 10th, 2009)

22

Shevchenko Didkovskiy & Partners, Project Financing. Risk Allocation and Security Structure http://www.hg.org/articles/article_335.html (visited 15th May 2009) United Nations Guidelines for Infrastructure Development through Build Operate Transfer Projects (1996) http://www.unido.org/index.php?id=oview/3426 (visited 14th May 2009) Verhoosel, G., Foreign Direct Investments and Legal Constraints on Domestic Environmental Policies: Striking a Reasonable Balance between Stability and Change. http://findarticles.com/p/articles/mi_qa3791/is_199807/ai_n8788210/pg_2/ (visted 15th May 2009) Wright. C., Rwabizambuga. A., Institutional Pressures, Corporate Reputation, and voluntary Codes of Conduct: An Examination of the Equator Principles http://www.scribd.com/doc/504851/Wright-Rwabizambuga-CorporateReputation?autodown=txt (Visited on 10th May 2009)

23