Will the Current Liquidity Crunch Have an Effect on the Global Market for Legal

Jobs in Project Finance Related Fields?

Recalde, Rafael

Global Lawyering

Professor John Flood

April 26, 2008

2
 Works Cited
Text Books
Hoffman, Scott L. The Law and Business of International Project Finance. Second
Edition. Kluwer Law Internationals. The Hague. 2001...............4, 10, 11, 12, 18, 19, 20
Periodical Materials
“A Fate Better than Debt.” The Economist. October 19, 1985. Retrieved from Lexis-
Nexis Academic database on April 2, 2008.....................................................................8
“Citigroup: Citi’s Kitchen-Sink Moment?” The Economist. January 15, 2008. Available
online on April 2, 2008 at
http://www.economist.com/finance/displaystory.cfm?story_id=10523468..................14
“Global Credit Squeeze Cutting International Bank Funds for Gulf Project Finance,”
Middle East Economic Survey (MEES), October 1, 2007............................................15
“It’s a Wonderful Mess,” The Economist. October 11, 2007. Available online on April 14,
2008 at http://www.economist.com/finance/displaystory.cfm?story_id=9957947........13
“Lessons from the Credit Crunch,” The Economist. October 17, 2007. Available online
on April 11, 2008 at
http://www.economist.com/opinion/displaystory.cfm?story_id=9988758....................13
“More on the Sackings at Cadwalader.” January 11, 2008. WSJ (Wall Street Journal)
Lawblog. Available online April 3, 2008 at http://blogs.wsj.com/law/?s=CDO...........16
“Open Thread—Law Firm Layoffs,” WSJ (Wall Street Journal) Lawblog. January 11,
2008. Available online April 3, 2008 at http://blogs.wsj.com/law/?s=CDO.................16
“Petrodollar power; Global imbalances,” the Economist. December 9, 2006. Retrieved
from Lexis-Nexis Academic Database on April 4, 2008.................................................7
“Project Finance Roundup,” Middle East Economic Survey (MEES)., December 24, 2007.
.......................................................................................................................................15
“Qasco Postpones $1.3bn Financing Citing Difficult Market Conditions,” Middle East
Economic Survey (MEES), October 29, 2007................................................................15
“Recent Project Finance Deals Secure Funding But Subprime Remains Liquidity Threat,”
Middle East Economic Survey (MEES), December 24, 2007. Available online on April
10, 2008 at http://www.zawya.com/story.cfm/sidv50n52-1TS04..................................15
“Subprime Crisis Highlights Need to Deploy Gulf Liquidity, Says Project Advisor,”
Middle East Economic Survey (MEES), January 7, 2008. Available online on April 11,
2008 at http://www.zawya.com/story.cfm/sidv51n01-1TS04..................................14, 15
“The Polish Bogey,” the Economist. March 20, 1982. Retrieved from Lexis-Nexis
Avademic on April 2, 2008..............................................................................................9
“UBS Marcel Waves Goodbye: The Boss of UBS Quits After Big Writedowns,” the
Economist. April 1, 2008. Available online on April 2, 2008 at:
http://www.economist.com/finance/displaystory.cfm?story_id=10947193..................14
Esty, Benjamin C., “Big Deals: Financing Large Scale Investments.” Leading Research,
Harvard Business School. Vol 4. Number 2. Boston. Available online on April 3, 2008
at http://www.leadingresearch.hbs.edu/archives/04.02/story02.html............................10
Harvard Business School (HBS) Project Finance Portal, Retrieved from
http://www.people.hbs.edu/besty/projfinportal/lawfirms.htm. on April 11, 2008.........11

3
Keoun, Bradley. “Merrill Posts Record Loss on $16.7 Billion Writedown” (Update6).
January 17, 2007. Bloomberg. Available online on April 2, 2008 at:
http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aWfl7kVEm
U_k................................................................................................................................14
Lachica, Eduardo, “U.S. Export-Import Bank Builds Up Steam for Key Role in Project
Finance,” Wall St. J., May 8, 1994, at A9G...................................................................20
Pike, Ronald E. and James T. Thibodeau. “The Role of Banks in Mining Projects.”
Mining Magazine. October 1981. Available online in Lexis-Nexis April 2, 2008........5
Rosenn, Keith S. “The Jeito: Brazil’s Institutional Bypass of the Formal Legal System
and its Developmental Implications,” The American Journal of Comparative Law, Vol.
19, No. 3 (Summer, 1971), pp. 514-549........................................................................12
Other Authorities
Telephone interview with Dr. Esteban Donoso, founding partner, Donoso Crespo
Abogados, Quito, Ecuador (April 2, 2008)....................................................................17

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 Will the Current Liquidity Crunch Have an Effect on the Global Market for Legal

Jobs in Project Finance Related Fields?

I. Introduction:

During the period of rapid integration and growth of the global economy that have

characterized recent decades, national governments, eager to satisfy the demands of their

expanding economies, have increasingly looked to the private sector for assistance in

building and operating major infrastructure projects such as water treatment plants, oil

refineries, pipelines, energy plants, mining operations, and toll roads. Strong liquidity in

world capital markets, among other factors, have permitted and propelled the transferring

of the financing for these types of projects from local budgetary resources and the

reliance on direct sovereign lending to other available alternatives. With this trend, an

infrastructure development financing mechanism known as “project finance” has gained

popularity as an alternative to direct project lending, which can expose both lenders and

developers to enormous risk, and to direct government funding, which can have

devastating effects on much needed budgetary resources.

In a project finance structure, “…lenders base credit appraisals on the projected

revenues from the operation of the facility, rather than the general assets or the credit of

the sponsor of the facility,…[using]…the assets of the facility…as collateral for the

debt[.]”1 Project finance has been defined as "the provision of funds for a specific

economic unit where the financing is secured principally by the assets of that unit with

repayment derived from the unit's cash flow rather than the earnings of a parent company

or group of sponsors."2 Thus, for example, a developer/operator of a power plant which

1
See Hoffman, Scott L. The Law and Business of International Project Finance. Second Edition. Kluwer
Law Internationals. The Hague. 2001. P. 4-5.
2
See Pike, Ronald E. and James T. Thibodeau. “The Role of Banks in Mining Projects.” Mining Magazine.
October 1981. Available online in Lexis-Nexis April 2, 2008.

5
is built under a project finance structure may have a contractual obligation per the project

finance lending documents to allow the lender control the flow of the generated income

through a mechanism which ensures that priority is given to the repayment of the debt.

The project finance alternative to development has proved tremendously attractive

and efficient, creating much needed infrastructure as well as countless jobs. Many of the

jobs that have been created by the project finance structure are legal jobs ranging from

cross-border lobbying to local zoning and licensing, from the legal management of major

corporate and banking transactions to the drafting and negotiating of local off-take

contracts, and from complex transnational litigation and arbitration to local labor dispute

resolution. Currently, however, the world is experiencing a crisis in the capital markets--

as a result of the so-called “sub-prime” crisis in the mortgage industry--that is expected to

have overarching effects in the global economy, including, many predict, in the field of

project finance.

II. Issues presented:

At this crucial moment in the history of world finance, the goal of this paper is to

seek to answer the following central question:

“Will the current liquidity crunch that is being generated by the “sub-prime” crisis have

an effect on the global market for legal jobs in project finance related fields?”

The answer to this question requires that we first answer the question of what, if

any, will be the effect of the current global liquidity crunch on the future of major

infrastructure development through project finance? In order to seek an answer to these

questions, this work will 1) give an overview of the growth of project finance as a result

of the availability of project finance liquidity that has characterized recent decades; 2)

6
discuss the types of legal jobs that have benefitted from the growth of project finance; 3)

address the current liquidity crisis and its causes; 4) discuss, based on the past and present

of project finance and on the current liquidity situation, the potential impact that the

liquidity crisis will have on the future of infrastructure development through project

finance; and, 5) in light of these potential effects, seek to determine whether legal jobs in

fields related to project finance will similarly be affected. In a small effort to continue to

propagate the growth of this development method which is so essential for jobs

(including legal jobs) and for the creation of infrastructure in developing countries, this

paper will conclude by discussing a possible solution to this potential problem. Namely,

this paper will conclude by discussing the availability of certain financing sources

through which developers and governments can, even during a liquidity crisis, continue

to utilize the project finance structure for the development of infrastructure.

III. The growth of project finance: a shift away from “traditional” lending

The growth of project finance as the financing alternative for large infrastructure

projects is attributable to several different factors, all of which, combined, resulted in the

increased channeling of infrastructure development funds towards the project finance

structure starting from the 1980’s and away from “traditional” lending mechanisms.3

Some of the reasons for this growth in the reliance on project finance during recent

decades can be summarized as follows:4

3
See “About Project Finance,” International Project Finance Association (IPFA). Available online on April
11, 2008. http://www.ipfa.org/about_pf.shtml
4
See Id. Note that the IPFA provides other factors which refer to the demand side rather than the supply
side of project finance liquidity and are thus beyond the scope of this writing. One such factor is the fact
that project finance is seen as a middle road between government funding and outright privatization.
Privatization is a politically sensitive issue in terms of local aspects such as labor and the environment.
Privatizing moves also force national governments to “relinquish total control of what may be regarded as
state assets.” See Id. The other such factor is economic and population growth and the effect that these had
on the demand for infrastructure development in developing countries.

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1. Debt Crisis: Following World War II, major government infrastructure projects were

funded and supervised by national governments through taxing and through the

borrowing of sovereign debt.5 Sovereign borrowings continued to fund large projects

through the 1970’s, when “petrodollars were deposited in western banks, which lent too

many of them to developing countries.”6 This flow of petrodollars “…sowed the seeds of

Latin America's debt crisis.”7 As a result of the debt crisis, the budgetary resources,

borrowing capacity, and control over fiscal decisions of national governments became

largely constrained. Countries were thus forced to seek alternative methods to fund their

needed infrastructure projects. The answer was to turn “…to the private sector for

investors for projects which in the past would have been constructed and operated in the

public sector.”8

2. Private efforts: In order to continue receiving government infrastructure contracts in

light of the debt-crisis, contractors and equipment suppliers also looked for ways to

overcome these monetary constraints with which national governments were faced.9

Lenders, too, were forced to seek new ways to continue financing major infrastructure

projects without continuing to rely entirely on governments who, during the 1980’s, had

proved themselves undependable and capable of unilaterally defaulting on their debts.

The above factors resulted in a tremendous increase of the liquidity available for

the financing of infrastructure development through the project finance structure. This

was so even though the world was experiencing a debt-crisis and thus a shortage in the

5
See Id.
6
See “Petrodollar power; Global imbalances,” the Economist. December 9, 2006. Retrieved from Lexis-
Nexis Academic Database on April 4, 2008.
7
See “About Project Finance,” International Project Finance Association (IPFA). Available online on April
11, 2008. http://www.ipfa.org/about_pf.shtml.
8
See Id
9
See Id.

8
liquidity that had been previously available from the 1970’s petrodollars. In other words,

this increased availability of project finance liquidity during the 1980’s in comparison to

that which was previously available is not the cause of an increase in general global

liquidity, but, rather, is the cause of a shift in strategies undertaken by banks, developers

and governments for infrastructure project lending, borrowing and funding as a result of

the factors outlined above.

A. Growth of project finance: lending strategies revised:

In a 1984 issue, for instance, the Economist discusses the new strategies that

banks were seeking at the time, pointing out that, from the perspective of many bankers,

“making loans for projects…is seen as less risky (because it is self-liquidating) than

credits to plug a country's balance of payments.”10 Indeed, in 1985, the Washington

Institute for International Economics (IIE) published a report, in light of the debt crisis,

discussing ways in which to “increase the flow of money from rich countries to poor

ones,” suggesting project-finance as a viable alternative to balance sheet debt.11 The IIE’s

work notes that “…a major weakness of the past organization of the international capital

market was the concentration on lending instruments that were a general obligation to the

borrower, with no tie to the outcome of the specific project for which funds were

borrowed.”12 The IIE’s proposed solutions to the then existing lack of capital flow into

developing countries stemmed from its theory that “[w]hen debt-service obligations are

linked to the outcomes of specific projects or undertakings with limited recourse to a

10
“Banks have to make strategic decisions in three areas if they are to respond effectively to the new
competition: on products, on markets, and on customers,” the Economist. March 24, 1984. Retrieved from
Lexis-Nexis Academic database on April 2, 2008.
11
See “A Fate Better than Debt.” The Economist. October 19, 1985. Retrieved from Lexis-Nexis Academic
database on April 2, 2008. (citing Lessard, Donald and John Williams, Financial Intermediation Beyond
the Debt Crisis. September, 1985. P. 60. Institute for International Economics (IIE), Washington, D.C.)
12
See Lessard, Donald and John Williams, Financial Intermediation Beyond the Debt Crisis. September,
1985. Institute for International Economics (IIE). Washington, D.C.

9
country’s general credit,” the risk undertaken by lenders is reduced.13 Project finance

provides such a mechanism and was therefore increasingly chosen by bankers and

governments in order to supersede the effects that the debt crisis had on the availability

and, from a banking perspective, desirability of sovereign credits.

One concrete example of this shift towards the prioritization of project finance

can be found in a 1982 Economist article entitled the “Polish Boogey,” which discusses

Poland’s inability to pay off its foreign debt and the banking sector’s reaction to this

event. 14 In this article, the Economist points out that Chase Manhattan insisted “…

(through Citibank and Bank of America…) that two loans totaling $525m to the [Polish]

state-owned mining company, Kombinat Gorniczo-Hutniczy w Lubinie, to finance

copper production, should be treated separately…” from the defaulted loans because

these two loans “…were….project-finance loans with their own foreign currency

earnings to support repayment.”15 With this mechanism of repayment reassurance, the

project-finance method of structuring deals thus proved successful and continued to grow

in the decades following the 1980’s.16 The success of project finance mechanism grew at

a fast pace and, “[a]fter a brief slowdown in 1997 and 1998 because of the Asian and

Russian financial crises, the project finance market came roaring back in 1999 and

continue[d] strong into 2000.”17

IV. Global presence and growth of the project finance attorney

13
See Id. at page 35.
14
See “The Polish Bogey,” the Economist. March 20, 1982. Retrieved from Lexis-Nexis Avademic on
April 2, 2008.
15
See Id.
16
See “About Project Finance,” International Project Finance Association (IPFA). Available online on
April 11, 2008. http://www.ipfa.org/about_pf.shtml".
17
See Esty, Benjamin C., “Big Deals: Financing Large Scale Investments.” Leading Research, Harvard
Business School. Vol 4. Number 2. Boston. Available online on April 3, 2008 at
http://www.leadingresearch.hbs.edu/archives/04.02/story02.html

10
 The enormous scale of the infrastructure projects that are developed through

project financing has created or benefited numerous roles for attorneys practicing in

several different fields. These roles begin at the most local and technical level. For

instance, while a project finance deal is likely structured by attorneys sitting in an office

high atop a Midtown, Manhattan skyscraper, the deal will invariably require that local

licenses and permits be obtained thousands of miles away in the country that is hosting

the project. The attorneys playing this coordinating role are the “project finance

lawyers.” These attorneys “provide advice on all aspects of a project, including laws and

regulations; permits; organization of project entities; negotiating and drafting of project

construction, operation, sale and supply contracts; negotiating and drafting debt and

equity documents; bankruptcy; tax; and similar matters.”18 Of course, many of these

legal aspects require more specialized advice as the project takes shape, translating, in

turn, into additional work for attorneys practicing construction law, tax law, international

sales law (for projects that involve construction and sale aspects), land use law, real estate

law, administrative law, labor, litigation, arbitration, etc.

Even the New York, London or Zurich based bank that is likely leading the

syndication of a given loan may require that local banks from the host country (and thus,

local attorneys) be included in the lending group “for the purpose of restraining the host

government from expropriatory acts or other discriminatory action.”19 Should this

protective mechanism fail and nevertheless give way to such expropriatory or

discriminatory action, it is easy to imagine that scores of lawyers will become involved in

the legal defense of all interested parties, including through litigation, mediation,

18
See Hoffman, Scott L. The Law and Business of International Project Finance. Second Edition. P. 108-
109. Kluwer Law Internationals. The Hague. 2001.
19
See Id. at p.105.

11
arbitration, or other methods of alternative dispute resolution. Some law firms are able to

provide integrated services on project finance deals. Indeed, many “…large law firms in

industrialized countries have developed international capabilities and established local

offices in foreign countries, merged with foreign law firms or established correspondent

arrangements or other informal alliances.”20 In 2005, ProjectFinance magazine rated the

following firms as the top five firms in the world providing advice on project finance

deals:

1) Clifford Chance—United Kingdom

2) Allen & Overy—United Kingdom

3) Latham & Watkins—United States

4) Milbank, Tweed, Hadley, & McCloy—United States

5) Baker & McKenzie—United States

(Source: ProjectFinance magazine, Legal Advisors Review 2004/2005). 21

A project finance deal involving a governmental concession agreement will,

almost invariably, require public bidding. In such a case, the specialized advice of an

administrative law attorney in the host country is an indispensible part of the project in

order for the company that is wishing to obtain the contract to successfully participate in

and win a bid. Even seemingly routine bureaucratic tasks, such as the establishment of a

business entity, a matter which a U.S. non-lawyer could handle in only days or hours,

could take months of highly detailed and complex legal work in a developing country,

particularly in a civil law jurisdiction or countries with colonial roots.22 This aspect alone
20
See Id. at p. 626.
21
See Harvard Business School (HBS) Project Finance Portal, Retrieved from
http://www.people.hbs.edu/besty/projfinportal/lawfirms.htm. on April 11, 2008.
22
See generally, Rosenn, Keith S. “The Jeito: Brazil’s Institutional Bypass of the Formal Legal System and
its Developmental Implications,” The American Journal of Comparative Law, Vol. 19, No. 3 (Summer,
1971), pp. 514-549

12
would thus require, in a project finance deal, the advice of the principal project finance

attorneys with regards of the legal corporate structure that the developer should use and

the legwork and advice of the local attorneys in various countries establishing the entities

that are forming part of the project company. Of particular importance to a project

finance deal in terms of work that attorneys must handle is securing the provision of “…

all governmental permits necessary for the ownership, development, construction, start-

up, operation and financing of a project.”23 Each project finance deal, in short, requires

the use of an enormous web of attorneys at every point of the project. The growth of

project finance, therefore, has created countless legal jobs in fields that are related to the

creation of the large infrastructure projects that are developed through project finance.

V. The current liquidity squeeze

Unlike the Asian and Russian financial crises mentioned in section III above, the

current financial crisis is stemming from the world’s strongest economy--the U.S.--and

may have the effect of bringing the development of infrastructure through the project

finance alternative to a screeching halt rather than a “brief slowdown.” The current

financial crisis—known as the “US sub-prime crisis”--is a phenomenon that has dragged

down the world’s economy for less than a year so far but that has immediate origins that

trace back to a longer recent period of unprecedented growth in the U.S. real estate

market. In recent years, many home owners became self-proclaimed property investors

and renters became home owners. At the same time, the mortgage industry grew at a

tremendous pace and credit became available to nearly anyone who applied. Developers

undertook countless new projects and bankers became increasingly creative in figuring

23
See Hoffman, Scott L. The Law and Business of International Project Finance. Second Edition. P. 67.
Kluwer Law Internationals. The Hague. 2001.

13
out ways to profit from the then-booming real estate markets. Mortgage loans were

securitized and widely traded in global markets.24 Even the most risk averse investors put

their money in the mortgage-backed securities that bankers created in these

entrepreneurial efforts. Unfortunately, many of these securitized loans were "sub-prime"

loans that were given to less-than-credit-worthy borrowers, most of whom greatly

exaggerated their income and many of whom eventually stopped paying. 25

These lending practices led to a wave of foreclosures and unpaid mortgages that is

affecting the banking industry and countless investors around the world, resulting in what

is now becoming a “credit crunch,” or liquidity crisis in the financing world.26 The

effects are continuing to be felt even though economists disagree on whether or not the

sub-prime crisis will be resolved in the near future (or whether we are currently in a

recession). For instance, on April 1, 2008, which, from this writer’s perspective, also

happened to be just yesterday, “UBS announced—and it was no prank—that it was

writing down a further $19 billion on its investments in American subprime and other

mortgages, as part of an unexpected SFr12 billion projected loss in the first quarter.”27

Similarly, in January of 2008, the Economist reported on Citi’s “…record net loss of $9.8

billion, driven by a whopping $18.1 billion in pre-tax write-downs and credit costs on

exposure to subprime mortgages, [a loss which]…was more than even the most

pessimistic analyst had forecast[.]”28 The same month, Bloomberg reported that “Merrill

24
See “It’s a Wonderful Mess,” The Economist. October 11, 2007. Available online on April 14, 2008 at
http://www.economist.com/finance/displaystory.cfm?story_id=9957947.
25
See Id.
26
See “Lessons from the Credit Crunch,” The Economist. October 17, 2007. Available online on April 11,
2008 at http://www.economist.com/opinion/displaystory.cfm?story_id=9988758.
27
See “UBS Marcel Waves Goodbye: The Boss of UBS Quits After Big Writedowns,” the Economist. April
1, 2008. Available online on April 2, 2008 at:
http://www.economist.com/finance/displaystory.cfm?story_id=10947193
28
See “Citigroup: Citi’s Kitchen-Sink Moment?” The Economist. January 15, 2008. Available online on
April 2, 2008 at http://www.economist.com/finance/displaystory.cfm?story_id=10523468.

14
Lynch & Co., the biggest U.S. brokerage, reported a record loss after $16.7 billion of

writedowns on assets infected by subprime mortgages.”29 The time that has span between

August 1997 and April 2008 is riddled with similar examples of major banks and

mortgage lenders reporting financial difficulties.

VI. Effect of the liquidity crisis on the future of infrastructure development through

project finance

It is important to point out that “[b]efore [the US subprime mortgage crisis] hit the

market in full force late summer [of 2007], few would have predicted that US home

owners’ defaults on high risk mortgages would impact project financings...”30

Nevertheless, “…as subprime events unfolded, international banks reported heavy losses

and write-downs, and movement of funds was less free than before the crisis.”31

Following years of lending terms which were favorable to international project finance

borrowers/developers, “…the subprime events brought about an abrupt change despite

the lack of direct exposure to the problems in the US.”32 In the Middle East Economic

Survey (MEES) article entitled “Subprime Crisis Highlights Need to Deploy Gulf

Liquidity, Says Project Advisor,” the head of HSBC’s Project and Export Finance

department is quoted as saying that ‘[w]hat the credit crunch has done in the project

finance market is to make it harder for non-prime borrowers to raise finance which means

they have to pay more and agree to less advantageous terms generally[.]”33 This has

29
See Keoun, Bradley. “Merrill Posts Record Loss on $16.7 Billion Writedown” (Update6). January 17,
2007. Bloomberg. Available online on April 2, 2008 at:
http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aWfl7kVEmU_k
30
See “Subprime Crisis Highlights Need to Deploy Gulf Liquidity, Says Project Advisor,” Middle East
Economic Survey (MEES), January 7, 2008. Available online on April 11, 2008 at
http://www.zawya.com/story.cfm/sidv51n01-1TS04.
31
See Id.
32
See Id.
33
See Id.

15
resulted in disruptions in the project finance market and the problems may get worse. For

example, on October 29, 2007, the MEES issued a report discussing the postponing of a

project by the Qatar Steel Company as a result of these changed market conditions.34

Earlier that same month, the MEES released another report entitled “Global Credit

Squeeze Cutting International Bank Funds for Gulf Project Finance,” discussing general

“concerns that [the] essential pool of liquidity would dry up.”35

In contrast with the 1980’s debt crisis, which had the effect of encouraging

project financing as an alternative to the out of control balance-sheet financing that was

being provided to developing countries, there is no similar correlation between out of

control mortgage loans and project financing that would have an encouraging effect on

project financing. In the absence of alternative sources of liquidity for project financing,

the effects of the “sub-prime” crisis could be devastating on the future of infrastructure

development through the project finance structure.

VII. Effect on legal careers

Unlike the immediate effects of most industry-centered crises, which, in terms of

legal jobs, affect only those which are directly related, (such as the current “sub-prime”

crisis and its immediate devastating effects on “collateralized debt obligation” (CDO) and

structured finance departments of many major New York law firms),36 a crisis in project

financing could affect a broad array of legal jobs worldwide because, as previously
34
See “Project Finance Roundup,” Middle East Economic Survey (MEES)., December 24, 2007. See also
“Qasco Postpones $1.3bn Financing Citing Difficult Market Conditions,” Middle East Economic Survey
(MEES), October 29, 2007.
35
See “Recent Project Finance Deals Secure Funding But Subprime Remains Liquidity Threat,” Middle
East Economic Survey (MEES), December 24, 2007. Available online on April 10, 2008 at
http://www.zawya.com/story.cfm/sidv50n52-1TS04, citing “Global Credit Squeeze Cutting International
Bank Funds for Gulf Project Finance,” Middle East Economic Survey (MEES), October 1, 2007.
36
See “Open Thread—Law Firm Layoffs,” WSJ (Wall Street Journal) Lawblog. January 11, 2008.
Available online April 3, 2008 at http://blogs.wsj.com/law/?s=CDO. See also “More on the Sackings at
Cadwalader.” January 11, 2008. WSJ (Wall Street Journal) Lawblog. Available online April 3, 2008 at
http://blogs.wsj.com/law/?s=CDO.

16
discussed, a wide variety of legal jobs are directly and immediately related to project

finance. As of the date of this writing, however, there are no visible signs that the

prospect for a decline in future project finance deals is having any effect on related legal

jobs or on the structure of law firms that have practices in project finance related fields.

VII. Conclusion and possible solution:

The liquidity crisis is a fairly recent phenomenon and its effects, along with the

other effects of the “sub-prime” crisis, are expected to be enormous on the global

economy. With such enormous potential effects, links can be made between the “sub-

prime” crisis and a wide range of industries, ranging from housing and automobiles to

miscellaneous industries such as garments, electronics, and even tourism. As we have

seen, the answer to the question of whether the current liquidity crunch will have an

effect on the global market for legal jobs in project finance related fields is not a simple

one to answer. Nevertheless, the link between the availability of liquidity for major

infrastructure projects and the credit crunch that banks are experiencing is perhaps more

direct. And the negative effects that such a link may have on infrastructure development

through project finance and on project finance related legal jobs may come sooner than

this author is predicting. Because the answer to the central question is neither “yes,”

“no,” or even “maybe,” but, rather, something more akin to “more likely than not,” it is

important to attempt to seek possible solutions which may stave off the possible demise

of development through project finance and, with it, the availability of modern

infrastructure for developing countries and the many legal jobs which have flourished

with its growth.

17
 While “[c]ommercial banks and institutional lenders are an obvious choice for

financing needs” in a project finance deal, there are alternatives to direct or syndicated

project finance lending within the project finance structure37 to which developers and

governments could turn in light of the current liquidity crunch. The first of these

alternatives involves multilateral agencies such as the IFC (International Finance

Corporation), which “…is the private-sector lending arm of The World Bank.”38

According to its Articles of Agreement, “…IFC participation is limited to projects ‘where

sufficient private capital is not available on reasonable terms’[.]”39 IFC loans do not

represent, however, an absolute alternative to private sources but, rather, one that must be

used in conjunction with such sources. IFC loans are generally structured as “A/B” loans

in which the IFC provides the “A Loan,” and a private bank (or syndicate) provides the

“B Loan.”40 Increased reliance on the “A Loan” must take place in order for the IFC to

be a true alternative to direct or syndicated project finance lending. However, during a

liquidity crisis, it is highly questionable whether the funds that the IFC obtains—and puts

forth as the “A Loan”-- will continue to flow in the middle-to-long-term. This is because

the IFC obtains “A Loan” funds from sources such as “…export credit agencies, (quasi-)

governmental entities, other multilateral organizations and local banks.”41 Nevertheless,

the availability of partial funding from public sources (through the “A” portion of the

loans) without having to resort to local budgetary resources increases the feasibility of

37
This excludes direct loans (whether made directly to developers or to governments, including World
Bank loans, which are made directly to governments), equity, Islamic financing, government funding, and
other such mechanisms which are outside the scope of this work on “project finance.”
38
See Hoffman, Scott L. The Law and Business of International Project Finance. Second Edition. P. 445.
Kluwer Law Internationals. The Hague. 2001
39
See Id. at 445-446. (quoting International Finance Corporation, Articles of Agreement, art. I).
40
See Id. at. 445-447.
41
See “Syndication and Resource Mobilization,” International Finance Corporation. Available online on
March 29, 2008. http://www.ifc.org/ifcext/syndications.nsf/

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putting together enough funding sources to complete the necessary financing for a

successful project finance deal.

Another option to which governments and project finance developers could turn

in light of a liquidity crisis is the option of obtaining financing from bilateral agencies

such as the Overseas Private Investment Corporation (OPIC) and the Export-Import Bank

of the United States (USExIm).42 It is important to note, however, that these

organizations exist to promote specific agendas to which the project developer must

adhere.43 USExIm, for instance, “…is the official export credit agency of the United

States [whose] mission is to assist in financing the export of U.S. goods and services to

international markets.”44 USExIM “…has three guiding principles imposed on it by its

governing statutes: support United States exports through financing, attain a reasonable

assurance of repayment, and provide financing support where commercial finance cannot

do so.”45 Since 1994, USExIm has also had “…a project finance division designed to

assist U.S. exporters to compete in new international infrastructure projects.”46 However,

as with the IFC and other multilateral and bilateral agencies, the involvement of these

sources of funding does not eliminate the need for supplemental private funding. Indeed,

such funding may even be absolutely necessary in order for a project to be completed:

42
Other developed countries have similar organizations. One example is the Export-Import Bank of Japan.
Another is the Export Development Corporation (EDC) of Canada, which is the “Canadian counterpart” to
the U.S. Ex-Im Bank. See e.g. “US Ex-Im and Canada’s EDC sign Co-Financing Agreement: Exporters
from Both Countries to Benefit From the Agreement.” Export-Import Bank of the United States. May 25,
2001. Available online at http://www.exim.gov/pressrelease.cfm/C1F3EA00-B3C3-BB47-
2C258B1260110C87/
43
See Hoffman, Scott L. The Law and Business of International Project Finance. Second Edition. P. 445-
458. Kluwer Law Internationals. The Hague. 2001.(stating that “[u]nlike multilateral agencies, bilateral
agencies are designed to promote…interests of an organizing country.”)
44
See “Mission,” Export-Import Bank of the United States. Available online on April 12, 2008 at
http://www.exim.gov/about/mission.cfm.
45
See Hoffman, Scott L. The Law and Business of International Project Finance. Second Edition. P. 461.
Kluwer Law Internationals. The Hague. 2001.
46
See Id. Citing Lachica, Eduardo, “U.S. Export-Import Bank Builds Up Steam for Key Role in Project
Finance,” Wall St. J., May 8, 1994, at A9G.

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“Ex-Im Bank does not compete with private sector lenders but provides export financing

products that fill gaps in trade financing.”47

There are numerous other bilateral agencies that exist in efforts to promote a

various array of agendas to which governments and developers could turn in order to

supplement scarce private funds. The Global Environment Facility (“GEF”), for

instance, provides “…grants and concessional financing for environmental projects and

programs in developing countries,”48 while the Overseas Private Investment Corporation

(“OPIC”) has, as its goal, “to assist participation by United States private companies in

economic development of developing countries, emerging democracies and fledgling free

market economies.”49 In light of the credit crunch, these types of resources should be

carefully analyzed by interested parties who are seeking to make a project finance deal

possible. Such alternatives may permit project finance deals that are currently scheduled

to become a reality and future finance projects to continue to be undertaken. Indeed,

these alternatives may permit the demand for legal careers in project finance to continue

to flourish and increase in importance.

47
See “Mission,” Export-Import Bank of the United States. Available online on April 12, 2008 at
http://www.exim.gov/about/mission.cfm. (emphasis added).
48
See Hoffman, Scott L. The Law and Business of International Project Finance. Second Edition. P. 466.
Kluwer Law Internationals. The Hague. 2001.
49
See Id. at p. 463.

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