Patricia Sulser, counsel at the International Finance Corporation (IFC) for over 20 years and current global lead lawyer for its early stage project development fund IFC InfraVentures, speaks to James Wilson about the organisation’s decision to target early stage development, the progress of regulatory reform in the region and how a creative approach on the part of law firms can support projects.
Why did early stage project development become a target for the IFC?
In the last five or so years we came to the realisation that what was lacking in the infrastructure space in emerging markets was not so much money, as well-structured projects. There seemed to be fewer well-structured projects than we’d like to see to meet the targets that our board was expecting for us to deliver and we realised that if we could get in earlier and help design and structure the projects – in terms of environment and social safeguards, inclusion of communities, structuring of the risk allocation between the private sector and the public sector – it might result in there being more projects that were bankable, for the IFC’s debt and equity investments as well as other institutions, and that commercial banks (and governments) would feel more comfortable. The other thing we noticed is that the IFC, as a lender and equity investor in projects that were presented to us, was doing a lot of handholding but wasn’t really capturing the upside. We were devoting a lot of resources to helping restructure projects that were presented to us but it was a sunk cost. So we set up IFC InfraVentures.
How does IFC InfraVentures involve itself in projects?
It’s primarily something we call cost sharing. We typically enter into joint development agreements with co-developers pursuant to which we commit to spending a certain amount of money toward a development budget, as distinct to the actual construction and implementation budget, and to roll up our sleeves and do a significant part of the project development. The idea would be that we then convert those costs, whether it’s hard costs in cash disbursements or sweat, into equity in the ultimate company that’s formed if the project is able to reach financial close. We are looking for the project to be successful and we are a long term investor in general but the idea is that we capture the upside of that early stage risk.
How much of a priority is Sub-Saharan Africa for IFC InfraVentures?
The board approval for the ‘fund’ is not strict but we are expected to do about 50% of our work in Sub-Saharan Africa. I would say that is pretty accurate. Sub-Saharan Africa is also a huge priority for the World Bank Group at large as well as the other international development institutions and in fact, the boards of the IFC and the World Bank have set aggressive targets for doing PPP (public-private partnership) projects in infrastructure in the poorest countries, in Fragile and Conflict Affected Situations and the underserved regions of the middle income countries.
What current trends in the region have been most significant from your perspective?
The trends are probably not contained in a single year, but the global financial crisis in 2008 and developments since then have resulted in a few things. What I’ve seen is that in some countries that were making significant progress on sector reforms – such as changing and modifying tariff policy to reflect the real costs of delivering an infrastructure service, or the setting up of independent regulators, ensuring that there is a movement towards competition – there’s been sort of a stepping back or delay in the delivery in some of those reforms. It’s unfortunate because all those things are critical to investors in terms of a level playing field and whether they can earn a return on investments. When governments in some countries are bringing in the private sector, they are really hoping to lay off a significant amount of the commercial risks onto those investors. Yet the sectors are not far enough along and government owned utilities and fuel suppliers and other state owned entities are not sufficiently strong to behave and perform their obligations without further government support. Another trend is the entry of non-traditional investors in these markets. This is a welcome development and one that challenges traditional stakeholders to reassess upward their risk appetite, though also presents some challenges to those looking for long term benefits for the countries.
What developments would you like to see to encourage infrastructure investment?
In my own view some governments need to reconsider the trade-offs to attract and keep private investors. This can mean that they are under pressure to bear certain risks that other countries that are farther along the reform path do not need to shoulder, at least until the first few projects are successful and the government and its state-owned enterprises and regulators have established a good record for performance. Countries with a single government buyer-distributor system seeking to develop their power generation capacity need to mobilize significant liquidity and credit support and, in some countries, support the ability of users to pay for the electricity. But some governments are reluctant or unable to gain consensus among the requisite constituencies to take on these risks and as a result it has been difficult to close transactions with traditional long-term investors and other stakeholders. Of course, over the last few years, there are countries that have been affected by conflict and other difficult physical situations and so sometimes that means that there is not a lot of capacity in the government to sustain the necessary long term involvement in the development and operation of the project. Some of that can be fixed by the many organisations that put funding in place to hire consultants and advisors to governments, but governments must be committed to taking some tough advice.
I personally believe that it is also critical to have an effective means of avoiding and resolving the inevitable disputes that arise in these complex projects without necessarily resorting to formal dispute resolution, which can not only be expensive but also lead to delays and sometimes suspension of the project altogether. I am a believer in the systematic use of dispute boards in PPP and private sector projects as well as in public procurements.
How many lawyers would you typically have supporting an IFC InfraVentures project?
Basically there is usually just one internal lawyer on each project. For lawyers that may not have worked on one of these projects before I tend to tag team and support them more actively until they get the hang of it.
When do you turn to external support?
This is a very important issue for us at least in the legal department of IFC. Infrastructure projects are typically large, high profile, complex and multi-stakeholder projects that take a long time to put together, including to review and revise the project documents, to keep pace with both the financing and the project side and due diligence and so on. As such, in most of the projects we hire external counsel to help, partly for horse power and partly for expertise depending upon the country, the sector and so on. We always use local counsel of course in each of the projects not only for the typical look at bankruptcy laws and how to take security and things like that, but in the infrastructure sector there is a high degree of regulation so it is very important that local counsel advises us on the procurement rules, what should have been done for the government to grant a license to a particular party and then what is the tax regime and the regulatory regime and how do we fit into that.
How do you choose which counsel to turn to and what skill sets do you most value?
We have a panel of firms that we use regularly and those teams know us well. A lot of times when I am looking for counsel, personally I am looking for where my actual investment team is; they might be in Washington, they might be in Istanbul or in Asia and I am looking for location, I’m looking for language skills and of course I’m looking for the actual infrastructure experience. I’m looking for whether it is a civil law or common law jurisdiction. I’m not just looking for the firms, I’m looking for the individuals on the team who I know either myself or my colleagues have thought did a great job, that were thorough, understood and were respectful of our requirements and that were pragmatic and driven to get to the end with some solution to the inevitable issues that come up in these projects. We look for senior partner involvement in structuring and overseeing the work of more junior associates.
Given the tight budgets there is a natural tendency for senior partners to let more junior associates take the lead in negotiating and drafting but this can actually lead to higher costs. Infrastructure projects require years of experience on the ground, not just a few sample concession agreements or power purchase agreements to use as a starting point. There virtually is no plain vanilla infrastructure project; the parties are different, the country, sector, sponsors, lenders etc. Each of these factors can imply a different business and contractual result. It is extremely useful when one’s counsel has a good commercial perspective as well and is willing to take the initiative to move things along.
Are there developments in external counsel you would like to see that would particularly benefit early stage projects in this region?
There is a bit of a distinction between the typical project finance structure and early stage project development. This comes from the nature of early stage project development, when you’re not really sure whether a project is going to get to financial close and when the development budget and the willingness of developers to put in risk capital is definitely limited by their own boards and their appetite for the financial risk. I’ve been trying to work towards a tighter budget control for legal counsel. Some of the firms are very willing to be creative about this and it takes being creative because the typical law firm structure is definitely an hourly rate structure which doesn’t necessarily mesh with the uncertainty of project development. One thing I’ve been trying to do is to be as task-oriented as I can, or you might have a rolling budget with the ability to defer costs to a later date. Some firms have been willing to take some sort of contingency arrangement, which is actually really helpful, on the basis that if the project does go forward they will be in there for the bigger piece of work (I’m talking about for the project development part of the work). I would say most developers are looking to have some creative fee structures. The fee structure is important. Of course from the firm’s perspective there’s the desire to be as efficient as possible, for example having your least cost lawyers work on the project. Yet as an in-house lead business lawyer, what I really rely on is that the external partner that I know and love and trust will be the person overseeing the work and really being available himself or herself to talk to me about the structure and what’s efficient. What’s not helpful is to get medium quality work that I have to spend a lot of time on.
To what extent do you try to engage local counsel firms?
It does vary according to the project and to the country. We work with many local lawyers. The IFC has been in existence since 1956 so we have lots of people and have relationships in many of the countries that we work in, maybe all of them. In the infrastructure area it does tend to be that the international firms are hired for the real transaction pieces of work because that’s what international investors and lenders will look to, some comfort level that the structure is consistent with the market and the expectations of lenders and investors. However there are certain countries, some of the larger emerging markets, where there are fantastic law firms and they are easily able to manage an infrastructure project on their own. It is more cost effective to work with some of those law firms, so in some countries, instead of using an international firm, we’ve used the firms that are local, not only on the local issues but the transaction work as well.
Lastly, international firms have made a push to offer local presence in the region, is this important to you?
It does seem to me that the larger firms and the mergers of the large firms recently have meant that there is a way larger footprint from each of these firms and their capacity near to the location of our project in the emerging markets. Yet interestingly over the years (and I don’t think I am unique among my colleagues) really in the end it is all about the people. It is really knowing the person that you are handing off the interests of the IFC too. I wouldn’t necessarily switch law firms just because a partner leaves and goes somewhere else but what is really important to me is the individuals that are working on the project and that are taking responsibility for the quality and the timeliness of the work.
International Finance Corporation (IFC)
About the author
Patricia Sulser is a Chief Counsel at International Finance Corporation (IFC), based in Washington, DC. She is the Global Lead Lawyer for IFC InfraVentures, a $150 million internally managed fund established by IFC in 2008 to fund and proactively develop private and public-private partnership (PPP) infrastructure projects in the poorest emerging market countries. Ms Sulser has been involved in the financing of complex, multi-party infrastructure projects for her entire career at IFC and before in private practice in the New York, London and Hong Kong offices of Shearman & Sterling. She leads the IFC Legal Department Public Private Partnership practice group and coordinates with colleagues from around the World Bank Group and other development financial institutions on the G20 and World Bank Group PPP agenda.
Ms Sulser is also a certified mediator and has provided legal support for IFC’s establishment of mediation centers around the world. In addition, she actively promotes the use of Alternative Dispute Resolution (including dispute adjudication boards) in PPP and infrastructure projects around the world as the best means of keeping these important projects on track. She has also recently been appointed to The Dispute Board Federation Advisory Panel and is a member of the Chartered Institute of Arbitrators.