Professional Documents
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Background
A part of the complexity of such projects is the multiplicity of the parties involved
in the planning, financing and execution of the projects: such parties may include a
consortium of project sponsors, an EPC (engineering, procurement and construction)
contractor, one or more financial advisors, financing arranged with export credit
agencies, multilateral financial institutions such as the International Finance Corporation,
Asian Development Bank or World Bank, and commercial lenders, and one or more host
government agencies as the grantors of concessions, as rate and service regulators or as
contracting parties (such as a state utility purchasing power from a privately owned
independent power project or a government undertaking responsibility for certain project-
related risks). A further layer of complexity is the multiple jurisdictions from which such
parties typically come: foreign investors working with domestic investors, supranational
multilateral institutions and foreign lenders working with domestic lending institutions
and, ever present, various agencies of the host government. Further complexities come
with the laws of differing jurisdictions governing the project and its financing and with
provisions for dispute resolution, sometimes in the host jurisdiction and sometimes
internationally in foreign courts or through international arbitration.
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Issues Paper No. 1
markets grew dramatically during the 1990s, from $18 billion in 1990 to a record $128
billion in 1997. The surge in such investments was driven mainly by privatizations of
government infrastructure assets in Latin America and greenfield power plants and
mobile telecommunications projects in Asia, though 132 developing countries adopted
policies during this period to attract private investment for infrastructure projects. The
number of new projects with private participation grew from only 65 projects in 1990 to a
peak of 361 in 1997. In 1990–2001 developing countries transferred to the private sector
the operating risk for almost 2,500 infrastructure projects, involving investment
commitments of more than $750 billion. Such projects were implemented under schemes
ranging from management contracts to divestitures to greenfield facilities under build-
operate-own (BOO) contracts, build-operate-transfer (BOT) contracts and so-called
‘merchant facilities’.
Investment commitments for infrastructure declined in the wake of the East Asian
financial crisis of 1997 and subsequent crises in Russia and Argentina. New investments
in such projects in the emerging markets fell to $58 billion in 2001, and the number of
new projects fell by half. This decline in investment commitments was driven mainly by
a reduction in privatizations and in investments in licenses or concessions to provide
infrastructure services; investments in privatizations fell by almost 80% between 1997
and 2001. Investments directed to new projects dropped by around 40%.
Such large scale private infrastructure projects have been prone to controversy,
given their complexity, their assumption of roles (providing infrastructure services to the
public) previously performed by governments, and their exposure to the commercial,
economic and financial risks of operating in the emerging markets. The systemic
financial crises in Asia in 1997 and in Argentina in 2002 stress-tested many such projects
and many projects broke under the severe stress of such crises, as the local currency
revenues of such projects could no longer service foreign currency debt made more
expensive by steep currency devaluations and as governments proved incapable or
unwilling to meet their obligations. Other projects have been overcome by political
controversies, severe environmental problems or intractable commercial disputes among
the sponsors. By one estimate more than 40% of the contracts for infrastructure projects
(excluding those in the telecommunications sector) have been or are being renegotiated.
46 projects reaching financial closure in 1990–2001 had been canceled by 2001-2002,
involving total investments of $21.6 billion.
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Issues Paper No. 1
Among the contracts canceled were those for toll road projects in Mexico,
Indonesia, Thailand and Hungary. Several very large independent power projects in
Indonesia were also canceled. The largest infrastructure projects canceled by 2001
included the Dhabol liquefied natural gas power plants (phases I and II) in India, the
Indah urban sewerage project in Malaysia, and the Azurix provincial water concession
project in Buenos Aires, Argentina. Protracted and often highly contentious
renegotiations and refinancings of other projects have been necessary, such as the
massive Hub River Power Project in Pakistan and the Tanjang Jati B power project in
Indonesia. Such renegotiations and refinancings have often involved significant write-
downs of the project sponsors’ equity investments and of moneys owed to project
financiers.
Table 1
Electricity 9 5.2
Natural gas transmission 1 0.7
and distribution
Telecommunications 7 1.3
Transport 22 9.9
Water and sewerage 7 4.5
Total 46 21.6
Source: World Bank, PPI Project Database. Note the foregoing tally
of the investment commitments relates only to canceled projects and
does not include investment or loan
write-offs in respect of renegotiated projects.
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Issues Paper No. 1
Table 2
Source: World Bank, PPI Project Database. Note the foregoing tally
of the investment commitments relates only to canceled projects and
does not include investment or loan
write-offs in respect of renegotiated projects.
Cancelled projects are hereafter sometimes referred to as ‘failed projects’ and projects
requiring renegotiation on terms requiring material write-downs of the sponsors’
investment or of the project debt are hereafter sometimes referred to as ‘distressed
projects’.
While the legal structure of individual global projects differ significantly in detail,
most embody a number of fundamental elements which are believed by foreign investors
and their lenders to minimize legal risks and to maximize the effectiveness of legal
remedies which it may become necessary to invoke and pursue. This approach and these
elements might be called the global project legal paradigm.
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Issues Paper No. 1
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Issues Paper No. 1
While case studies have been undertaken of individual failed and distressed
projects, there has been no comprehensive and comparative exploration of the extent to
which the outcomes and benefits contemplated by application of the global legal
paradigm to the original planning, negotiation and documenting of such projects have
been realized as the projects have become distressed and, in some cases, failed.
To what extent was recourse to the courts or arbitration actually used to resolve
the problems facing such projects and to what extent was the ultimate project outcome a
direct result of such proceedings? What role did other approaches to the resolution of
such problems play – such as domestic lobbying or the use of diplomatic channels by
foreign investors and financiers -- and which proved to be the most effective in
contributing to the resolution of such problems?
To what extent did the structure of the financing for failed or distressed projects
contribute to the outcome? Some observers have commented that projects largely
financed by domestic financial institutions (such as in Thailand and Malaysia) were more
likely to come to a reasonably quick negotiated settlement with the project sponsors
because of such financiers’ vested interest in the local economy and their susceptibility to
pressure from the host government. It is not known, though, whether such projects
ultimately involved higher or lower losses to such institutions and the project sponsors
than was the case in comparable projects with more foreign lenders. The same questions
can be asked in respect of projects financed heavily with export credits and those
financed by the multilateral development banks such as the International Finance
Corporation or the Inter-American Development Bank, which are often thought to have a
close relationship with their member governments which can be called upon in times of
distress to resolve project issues.
Did the state of development of the local legal profession or the ability of foreign
lawyers to practice locally have an impact on the effectiveness of foreign investors’ and
financiers’ legal remedies in respect of failed and distressed global projects? To what
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Issues Paper No. 1
extent did other features of the host country’s legal system -- its judiciary, its court
procedures, the availability of interim remedies (such as injunctions), its procedures for
the enforcement of judgments, the availability of bankruptcy proceedings and the speed
with which cases proceed through the courts -- contribute to the legal outcome of such
failed and distressed projects and to the level of resulting losses?
Were outcomes different in emerging markets which are democracies and those
with other political systems? Why was the political consensus on the desirability of
private investment in infrastructure so imperfect, even in countries where legislation to
authorize such projects had been enacted by democratically elected legislatures and
implemented by democratically elected governments?
What, in sum, are the lessons to be learned as to the legal structure of complex
global projects in the emerging markets? Has the ‘stress testing’ of global projects by the
Asian financial crisis and non-crisis related controversies such as those which engulfed
the Dabhol and Hub River projects confirmed the validity of the global project legal
paradigm or does such experience suggest that major changes to the paradigm, or more
modest adjustments, are required?
To explore these questions based on the now extensive experience with failed and
distressed global projects, the Stanford University Collaboratory for Research on Global
Projects will establish a General Counsels’ Roundtable and a research project on ‘The
Legacy of Failed Global Projects: Testing the Legal Paradigm.’ The Roundtable, to be
co-chaired by Barry Metzger, Senior Partner of the Coudert Brothers LLP international
law firm and formerly General Counsel of the Asian Development Bank, and Professor
Thomas Heller of the Stanford Law School, will bring together the General Counsels and
other senior legal officers of companies involved in global projects as investors, EPC
contractors, and financiers to explore these questions and to guide the project research
agenda for the empirical exploration of these questions on the basis of actual experience
among failed and distressed global projects. Such research results will be evaluated by
the Roundtable participants, published as working papers and ultimately edited into a
book-length publication.