Litigators View

Law firms are chasing substantial business as the demand for project finance increases reports Mary Heaney

While law firms have seen no great increase in the amount of asset financing transactions, domestic and international project finance work has escalated.

“There’s huge developments, particularly in electricity in Asia and high speed train networks in Europe,” according to Michael Clode of Freshfields.

Infrastructure development work has rapidly expanded throughout South East Asia, the Middle East, India, China and Eastern Europe.

More firms are attempting to enter the market as governments create or rebuild their infrastructure.

“Everyone is trying to get on the bandwagon,” says Graham Vintner of Allen & Overy.

This is certainly the case in the UK where the Government is hyping its private finance initiatives. This month, 11 shortlisted consortia expect to receive tender documents to compete for four of the UK Government’s privately financed road schemes (PFI).

It is the first time the Government has used a DBFO (design, build, finance and operate) system of injecting private capital of injecting private capital into its roads programme.

“The politicians have suddenly lumbered onto project finance,” says Tim Steadman of Baker & McKenzie.

The attraction of such schemes for the politicians is that the balance sheet of the borrowers does not show the liability of the borrower. However, despite the enthusiasm for PFI schemes, to date only a few have gone through. The recent financing of the new trains for the Northern Line was widely trumpeted as a great success. Clifford Chance’s client General Electric was awarded the contract to provide new stock.

The use of private finance for roads is not new and was used in the 19th century when tolls were charged. Until the First World War, railways, waterworks, roads and bridges across the world were financed largely by private capital. After the war the State paid for public works. The trend reappeared in Asia in the 80s and more recently in Western Europe. France has had motorway tolls for some time. Now poorer countries like Portugal are also introducing such schemes.

Wilde Sapte is one firm which is interested in the roads initiatives and the firm is currently talking to members of the shortlisted consortia. Partner Graham Smith says: “People are waiting to see what the tenders contain.” However, he adds that one difficulty for lawyers was the complicated tender process. “You have to negotiate all the documents and pump in huge amounts of money before you get the job.”

The Government’s wishlist of future projects has excited many, listing as it does projects in transport and health. However, there is some doubt about the Government’s ability to follow the plan through.

“It’s more hype than reality,” says Vintner. “Some of the deals will get done.”

“The UK Government’s credibility is on the line as to whether it can get new projects,” says Steadman, whose firm represents one of the members of the road consortia. He adds that governments have to make themselves attractive to financiers and that the UK Government could lose out if it does not get more projects on board.

Other countries have followed the same path. Baker & McKenzie represented the arrangers BNP in the M1 – M15 project in Hungary, a motorway which links Vienna and Budapest; the first major project financing in Eastern Europe. The firm is also involved in the second one, the M5, representing the concession company.

Power projects are seen as more attractive than roads as the latter needs large numbers of users staying on the roads to generate revenue. Power, however, is a licence to print money, although some governments are concerned about the generation of excessive profit. China and India have introduced formulae to limit rates of return.

According to Robert Phillips of McKenna & Co, a number of project finance lawyers cut their teeth in Hong Kong, 10 years ago, on the Shajaio B Power Station, a transaction which he describes as the “first private sector power station in China”.

An increasing amount of funding comes from the EBDR and the World Bank, according to Linklaters & Paines partner Terence Skeat.

There is a global scurry when transactions go out to tender as US and UK firms vigorously compete for the work.

“The US firms are serious competition in international professional financings,” says Clode of Freshfields. English firms say that the Americans frequently bid very low for the work.

Smith says: “Some are trying to win market share by bidding at very low rates.”

Competition is increasing. “There are lots of people wading in. Everyone is setting up departments. The edges are becoming blurred as a lot of players are getting into private finance initiatives,” Smith says.

While asset financing and leasing has a lower profile than project financing and is less buoyant, firms are reporting some movement in the marketplace. Clifford Chance partner Geoffrey White says there is a high level of Japanese leveraged lease financing for aircraft and a continued increase in the willingness of banks to participate in asset finance. “The conditions for borrowers are becoming better as the financiers return,” he says. “Transactions are increasingly easy to consummate and there is a generally positive feeling across the whole market.”

However, Simon Hall of Freshfields believes the market will face difficulties in that “the opportunities for cross-border tax based finance are becoming more limited and more difficult because apart from Japanese leveraged leases, there is not another volume market.”