Contributed By Winston & Strawn London LLP
Project finance has been used to finance large capital-intensive energy and infrastructure projects in the UK since the 1970s. Project finance entails the raising of finance on a non – or limited – recourse basis by a special purpose vehicle (Project Company), with all repayments payable from the cash-flows generated by the project.
A typical project financing structure includes one or more equity investors as owner(s) of the Project Company and lenders (usually composed of a consortium of financiers, including commercial banks and, often, multilateral agencies or development finance institutions). In the wake of the financial crisis, continuing pressure on commercial banks’ liquidity and the tightening of regulatory requirements under the Basel III rules saw many banks reduce or cease their involvement in project financing transactions. In recent years, institutional investors have increasingly contributed to closing the financing gap in UK infrastructure projects.
Project finance in the UK is not subject to a specific legal framework and the applicable rules will often depend on the sector and location of the relevant project. In addition to UK legislation (ie laws of England and Wales, Scotland and Northern Ireland), the applicability of European law must be taken into consideration when structuring and procuring projects. Relevant European law provisions include the state aid rules under articles 107 and 108 of the Treaty on the Functioning of the European Union (State Aid Rules) and various EU environmental regulations. In addition, the planning and licensing regimes in the UK are also a prime consideration in project financing transactions.