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http://ssrn.com/abstract=1908385
 
 

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Unmasking Project Finance: Risk Mitigation, Risk Inducement, and an Invitation to Development Disaster?


Shalanda Helen Baker


William S. Richardson School of Law

August 11, 2011

Texas Journal of Oil, Gas, and Energy Law, Vol. 6, p. 273, 2011

Abstract:     
Each year one in every five foreign direct investment dollars in the Global South flows through project finance transactions. These transactions consist of large-scale energy and infrastructure projects, and consistently produce deleterious effects on third parties. Until now, much of the legal scholarship in the infrastructure development field has focused its attention on the complex mechanics of project finance, including understanding the ways in which project promoters utilize project finance to manage commercial and political risks. Much of the human rights and environmental advocacy related to negative development outcomes is limited to seeking ex post fact relief. To date, very few scholars have delved into the intersection between these bodies of scholarship (project finance and human rights), and queried whether project finance transactions, ex ante, have a relationship to the externalities produced in large-scale development projects.

This article squarely engages this inquiry, and argues that the risk diffusion mechanisms native to project finance transactions work together to undermine limits on risky behavior on the part of project sponsors and thereby lead to the externalization of risk. To remedy this transactional failure, I recommend that three of the key risk-mitigation features of project finance - (1) non-recourse debt, (2) high debt-to- equity ratios, and (3) the use of special purpose entities - be abrogated in order recalibrate the development calculus and force project sponsors to bear more of the risk of their activities. Ultimately, more rigorous, interdisciplinary, examination of project finance is required to understand fully how this pervasive method of financing infrastructure externalizes many of the costs of development, however, this article provides a useful starting point for the discussion.

Number of Pages in PDF File: 62

Keywords: project finance, finance, risk, human rights, energy, indigenous rights

JEL Classification: F23, F30, O19, Q25, Q42

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Date posted: August 11, 2011  

Suggested Citation

Baker, Shalanda Helen, Unmasking Project Finance: Risk Mitigation, Risk Inducement, and an Invitation to Development Disaster? (August 11, 2011). Texas Journal of Oil, Gas, and Energy Law, Vol. 6, p. 273, 2011. Available at SSRN: http://ssrn.com/abstract=1908385 or http://dx.doi.org/10.2139/ssrn.1908385

Contact Information

Shalanda Helen Baker (Contact Author)
William S. Richardson School of Law ( email )
2515 Dole Street
Honolulu, HI 96822-2350
United States
8089569435 (Phone)
8089569435 (Fax)
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