Academic journal article Duke Journal of Comparative & International Law

Framing the Inquiry: The Social Impact of Project Finance

Academic journal article Duke Journal of Comparative & International Law

Framing the Inquiry: The Social Impact of Project Finance

Article excerpt

In Project Finance, Securitization and Consensuality, Professor Carl Bjerre compares and contrasts securitizations and project finance transactions, concluding that the differences between the two financing techniques, although distinct, are more differences of degree than of kind. (1) One distinction between the two transactions that Professor Bjerre does find significant, however, is the social impact of project finance transactions. (2) The impact on third parties as the result of the construction and operation of a power plant in a developing country, for instance, is likely to be enormous. Professor Bjerre also invites us to consider the negative impacts of the project and the more subtle effects it may have on the citizens of the host country, including the impact on what the Nobel Prize-winning economist Amartya Sen has called the population's "capabilities." (3) These capabilities include having a political voice, an education, civil liberties, free agency, freedom to live on a family's traditional land without displacement, and maintaining traditional lifestyles. (4)

I second Professor Bjerre's invitation for more analysis of the social impact of project finance transactions, especially on nonconsenting third parties. In addition, I raise some specific questions that I would like to see explored, and for some of the questions, a few very preliminary observations on the issues they raise.

1. How do the policy considerations relating to project finance transactions differ (if at all) from the policy debate surrounding direct foreign investment in developing nations?

Professor Bjerre notes that "international project finance transactions are inextricably linked to the longstanding controversies over FDI's [foreign direct investment's] effects on developing nations." (5) That link should be explored further. The text on economic development, to which Professor Bjerre cites, sets forth seven disputed issues relating to the impact of FDI by multinational corporations in developing countries.

1. International capital movements (income flows and balance of payments)

2. Displacement of indigenous production

3. Extent of technology transfer

4. Appropriateness of technology transfer

5. Patterns of consumption

6. Social structure and stratification

7. Income distribution and dualistic development (6)

Sen's concerns--political voice, education, civil liberties, free agency, continuing habitation of traditional family land, and maintenance of traditional lifestyles--all seem to be encompassed within item 6 (social structure and stratification).

The debate about the effects of development on poverty in the host country is vigorous and ongoing. A recent study of eighty counties over four decades, for instance, countered the notion that the poor do not take part in or benefit from economic development. The study found that as the economy grows, the income of poor people--defined as the bottom fifth of the population--rises by about as much as the income of everyone else. (7) If "political empowerment flows from economic empowerment," as some contend, (8) then it is possible that many of Sen's concerns could be addressed by additional economic development, including project finance, in emerging economies. Indeed, project finance transactions may provide direct benefits to the population of developing countries if the project financed is a school or hospital. (9)

2. Are the policy considerations raised by Bjerre already factored into decisions regarding the viability of a particular project finance transaction? If the project's sponsors do not specifically consider the policy considerations, do the market and the rating agencies, nevertheless consider them in evaluating the economic viability of the transaction? Are some policy concerns evaluated in this manner, while other, broader-reaching ones, are not considered either explicitly or implicitly by the project's sponsors, investors, or lenders? …

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