Academic journal article Journal of Business Economics and Management

Establishing SPV for Power Projects in Asia: An Analysis of Critical Financial and Legal Factors

Academic journal article Journal of Business Economics and Management

Establishing SPV for Power Projects in Asia: An Analysis of Critical Financial and Legal Factors

Article excerpt

1. Introduction

More often than not, Public-Private Partnership (PPP) is constructed through a 'Special Purpose Vehicle' (SPV), which acts as a managing and operating company for project(s) as well as the legal body that guarantees concessions from the public authority. A concession agreement is the agreement between government and the SPV for development, construction and operation of specific projects. As part of the concession, a SPV owns and operates the facility and collects revenue which is used to repay the financial and investment costs, to maintain and operate the facility, and to make marginal profits (Merna, Smith 1996). Since financing is arranged through the SPV, it is thus said to be the heart of project financing (Tan 2007; IPFA supra note 4). A contractual network revolves around the SPV where each party sets up contracts with the SPV for a specified period of the project (Gatti 2008). All legal and financial agreements with various parties/stakeholders of a project are accorded with the SPV. Thus, it acts as an entity for legal manifestation of a project consortium. The SPV is embraced by lenders, financial institutions, public authorities, export credit agencies, guarantors, suppliers and off-takers where equity comes from a prime contractor, service provider and public authority. Apart from initial share capital subscription, extra funds are raised either through subordinated debt from project participants or senior secured debt from capital markets or from banks. Because of limited liability of equity holders, creation of the SPV allows off-balance sheet financing which means that the debt raised by the promoters (i.e. investors, contractors, subcontractors and suppliers) would not appear in their balance sheet but it would appear only on the balance sheet of the SPV. This situation allows promoting companies to raise extra debt without providing their own assets as collateral (Dias, Ioannou 1995). At the same time, through the SPV, risks of the participating parties can be minimized and the project can also be assessed on its own merits (Bult-Spiering, Dewulf 2006). The liability of the project sponsors is limited to the amount of capital they have injected, plus any obligations individual sponsors may have under the contracts with the SPV. Though the SPV serves different functions for its various participants in a project (as it is bound by many legal and financial agreements), the main objective of the SPV is to obtain funds. Figure 1 shows the SPV and its agreements with various parties.

Another objective of SPV is to minimize the project risks that are assumed by it and to pass them through the contractual structure to stakeholders that are best able to assess and manage risks. The establishment of SPV for capital-intensive projects is prompted by its ability to spread risk and the expanded borrowing capacity for new investment (Devapriya, Alfen 2003). Figure 1 depicts how a SPV is interrelated with various parties in a project. Most of the boxes in the diagram are self-explanatory and the most common agreements surrounding SPV are the loan agreement, off-take or purchase agreement, supply agreement, concession agreement, O&M agreement, Engineering-Procurement-Construction (EPC) agreement or turnkey agreement and sponsor's support agreement. Participation of Multi-lateral Development Banks (MDBs) and Export Credit Agencies (ECAs) in PPP project has some specific roles. These agencies place strict requirements on the SPV. Due to their ability to potentially mitigate risk, many offshore and domestic banks are willing to participate in a project. It is believed that governments make greater effort to ensure that loans to MDBs are repaid even in difficult times. Similarly, ECAs are also popular stakeholders in the financing of PPP projects. They offer finance, insurance and guarantee repayment of commercial lender financing in case of political risk and/or commercial risk.

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Structuring of SPV is thus of great importance. …

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