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Critically examine the requirement for special purpose vehicle (SPV) Project Financing of a large complex infrastructure or similar type projects. In your discussion you should consider:

• The requirements for a robust Business Case

• The reasons and advantages for using an SPV for such projects

• The Project Financing process, examining the key aspects and pitfalls in the process

• Sustainability aspects that may be necessary in such projects.

Enron Case Study

A Special Purpose Vehicle (SPV) has been given another name which is Special Purpose Entity (SPE). This legal body can be thought of as one to accomplish a specific short distanced provisional target. This body is mainly either originated or sponsored. The body’s power is distanced from a small fenced parameter which can be explained due to its short-term existence till the date the target is not accomplished. The main work of this body is to tackle all the risky loopholes and to present it before the investor willing to take them on for the sake of making investments in order to gather profits (Slee, 2011). This process also opens up the gates of getting financial help for the company.

An SPV always resides on the investor’s side with advantages for them. But this process should be used only when it is most needed. There are two types of procedures for investing which includes a solo option and as a company. It is seen that if a real estate investor buys a property from a company then it is profitable for the person because if the property is kept for a term longer than 5 years then the person gets a PIT exemption (Goergen, 2012). It is seen that though the person gets a PIT exempt but it also prone to double taxation related dividends, but it is always useful to work in order to the SPV and also to sideline your investments as a solo as well. This can bring up dual profit making conditions.

Enron can be thought of as the most highlighted case when it comes to discussing the topic of off-balance sheet SPVs. Enron was a buyer-seller of electricity and other merchandise related to the electric field. Enron can be seen as the first company who marked its place in the electricity market. In 1990’s it became a massive energy package as it shifted from buying-selling electricity to production of large-scale electricity merchandise. Almost all the energy contracts were wholly created by this company. All these were pointing towards a disturbed market. Huge unpaid sums were drawn by the company through many off-sheet SPVs which were not legal. It was also noted that all these huge unpaid sums were absolutely undisclosed and were replaced by the assets that were negligible in capacity to the SPVs. Also, sales were grabbed on from these processes. SPV’s Board of Directors knew all about this but were totally engaged with the company’s authorities on such topics. Many of the employees which were against the unethical and corrupt practices of the company had to face penalties.

Requirements for a robust business case

It was seen that during the early workings. Enron was making use of the SPVs in a very legal and balanced way to manage its electricity business. Greed for surplus money led the company to take up unethical use of the SPVs and to follow a different track by hiding their losses. Some of the main reasons which led to the collapse of the company were the sleepy authorities, a pampered relationship with the auditors which despite of the discrepancies favored the company, lazy watchfulness, corporate arrogance and lacking in disclosures. It was clear that the CFOs could hide the huge unpaid amount with the help of the prevailing accounting loopholes (Ianchovichina et. al, 2013). It was noted that the company had a very different point of view in these matters as compared to the managers of the off-balance sheet body as the company tried to suppress the prevailing risks and conflicts (Doz & Kosonen, 2010). The main work and the effective power of the off-balance sheet bodies were not at all widely known by various investors. It was only after the decline of Enron that the investors gained knowledge about the complex SPVs which were a regular part of the US companies.

Recognition of measures, benefits, and owners

A thorough discussion must be facilitated by the business representatives on the anticipated advantages and these must be explicitly taken into due consideration. It is very important for such business representatives to let their clients dictate their terms and conditions instead of themselves concentrating on the product sales pitch. Furthermore, if such advantage expected by the client is outside the restriction of new technologies, it must be redressed as soon as possible. Besides, when all the anticipated advantages are recognized, the metrics on which such advantages can be measured must be decided (Mandri-Perrott, 2009). This is significant for various organizations because distinct metrics are used by them in order to measure the same advantage. For instance, if it is presumed that the advantages are ‘enhancement in sales figures’, these can be measured by various parameters such as increased sales in a fresh market, enhanced sales in a non-potential market, etc. At the last, the beneficial owner must be recognized like in a self-checkout system project, the most relevant benefit owner is the Marketing VP but other beneficial owners like the finance VP and operational VP must not be ignored (Freedman, 2013). Nevertheless, a self-checkout project can also influence issues associated with petty management of cash and even finance VP may be ready to exert some interest in the project.

Recognition of measures, benefits, and owners

Investment purposes and business driver

Business drivers are basically nothing but present complications encountered by an organization. It is very crucial to recognize what are the business drivers that are faced by clients in order to facilitate heavy investments in the Information Technology segment. However, recognition of such drivers is not simplified in nature (Morgan, 2009). For instance, a retail chain such as Walmart may provide that they need to install a fresh self-checkout innovative technology to offer a rapid checkout option for the customers who carry fewer items with them but Walmart’s unidentified business driver can prove capable in decreasing the manpower as a whole. Further, sometimes clients are hesitant to share real business drivers or they may not even know why they require a newer technology. Hence, it is crucial to interconnect the investment objectives of a business to its drivers (Svejenova et. al, 2010). Nevertheless, this is the reason why investment objectives must redress all the unidentified and identified business drivers.

Recognition of risks and expenses

The expenses that the client may have to incur can be of several kinds. The initial purchases needed to start the project may be considered one kind of expense. Such costs can be easily recognized by ascertaining the set of requirements that are not present with the client. The initial cost of purchases relies upon the readiness of the client. Another kind of investment is developmental expenses that are the expense required by the client to incur for the progress of a project. Besides, often a project may require additional infrastructure investment even before the start of the actual project. This signifies that completion of a project does not always mean that additional expenditure may not incur. It is therefore required that cost of business variation must also be considered. For example, the resources an organization requires to expend after completion of a project like hiring consultants, cost of adoption of technologies, etc must also be considered. At the last, the maintenance expenses must also be addressed for the new solution that is proposed to be offered to the client.

Tax advantages

SPV has various tax advantages wherein assets are exempted from particular direct taxes. For instance, in the Cayman Islands, accommodated SPV’s attain advantages from a total tax holiday for the initial twenty years. In addition, SPV’s are utilized to make a transaction tax effective by selecting the best tax residence for the vehicle. In other words, SPV’s are utilized in financial engineering strategies having the main objective of the influence of financial statements or tax avoidance (Ehlers, 2014). Further, few countries also possess distinct rates of tax for gains associated with the sale of property and capital gains. For the purpose of tax schemes, letting every property be owned by a distinct company can be an efficient thing. Such companies can then be easily sold and purchased in place of actual properties, efficiently transforming sale of property gains into capital gains for the purposes of tax.

Investment purposes and business driver

Jurisdiction freedom

The firm starting the special vehicle is free to accommodate itself in the most efficient jurisdiction from a statutory aspect while still continuing to function from outside this segment. For instance, companies desire SPV’s that exist in countries like Singapore that are considered top rated from the perspective of doing business (Sims & Brinkmann, 2003).

Hives off all the risks

By terminating liabilities and assets from the balance sheet of the sponsor, SPV’s can function as a bankruptcy remote. Moreover, if the sponsoring firm encounters some financial issues, it can easily safeguard itself from its creditors as they cannot snatch away the assets of the SPV. Further, by isolating risky projects from the parent company and by offering the same to new investors, the opportunity to acquire a share of a particular risk in a firm with a clearer and simple balance sheet (because it is established for a sole objective only and there are no debt obligations as well), can easily benefit both investors and firms (Singer, 2007).

Documentation clarity

It is very simple and easy to restrict various affairs or limit unauthorized transactions that prevail within the documentation area of the SPV.

Statutory compliance

A special purpose organization can often be established in order to surpass statutory restrictions like rules associated with the nationality of ownership of particular assets. For instance, it can be observed from the case of Vishal Retail Ltd that the firm intended to transfer all its fixed assets to an SPV that was decided to be predominantly acquired by the international private equity firm (Texas Pacific Group). However, once the assets were acquired by the SPV, the firm (TPG) would have operated the entity as current laws did not permit FDI (foreign direct investment) in multi-brand retail organizations. It is very easy and simple to establish a special purpose vehicle based on the jurisdiction choice of an entity. Besides, such procedure may consume more or less one day with no permissions and authorization from the government.

In controlling and managing the construction projects, both project management and finance go hand in hand. In general, many engineers are aware of the aspects of project management whilst they are not required to pay due attention towards project financing. As a result, many project failures and delays happen because of lack of appropriate financing that is the major bloodstream in enhancing and building the infrastructure projects (Sainati, 2016).

Recognition of risks and expenses

Project financing is generally in the form of asset-backed securities, public-private partnerships, etc and is becoming famous in the current scenario. Projects have traditionally depended upon methods of project finance with debts being offered by commercial banks. However, in order to gather borrowings, long-term debts, equity, senior debt, etc against the project is not a simplified process. Besides, securitization provides an efficient and potential substitute for generating capital in order to finance the projects (Ianchovichina et. al, 2013). This is the reason why more infrastructure financing is using securitization in conjunction with traditional techniques of project financing. In the lifetime of securitization, various experts are expecting that it will take around 10-15 years for it to replace project finance international or traditional bank lending (Nose, 2014). Hence, it is crucial to pursue a basic knowledge of securitization, public-private partnership’s role in the projects by the involved parties such as engineers.

Creating an SPV also allows privately sustained infrastructure projects to enjoy a degree of isolation either at the operation stage or construction stage. In most of the cases, the benefits of an SPV are a major requirement imposed by the public sector, contractors, guarantors, etc on the private agent. Furthermore, the SPV can also be segregated into viewpoints like financial and legal. SPV varies depending upon the financial and legal stakeholder agreements in a project (Nose, 2014). Nevertheless, various infrastructure projects possess distinct structures of SPV like telecommunication, power purchase agreements, mining, oil, gas, and even water treatment projects (Nag et. al, 2007). This signifies the fact that no single SPV structure is suitable for all the PPP projects.

In opposition to the aforesaid scenario, financing infrastructure or similar kinds of projects, especially in major developing countries entails various kinds of pitfalls or risks. Firstly, the process of project financing is a massively complicated financing mechanism that can need major lead times. Furthermore, high transaction expenses can also be incurred for setting up or developing one-of-a-kind SPV (special purpose vehicles). Besides, raising capital from project finance is more expensive than through corporate finance avenues. The more requirements for monitoring, information, and contractual agreement enhances the transaction expenses (Gatti, 2008). In addition, the highly-specific behavior of the financial structures also entails bigger costs and can decrease the liquidity of the debt of the project. Such margins for project financing also sometimes consist of premiums for political and country risks because many of such projects are in relatively high-risk countries or zones. The projects involved in project financing have also elevated coverage ratios and requirements of cash flow. Nevertheless, the contractual arrangements involved in the project often prescribe intrusive monitoring on the part of the management and operations that can be presented in a corporate environment of finance (Demil & Lecoq, 2010). Overall, it is the role of the project advisor, sponsor, and other participants to structure the financing in a way that mitigates the aforesaid risks. Investors and lenders are always concerned about financing immobile assets in risky areas of the world. The role of the project finance advisor is to carve out all the risks in a way that can assist them in assigning the risks to the parties who are best suited in order to be liable to control them (Rothballer & Kaserer, 2012).

Project finance has enjoyed massive growth in the past few years and its emergence has resulted in the creation of trends like privatization, industries’ deregulation, etc. However, despite such success, there are pitfalls that remain as underlying questions.

In the case of large infrastructure projects there is a need of huge resources and have high influence. The extent of the investment required for the projects are mixed with the influence of the scale that makes a strong assessment into such projects from the example on a sustainable development (Sawant, 2010). This is majorly so because there is a strong increment in the public services and goods as they are delivered in a public-private-partnership mode o the contrary, the regulators needs to keep a balance between the factor of affordability and sustainability and in the process it ensures that there is a strong demonstration for money value (Inderst & Stewart, 2014). Sustainable development does not indicate full limit to growth and cannot be termed as a new process to environmental protection rather it is a concept that has re-defined economic growth that enables to induce path of development that are economically, socially and ecologically sustainable (Gatti, 2008). When it comes to the mega projects such as Ultra Mega power projects, Highways, Dams and other huge construction such are deemed to be the catalyst for induction of new development paths and hence, helps to address the economic, social, as well as environment dimension of sustainability of the projects.
As per the above discussion, it can be commented that the conventions on sustainability helps in creation of huge economic and other social benefits to the public at large if it is planned and executed in a well defined manner. Compliance in terms of policy and provisions on Resettlement and Rehabilitation and other defined process in terms of acquisition of land and compensation to every Project Affected Person can provide social responsibility to the projects (Fernando, 2009). Moreover, compliance with the regulations contained under the Environment Impact Assessment Act can make the projects to be sound in terms of environment. When the laws are enforced in an effective manner, law, as well as policies can be an important driver in terms of responsible behavior (Douma & hein, 2013). Hence, the requirement for due compliance strikes the notion that the central role of law, as well as policy projects better sustainability. As the role of law is important in sustaining large infrastructure projects it will be important to peer the influence of litigation on the court of law on large infrastructure cases that pertains to road, river valleys, power plant, etc (Moncrieff, 2014). Going by the overall discussion, it can be said that a holistic approach is required in the case of an infrastructure development that considers both the consumption, as well as aspect of production, various stages of infrastructure, organizational levels and role by various stakeholders.


A much standardized legal noting of the SPVs is also their disadvantage. From a point of view of larger associated it was seen that the civil law partnership didn’t fit into the picture and also it was not agreed on from the economic angle. All this led to the acceptance of a limited joint-stock partnership. Though the civil law partnership won in respect to the tax exemption it was the joint-stock which was simpler and common to all the investors widely. The KRS registration system also brought up velocity in concern. Going by the overall study, it can be commented that the project finance is the need of the hour and therefore demands a proper risk consideration. Moreover, the alternative to the management of risk involved in SPV is to use the vehicles overall through re-intermediation of off-balance sheet assets.


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