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

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