Finding a new balance of risk: the impact of COVID-19 on project finance and development practices in Latin America and Africa

By Sofiane VANDECASTEELE, Student in Dual Master’s Degree in Law and Finance

Project finance is a form of secured lending characterized by intricate, but balanced, risk allocation arrangements[1]. This definition of project finance perfectly highlights how the legal documentation for this particular mode of financing seeks to strike the right balance of risk. It is worthwhile to briefly review the principles underlying project financing to better understand the issues that have been raised by the current global pandemic in this regard. In fact, project development and finance usually relies on a project company that is a legally independent special purpose vehicle (SPV)[2]. Furthermore, what is important to note about project development and finance is the way the primary source of income for the repayment of the debt provided by the lenders is the revenue generated by the project. Thus, lenders rely on the future cash flows the project is expected to generate for interest payments and debt repayment, rather than on the value of its assets or analysis of its historical financial results[3]. The project has a limited life due to the consideration of elements such as the duration of contracts and licenses granted by public authorities[4], and the project financing debt must therefore be repaid in full at the end of this life. Thus, the legal documentation appears as one of the main guarantees for the lenders who therefore attach great importance to the drafting of the latter. Nevertheless, this balance of risk, so finely and rigorously elaborated, has been greatly impacted by the emergence of the global pandemic.

In order to analyze the implications of COVID-19 on project finance and development transactions, it seems relevant to focus on the emerging economies of Latin America and Africa in order to observe the practical and legal consequences that public and private actors have had to face. These regions of the world are of great interest to law firms in terms of project financing, as they present significant needs in terms of building new infrastructure aiming to fill gaps in terms of water supply, electricity or public transport[5]. Indeed, project finance plays an essential role in Latin America, a region of the world that, beyond its important needs in public infrastructure, has found in this complex financing technique a particularly useful tool for its development following the Great Recession of 2008[6]. Africa is also a region of the world where this technique of financing plays an essential role insofar as the traditional modes of financing often prove insufficient and considering the participation of certain regional and international banks such as PROPARCO and the African Development Bank in the financing of various projects[7].

In connection with the inherent characteristics of project financing and its mode of operation, the global pandemic disrupted the normal play of legal mechanisms in several respects.

Economic and financial forecasts as cornerstones of risk allocation arrangements

In fact, since project financing relies heavily on the future cash flows generated by the project, strict adherence to construction deadlines plays a major role in this financing method[8]. It is therefore the very essence of project financing that has been disrupted by the emergence of the current global pandemic, leading to the implementation of public measures aimed at curbing the spread of the epidemic and having a considerable impact on the smooth running of construction work[9]. As most African countries suffer from a lack of health care infrastructure[10], they have not been spared by COVID-19 and have therefore had to take restrictive measures that have contributed to the slowdown of the work[11]. The COVID-19 having spread rapidly on all the continents of the world, Latin America was also confronted with these same issues with the stopping of constructions in Panama for example[12]. Beyond the construction sites, it is also crucial to consider the way the pandemic impacted supply chains and the arrival of key components[13]. These delays in the construction of the project are not trivial and may constitute cases of default, as the importance of meeting these deadlines is crucial, particularly in connection with the fact that the lenders rely on the profits generated by the project for their repayment. This risk of delay may be borne by the contractor under a construction contract, or it may be assumed directly by the sponsor through a completion guarantee issued to the lenders[14].

These construction delays and procurement difficulties often result in additional costs and changes to the construction budget for the project. Nevertheless, in most cases, lenders have approval rights if the project company wishes to incur costs in excess of what was originally agreed upon[15]. In the most urgent cases, the borrower will also need to request a waiver from the lenders in order to receive approval for an emergency budget to address the new realities posed by the current pandemic. These considerations about the variance of the original budget naturally lead this analysis to the fundamental concept of balance of risk, an idea fully illustrated by the undertakings and the guarantees given by the project company to the lenders[16]. The purpose of these financial covenants is to ensure that the economic and financial conditions upon which the lenders agreed to finance the project are met by the project company. In this way, these clauses allow the lenders to monitor the borrower’s financial performance and can be the source of triggering cases of default or a draw-stop[17], if the project’s debt capacity or financial ratios are not respected or if the project does not generate sufficient revenues compared to what was initially agreed[18].

Legal clauses dealing with unforeseen events: how to consider COVID-19?

Beyond the balance of risk inherent in the implementation of the project, a subsidiary question also deserves to be studied: that of the current pandemic and its consideration in the legal documentation relating to the financing of the project. Indeed, in the context of project financing, notices of force majeure events could come from contractors with the project company under construction contracts, the latter facing numerous constraints related to public health measures and supply issues arising. First, it is necessary to deconstruct the apparent evidence that a natural disaster is necessarily a force majeure[19]. In fact, force majeure is based on three fundamental elements: an unforeseeable event, beyond the control of the affected party, resulting in the impossibility of performing a commitment[20]. Thus, to qualify as force majeure, the only solution is to rely on the terms of the construction contract by fully articulating the link between the pandemic and the impossibility of performance[21]. As a member of the LATAM COVID-19 Task Force, the law firm Willkie Farr & Gallagher LLP published an analysis reporting, among other things, risk of force majeure claims in Latin America, concerning for example the contracts executed by the National Infrastructure Agency in Colombia and construction of several projects in Ecuador[22]. Such force majeure claims were also reported in African countries due to completion delays[23].

In addition to force majeure clauses in construction contracts, it is also relevant to consider material adverse change clauses (MAC) and their relationship to the COVID-19 pandemic. In fact, this clause is intended to protect one of the contracting parties from the unfavorable consequences of a significant change in circumstances before the final conclusion of the envisaged contract or during its execution. It allows the party concerned to renege on its initial commitment and withdraw from the transaction, or to decide to continue with it in return for a partial renegotiation[24]. However, the restrictiveness of most of the MAC clauses[25] and the way they are drafted tend to exclude the current COVID-19 pandemic from their scope, leading the law firm Norton Rose Fulbright LLP to underline that “it is often much easier to rely upon and enforce the more specific contractual provisions […] than to argue that a material adverse change has occurred[26]”.

What comes next? Building up on evolving market practices in Latin America and Africa

Having reviewed the various legal and financial issues underlying the emergence of the COVID-19 pandemic, it now seems relevant, by way of conclusion, to look at the current trends in the two regions of the world under study. Indeed, while the pandemic has done much to disrupt the global economy and the progress of infrastructure projects in emerging countries, it has also revealed the gaps and shortcomings that need to be addressed[27]. In this way, development and project financing as well as public-private partnerships could represent real opportunities for public authorities in financing new infrastructures[28]. Thus, in Latin America, the effects of the pandemic have been a major incentive for the public authorities to adopt measures to promote public works and public-private partnerships. In that regard, Garrigues’ analysis seems particularly illuminating for the situation in Latin America, especially in highlighting the idea of a significant boomerang effect in most countries of that region of the world[29]. In Chile, it is possible to mention the plan “Step by Step, Chile recovers” under which both the Ministry of Public Works and the Ministry of Housing and Urban Development awarded several project contracts[30]. In Colombia, the Fifth-Generation program led to the award of 27 multimodal road infrastructure projects[31].

However, this boomerang effect seen in some Latin American countries does not seem to be happening in Africa, as the pandemic has significantly widened the financial gap with the withdrawal of several international banks[32]. Indeed, while energy, transportation, oil and gas have been the main drivers of African growth, credit downgrades[33] and fluctuating commodity prices are drawbacks that do not provide a stable framework for negotiating the contracts and to establish the legal and financial balances mentioned above. Nevertheless, even if the magnitude of the infrastructure deficit remains colossal in Africa, it seems relevant to mention the existence of real investment opportunities, especially in critical infrastructure related to health, transport and digital connectivity[34]. In that regard, it is possible to mention the financing agreement signed by the Government of Tanzania and Agence Française de Développement, which will be on-lent to Tanzania Electric Supply Company to finance a 50 MW Solar Photovoltaic Power Plant in the Kishapu district of the Shinyanga region[35].

Thus, project finance is based on a careful allocation of risk but also on a precise analysis of the economic and financial parameters of the project considered. Therefore, the emergence of the current global pandemic has disrupted the usual play of these legal mechanisms due to construction delays, material supply problems, questioning the capacity of the current legal clauses to encompass such unforeseen events. Although the normal implementation of infrastructure projects has been greatly disrupted, Latin American countries seem to be experiencing a boomerang effect, considering the importance of building new infrastructures. As for Africa, the widening financial gap should not obscure the important investment opportunities in this part of the world, as brilliantly illustrated by these words: “We can’t throw a blanket over Africa — this is a rich and diverse region of multiple cultures, economies and histories. But opportunity abounds in all corners of the continent[36]”.


[1] Phillip Fletcher, Partner, and Andrew Pendleton, Associate, “Identifying and managing project finance risks: overview (UK)”, Milbank, Tweed, Hadley & McCloy LLP and Practical Law Finance (2014): 1.

[2] João M. Pinto, “What is project finance?”, Investment Management and Financial Innovations (2017): 3 [201].

[3] E. R. Yescombe, Principles of Project Finance (2002): 7.

[4] Pinsent Masons, “An introduction to project finance documents”, Out-Law Guide (2011).

[5] Antonio Estache, “Infrastructure finance in developing countries: An overview”, European Investment Bank Papers (2010): 60-88.

[6] Daniel D Bartfeld, Roland Estevez, Jaime E Ramirez and Genevieve Fox, “The Role of Project Finance in Developing a Region: Trends and Considerations”, Milbank LLP (2018).

[7] DLA Piper, “Project financing in Sub-Saharan Africa”, Real Estate Gazette Issue 26 (2016).

[8] Ronen “Ro” Lazarovitch and Alistair Calvert, “Construction Disputes in Project Financing: Managing Conflicts of Interest Between Project Parties”, Bracewell (2021).

[9] Josh Montebello, “Consequences for Project Finance due to COVID-19 Staffing Reductions on Construction Sites”, Maddocks (2020).

[10] Akalewold T Gebremeskel, Akaninyene Otu, Seye Abimbola, et al., “Building resilient health systems in Africa beyond the COVID-19 pandemic response”, BMJ Global Health (2021).

[11] Catherine Johnston and Peter Kasanda, “COVID-19 Africa: Legal considerations for construction site closures”, Clyde & Co (2020).

[12] Nelson L. Gallardo, “COVID-19 Impacts on the Construction Industry in Latin America”, FTI Consulting (2020).

[13] Kenneth Hansen and Sarah Devine, “COVID-19 and financing in emerging markets”, Norton Rose Fulbright LLP (2020).

[14] Roberto A Fortunati and Daniel A Levi from Beccar Varela, “The Project Finance Law Review: Completion Guarantees”, The Law Reviews (2021).

[15] Norton Rose Fulbright LLP, “COVID-19 and its impact on project finance transactions”, Publications (2020).

[16] The World Bank, “Risk Allocation Bankability and Mitigation in Project Financed Transactions”, Public-Private Partnership Legal Resource Center (2020).

[17] Michael Chernick, Partner, “Coronavirus Implications in Loan Documents”, Shearman & Sterling (2020).

[18] The World Bank, “Key Issues in Developing Project Financed Transactions”, Public-Private Partnership Legal Resource Center(2020).

[19] Steve Miller and Tiffany Raush, “When Force Majeure is for Sure: The Business of Constructing in Disaster-Prone Areas”, Jones Walker LLP (2018).

[20] Schmidt Brunet Litzler, “Force majeure | Briefing on legal recourse with respect to the coronavirus epidemic” (2020).

[21] Sue Wang, “Force majeure and coronavirus”, Norton Rose Fulbright LLP (2020).

[22] Maria-Leticia Ossa Daza, Jorge H. Kamine and Maria Isabel Nieto, “Actions Affecting Energy and Infrastructure Projects in Latin America”, Willkie Farr & Gallagher LLP (2020): 23.

[23] Lido Fontana, “COVID-19 stokes force majeure claims”, Covington & Burling LLP (2020).

[24] Damian McNair, “Material adverse change clauses”, PricewaterhouseCoopers (2016).

[25] Peter Crossley, Max Rockall and Maria Davies, “Material Adverse Change Clauses Amid the COVID-19 Outbreak”, Squire Patton Boggs (2020).

[26] Norton Rose Fulbright LLP, Op. Cit.

[27] Michael Igoe, “Blind spots: What COVID-19 revealed about global development’s biggest gaps”, Devex (2021).

[28] Luc Eyraud, Catherine Pattillo and Abebe Aemro Selassie, “How to attract private finance to Africa’s development”, Getting Infrastructure Finance Right (2021).

[29] Garrigues, “Infrastructure and project finance in Latin America: prospects for 2021”, Latin America Projects Group (2021): 2.

[30] Ibid.: 6

[31] Carlos Vargas, “Colombia government to sign $5.39 billion in road contracts in final year of term-minister”, Reuters (2021).

[32] African Development Bank Group, “African trade finance sees $5 bn in portfolio outflows in Q1 2020 due to Covid-19, but opportunities exist – report”, News and Events (2021).

[33] Hippolyte Fofack, “Downgrading Africa’s Development”, Project Syndicate (2021).

[34] Baker McKenzie, “New Dynamics: Shifting Patterns in Africa’s Infrastructure Funding”, Publications (2021).

[35] AFD, “AFD to Finance the First Grid Connected Solar Photovoltaic Power Plant in Tanzania and the Modernization of Electricity Network”, Press Releases (2021).

[36] Wildu du Plessis, Partner, in Baker McKenzie, “New Dynamics: Shifting Patterns in Africa’s Infrastructure Funding”, Publications(2021).

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