Project Finance: Brazilian Perspective
(Lecture at the Joint Seminar: "The Private Financing of Infrastructure
Projects in Latin America", Miami, Oct/98).



Antonio Carlos Rodrigues do Amaral
Professor da Universidade Mackenzie (São Paulo)





The decade of the 90’s is characterized by the contemporaneous phenomenon of regionalization and globalisation of economies. The establishment of commercial blocks for free trade, with a view to eliminating tax and non tax barriers amongst the member nations, is a translation of the expansion of the private sector, on an international level, in opposition to the growth of the public sector, which was a characteristic of past decades.


With the loss of capability of investment by the public sector, there was a universal tendency to diminish the role of the State, with which the privatization and concession of public services to the private sector began. This loss of investment capability also had as a consequence the reduction in governmental funds to finance private projects. Therefore, the transfer of part of the infrastructure to private initiative, demanding substantial investments in its planning, development and operation, began to be financed by other agents and other sources, due to the internationalization of the partners in the respective projects. Commercial banks, multilateral agencies, export credit institutions, pension funds, insurance companies and participants in international capital markets are, in this way, the major financiers of such projects.


With this perspective, Project Finance, as a financial model which adapts itself to the need of funds for the developed projects by the private sector, is an important instrument to make infrastructure projects in developing countries viable.


In Brazil, due to the large amount of funds needed for the viability of infrastructure projects, companies, as a general rule, are incapable of compromising their budgets during the long course of maturation of such projects, being indispensable, therefore, a knowledge of the advantages, and the respective limits, of Project Finance. We have as data arising from governmental estimates, that in Brazil, during the coming four years, more than U$ 200 billion will be spent, which shall be used on hundreds of infrastructure projects, in the energy, sanitation, highways, railways, telecommunications, oil and gas sectors.


To know the advantages and limits of Project Finance, a detailed analysis of the various aspects must be made by those interested, involving, amongst others:


(a) a study of the structure that comprises Project Finance, detailing the advantages, the disadvantages and limits of each model;

(b) the criteria of evaluation and requirements established by the agents in charge of classification of credit and the respective impact on the composition of the interest rate of the financing;

(c) identification, allocation and development and implementation of the criteria and methods to manage the risks involved;

(d) formulation of an accurate economic-finance model to obtain the resources on the international market;

(e) techniques and implications of the necessary due diligence; and

(f) monitoring the project during its building and operational phases and respective management of financial documents, also contemplating the securitization of the receivables.

In this brief presentation, the fundamental aspects of the documentation in Project Finance will be analyzed, taking into consideration, in its basic aspects, the composition of the major elements relating to the evaluation of risks and essential documents, more specifically, relating to an electric energy generation project.


Project Finance Documentation:


The financing of infrastructure projects (for electric energy generation, highways, railways, airports, etc.), through the Project Finance model are well known worldwide. They seek to facilitate the financing of projects accommodating the various objectives of the parties involved: governments in the countries in which the projects are being developed, parties in the private sectors (the sponsor and contracted third parties), and the lenders (private financial institutions or multilateral agencies, such as the International Finance Corporation or export credit agencies).


In a general sense, Project Finance describes a series of financial structures with a common characteristic: the financing will not primarily be based on the credit risk of its sponsors, or on the value of the physical assets involved in the project. Truthfully, the financing will depend on the degree of confidence in, and performance of, the project itself, which will generate a cash flow, determined on the basis of a financial and economical balance that will be self-supporting in the medium to long term. Such cash flow will be used to effect the repayment of the debt to the lenders and to sustain the operation of the project. The repayment of the debt to the lenders will, normally, only be partially assured by the sponsors (limited recourse), or, rarely, without any recourse to them at all (non-recourse).


The Project Finance structures are the more expensive of the conventional forms of financing, especially due to the following aspects:


(a) the time spent by the financiers and the sponsors, with their specialist consultants and lawyers on the evaluation of the project and the negotiation of the usually complex documentation involved;

(b) the costs involved with insurance (including guaranty-insurance in Project Finance), particularly due to loss and damages and the political risk coverage;

(c) the costs of monitoring the implementation and technical performance of the project during the entire period of repayment of the financing; and

(d) the costs and charges demanded by the financiers (and possibly by other interested parties) relating to the assumption of additional risk.

Therefore, the advantages to the sponsors of the project and its operators should outweigh the higher costs of the Project Finance structure, normally based on the ability to share the risks and on the non-impact (or reduced impact) on the balance sheet of the respective interested parties.


As the financing of an infrastructure project will commence prior to the beginning of the project itself, at the time that the first loans are obtained there will generally not be sufficient assets, or cash flow, available to protect the lenders. Accordingly, the financing will be based on a network of interrelated agreements (which will be referred to as the "Project Finance Documentation"). Such documents, due to the nature of Project Finance, will contain the essential structure of the model, identifying, allocating and managing the risks involved in the transaction and the operation of the project.


In this way, the documents that make up the basic agreements of Project Finance will be based on technical, financial and economic considerations of the project which is to be implemented. The risk involved must be allocated and managed through the respective agreements. Taking into consideration a project for the establishment of an electric energy unit to supply a long term energy need, at a reasonable cost and, with a reliable supply, the main aspects involved in the Project Finance Documentation are as follows:


(i) Economic considerations for the financing of the project:

(a) the cost of buying and installation of the equipment for the generation of electric energy, including the installation site;

(b) the level of capital (equity) invested by the sponsors and the financing (debt) for the project;

(c) the rate of interest on the debt;

(d) the amount of energy produced and the efficiency of the project;

(e) the price received for the energy produced and marketed;

(f) the cost of fuel needed to generate the energy.

(ii) Main agreements:

(a) acquisition or rental of the site for the project;

(b) building and acquisition of the equipment;

(c) selling of energy, including the transportation and building costs of energy on the network (grid), in the case of a failure in the network (wheeling and back-up), as the case may be;

(d) supply of fuel for the project;

(e) grants, licenses and governmental authorizations;

(f) operation and maintenance; and

(g) financing.

(iii) Main risks to be allocated and managed through the Project Finance Documentation:


(c) building risk;

(b) operational risk;

(c) political and governmental risk;

(d) changes in tax and legislation;

(e) interest rates;

(f) exchange rate variation (valuation and devaluation of the contractual currency);

(g) inflation;

(h) efficiency of the unit generating the electric energy;

(i) availability and cost of fuel; and

(j) ability to execute the agreement for purchasing the energy and the mechanisms for the resolution of disputes.


Bearing in mind that the basic agreements that make up the documental matrix for the Project Finance will normally be made between different parties and will be signed at different times, it is of extreme importance that, due to their interrelationship, all interested parties keep in mind the project as a whole, when negotiating the documents involved. A simplified analysis of certain kinds of ordinary risks will assist in the negotiation of the respective agreements, and on the technical, economical and financial viability of the project.


There are two categories more generally related to the typical structure of Project Finance for the generation of electric energy: the risk during the construction phase and the risk during the operational phase, which should be foreseen and the respective responsibilities allocated in the Project Finance Documentation.


(i) Risk during the construction phase:

(a) increase in building costs, due to various factors;

(b) delay in construction;

(c) non compliance with the technical performance criteria;

(d) changes to the building required by legal regulation;

(e) changes to the building due to the alteration of the project;

(f) strikes;

(g) force majeure events or accidents, natural disaster, political risk, etc.;

(h) environmental matters; e

(i) failure of the constructor to pay subcontractors or suppliers.

(ii) Risks during the operation phase:

(a) availability, performance and efficiency of the project;

(b) increase in operational costs;

(c) decrease in demand for electric energy;

(d) cost and availability of fuel;

(e) changes in general legislation (tax and environmental in particular);

(f) damages or losses which are not guaranteed or protected;

(g) inflation;

(h) increase in interest rates;

(i) currency exchange variation, non conversion or impediments to the remittance of funds abroad;

(j) strikes; and

(k) force majeure events or accidents, natural disaster, political risk, etc.;


Accordingly, the Project Finance model, from the perspective of a financial structure based on a network of agreements, is designed with a view to contractually supporting a cash flow (receivables) which will be used to effect the payment of the project financing and, respectively, sustaining the operation of the same. Whether the Project Finance is developed, exceptionally, without recourse (non-recourse), or more frequently with limited right of recourse (limited recourse) in relation to investors or sponsors of the same, its documentation is what fundamentally establishes its implementation.


In this particular, the activities of the lawyers, is absolutely vital to the viability of the model. The Project Finance, above all, is a financial structure essentially molded by legal documentation. The complexity of the agreements involved, usually comprising terms and conditions to be executed and performed in various jurisdictions, demands legal assistance of significant breath and competence, in order to implement the same in an efficient and adequate manner, addressing the needs and interests of all the parties involved.


In case of Brazil, the involvement of law firms which act in the area of Project Finance, in accordance with the peculiarities of the local legislation, give special attention to the following aspects relating to Project Finance Documentation:


(a) corporate structuring of the project and of the special purpose company (SPC), inter alia, evaluating issues regarding the incoming foreign resources (capital and loans), exchange risk and remittance of profits and interest (payments in respect of debt and capital) abroad;

(b) acquisition of a vehicle, the formation of a joint-venture and consortium of companies;

(c) royalties and technical assistance, scientific or administrative;

(d) import of equipment and other input;

(e) executable agreements and efficient methods of resolving disputes;

(f) analysis and profound knowledge of specific legislation applicable to the project;

(g) local and international tax planning, on a global basis, transfer-pricing, customs valuation, etc.; and

(h) legislation relating to commercial, financial, corporate, securities, labor, environmental, civil, capital markets, competition and other aspects.


The considerations and legal structure which arise under Brazilian legislation, should be compared with the requirements of the regulations of the international jurisdictions involved in the project. In this way, it is important to establish an initial schedule to be followed by a basic team in charge of the analysis of the Project Finance, in which the participation of lawyers and consultants is absolutely essential, from the outset, in order to avoid larger costs due to delays or lack of specific knowledge of the complex network of agreements involved in Project Finance. Such schedule should include, amongst others, the following steps:


(a) gathering general data and initial definition of the project;

(b) identification and characterization of the parties involved, with their respective responsibilities;

(c) analysis of the data, involving the technical evaluation and a study of the financial and economical viability and of the structure of the financing, with the respective hypotheses;

(d) detailing the studies, identification and allocation of risks;

(e) establishment of the strategies for the negotiation and the decision making process;

(f) plans for the implementation of the financing and syndication of the sources of funds;

(g) implementation of the financing transactions;

(h) follow up and amendments; and

(i) disbanding the initial team after the conclusion of the financing and reallocation of functions, as needed.




The success in the financing of an infrastructure project, by means of Project Finance, depends on all the parties involved satisfactorily complying with their various contractual obligations under the Project Finance Documentation. From the lenders' perspective, the analysis of all the documents involved should afford a reasonable degree of comfort, in the sense that, to the greatest extent possible, the risks that the loans won't be paid through the cash flow of the project are minimized. Therefore, the lenders, as well as the other participants, in accordance with the level of risk being assumed and in proportion to the benefits received from the implementation of the project, will undertake the due diligence needed to adequately measure the risks involved, through: (i) detailed analysis of the technical, financial and economical viability of the project and the respective legal structure; and (ii) careful evaluation of each of the participants in the project and its ability to fulfill its respective contractual obligations.


The viability of the Project Finance model, in short, is based on the consistency and efficiency of its network of agreements. Such documents must be structured and negotiated in a consistent manner with the respective legislation applicable in the jurisdictions involved, and be constructed in such a way as to allow full implementation of their respective terms and conditions, notwithstanding the natural complexity of the same, in a form which will satisfactorily identify, mitigate, allocate and allow the adequate management of the various risks involved in the Project Finance.


In relation to Project Finance, each case is a case. It is virtually impossible, in a jurisdiction such as Brazil, in which its experience with Project Finance is recent, to apply a formula which is valid in all circumstances. The solutions are necessarily "tailor made".


Due equally to the phenomenon of the internationalization of economies, the lack of Brazilian experience in this area and the high complexity of the technical and legal work associated with Project Finance, often, a substantial change is indispensable in the usual approach of the technical experts (legal, financial, etc.) and executives (administrators of interested companies) which will work on such projects, in the private sector and the public sector, creatively searching for alternative solutions to the problems and obstacles that naturally occur in the work of the teams involved with the project.


Concerning Project Finance Documentation, perseverance, dynamism, team vision and inter-discipline, capability for negotiations (which are normally long and extenuating) and thorough knowledge (or openness to new knowledge) of the matters submitted for study and decision, are essential characteristic for all of those who will devote their professional efforts in this new field of activity, highly complex and challenging, which has now been inaugurated in Brazil.


Therefore, the initiative of the Union Internationale des Avocats and of the Ordem dos Advogados do Brasil, together with Inter-American Bar Association, the New York Bar Association and the Florida Bar, with a view to amplifying international discussion with a subject of such legal significance and of such great governmental and business interest, in the context of the development and progress of Latin-American nations, is most opportune and of great importance.