Role of Advisors in Project Finance – Financial, Legal & Technical Advisors

Project finance transactions are highly complex, involving multiple parties, intricate contracts, and significant risks. Advisors play a crucial role in structuring, negotiating, and executing these deals.

Types of Advisors

Project finance typically involves five types of advisors:

1. Financial Advisors (Transaction Advisors)
2. Legal Advisors (Lawyers/Law Firms)
3. Technical Advisors (Independent Engineers)
4. Environmental & Social Advisors
5. Insurance Advisors

1. Financial Advisors

Role & Responsibilities

Pre-Financial Close:

• Design optimal capital structure (debt-equity mix, senior-subordinated debt)
• Build detailed financial models (20+ year projections)
• Conduct sensitivity and scenario analysis
• Prepare Information Memorandum for lenders
• Identify potential lenders and investors
• Arrange roadshows and investor presentations

During Financial Close:

• Negotiate term sheets
• Coordinate with lenders
• Structure security package
• Assist in loan documentation review

Post-Financial Close:

• Monitor project performance (for lenders)
• Debt restructuring (if needed)

Key Deliverables

1. Financial Model: Excel-based model with monthly cash flows for 20-25 years
2. Valuation Report: Project NPV, IRR, DSCR analysis
3. Funding Plan: Sources and uses of funds
4. Risk Matrix: Identification and allocation of all risks

When Engaged

• Appointed by sponsors at pre-feasibility stage
• Works through financial close (6-18 months)
• Sometimes retained for monitoring (on lender's behalf)

Major Players

• Investment Banks: Goldman Sachs, Morgan Stanley, Citi, JP Morgan
• Boutique Advisors: Rothschild, Lazard, Evercore
• Big 4: Deloitte, PwC, EY, KPMG (for smaller deals)
• India: SBI Capital Markets, ICICIBANK, Axis Bank, Yes Bank

2. Legal Advisors

Role & Responsibilities

Due Diligence:

• Review land titles and clearances
• Check regulatory permits and licenses
• Verify sponsor credentials
• Assess environmental and labor compliance

Contract Drafting:

Project finance involves 20-30 legal agreements. Key documents include:

1. Concession Agreement (with Government)
2. Loan Agreement (with Lenders)
3. EPC Contract (with Contractor)
4. O&M Agreement (with Operator)
5. PPA / Off-take Agreement (with Buyer)
6. Fuel Supply Agreement
7. Escrow Agreement
8. Security Documents (Mortgages, Pledges, Assignments)
9. Shareholder Agreement (among Sponsors)
10. Direct Agreements (Lenders' step-in rights)

Negotiation:

• Represent client in negotiations with counter-parties
• Ensure favorable terms and risk allocation

Opinion Letters:

• Legal opinions on enforceability of contracts
• Tax opinions
• Regulatory opinions

Separate Legal Counsel

Each major party typically has its own legal advisor:

• Sponsor's Counsel
• Lender's Counsel (often separate for each lending group)
• Government's Counsel (for PPP projects)
• Contractor's Counsel

Major Players

International Law Firms:

• White & Case
• Latham & Watkins
• Allen & Overy
• Clifford Chance
• Freshfields

Indian Law Firms:

• Cyril Amarchand Mangaldas
• AZB & Partners
• Khaitan & Co
• J. Sagar Associates
• Trilegal

3. Technical Advisors (Independent Engineers)

Role & Responsibilities

Pre-Construction:

1. Feasibility Study: Assess technical viability
2. Technology Review: Validate chosen technology
3. Design Review: Check engineering drawings and specifications
4. Cost Estimation: Verify construction and O&M cost estimates
5. Risk Assessment: Identify technical risks

During Construction:

1. Progress Monitoring: Monthly site visits and reports to lenders
2. Quality Checks: Ensure adherence to specifications
3. Disbursement Certification: Certify work completion for loan disbursement
4. Variation Orders: Review and approve design changes

Post-Construction:

1. Completion Certificate: Certify that project is mechanically complete
2. Performance Testing: Verify project meets technical guarantees
3. Provisional Acceptance: Confirm readiness for commercial operation
4. Final Acceptance: Issue final certificate (after defect-free period)

Why Independent?

• Lenders need unbiased technical assessment
• Protects lenders from contractor-sponsor collusion
• Provides technical expertise lenders lack

Major Players

• Mott MacDonald (UK)
• Arup (UK)
• Parsons (USA)
• Black & Veatch (USA)
• AECOM (USA)
• India: RITES, WAPCOS, Mecon

4. Environmental & Social Advisors

Role

• Conduct Environmental Impact Assessment (EIA)
• Prepare Environmental Management Plan (EMP)
• Develop Resettlement Action Plan (RAP) for land acquisition
• Ensure compliance with environmental regulations (Forest clearance, Wildlife clearance, etc.)
• Assess social risks and community impact
• Monitor compliance during construction and operation

Why Important?

• Required by law in most countries
• Mandatory for IFI financing (IFC, ADB, World Bank have strict E&S standards)
• Delays in clearances can stall projects for years
• Community opposition can derail projects

5. Insurance Advisors

Role

• Identify all insurable risks (construction, operational, liability)
• Design insurance program
• Negotiate insurance premiums with insurers
• Arrange Political Risk Insurance (PRI) for high-risk countries
• Coordinate with Export Credit Agencies for ECA coverage
• Process insurance claims if needed

Advisory Fee Structure

Total Advisory Costs: 2-5% of total project cost

Summary

• Project finance requires specialist advisors due to complexity
• Financial Advisors: Structure deal, build models, raise funds
• Legal Advisors: Draft 20-30 contracts, conduct due diligence, ensure compliance
• Technical Advisors: Validate feasibility, monitor construction, certify completion
• Each major party (sponsor, lender, government) has its own set of advisors
• Advisory costs are high (2-5% of project cost) but prevent costly mistakes
• Advisors ensure proper risk identification, allocation, and mitigation

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