The construction of large scale projects is often met with delays, disruptions or even cancellations. As such, all stakeholders in an infrastructure deal will both put in place appropriate risk mitigants as well as further escalation (terms of settlement, litigation) procedures. In such instances, players will first seek economic settlement (out of court, through insurance or contractual claims), before escalating to forms of legal recourse.
For economic recourse, there are insurance and other risk mitigation options offered by export credit agencies (ECAs) or multilateral development banks (MDBs) that provide investors with confidence and mitigate their exposure to risks. For example, ECAs can provide cover for investors by means of insurance or of a direct guarantee for political risks, commercial risks, or both. With their involvement, the infrastructure projects become more bankable and commercial lenders would be less averse to financing these projects.25
Private investors who do not have access to ECAs or MDBs can turn to other entities for such economic recourse. An example would include clients who have sought Marsh's expertise for non-payment insurance for project finance lenders. Using the example of non-payment insurance, this policy does not only mitigate risk, but also has other advantages including reduced borrower credit risk, country exposure relief assistance, and regulator capital relief.
A key requirement for appropriate legal recourse preferred by emerging market financiers is sovereign immunity or named centers of arbitration. This is because it is likely that the awarding authority in an infrastructure project will be a government authority and could consequently benefit from sovereign immunity. This immunity is a legal doctrine according to which the sovereign or state cannot commit a legal wrong and is immune from civil proceedings or criminal prosecution.
This way, the government is able to provide credible guarantee support to PPPs which would demonstrate to investors that there is a high quality of project preparation, including financial and structuring parameters. In the event that there is a guarantee call, there will be a claim assessment and the associated guarantee payments will be made to the recipient of these guarantees. For example, in Indonesia there are two other types of government guarantees applicable to power plant projects in addition to the Public Service Obligation (PSO). These guarantees are the Guarantee Agreement issued by the Indonesian Infrastructure Guarantee Fund (IIGF) and the Business Viability Guarantee Letter (BVGL) issued by the Ministry of Finance (MoF).26