- Sustainable Project Finance (SPF) is financing projects through a Special Purpose Vehicle (SPV) company that repays the loan from cash flow generated by the project in a sustainable sound manner both environmentally and socially.
- This mechanism is used for developing certain projects, or for acquiring assets or companies, isolating them from the motherboard.
- The Project Finance process is shaped by Sustainability and Environmental and Social Standards.
- Triple Sustainability personnel has taken part in many of those processes in a successful manner for all the parties involved.
What is Sustainable Project Finance?
Sustainable Project Finance (SPF) is financing projects through a Special Purpose Vehicle (SPV) company that repays the loan from cash flow generated by the project in a sustainable sound manner both environmentally and socially.
SPF Mindmap
All the keys to understanding the elements involved in Sustainable Project Finance, as well as the relationships between them, are presented in the Mindmap.
Objectives in Sustainable Project Finance
Objectives for Project Sponsors
- Getting a loan that allows maximizing Project benefits with affordable conditions.
- Signing a loan that does not undermine the viability of the Project by imposing expenditures or operating procedures away from the Project sponsor’s standards.
Objectives for Lenders
- Lending funds in a profitable manner according to set environmental and social standards
- Loan repayment in compliance with the set schedule and interest rate
- Project performance meeting lenders operating procedures and in particular those related to environmental and social performance
Stakeholders in Sustainable Project Finance
Project Sponsors
Project Sponsors are those companies, agencies, or individuals who:
- Have the idea and promote a project;
- Bring together the required parties to get the project underway;
- Obtain the necessary permits from the various agencies in the relevant jurisdiction;
- Are investors in the equity of the project company; and
- Provide support to the project company in a variety of ways.
Lenders
Lenders are financial institutions that provide loans (debt financing) for the construction and initial operation of the project:
- Lenders may be commercial banks, saving banks, savings and loan associations, credit unions, multilateral banks, or export credit agencies.
- Depending on the size and risks of the project they can be either a single lender or a syndicated group of lenders.
Project Finance Facilitator
Project Finance Facilitators are specialized consultancy companies providing support to the Project Sponsor to reach the Financial Close with the Lenders.
- These firms fill the gaps of the Project Sponsor in preparing the Project Finance documents and in coordinating the different parties providing input to those documents.
- Their scope is more or less extensive depending on both the experience of the Project Sponsor and its willingness to participate in the development and project management.
- Based on the above, Project Finance Facilitators may play from a marginal role to acting as Project Managers of the Project Finance on behalf of the Project Sponsor.
Project Finance Stakeholders
- Project Sponsor who invest in equity.
- Equity Investors.
- Off-Takers who receive the product.
- Lenders who lend the funds.
- Multilateral Agencies and Export Credit Agencies who also lend funds.
- Project Finance Facilitators:
- Legal Advisors.
- Technical Advisors.
- Financial Advisors.
- Regulatory Agencies who grant the permits and licenses.
- EPC or Construction Contractors who may engineer, procure and construct.
- Equipment Suppliers.
- Insurance Providers.
- Hedge Providers.
- Operator who will operate the facility once constructed.
Risks for Project Finance
Early identification and assessment of Risks
- CREDIT RISK: A borrower is unable to repay a loan due to social and environmental risks.
- LIABILITY RISK: Legal complications, fees, and/or fines for rectifying social and environmental damage.
- REPUTATIONAL RISK: Negative aspects of a Project may impact company reputation and thus reduce company value.
Benefits of Sustainable Project Finance
Top Benefits of SPF for Project Sponsor
- Protecting Other Assets: The project is set through a Special Purpose Vehicle (SPV) shielding other assets owned by the project sponsor from the detrimental effects of a project failure.
- Protects Project’s Cash Flows: By avoiding unmanaged risks or impacts.
- Facilitates Lenders’s Approval: The process assures Lenders that all the risks are managed so the loan can be repaid in an easier way.
- Social License Assurance: The stakeholder engagement required for the Project Finance or its recommendations renders more positive relationship that not only reduces social risks but that unlock social opportunities.
Top Benefits of SPF for Lenders
- Covers all the Environmental and Social Issues. The thoroughness of the process ensures that there are no loose ends in those areas.
- Risks are Shared and more Manageable: Sharing the risks among several lenders and setting the boundaries for risks associated with a single project.
- Loan Payback: The process also ensures additional optimizations that enhance operational performance leading to more comfortable loan payback.
- Increased Ability to Lend: As the SPV risks are lowered, there is an increased capacity for expanding lenders’ portfolios and profits.
Sustainable Bankability
Ensuring sustainable bankability requires the involvement of several specialists. There are many elements to be analyzed such as E&S Policies; E&S impacts and risks identification processes; Working Conditions; or Relationships with the Communities. A first approach to assess how close the project is to be bankable is a self-assessment of the status of the project and the organizations and systems supporting it.
That self-assessment can be conducted using the following:
- Manually through using the Standards listed on the Standards Page.
- Bankability Assessment Tool.
Contracts and Documents
Project Finance Typical Documents
- Business Plan.
- Financial Models.
- Market Feasibility Study.
- Project Feasibility Study.
- Financial Feasibility Study.
- Concession Deed.
- Off-take Agreement.
- Loan Agreement.
- Environmental and Social Due Diligence.
- Shareholders Agreement.
- Intercreditor Agreement.
- Terms Sheet.
- Tripartite Deed.
- Common Terms Agreement.
- Engineering, Procurement and Construction (EPC) Contracts.
- Operation and Maintenance (O&M) Agreements.
- Supply Agreements.
Standards for Sustainable Project Finance
Applicable Legislation
- Local Regulations.
- State Regulations.
- International Conventions the country or countries are party at.
Equator Principles
JULY 2020
- Principle 1: Review and Categorisation.
- Principle 2: Environmental and Social Assessment.
- Principle 3: Applicable Environmental and Social Standards.
- Principle 4: Environmental and Social Management System and Equator Principles Action Plan.
- Principle 5: Stakeholder Engagement.
- Principle 6: Grievance Mechanism.
- Principle 7: Independent Review.
- Principle 8: Covenants.
- Principle 9: Independent Monitoring and Reporting.
- Principle 10: Reporting and Transparency.
IFC
January 2012. Performance Standards
- PS 1: Assessment and Management of Environmental and Social Risks and Impacts.
- PS 2: Labor and Working Conditions.
- PS 3: Resource Efficiency and Pollution Prevention.
- PS 4: Community Health, Safety, and Security.
- PS 5: Land Acquisition and Involuntary Resettlement.
- PS 6: Biodiversity Conservation and Sustainable Management of Living Natural Resources.
- PS 7: Indigenous Peoples.
- PS 8: Cultural Heritage.
April 2007. General Environmental, Health and Safety Guidelines
2016-Onwards. Industry Sector Guidelines
OECD
April 2016. Common Approaches
- I. Definitions.
- II. General Principles.
- III. Screening.
- IV. Classification.
- V. Environmental and Social Review.
- VI. Evaluation, Decision and Monitoring.
- VII. Exchange and Disclosure of Information.
- VIII. Reporting and Monitoring of the Recommendation.
References for Sustainable Project Finace
Recommended Links
- Local Regulations. WorldLex as Service Provider.
- IFC Performance Standards.
- IFC EHSE Guidelines and Industry Sector Guidelines.
- Equator Principles Resources.
- Inter-American DB Sector Policies and Sector Framework Documents.
- Asian DB Safeguard Policy Statement.
- African DB Operational Safeguards.
- Dentons’ Guide to Project Finance.
- Chambers’ Guide to Project Finance.
- Milbank: Why the world needs Project Finance.
- Developers International’s Guide to Project Finance.
- Broughton Capital Resources on Project Finance.