Many scholars and experts have addressed the issue of project finance, but one area that remains without detailed examination is its legal treatment under the legal systems of developing countries. The legal concepts applied under project finance are Western and are not necessarily identical to or compatible with legal concepts in Middle Eastern countries in general or Iraq in particular. In that sense, project finance is a transplanted legal concept when examined in the Middle Eastern legal framework. Although this Paper tackles the legal and strategic issues arising from the use of project finance in Iraq, its analysis and comparative approach is equally applicable to many other Middle Eastern countries whose legal systems are based on the civil code.
This Paper establishes priorities and examines the factors for completing a project finance in Iraq. It can be used as a "road map" in understanding those factors while, at the same time, it addresses the special needs and interests of the lenders (private banks and international lending agencies), the sponsors (private or governmental entities championing the project and creating a special purpose vehicle ("SPV") acting as the borrower) and the Iraqi counterparts. It focuses on risk factors, permits and concessions, ownership structures, the taking of collateral, and dispute resolution. Further, this Paper seeks to explain the legal framework for these categories and enhance project finance parties' capacity to provide management and oversight.
A common feature of project finance is the creation of an SPV by sponsors. The SPV is an incorporated entity, with no other or previous operations other than the business of the project. Its assets are comprised solely of the assets of the project itself, and absent other arrangements, recourse to those assets will represent to the lenders their final recourse option.
More specifically, project finance can take two forms, recourse and non-recourse.1 Non-recourse project finance is a type of financing in which the lender has no ability to make claims against the sponsor in excess of the value of the SPV collateral if such collateral is insufficient to repay the debt.2 A recourse financing structure, on the other hand, gives the lenders the ability to make claims against the sponsor in excess of the SPV collateral, if such collateral is insufficient to repay the debt.3
In an underdeveloped market like Iraq,4 project finance agreements are sometimes called upon to play both a contractual and a regulatory role among the involved parties. One example arises in the area of power generation, where project finance augments the existing power generation grid, either through public or private models. Because the Iraqi market is lacking in competition regulation, project finance documents should attempt to fill in the gaps created by deficiencies in market regulation and competition law.5 For instance, such power generation schemes may include long-term contracts for the sale of the generated power to credit worthy purchasers. When such arrangements are used, they are secured via an off-take agreement that creates the type of long-term commitment needed by the power producer for the buyer to purchase the power produced at a set price.6 Similar utility for project finance can also be found in projects involving pipelines, storage facilities, refineries, waste disposal, water and telecommunications, just to name a few areas of application.7
Another point of interest in markets like Iraq is the enforceability of the project finance terms, which is predicated on the predictability of the legal, regulatory and political environment. Unstable markets are not good candidates for security and contractual enforcement, and therefore project finance documents must be specific in addressing potential regulatory and legal problems, as well as in allocating risk and responsibility.
Even though project finance can cover areas with varying technologies, needs and circumstances, there are four distinct phases of risk common to all areas of project finance which can be discerned: development, construction, start-up and operation or commencement of the project. …