lease because of force majeure.Other immovable assets would have been leased under
Mexican law. The Mexican authorities rejected this structure in early 1994 because of its
complexity, sending the sponsors and their lawyers back to the drawing board.
The sponsors’ principal Mexican law firm, Ritch, Heather y Mueller, and the CFE’s
lawyer developed the concept of a Mexican business trust combined with a lease. Obligations
under trust agreements can be made ‘come hell or high water’ and these obligations cannot
be abrogated because of force majeureas they can under leases. If the lessee were subject to
force majeure,the value due under the trust would turn out to be equal to the remaining lease
payments. This was the fundamental legal cornerstone that allowed the project to be financed.
The trust structure also provided benefits to the CFE, such as the right to interact with
the developers in the construction process, seeing drawings, approving designs and inspect-
ing progress. (The original bid specifications would have handicapped the CFE, the user of
the plant, by not providing for it to interact with the developers.) As a result, lawyers for both
sides believed that there was a sufficient two-way flow of benefits and consideration to make
the agreement enforceable.
An unusual aspect of the trust structure, as applied to a project financing, is that the CFE
contracted with the owner, which in turn contracted with the engineering, procurement and
construction (EPC) contractor. The obligations that the owner undertook in favour of the CFE
in many respects had to be identical to obligations undertaken by the EPC contractor in favour
of the owner.
The CFE is a party to the trust as well as to the lease agreement. It is the third benefi-
ciary of the trust, the first being the senior lenders and the second being the equity holders.
As a result, when the transfer of the trust’s assets, the power plant, is made at the end of the
lease period, the CFE will have third priority in receiving the assets.
Lessons learned
Blaylock believes that the lessons learned from this long process can be applied to any poten-
tial project participant in developing international markets: be prepared to learn a lot and be
prepared to teach as well. A successful project requires close teamwork among all the project
participants, and sensitivity to each other’s issues and needs. As those involved in concurrent
IPP ventures in other less developed countries would agree, financing takes longer than usual
with any first-of-a-kind project, especially when there are difficult risk-allocation issues.
Often the process is just as important as the substance.
Miguel Rubio, a lawyer with US Eximbank, believed at that time that the Mexican gov-
ernment had learned about the need to develop project-financing and risk-allocation struc-
tures that are in line with the world market.
Ana Demel, partner of Cleary, Gottleib, Steen & Hamilton, believes that the most impor-
tant lesson concerns the need to have rational, well-thought-out bid specifications, with careful
consideration of local-law constraints and a realistic approach to meeting market requirements.
When there are flaws in the specifications, a lot of time and money is required to work around
the problems. Demel notes that delay is not only expensive and frustrating for all parties, but
also brings with it a host of other risks such as the uncertain policies of a new government.
Because this was Mexico’s first quasi-IPP venture, the CFE encountered many problems
that it should, perhaps, have foreseen but did not when drawing up the rather simple bid spec-
ifications and draft lease agreement. Examples include the Pemex monopoly on pipelines and
POWER PLANT