CLASS NOTES 06 JUNE 2022

WHAT TO LOOK OUT FOR?

You don’t need to read everything

Look for transactional aspects

What does the WB do to finance development?

How does the WB do so?

How to secure funding from an Int. Econ. Instn?

Both Goverments and Private entities get funding

What source of funding?

What are the Conditionalities for those funds?

Who can apply for funds?

Who can give funds?

Chinese banks seems to have taken over traditional WB and IMF lending

But these have a lot of limitations

China doesn’t care about human rights, etc etc, etc so governments run there

Countries now realize that they have signed away their say in most of their
national assets

So there is no cheap credit

So the countries which were running to china are slowly running back to the
traditional markets

If a state or entity needs money, they have to make a choice between

1. Chinese lending (borrowing from another government)or

2. Traditional lending (int institutions) or
3. Private loan markets (international private lenders) eg venture funds,
banks
Concessional loans are those with low interest (less than 2%). Commercial are
those above two %. Private lenders don’t give concessional loans because they
are profit oriented.

These days, concessional loans are no longer common.

In any situation before you, you need:

1. Determine what the source of money will be

Some factors to determine this is the rate of return. Source of capital will
be determined by the rate of return of the project. Debt, debt finance or
project finance
2. Determine risk factors for all participants
3. Make agreements or give solutions that take into account the two above.

Use the economics to determine the legal aspects

Facts may tell you country x wants to do a project with such and such rate of
return. Start by identifying the source of money.

Don’t go to a private lender if the rate of return is low, and not certain.

Airport has a small rate of return. Public infrastructure projects have very low
rate of return.

It has to be clear what the implications are for the default clauses

Project finance

1. You can go to bilateral lender

2. International agency or
3. International debt markets

However, these are being superseded by Project finance especially for long term
projects (10 to 20 years). The traditional lenders (WB and IMF) don’t require
collateral. Your membership is the collateral.

Many private lenders also formally did not require collateral as long as your
credit rating is good.

If your credit rating is bad, then you go for Chinese lending which requires
collateral.

Private lending now require collateral and can take you to international courts
for default. This is called sovereign debt.
What happens;

There is always a clause on dispute resolution

Argentina completely refused to pay.

If you default on debt, there are mechanisms to enforce, and there are
sanctions. It affects your credit ranking and no one will be willing to lend you.
Each country needs credit.

Most credit is syndicated loan, some of the funders are foreigners and if you be
like Uganda (ham, bitature, etc) and play legal tricks to avoid paying, lenders
will run away.

It is never in your interest to help your client to avoid meeting their interest
payments, it is your duty to help them meet their payments in the least painful
way possible. Otherwise, your credit rating willgo to junk status.

Project finance means that you have a big project. You go for project financing
if the project will give returns (eg road toll). A lender lends you money not
agaisnt collateral but against the returns from the project so you don’t require
any collateral. In project finance you don’t look at assets. You look exclusively
at the income from the project. So look at the expected income, the risks of
that income not coming or a project participant not meeting their bargain.
Allocate risk in the contract. The more risk the people take, the greater the
money.

Project finance for a road

Road company, construction co, workers, suppliers, lenders. Sit down with all
these and identify their risks. Include clauses based on risk. The more the risk
a person is likely to suffer, the more he should be able to benefit from the
project.

Off takers agreement guarantees you that irrespective of whether the project
makes money or not, you will be paid so and so amount.

IMF lends for short term financial cash flows.

As a lawyer, make sure the project is appealing for all the participants.

WB and IMF

Wyas of accessing capital

What project can I access loan for

Who do I go to

The actual agreement