CRGP Sponsors a General Counsels Roundtable on The Legacy of Failed Global Projects

 

The General Counsel Roundtable was held on January 21-22, 2005, at Stanford University, hosted by the Collaboratory for Research on Global Projects (CRGP). The Roundtable was co-chaired by Professor Thomas C. Heller of the Stanford Law School and Barry Metzger, a senior partner of the Coudert Brothers international law firm. Participating in the Roundtable discussions were senior lawyers and business executives from a cross-section of project sponsors, investment funds, engineering firms, multilateral financial institutions, export credit agencies and private law firms, including representatives from Bechtel, World Bank (MIGA), Asian Development Bank, and Export-Import Bank of the US. Also present were senior faculty members from Stanford schools of Law, Engineering, and Humanities & Sciences.

The stated purposes of the Roundtable were:

• To address the legal issues raised by failed and distressed private infrastructure projects in the emerging markets over the past decade

• to identify areas of further research to improve understanding of the reasons for such failures and

• to develop guidelines to inform future public policy and project design.

The Roundtable was part of a broader examination by CRGP of the organizational and institutional reasons for project failures that involve multi-jurisdictional project implementation. The Roundtable benefited substantially from the presentations on the work of the Program on Energy and Sustainable Development (PESD) at Stanford's Institute for International Studies and, in particular, PESD's ongoing study on independent power projects (IPP) in emerging economies.

Background papers were presented detailing the explosive growth of private infrastructure projects in the emerging markets during the 1990s and a large number of cancelled or distressed projects which required renegotiation of their substantive terms. While considerable research and analysis has been undertaken for such failed and distressed projects from a public policy perspective, little attention has been focused on the legal paradigm used in structuring such projects.

The global project legal paradigm applicable to such projects generally involved:

Establishment of an appropriate legal framework in the host country,

The creation of detailed contracts among the project,

participants, setting out the obligations to be performed by each

The use of the law of a well-established, developed country with jurisdiction over the project to the maximum extent possible, rather than the laws of the host country, and

Dispute resolution in a foreign court or arbitral tribunal.

If evaluated in terms of the enforcement of the parties' original economic bargain, the global legal paradigm has not performed well. It is estimated that about forty percent of all emerging markets private infrastructure projects undertaken during the 1990s have been or are currently being fundamentally renegotiated.

Particular attention at the Roundtable focused on the question of whether it is possible to create "more flexible project contracts" which would better accommodate the need for changes in the project economics, recognizing the very long-term nature of most private infrastructure projects (often 25 to 30 years). The participants discussed a "governance model," which might be contrasted to the "contractual model" that currently prevails. Under a "governance model" greater attention would be devoted to establishing rules for decision-making over time between the project sponsors and government and possibly other interested parties. The objective would be to establish a broader alignment of incentives for the project sponsors and government and to foster trust between them through their continuous participation in decision-making throughout the project.

An alternative to the "governance model" is an ongoing amendment to the currently prevailing structures, adding "components" which are patches or new structural elements intended to address specific problems encountered to date with failed and distressed projects and in application of the global projects legal paradigm. Many of these components are currently under consideration by project sponsors and financiers and have been incorporated into some contracts. The components referred to in the Roundtable discussions included, among others, local currency borrowing, greater use of partnerships with local or regional private sector sponsors, greater transparency in the government's decision-making processes on project approvals, enhanced political risk insurance for both investors and lenders, and greater use of balance sheet financing.

Roundtable participants identified important areas for further research and analysis, with the expectation that the results of such research and analysis would be presented to future meetings of the Roundtable for consideration. Specifically, these included:

• Detailed examination of the enforcement and renegotiation experience of failed and distressed private infrastructure projects, particularly in the context of the existing country and project studies of IPP study, to understand the enforcement and renegotiation strategies pursued and the outcomes achieved

• Contrasting the experience documented in PESD's interim report on its IPP study in one or more other infrastructure sectors, such as transportation and water.

• Articulation and analysis of the "governance model" as an alternative to the prevailing "contract model" for private infrastructure, including assessment of the experience to date with public-private partnership projects

• Examination and analysis of the work now being done on "components" to complement existing private infrastructure project design and the global projects legal paradigm, including an assessment of the likely performance of such components in addressing factors contributing to project failure

CRGP will be reverting to Roundtable participants with a more detailed research program based on the Roundtable discussions, with a request for access to participants' project experience for such research, and for material support of such research program through CRGP.

Posted by rjorr at January 27, 2005 5:08 PM