Project Sponsors Must Fund Advisory Costs

Project Sponsors Must Be Capitalized to Fund the Financing Process

Institutional financing does not eliminate the sponsor's obligation to fund project development. Financial advisory, legal work, technical diligence, modeling, permitting and transaction preparation are costs of bringing a project to financial close.

One of the recurring misconceptions in project finance is that substantially all project-related expenditure should be deferred until financing has been secured.

This is rarely a workable premise.

A sponsor may be seeking US$50 million, US$250 million or US$1 billion of debt, but the existence of a large capital requirement does not relieve that sponsor of the need to fund the work required to make the project financeable.

Before financial close, a project may require financial advisers, legal counsel, engineers, technical consultants, environmental specialists, insurance advisers, model auditors, tax advisers and other professionals.

Those parties perform substantive work before lender funds are available.

Accordingly, where a sponsor is unable, or unwilling, to fund ordinary professional costs associated with the financing process, the issue extends beyond the amount of a particular retainer. It raises a broader question as to whether the sponsor is adequately capitalized and institutionally prepared to execute the proposed transaction.

Financing Begins With Project Preparation

Financial close is the culmination of a financing process. It is not the beginning of one.

Before lenders commit capital, they generally need sufficient information to understand the project, its contractual structure, its economics, its risks and the parties responsible for delivering it.

The World Bank's project preparation guidance recognizes that infrastructure and PPP preparation can require substantial expenditure on financial, legal, technical, environmental and transaction advisory work before a project is ready for implementation.

In other words, preparation itself requires capital.

Depending on the sector and project, preparation can involve:

• Feasibility studies.
• Detailed financial modeling.
• Technical design and engineering.
• Environmental and social assessments.
• Market studies.
• Resource or reserve assessments.
• Land and site work.
• Permitting.
• Tax structuring.
• Legal structuring.
• Material project contracts.
• Insurance analysis.
• Financial advisory.
• Lender due diligence.
• Transaction documentation.

The World Bank's PPP Resource Center specifically notes that project preparation requires specialized technical, economic, legal, social, environmental and financial expertise and that inadequate resources for project preparation are themselves a material impediment to successful project development.

World Bank guidance on project preparation

Development Capital Is Different From Project Debt

Sponsors sometimes assume that because the project is intended to be debt financed, the lender should ultimately fund substantially every expenditure associated with developing the transaction.

That confuses two different sources of capital.

Development capital funds the work required to bring a project to the point at which institutional capital can reasonably be underwritten.

Project debt is generally committed only after a lender has completed its underwriting and the relevant conditions to closing have been satisfied.

Debt therefore cannot reliably be used to fund every expense required to make that debt possible in the first place.

A sponsor pursuing project finance should consequently maintain a realistic development budget separate from the eventual project financing requirement.

The Function of an Advisory Retainer

An advisory retainer is compensation for professional services performed during the mandate.

It is not a fee for guaranteeing that a lender will approve a transaction.

In a structured debt or project finance engagement, the work performed before closing can include:

• Reviewing the project structure and financing requirement.
• Assessing available sponsor information.
• Reviewing the financial model.
• Assessing debt capacity and coverage ratios.
• Reviewing material commercial contracts.
• Identifying structural weaknesses.
• Determining an appropriate debt structure.
• Preparing the financing proposition.
• Identifying relevant lenders.
• Coordinating lender distribution.
• Responding to credit and diligence questions.
• Evaluating financing proposals.
• Negotiating commercial terms.
• Managing execution toward documentation and closing.

Those services are performed whether the ultimate credit decision is favorable or unfavorable.

An adviser cannot control a lender's credit committee, a change in market conditions, a sponsor's subsequent performance, the emergence of a diligence issue or a regulatory event.

A retainer therefore compensates the adviser for work undertaken. A success fee, where applicable, compensates separately for the achievement of a defined transaction outcome.

Upfront Transaction Costs Are Not Unusual in Institutional Finance

The principle is not unique to financial advisers.

Institutional lenders themselves commonly require borrowers and project companies to bear transaction expenses associated with underwriting and closing.

The European Bank for Reconstruction and Development, for example, states that project sponsors may be required to reimburse the bank for out-of-pocket expenses including technical consultants and outside legal counsel. It also identifies front-end commissions among the fees that may apply to project loans.

EBRD project financing terms

This reflects an ordinary feature of institutional financing: specialist work undertaken in connection with a transaction has a cost, and those costs do not disappear merely because financial close has not yet occurred.

Why a Larger Success Fee Is Not a Substitute for a Retainer

Sponsors sometimes propose that the adviser waive all upfront compensation in exchange for a materially larger fee at closing.

Economically, the proposal changes more than the timing of payment.

It transfers the cost and risk of the sponsor's financing process to the adviser.

The adviser must still allocate personnel, incur opportunity cost, perform analysis, engage financing counterparties and manage execution.

Under a success-only arrangement, however, the adviser receives no compensation if the transaction does not close, even where the failure results from matters outside the adviser's control.

Examples include:

• The sponsor failing to provide requested information.
• A material diligence issue emerging.
• A required permit being delayed.
• An offtaker withdrawing.
• A contractor failing lender diligence.
• Project costs increasing materially.
• The sponsor changing transaction structure.
• The sponsor terminating the process.
• Credit markets deteriorating.
• A lender changing appetite.
• A credit committee declining the transaction.

None of those circumstances eliminates the professional work already performed.

An increased contingent fee therefore does not convert unpaid work into an economically equivalent engagement.

Development Risk Properly Belongs With the Sponsor

A project financing allocates different categories of risk among different parties.

The sponsor carries development and equity risk.

Contractors assume defined construction obligations.

Operators assume operating responsibilities.

Offtakers assume contractual purchase obligations.

Lenders assume credit risk once the transaction satisfies their underwriting requirements.

Financial advisers provide structuring and execution services.

Requiring an adviser to fund its own work until closing effectively reallocates a portion of the sponsor's development risk to a service provider.

That is not merely a compensation issue. It changes the economic role of the adviser.

If the sponsor expects the adviser to contribute uncompensated services with repayment dependent entirely on project success, the sponsor is effectively requesting an in-kind investment in the development process.

A professional advisory mandate is not ordinarily structured as an equity investment.

Inability to Pay Raises a Capitalization Issue

A sponsor that genuinely cannot fund an ordinary advisory retainer may still have a potentially viable underlying project.

The conclusion should not automatically be that the project lacks merit.

The more immediate conclusion is that the sponsor may not yet have sufficient development capital to commence an institutional financing process.

That distinction is important.

A project can have attractive economics and still be prematurely financed.

If the sponsor cannot meet relatively modest professional costs before closing, additional questions naturally arise:

• How will legal fees be funded?
• How will independent technical diligence be funded?
• How will model audit costs be funded?
• How will environmental studies be funded?
• How will lender consultant costs be funded?
• How will permitting costs be funded?
• How will the sponsor respond to development delays?
• How will unexpected project expenses be funded?
• How will required equity ultimately be contributed?

An advisory invoice may therefore reveal a broader liquidity constraint that would have surfaced later in the financing process in any event.

The Appropriate Solution May Be Development Equity

Where the underlying project is credible but the sponsor lacks sufficient liquidity to complete development, the appropriate capital may not yet be senior debt.

The project may first require:

• Additional sponsor equity.
• Shareholder funding.
• A strategic investor.
• A co-development partner.
• Joint venture capital.
• Development-stage equity.
• Grant capital where applicable.
• Another form of early-stage risk capital.

Raising that capital can be necessary before launching a full institutional debt process.

There is no inconsistency in saying that a project may ultimately support substantial leverage but still require sponsor or development equity today.

Refusal to Pay Raises a Different Issue

A sponsor that cannot pay and a sponsor that can pay but refuses to do so present different considerations.

The first may have a capitalization problem.

The second raises questions of commercial behavior, risk allocation and execution discipline.

A sponsor may argue that an adviser should "prove confidence" by working entirely on success.

That argument does not follow.

Confidence in the quality of a transaction does not imply certainty of closing.

Professional advisers routinely act on transactions they consider credible while recognizing that financing remains subject to third-party underwriting, documentation, market conditions and events beyond their control.

Requiring the adviser to waive compensation until closing does not increase the probability of financing.

It merely reallocates economic risk from the sponsor to the adviser.

Payment Conduct Can Be Relevant to Execution Risk

Financing large projects requires the sponsor to coordinate multiple counterparties over an extended period.

The process may include lenders, lawyers, engineers, contractors, insurers, accountants, government agencies and consultants.

Financial capability is therefore only one part of sponsor assessment.

Organizational discipline also matters.

A sponsor that repeatedly agrees commercial terms and then seeks to renegotiate them, delays relatively modest professional invoices, refuses necessary third-party diligence or expects vendors to finance the sponsor's obligations can create additional execution risk.

This does not mean that a fee dispute proves a project is unfinanceable.

It does mean that payment behavior may provide information concerning budgeting, internal authority, liquidity management and decision-making processes that will become relevant again as the transaction becomes more complex.

Lenders Underwrite the Sponsor as Well as the Project

Non-recourse and limited-recourse project finance is often described as lending against the future cash flows of a project.

That description should not be interpreted to mean that lenders disregard the sponsor.

Institutional lenders examine sponsor ownership, financial capacity, management experience, integrity, project-development capability and the credibility of the proposed financing plan.

EBRD, for example, describes due diligence covering beneficial ownership, technical and operational assumptions, legal matters, environmental and social risks, management and project structure.

EBRD client due diligence framework

The question is therefore not merely whether the asset might produce sufficient cash flow once operational.

The lender must also become comfortable that the project can survive development, financing, construction and commissioning.

Limited Recourse Does Not Mean No Sponsor Support

Another misconception is that a project-finance structure eliminates sponsor responsibility once a special-purpose vehicle has been incorporated.

In practice, lenders can require sponsor support in several forms during development and construction.

Depending on the transaction, this can include:

• Equity commitments.
• Completion support.
• Cost-overrun support.
• Contingent equity.
• Subordinated shareholder funding.
• Guarantees relating to specified obligations.
• Undertakings relating to ownership or project completion.

Even EBRD's project-financing materials note that although full sponsor recourse may not be required, completion guarantees and other forms of sponsor support can be required in limited-recourse structures.

A sponsor with no meaningful liquidity should therefore not assume that the project-finance label eliminates the need for financial capacity.

A Large Project Value Is Not a Substitute for Sponsor Liquidity

Project size is frequently invoked as an argument against paying professional fees upfront.

The argument usually takes the following form:

The size of the proposed investment does not itself create liquidity.

Nor does a projected project valuation represent cash available to fund the development process.

A sponsor seeking US$500 million of financing while lacking sufficient funds to pay ordinary transaction costs has not demonstrated US$500 million of financial capacity.

It has demonstrated a US$500 million financing requirement.

Those are entirely different propositions.

Project Valuation Does Not Pay Development Expenses

A financial model may show substantial net present value.

A feasibility study may estimate significant future revenues.

A concession may appear commercially attractive.

None of those items is equivalent to unrestricted cash.

Until capital has actually been committed and is available for use, projected value cannot pay lawyers, engineers, consultants, advisers, employees or government fees.

Sound project management therefore distinguishes between:

• Projected enterprise value.
• Total project cost.
• Financing requirement.
• Committed equity.
• Available development capital.
• Current liquidity.

The Adviser Is Only One of Several Professional Cost Centers

Refusing an advisory retainer does not resolve the larger cost of reaching financial close.

If the sponsor cannot fund the first professional adviser, it should address how the remaining workstreams will be financed before commencing a full debt process.

Project Preparation Costs Can Be Material

The cost of preparing a major project should not be underestimated.

World Bank materials addressing PPP preparation report substantial upfront preparation costs and note that larger projects can still incur preparation costs representing a meaningful percentage of total investment.

The precise figure for a private project varies considerably by sector, jurisdiction, development stage and transaction complexity.

The broader point is more important than any single percentage:

Project preparation is itself a funded workstream.

It cannot responsibly be treated as having no cost until financial close.

Success-Only Compensation Can Create Adverse Incentives

There is also a structural reason not to rely exclusively on success fees.

If an adviser receives no compensation unless financing closes, it is economically rational for that adviser to maintain a very large mandate pipeline and allocate resources dynamically toward whichever transactions appear most likely to close.

That model can create poor alignment for sponsors seeking sustained execution support.

A paid engagement creates a different set of incentives.

The sponsor has committed capital to a defined mandate.

The adviser has accepted defined obligations and is compensated for allocating resources to them.

A success fee can then provide additional alignment around closing without requiring the adviser to finance the entire process.

Retainers Also Serve a Legitimate Selection Function

The financing market contains considerably more proposed projects than financeable projects.

Advisers and lenders therefore need mechanisms to determine where professional resources should be allocated.

A retainer does not prove that a project is bankable.

Nor should payment ever be represented as evidence that financing will be obtained.

It does, however, establish that the sponsor has:

• Authorized a defined engagement.
• Allocated a budget to the financing process.
• Accepted that professional work has an economic cost.
• Made a tangible commitment to progressing the transaction.

Those are reasonable prerequisites to a serious advisory relationship.

No-Upfront-Fee Financing Is Not the Same as No-Cost Financing

Sponsors sometimes point to lenders, investors or brokers that advertise transactions with little or no upfront cost.

This does not establish that project preparation has no cost.

It ordinarily means one of three things:

• The provider is absorbing the cost within another source of revenue.
• The cost is being deferred and ultimately charged elsewhere in the transaction.
• The provider is performing a materially narrower scope of work.

Professional work must ultimately be funded by somebody.

Deferring payment changes the financing of that cost. It does not eliminate the cost itself.

Our Position on Advisory Mandates

Financely operates on a paid advisory basis.

We do not undertake project finance or structured debt mandates on the basis that all compensation is contingent upon financial close.

This is not because we expect sponsors to guarantee an outcome.

The opposite is true.

Financing remains subject to lender underwriting, KYC, AML and sanctions review, legal diligence, technical diligence, documentation, market conditions and final credit approval.

Our retainer compensates us for the professional work undertaken during that process.

Where a success fee is agreed, it compensates separately for the successful completion of the financing.

We consider that structure clearer and more commercially appropriate than requiring our firm to finance the client's mandate through uncompensated professional work.

Characteristics of a Financing-Ready Sponsor

No single factor determines financing readiness.

However, stronger sponsors generally demonstrate several characteristics before launching an institutional debt process:

• A defined development budget.
• Evidence of capital invested to date.
• A credible equity strategy.
• Capacity to pay professional advisers.
• Capacity to fund third-party diligence.
• Clear internal decision-making authority.
• A realistic financing timetable.
• Complete and organized project information.
• Responsiveness to diligence requests.
• Contingency planning for delays and cost overruns.

These characteristics do not guarantee financing.

They make a financing process capable of being executed professionally.

What a Sponsor Should Do If It Is Not Yet Capitalized

The appropriate response is not to proceed as though the development budget does not exist.

The sponsor should identify the funding gap and solve it before launching an unnecessarily expensive or premature institutional financing process.

Depending on the project, that may involve:

• Raising additional sponsor capital.
• Introducing a co-sponsor.
• Securing development-stage equity.
• Reducing or phasing the project.
• Completing additional technical work first.
• Advancing permitting.
• Securing stronger commercial contracts.
• Improving the financial model.
• Building an appropriate transaction budget.

There is no disadvantage in recognizing that a project is not yet ready for senior debt.

The greater risk is entering the institutional market prematurely, exhausting counterparties and then attempting to repair development deficiencies in the middle of a lender process.

Project Finance Advisory Fee FAQ

Why are advisory retainers paid before financing closes?

Because significant advisory work is performed before financial close. The retainer compensates the adviser for that work rather than for a guaranteed financing result.

Does payment of a retainer guarantee financing?

No. Lenders retain complete discretion over underwriting and credit approval. A retainer pays for the agreed advisory services.

Why not compensate the adviser entirely through a success fee?

Because the adviser incurs costs and performs substantive work before the contingent closing event. A success-only arrangement transfers the cost and risk of that work from the sponsor to the adviser.

What if the sponsor offers a significantly larger success fee?

Increasing contingent compensation does not fund current execution costs. It increases potential future compensation while leaving the adviser responsible for financing the mandate until closing.

What if the sponsor genuinely cannot afford the advisory fee?

That may indicate that the project needs additional development capital before commencing a full institutional debt process. It does not necessarily mean that the underlying project lacks merit.

Can advisory fees ultimately be reimbursed from financing proceeds?

Certain eligible transaction costs may in some structures ultimately be financed or reimbursed at closing. Whether that is permitted depends on the financing documents and lender approval. It does not eliminate the need to fund work performed before closing.

Are legal and technical costs also usually paid before closing?

Frequently, yes. Major financing processes commonly require outside counsel, technical consultants and other specialists during due diligence. Some institutional lenders expressly require clients to reimburse these expenses.

Does limited-recourse project finance mean the sponsor needs little or no capital?

No. Limited recourse principally concerns lender recourse after the financing has been structured. Sponsors may still need to provide equity, development funding, completion support, cost-overrun support or other commitments.

Does a high project valuation demonstrate that the sponsor can afford development costs?

No. Project valuation, projected revenues and total capital requirement are different from available sponsor liquidity. Development expenses require actual available capital.

Is refusing to pay a retainer evidence that a project is unfinanceable?

Not by itself. It may, however, indicate a disagreement over commercial risk allocation, insufficient development budgeting or broader concerns about execution discipline.

How much development capital should a sponsor maintain?

There is no universal percentage. The required amount depends on project size, sector, jurisdiction, development stage and the diligence required. The sponsor should maintain sufficient liquidity to fund all reasonably foreseeable project-preparation and financing costs through financial close, together with an appropriate contingency.

When should a sponsor postpone a debt process?

Where material development work remains unfunded, core permits or contracts are incomplete, required equity is unidentified, or the sponsor lacks sufficient resources to support the diligence and transaction process, it may be more efficient to complete those steps before approaching institutional lenders.

Proper Capitalization Is Part of Project Readiness

The question of advisory retainers should not be reduced to whether a particular professional is willing to defer its fee.

The more important question is whether the sponsor has adequately funded the development and financing process.

Large projects require significant institutional commitments from lenders, investors, contractors, advisers and other counterparties.

It is commercially reasonable for those parties to expect the sponsor to have committed resources of its own.

Where a sponsor genuinely lacks the resources to pay for ordinary development and transaction costs, additional development capital may be required before senior debt is pursued.

Where the sponsor has the financial capacity but nevertheless expects advisers to work entirely at risk, the issue is one of commercial allocation rather than affordability.

Financely does not transfer the cost of a client's financing mandate onto its own balance sheet.

A sponsor seeking institutional financing should be sufficiently capitalized to fund the professional work reasonably required to develop, structure, diligence and execute the transaction.