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Structuring PFI in a financial crisis market

Despina J Doxaki

The financial crisis throughout the eurozone has had a significant impact on the structuring of project finance deals, particularly with respect to the way in which country risks and lenders credit risks are effectively addressed.

Structures have been seen whereby, for example, the pro rata disbursements of the financing banks were not followed – not as a result of the risks inherent to the project during the construction phase, but as a result of the ratings assigned by the rating agencies to both country and banks. Market flex and MAC clauses have also had to be re-drafted so as to reflect such risks in the financing which of course has imposed a further burden on the sponsors. In large infrastructure projects, interest-rate clauses now take into account down-ratings and are drafted in such a way as to always follow the ratings of both country and banks. Due to the liquidity shortage and the down-ratings, the issuance of project related L/Gs (good performance of works and/or operation) has become more difficult and more expensive. Therefore, to mitigate such risks, reserve accounts had to be foreseen which of course had an impact on the disposition of the available cash and distribution to the sponsors.

Another issue affected by the financial crisis, and a measure taken in an attempt to avoid projects being in default, has been the structuring and operation of accounts, in light of the effect of commingling of cash kept with the security agent and/or bondholder agent account, further complicated by the place where such account was kept. Several structures have been followed in an attempt of repayment being made through project accounts rather than the security agent/bondholder agent account while several types of collateral to preserve the cash already in the accounts and safeguard the repayment of the financing had to be evaluated and the related tax issues raised had to be considered. Given the liquidity issue banks were facing, claims from project bonds had to be freely assignable to central banks (as collateral for bank funding) also taking into account that the projects were not rated; therefore, customary transfer provisions up to now had to be structured so as to allow for this, also considering the risk for the sponsor and the project from such assignment and transfer especially during the sensitive period of construction.

With respect to the PPP law, a recurring issue for PPP projects to date has been the tax classification – from a VAT perspective – of costs incurred during the construction phase as capital goods, since in the former case, the refund of any surplus VAT (credit balance), mainly on the basis of the previous regime, occurred on a fast-track basis compared to the one applicable for so-called common expenses. In any other case (common expenses), VAT refunds are only possible after the tax payer has exhausted every possibility to carry forward its credit balance, which in any event cannot go beyond three years from the time when the relevant annual clearance VAT return was filed.

Until September 13 2011, PPP-related costs did not qualify as capital goods nor were they subject to the once privileged regime of capital goods. Thus, such costs were subject to the lengthier and more precarious VAT return procedures of non-capital goods. Following pressure from sponsors, an amendment to the relevant provisions of the Greek PPP Law recently took place, aiming at aligning VAT treatment for PPPs with the treatment of capital goods.

The situation theoretically changed, since the introduction of Law 4013/13.09.2011 amending the relevant provisions of Articles 29 and Article 30 of the PPP Law on VAT. The new law, however, only goes halfway in that direction, since it does not explicitly qualify the relevant expenses as relating to capital goods but allows filing of annual VAT refund applications, thus granting PPP-related costs a hybrid status between capital goods and non-capital goods.

Further clarifications are expected on the basis of the explanatory circular that should be issued following the introduction of this new provision.

Despina J Doxaki

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