Page 60 - A U4SSC deliverable - Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects

Planning risks

Planning risks can be prevented by obtaining all the necessary licences, permits, consents and
approvals connected with the planning. Lenders need to know if changes in planning, zoning
or environmental regulation could affect the future economic performance of the project, as this
increases risk.

Recommendation: as planning licences and permits usually expire after a specified period, it
is suggested to check the validity of documents before starting a project, and make sure not to
take on a new project based on old information (for instance, obsolete municipal plans might not
include the latest developments in land law).

Environmental and force majeure risks

Environmental and force majeure risks are normally due to natural disasters, war, political unrest,
pandemics and similar concerns, which are beyond the control of any party to the project. Force
majeure excuses the lack of performance by a party in any contractual relation.

Recommendation: having strong, reliable cash flow is essential. Beyond this factor, however,
environmental and force majeure risks are the hardest to mitigate.

Economic and political environment risks.

Private investors usually prefer politically independent markets, where a strong legal framework
establishes the same rules for all participants. Small and medium-sized companies are cautious
about investing in controlled markets, since they would not be able to fight the system if rules
change suddenly, or they will be cautious in order to secure their relationships with government
and government affiliated organizations. In these economies, international institutions therefore
play a very important role as security guarantors, ensuring that investors can deliver the project
under the conditions established at the start of the project, rather than any new conditions imposed
once the investments are in place. International arbitration has been able to prevent companies
from abandoning projects, by giving them the security they lost due to insufficient information,
unclear contractual terms, or changes in the legislation of the receiving location.

Recommendation: it is recommended to engage partners to manage these types of risks. In order
to mitigate them, ensure that the central government, state regional government, local government
or any institution above the contracting one is aware of the investors’ involvement, and is present
at the negotiations so that they can be called upon in arbitration courts, if need be. International
arbitration courts should be explicitly agreed upon and formally indicated in the contract.

42 U4SSC: Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects