ing cautious progress. Even in the United States at that time, utilities were just becoming
comfortable with risk-allocation issues related to IPPs. At about the same time sponsors were
negotiating terms for the Chabei power project in China, the Termobarranquilla project in
Colombia, the Dabhol project in India and the Paiton I project in Indonesia. The issues
between the sponsors and the host countries were similar. Specifications in the host countries’
RFPs were not precise. The host countries did not have a clear understanding of how owner-
ship relationships would work, how risks would be allocated among contract parties or other
legal issues. Progress required trust to be developed on both sides of the negotiating table.
The sponsors had to maintain the fundamentals of project contracts and project finance, while
recognising that the host countries’ authorities had to protect their own countries’ assets and
to be seen by their peers as negotiating smart deals.
When President Zedillo assumed power the top officials at the CFE were replaced and
the new officials had to be brought up to speed. Continuity of many officials at lower levels
aided this process.
The economic crisis following the devaluation of the peso in December 1994 temporar-
ily rocked confidence in Mexico, which had restructured its foreign debt in the early 1990s
and recently had come to be seen as one of the more stable economies in Latin America. With
the bond markets unavailable, the sponsors looked for other sources of financing. This came
in the form of loan commitments from US Eximbank and the IDB, and a syndicated com-
mercial bank loan, as discussed above.
Political risk was evident in the United States as well. The US government was shut down
for two short periods in late 1995 as a result of domestic disagreements between the
Republican-dominated Congress and the Democratic administration of President Bill Clinton.
This delayed negotiations between the project sponsors and one of the principal lenders, US
Eximbank. Later, however, the debate over US Eximbank’s own reauthorisation did not put the
project at risk because US Eximbank had already made a binding commitment to finance it.
Legal issues
The CFE’s original bid specifications included a model lease agreement that was about three
pages long. Brandon A. Blaylock, Managing Director, International Business and Venture
Development, GE Capital Services Structured Finance Group, noted at the time that even a
normal car lease in the United States is longer. The sponsors and their lawyers had to negoti-
ate a more detailed comprehensive agreement.
The principal problem that the sponsors faced was a provision in Mexican law that a
lessee that suffers force majeurecan abrogate a lease. For example, if half of an apartment is
destroyed by fire, the lessee has a right to reduce the rent paid by one half. If the problem is
not corrected within a reasonable time, the lessee has the right to terminate the lease. This
right cannot be waived by a lessee. It applies to all types of leases, from apartments to power
plants. A lease that gave the CFE a right to terminate in the event of a problem could not have
been financed. Financial leases generally have ‘hell or high water’ payment provisions. The
challenge for the sponsors was to arrange a BLT project structure that would satisfy Mexican
law but could also be financed.
Negotiations had a couple of false starts. One structure developed in detail, with some
precedent in Mexico, was called a split lease. Some of the assets, principally movable assets,
would have been leased under New York law, which does not allow the lessee to abrogate the
SAMALAYUCA II, MEXICO