Project Finance mainly consists of.

1.    A financing mechanism that uses different legal instruments like contracts, various forms of association methods, and warranties aimed at achieving a single purpose: implement a project.

2.    Several parties take part in the process, like the sponsor, the lender, the government – for State projects- third-party investors, and other parties like advisors and project operators. The combination of warranties and association methods to participate in the project prevents one of the parties from assuming the full funding risk, which is actually shared by all parties participating in the project.

3.    A new company – hereinafter the Special Purpose Vehicle or SPV (Special Purpose Vehicle) is also needed for the sole purpose of building and operating the project. Its existence will depend on the duration of the project. It means that the company must have enough assets and resources to operate, without resorting to third-party assets or, if it were to resort to third parties, then it should be given unconditional access to said assets.

The SPV’s shares (or participating interests) belong to the sponsors, who enter into an agreement on their duties and rights as holders of the relevant shares (or participating interests).

4.    The sponsor’s credit capacity does not fully depend on its level of assets, but rather on the project’s ability to generate cash flow, although both real and personal guarantees are to be furnished by a third party or even by the SPV.

5.    The ultimate purpose of Project Finance is to have the relevant project self-financed and protect the sponsor’s personal assets if it gets sued, which means that if any lawsuit if filed, then it should be exclusively focused on the assets of the SPV, which is a legal entity other than the sponsor.

6.    Following are the main agreements involved:

- Credit or loan agreements: They are signed to obtain the largest possible amount of funding. Apart from these agreements, there are other agreements like security agreements and other contracts aimed at guaranteeing repayment to the lenders.

- Construction contract: An agreement whereby the company entrusts a contractor with the design and construction of the project.

- Supply contract: An agreement for the supply of all equipment and raw materials required for the project once it comes into operation.

- Purchase and sale agreements: The offtakers are usually the project sponsors, who undertake to buy the SPV’s production once the project has been completed. With the proceeds derived from the sale of its production, the SPV covers its operating costs, obligations, and the distribution of dividends to its shareholders.

- Project operation and maintenance contract: It is an agreement signed between the SPV and the operator to have the project managed by the operator during part or all of the concession term, following for such purpose some pre-established parameters. The operator is usually a promoter that receives a fee in exchange for its services.

- Concession: The government usually grants a right to a private company, in order for the latter to build and operate a project for a given period of time; for instance, an electric power plant, a road or a pipeline. It can be a build-operate-transfer (BOT) concession, where the government contributes land and recovers it after a given period of time, to give the company enough time to obtain a certain profit.

7.     Other auxiliary contracts may include:

- Interest hedge agreements and currency hedge agreements: These agreements are entered into to afford protection against the risk of fluctuations in the interest and devaluation rates.

- Insurance contracts against damage, delays, political risks, etc.

- Direct agreements where the party or parties that enter into agreements with the SPV agree with the lenders that they will not cancel their contract if the company fails provided the lenders continue implementing their agreements.

- Advisory service agreements signed with independent experts.