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Project Finance 2017: Trends & Conclusions

As oil and commodity prices continued to recover, 2016 witnessed a growing focus on infrastructure work globally. Africa remains a hotbed of project activity, particularly in the power sector. Additionally, alternative sources of financing are becoming more and more sophisticated and are playing an increasingly important role in the market. As substantial political and economic shifts continue to dictate the landscape of project finance activity, the need for lawyers to adapt and diversify their practices is greater than ever. 

Developing Africa’s Power Sector

Despite an initial slump in the project finance sphere following the drop in oil and commodity prices as well as the slowdown in the Chinese economy, there remains a great amount of projects work throughout Africa – with South Africa and Nigeria, the continent’s two largest economies by GDP, now focusing keenly on developing their power sectors. The case for development, with power and electricity as a basic necessity, is driving a lot of related projects across the continent. In South Africa, coal-fired initiatives such as the Kusile power station project and Medupi power plant continue to develop, as coal remains the main source of fuel in the region.

Lawyers, however, noted to us that the past year has seen much attention around the potential development of nuclear power in South Africa. Its importance in the long term is a hotly debated topic, with many in the political sphere highlighting its significant potential to be used as a baseload power. Sources, however, lament that the issue is currently “mired in political noise”, with financial concerns at the heart of the debate. With plans put in place at the end of last year to postpone the construction of nuclear power stations until the 2030s, lawyers are uncertain about the future of nuclear’s role in the country’s power sector. Patience will remain a key feature of projects work in Africa, say sources, who cite complex political relations and social dynamics as the main challenges facing the sector.  

The Rise of Infrastructure

Infrastructure projects have also been prevalent throughout Africa. Government-driven renewable energy programmes in countries such as Namibia and Ethiopia have encouraged sector-related construction. The latter is poised to become a leader in the field having launched major innovative clean energy projects over the last few years, including the Ashegoda wind farm in 2013 and, more recently, the Grand Ethiopian Renaissance Dam, which is set to open later this year. Significant road projects have also been pursued across the continent, most notably with the construction of a new 118km road between Kapchorwa and Kitale, connecting Uganda and Kenya – it is forecast to be completed by 2021.

Projects work has also been widely discussed across the US, following Donald Trump’s core pledge throughout his presidential campaign to rebuild the country’s infrastructure. In his acceptance speech he declared, “We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals.” Earlier this year he unveiled his plans to achieve this, which would require approval from Congress for an investment package totalling $1 trillion, financed through a combination of private and public capital. Despite this, a recent review by the American Society of Civil Engineers puts the country’s infrastructure investment deficit at a gargantuan $4.3 trillion. The US’s need for infrastructure renewal is evident, and with President Trump pursuing his campaign pledge, US lawyers are optimistic that the following few years will witness an increase in related activity across a range of practice areas, from construction and government contracts through to finance and transactional work. Indeed, many that we spoke to noted that the recent moves from the Trump administration have caused “a gold-rush effect” in the legal market, whereby practitioners who previously would not have considered themselves project finance specialists are now entering into the field in anticipation of higher levels of activity.

Global Challenges

The European projects market has remained stable, with many practitioners across the continent often heavily involved in international projects, most notably in emerging markets including those throughout Africa. Lawyers in Spain and Portugal, countries whose previous economic instability had resulted in a slowdown in activity, have noted an uptick in the amount of infrastructure work and investment throughout their jurisdictions and abroad as their economies have started to get back on their feet.

The market in the Middle East however, has experienced a more turbulent year, with sources observing that a number of projects have been either cancelled or delayed. Furthermore, interviewees lamented that South-East Asian investors, particularly those from Japan or Korea, “are no longer finding the Middle East as happy a hunting ground as before.” Despite this, lawyers we spoke to also highlighted the increased focus on the private sector from various Middle Eastern governments. The UAE, Oman and Qatar have addressed the need for regulatory reform with an aim to encourage private sector ownership, particularly PPPs, as a means of tackling current budgeting and funding problems. Practitioners are confident that the following few years will see a growth in interest from outside investors, and a subsequent growth in activity in the region’s projects market.

Latin America, a region that usually experiences high levels of project activity, particularly in the mining sector, has undergone a shift in focus when it comes to this type of work, as a result of the drop in commodity prices. Coupled with the continued instability of regional politics and economies, lawyers are finding it increasingly difficult to predict the direction in which the market is heading. Indeed, as one prominent practitioner commented: “Uncertainty is the new normal.”

Argentina offers a prime example of the type of change that many countries in the region are facing. With the election of Mauricio Macri as president last December, the country opted for a reform in economic policy and a clear move towards a market-friendly approach. As the current government now looks to tackle the effects of the previous administration’s harsh and damaging foreign exchange restrictions and capital flow controls, lawyers are optimistic for the future of foreign investment and business in the country.

Alternative Sources of Financing

Alternative sources of financing, beyond the traditional commercial bank model, continue to play an increasingly important role in the project finance space; however, the nature of its deployment has shifted over the last year. While it was highlighted in 2015/2016 that much of the investment activity was opportunistic and targeted at distressed assets, lawyers this year have noticed a more long-term approach being taken by financial investors. As global markets have started to recover, investors have demonstrated an increasing appetite for risk, seeing them take a greater interest in projects. Fixed-rate lenders, for example, “have become increasingly sophisticated”, according to sources, who comment that many lenders are now happy to take projects through to financial close, dispersing their loans gradually. Furthermore, their activity throughout the process has diversified, with many now playing a part in ancillary business such as financial structuring and remodelling, a role traditionally handled by commercial lenders. Indeed, the changing nature of projects funding is clearer than ever, as the role of commercial banks in large projects continues to be replaced by the likes of multilaterals, world banks and private funds.

***

After the disastrous drop in oil and commodity prices coupled with the fragile global economy over the past few years, the future seems bright for the market, as economies recover and governments across the world find new and innovative ways to bolster investment and stimulate projects work. The nature of the work and the players in the legal market continue to change, forcing lawyers to continue to diversify and adapt their practices. 

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