Economic Conditions
Cancellation of Licences and Permits
Use of Local Services or Goods
Foreclosure of Assets
Dispute Resolution
Currency Exchange Regulations
Restrictions
Non-recourse project financing applies to certain industrial projects that:
- are mainly export-oriented or related to the building and operation of public works/services with a system of tariffs or tolls;
- involve government participation or the granting of government permits, licences or contracts. Such permits are typically granted for 20 to 30 years but are subject to earlier termination where an investor is found to be in default of its undertakings; and
- require the incorporation and participation of local investors and maximization of the use of local-origin resources, goods and services.
In this overview some of the main issues concerning parties seeking to evaluate the granting of non-recourse financing to a project will be addressed.
Revenue Securitization
Where the revenue being used to pay a loan is mostly derived from the export sale of a project's production (either under long-term agreements with offshore purchasers or their affiliates), securitization systems similar to those employed in more developed countries can easily be established. However, where revenues result from purely domestic transactions, the method of securitization must be adapted from legal instruments which do not necessarily have the scope of other developed legal systems.
Where project financing is made in favour of an unincorporated joint venture of which the state controlled oil industry's parent company (PDVSA) is part, the government may preclude PDVSA from granting a security interest on its receivables. This does not prevent alternative mechanisms from being adapted, allowing the lenders indirect access and control (through a managing agent) to PDVSA's share of the project's export revenues.
In late 1999 Venezuela enacted a Law for the Promotion and Protection of Investments (both foreign and national) that not only precludes discretional expropiation of private investments without compensation - itself a constitutional principle supported by a number of international treaties - but also provides for the possibility that the National Assembly may authorize the granting of stabilization agreements to certain investors. The agreements ensure that tax rates and other conditions prevailing at the time of their investment will be frozen for 10 years.
Venezuela is party to various treaties with developed countries that protect the investments of foreign nationals living in Venezuela from uncompensated expropiation and provide ways of ensuring payment of fair compensation to investors whose assets are seized or sequestered.
Cancellation of Licences and Permits
Certain public interest activities are by law reserved to the state and must therefore be performed only
- by a government entity;
- through a joint venture between a government entity and private investors; or
- by private investors who have been granted a special licence or permit by the government.
Often the assets used in performing these licensed activities (eg, gas exploration, production, transportation and distribution) are transferred to the government upon expiry or revocation of the relevant licence. Restrictions are thus placed on the encumbrance or transfer of these assets, making the securitization of lenders' loans less reliable. Additionally, the contracts or licence permit rights are frequently declared unmortgageable and their transfer is subject to prior government approval. This makes it difficult for the party receiving the financing to provide for rights that favour lenders, as the normal procedure is for such transfer to be approved by the relevant government entity.
When the licensor appears to have violated the licensed undertakings, a risk lies in how discretionally the government entity may interpret supervening circumstances when judging whether the licence conditions or other regulations have been violated and should be cancelled.
The assumption is that government entities will be careful in judging when a violation has ocurred, mainly because of the possibility that a claim may be filed by the prejudiced investor.
Use of Local Services or Goods
One of the government's policy guidelines is that any government sponsored project should be established and run with the maximum use of national goods, services, resources and materials. This is always a condition for obtaining a licence or permit for a project although it is tempered with the qualification that local origin goods and services be of comparable quality, timing of delivery and cost to those of foreign competitors.
Even when assets are mortgageable, foreclosure only entitles lenders to have the assets auctioned and retain the proceeds. Where the project is the subject of a government licence no automatic step-in rights are allowed, although the government may authorize the transfer of the licence to a qualified party upon the request of the licensor.
Parties may choose the law to be applied when deciding any dispute arising from the interpretation or performance of their contract. This principle is subject to an important exception - contained in the former Constitution of 1961 and in the current Constitution of 1999 - that so-called contracts of public national interest (ie, contracts made by the government that affect the national public interest) be governed by Venezuelan law. Any dispute not amicably settled must be deemed subject to the jurisdiction of Venezuelan courts. This provision has not prevented agreements from providing for both non-Venezuelan governing law and international arbitration.
Usually it is licence or concession documents and investment or joint venture agreements which are subject to Venezuelan law and jurisdiction, although a recent judgment by the former Supreme Court (based on the 1961 Constitution) declared international arbitration to be acceptable for joint venture agreements providing for oil exploration and production of large tracks of subsoil.
International arbitration is also fairly frequent in international offtake of supply agreements.
As one of the world's main oil producers Venezuela enjoys a healthy trade balance and an abundance of reserves. The country has not needed any exchange control restrictions and allows full access and repatriation of foreign currency.
Previous foreign exchange control practices led to complaints by the public, leaving the country with a dislike for such controls. It then became customary for Congress and the government to grant free access to foreign exchange to investors of large projects.
This may be the subject of some of the provisions of the stabilizations agreements to be authorized by Congress, pursuant to the Law for the Promotion and Protection of Investments.
Where PDVSA directly participates as a partner in an unincorporated joint venture to build and operate a project, certain covenants exist (in the form of negative pledges) that may restrict its ability to grant lenders more security than the government is willing to grant other creditors.
The Law of Concessions allows private parties to execute public works against an agreement to operate and receive the proceeds from the use of such public work for a number of years. A private party may receive enough to allow it to recoup its investments, cover its operating costs and receive a pre-determined profit.
For further information on this topic please contact Humberto Vivas at Hoet Peláez Castillo & Duque by telephone (+58 212 263 644 )or by fax (+58 212 263 7744)or by e-mail
([email protected]).
The materials contained on this web site are for general information purposes only and are subject to the disclaimer.