UNCITRAL: A Legislative Guide to Privately Financed Infrastructure Projects


In September, 1999, the United Nations Commission on International Trade Law (UNCITRAL) -- the core legal body of the United Nations system for international trade law -- released to the public its "Report of the United Nations Commission on International Trade Law on the work of its thirty-second Law on the work of its thirty-second session," containing, among other things, the now complete draft legislative guide on privately financed infrastructure projects (the "guide"). Cadwalader's attorneys participated in the preparation of the guide and we summarize below its contents.

Thirty-four of UNCITRAL's thirty-six current members met from May 17 to June 4 to revise and update several important trade law legislative guides, including the guide. In addition to the participation of the current member States, which membership includes the United States and Great Britain, as well as a number of Latin American, Middle Eastern, African, and Asian countries, the session was attended by observer States such as the Republic of Korea and Turkey, and by interested international organizations, such as the International Monetary Fund and the International Institute for the Unification of Private Law.

In the past, UNCITRAL has developed what are considered to be and described as "landmark legal texts." These texts include the United Nations Sales Convention, the UNCITRAL Model Law on International Commercial Arbitration and the UNCITRAL Arbitration Rules. This most recent guide, addressed to legislators and policy makers in countries interested in promoting private investment in infrastructure projects, is at a minimum already thought to be a "useful tool for interested governments when reviewing and modernizing legislation" in an attempt to attract such foreign investment. As with its other guides, the Commission claims merely to provide advice, which in itself is helpful to both countries and private project finance participants, but inevitably, with the input and agreement of a multitude of states and international organizations behind it, the guide becomes by most standards more than advisory.

The guide's legislative advice to governments is fundamentally concerned with the necessary balancing of both private sector and public sector interests when cooperating in privately financed infrastructure project work. Listed as the most central requirements for a beneficial project from the private sector perspective are the need for certainty, stability and transparency, investment protection provisions and a choice of guarantees against inappropriate interference by the contracting authority. The public sector on the other hand is naturally said to be more concerned with the need to ensure the continuing of the service, the observance of environmental and safety standards, adequate monitoring of the project performance, and the possibility of revoking a concession when applicable requirements are not met. Throughout the guide, the Commission strives to sustain each of these requirements in a fair, balanced and beneficial manner.

The complete draft of the guide includes an introduction and seven chapters. In the introductory section, the guide lists its purpose as to assist national authorities and legislative bodies wishing to establish a legal framework favorable to the development of public infrastructure through private investment. It further explains that it does not provide a single set of model solutions but seeks to help the reader evaluate the different approaches available and to choose the one most suitable to the national or local context. In addition to this purpose and scope section, the introduction includes the various definitions and concepts used throughout the guide.

In Chapter I, General Legislative Considerations, the Commission delves into the combination of the State's constitutional law and privately financed infrastructure projects, comments on the government's scope of authority to award concessions, along with relevant general guidelines, and discusses the importance of administrative coordination. For example, one of the Commission's suggestions -- citing recent international experiences -- is the importance and demonstrated usefulness of establishing a central unit within the host country's administration to coordinate the exchange between the main governmental bodies involved and the project company.

In its second chapter, Project Risks and Government Support, the Commission provides an overview of the main categories of project risks -- political and currency risks at the forefront -- and suggests various principles behind the possible contractual arrangements for risk allocation and mitigation. It goes on to discuss policy considerations relating to government support of projects and those forms of support available, e.g. public loans or loan guarantees for the repayment of loans taken by the project company. It then delineates the various guarantees available through international financial institutions, such as the World Bank, and those guarantees provided by bilateral institutions, such as export credit agencies. As with other chapters, this chapter also includes an array of different options. It is suggested, for example, that in cases where a project company is unable to repay funds borrowed in foreign currencies due to extreme foreign exchange fluctuations, the foreign exchange risk may be regarded as a political risk, for which the government may step in to assist.

Chapter III deals with the selection of the concessionaire -- covering selection procedures to procedures for requesting proposals and dealing with direct negotiations, as well as the issue of unsolicited proposals. Among other comments, the Commission advises the government to keep a record of its selection proceedings, suggests various qualifications that bidders should possess, such as professional and technical qualifications, and defines and strategizes several key concerns relating to the concessionaire-host country relation. For example, the Commission suggests it preferable to "adhere to competitive methods when selecting the concessionaire in order to counter improper practices and corruption, as well as to obtain the best value for the host government and the users of privately financed infrastructure facilities."

The guide discusses the project agreement in its Chapter IV. It discusses the core terms of the project agreement, from the financial arrangements to the project site, the concept of security interests and easements, as well as the transferability of shares of the project company. In addition to informing the host country of the possibilities, the guide suggests which arrangements the host country may wish to offer a project company in order to attract financing.

Infrastructure development and operation are the topic of Chapter V, which covers subcontracting issues, infrastructure operations, performance guarantees and insurance, changes in conditions, exemption provisions, and events of default and remedies. As in previous chapters, the guide suggests various possibilities and preferable alternatives to the contracting country.

Chapter VI addresses the issues of extension and termination of projects. Covered in this range of topics are the financial arrangements upon termination and the wind-up and transitional measures to be taken, the possible transfer of assets to the contracting authority or to the concessionaire, and the possible transfer of technology. Definitions and explanations of the different types of terminations preface these arrangement options. In addition, suggestions as to host government compensation is explored.

Chapter VII, viewed by some as the most important part of the legislative guide and by others as "overly ambitious," outlines the relevant areas of domestic legislation that may directly impact the likelihood of foreign investment. The chapter covers a long list of these areas, including property law, rules and procedures on expropriations, intellectual property law, accounting practices, contract law, insolvency law, tax law and environmental protection laws, among others.

The final chapter, Chapter VIII, discusses the settlement of disputes. It cites different options for resolving disputes between contracting authority and concessionaire, such as negotiation, conciliation, referee and dispute board proceedings, as well as arbitration or judicial proceedings. The settlement of commercial disputes and disputes involving other parties is also reviewed.

In short, this latest of UNCITRAL guides is far-reaching and thorough. It will be interesting to monitor its development and the extent of its future implementation. If UNCITRAL's efforts regarding privately financed infrastructure projects become as influential as previous guides on other matters have been, such monitoring will be essential. *