15.1 The Process of Analyzing Legal Feasibility and Conducting Legal Due Diligence

The due diligence process should ensure that the project is procured in accordance with current legal requirements, both in domestic and international terms, and that key aspects of the project have been analyzed from a legal perspective. In order to assess the legal feasibility of the project, legal due diligence should include at least three important steps, as described below.

The first task is an analysis of the applicable legal framework. This includes the identification and analysis of pertinent laws and regulations that may affect the project. Some of the legal and regulatory aspects that need to be reviewed are listed below.

• The enabling PPP legislation, especially looking for particular requirements imposed on projects, such as minimum capital value and maximum contractual duration;
• The public procurement law which may be partially applicable, especially in search of general contractual and procurement guidelines;
• Legislation referring to foreign investment, property, and labour issues;
• Legislation related to land use planning and environmental laws;
• Sector specific legislation, for example, corrections legislation may regulate whether a prison PPP can be operated by the private sector;
• Legal aspects of dispute resolution and intellectual property, among others;
• Legislation relating to the granting of ownership/control of public assets or of responsibility for the delivery of public services to third parties; and
• Legal treatment of revenue sources associated with the concession.

These reviews need to provide, firstly, a comprehensive list of requirements applied to the project that feed other feasibility exercises, such as the technical requirements and the commercial feasibility analysis. Secondly they should indicate, whenever appropriate, the need for any change in law or regulation and, should it be the case, identify the process through which this change can be enacted and assess the time and resources needed to promote the change.

The second task is the assessment of the legal readiness of the procuring authority. Although this particular issue may have already been checked, it is important to review at this stage whether the promoting authority and other institutions involved have the legal authority to launch the project or proceed with the approval as needed. The legal empowerment issues also apply, in some countries, to the formal responsibility for the appraisal exercises. As described in chapter 2.18, some countries require official feasibility exercises to be conducted. In this case, there can be requirements about which governmental bodies should be included and how. Therefore, the legal due diligence must clearly conclude which authorities should be involved and to what extent in each case.

The third task is an in-depth legal analysis of the main project issues. Large infrastructure projects often have particularities with significant legal implications. It is thus very important during appraisal to assess the adherence of several aspects of the project to the general legal framework. Particular attention should be given to the legal feasibility of:

• The financial aspects of the project;
• Issues considered relevant to commercial viability, including the bankability of the project;
• The use of land and existing assets;
• Potential alternative ownership claims on the land (common in countries with complex or undocumented systems of property ownership);
• Rights of other users (for example, a state oil company that owns pipes buried under the land, a road route crossing under electricity transmission wires, and so on);
• Employment issues; and
• Tax and accounting issues considered in the financial model.

Box 4.14 table presents examples of specific issues from these categories.

One important assessment required during the analysis of the main issues is the legal classification of the land and any existing assets. Even if the assets are already held by the procuring authority, they may not be ready to be transferred to the concessionaire. In some countries, there is a requirement for a change in the type of use of the asset, from “public use” to “disposable use”. Other countries require legal authorization to transfer the control of public assets to the private sector. In any case, the availability of the land or asset needs to be fully acknowledged and the issues surrounding it identified.