Project Finance in the United States: Overview

The private sector projects most commonly financed in the US are electric power projects, particularly gas-fired and renewable projects, and some pipeline projects. Local government infrastructure projects, including toll roads, bridges, airports and similar improvements, are frequently financed through bonds, and increasingly through Public Private Partnership (PPP) arrangements.

The US has a large number of project financed transactions, particularly if government infrastructure projects are included, and it would be challenging to single out one or several transactions as particularly noteworthy.

In the US, there is not a single overarching regulatory framework for project finance. The regulatory framework governing a project finance transaction will derive from a combination of federal, state, and local laws.

The governmental entities with authority to regulate a project will depend on the location and nature of the project. Responsibility for regulation is shared among US federal, state, and local agencies. Federal agencies with jurisdiction over energy and transportation projects may include (among others):

The extent and nature of their authority is shaped by federal statutes, federal regulations and interpretations as well as case law.

Project finance transactions can also be subject to the jurisdiction of state authorities, such as state environmental authorities, public service commissions, public utility commissions, energy siting commissions and transportation authorities. Approval from local agencies and boards may be required with respect to a project's construction and siting.

Environmental. At the federal level, the following key legislation may apply:

Certain federally assisted projects, including transportation projects, may be subject to environmental assessment under the National Environmental Policy Act (NEPA). A project's environmental impacts may also be subject to analogous state and local laws with respect to air quality, water quality, endangered species, historic resources, and other environmental matters.

Energy. The Federal Power Act (FPA) regulates the rates, terms and conditions for the sale of electricity and transmission service in interstate commerce. The FPA requires FERC approval for a variety of energy transactions, including mergers, consolidations and other direct and indirect changes in control of public utilities. The FERC also:

Health and safety. Under the federal Occupational Safety and Health Act (OSHA), the United States Department of Labor's Occupational Safety and Health Administration implements federal rules with respect to workers' health and safety. State and local governments also enforce rules with respect to workplace safety.

The United States is party to a number of bilateral and multilateral investment treaties intended to encourage foreign investment and provide protection to foreign investors, including the among Canada, Mexico, and the US-Mexico-Canada Agreement (USMCA), and bilateral free trade agreements with countries such as Chile, Colombia, Singapore, and South Korea.

The governmental approvals required for financing a project vary by location, industry sector, and the size of the project. A project may require a number of approvals, licences, permits and consents from federal, state, and local authorities. Environmental approvals and assessments are typically required. Local ordinances may require construction and operating permits, as well as zoning and land use approvals. Electricity-generating projects require regulatory approval for interconnection with the transmission grid. Fees are usually paid in association with governmental approvals.

Project finance transactions involving foreign investment or ownership may be subject to review by the Committee on Foreign Investment in the United States (CFIUS), which has the authority to suspend, block or impose conditions on a transaction if it determines that the transaction threatens to impair US national security, including with respect to critical infrastructure. In certain cases, filing with CFIUS will be mandatory (for example, where the transaction involves investment from a foreign state-owned entity in a sensitive US business, or where a US business develops certain "critical technologies"). Other types of foreign investment in US businesses may also fall within the scope of CFIUS jurisdiction, but in these cases filing would be voluntary. If a notification (whether mandatory or voluntary) is not filed, CFIUS has the option to self-initiate a review of the transaction at any time, with uncertain and potentially significant results, which may include ordering the investor to divest the US business or US assets.

CFIUS filing fees may be up to USD300,000, depending on the value of the transaction and the type of filing submitted.

Generally applicable filing and registration requirements apply to security interests and interests in real property. Security interests in most types of personal property are perfected through filing a Uniform Commercial Code (UCC) financing statement in the relevant jurisdiction. Interests in real property may be documented by mortgages or deeds of trust, which must be recorded in the jurisdiction where the real property is situated.

Otherwise, registration and filing requirements for project documents will vary depending on the nature of the project. For example, projects to which the Federal Energy Regulatory Commission (FERC) has granted authority to sell wholesale electric power are required to file copies of their power purchase agreements for approval.

Generally, the US does not require, as a matter of law, state ownership of or an interest in projects or project companies. However, the federal and state governments may hold varying levels of ownership in projects in the energy and transportation sectors.

Under the doctrine of eminent domain, the US Government or a state government can take private property without the property owner's consent, provided that it is for "public use" and that the private property owner receives just compensation. The power of eminent domain is limited by the Takings Clause of the Fifth Amendment and the Due Process Clause of the Fourteenth Amendment of the US Constitution.

In addition to constitutional protections, many investment treaties include expropriation provisions that offer protection to foreign investors. For example, USMCA prohibits expropriation of an investment in a host country unless the expropriation:

There are no generally applicable laws enabling the US to repatriate foreign assets or earnings, although foreign profits may be subject to taxation.

The main parties in a project finance transaction involving an energy or industrial project (for example, a power project or a petrochemical complex) include:

A public infrastructure project (for example, a toll road or a light rail project) will involve many of the same types of parties as above.

Additionally, government entities or public authorities typically play key roles in such projects. For example, a road or rail project may involve an initial concession from a government or public authority providing the sponsors the right to build and operate, or to build, own and operate, the project for a stated period of time.

A range of federal and state government entities can also be involved in providing funding for public projects, the overall financing of which can take a broad range of forms, particularly when delving into PPP (or P3) structures. Public infrastructure projects may also involve a public conduit financing entity that will serve as a bond issuer and, depending on the project structure, may play a central role as the project company and borrower under the financing.

Project financing takes various forms depending on the nature of the project.

Private projects are typically financed through construction loans, term loans, private placements, capital markets offerings, or a combination of these. Typically, projects are financed by construction loans provided under a credit agreement, which, at construction completion, will convert to a longer "term loan" structure (or be "taken out" by a term loan financing) with an amortising payment schedule. For private projects that qualify for certain types of tax benefits, all or a portion of the long-term financing may take the form of "tax equity" whereby the equity investor obtains substantially all of these benefits.

The typical entities providing financing for privately sponsored projects include:

Additionally, projects may be able to access a range of multilateral and bilateral sources of project financing or support, including from the World Bank Group and other development finance institutions, as well as export credit agencies (ECAs). Development finance institutions typically support projects in developing countries, so they would be unlikely to be involved in a US project. ECAs support the export of equipment or other services from a country, and can be involved in US projects where major equipment or materials are sourced abroad.

Public projects are funded through a wide range of sources, including:

The federal government can also provide funding for projects under the auspices of certain federal statutes, such as the Transportation Infrastructure Finance and Innovation Act (TIFIA).

PPPs (or P3s) provide innovative paths to finance projects by leveraging both a private sponsor's access to project debt capital and a public entity's array of federal or state funding sources. This includes special private activity bonds, which are public bonds issued by state or local governments in connection with privately developed, constructed and/or operated projects. Government entities may provide other direct financing, backstop or credit enhancement to projects that are structured as P3s.

Regardless of form, project debt should be either non-recourse or limited recourse to the project sponsors, meaning that the lenders will look only (or largely) to the project company and its assets for re-payment, and the project sponsors' and investors' risk is limited to their respective equity investment in the project. A limited recourse financing refers to situations where the lenders require sponsors to provide additional support, through the issuance of letters of credit, guarantees or other bankable commitments, to cover a limited and well-defined set of project risks, contingencies or obligations, such as:

The advantages of using project financing are as follows:

Generally, the costs of structuring, negotiating, documenting and closing a project finance transaction are substantially higher than for either a traditional corporate or public financing. This reflects the:

The financing arrangements are also more complex (and sometimes multi-tranched) and involve terms typically far more restrictive and burdensome for the borrower than other types of financings, including restrictive covenants, reporting requirements and lender consent rights. Lender consent rights collectively limit the project company's flexibility including with regards to:

These limitations typically also include:

A typical financing also will contain an array of cross-default provisions so that any material default in a project contract will constitute a default under the principal financing document. The financing is therefore like a house of cards, where fault in one area can bring the entire structure crashing down.

The special purpose vehicle (SPV) through which the project will be carried out is typically either a corporation, a limited liability company or a partnership. The primary consideration in choosing a form of organisation is limitation of liability. This means ensuring that the lenders and other creditors and counterparties to the project have no recourse to the assets of the project sponsors for the repayment of project debt or the satisfaction of other project obligations. This "ring-fenced" nature of transaction constitutes an essential feature of any project financing. Tax treatment also factors into the selection of organisational structure.

These include:

However, the above are just the typical major contracts involved in a project financing. Most projects involve a range of other less significant additional contracts.

These include:

These include:

Almost any form of asset (tangible and intangible) can be used to provide security in a project financing, with the exception of a handful of intangible assets where public policy prevents them from being used in this way (for example, assignments of wages are largely proscribed). For the great majority of collateral, the establishment, perfection and priority of collateral is governed by state, not US federal law. In addition to security over the debtor's assets, parent guarantees, letters of credit and surety bonds are frequently used as tools to enhance security in project financings.

Real property is typically pledged through a mortgage (or in certain states such as Texas which allow extrajudicial (contractual) foreclosure, through a deed of trust to a trustee).

Personal property is most frequently pledged by grant of security interest under the Uniform Commercial Code (UCC) of the relevant state. This includes accounts and after-acquired collateral, as well as proceeds of collateral. The UCC in each state is generally similar, with a few unique features (for example, the New York UCC has special provisions governing security in interests in co-operatives, and the Texas UCC creates a super-priority security interest in favour of first sellers of oil and gas).

Certain personal property such as ships, aircraft and railroad rolling stock is pledged through specialised instruments such as aircraft security agreements and ship mortgages, outside of the UCC system.

Fixtures, which are personal property that have been affixed to the real property (for example, pipelines and tanks) can generally be pledged either through a real property security arrangement or under the UCC (and secured parties generally take both approaches).

Real property mortgages or deeds of trust must describe the property with a proper legal description and be signed and acknowledged before a notary public. In certain states, the mortgage may need to state a maximum indebtedness incurred, and various other requirements may apply. Security over real property is perfected by filing the instrument in the county records (parish records in Louisiana) of the county where the property is located.

Security in personal property under the UCC is generally created by a written security instrument. No specific form of instrument is required; a grant of a security interest may be a part of a mortgage instrument, for example, where real property is also involved. The security interest generally becomes effective when:

A security interest over personal property can be perfected in various ways depending on the nature of the collateral. Some of the most significant categories are:

Certain security interests can be perfected from the moment they attach, without further action, in some cases for limited periods. Others can be perfected by control exercised through intermediaries holding the collateral. Special rules apply to proceeds, which generally remain subject to the security interest following disposition of the collateral but may lose perfected status, depending on the scope of the description of the collateral in the UCC filing and other factors. As another example, Texas provides an automatically perfected security interest in favour of first sellers of oil and gas production against first purchasers. The relevant state UCC should be consulted with respect to these and other special cases.

Security interests in aircraft, vessels and railroad rolling stock are perfected by filings with the appropriate US federal agency and, in the case of aircraft, by filing with the Aircraft Registration Branch of the FAA or the International Registry.

The HCCH Convention on the Law Applicable to Certain Rights in respect of Securities held with an Intermediary 2002 (Hague Securities Convention) took effect in the US in 2017, and the rules set out in that convention will supersede the UCC provisions regarding choice of law for perfection of security interests in securities accounts.

As a general matter, financing parties will require searches of public records to determine whether there are any existing security interests over contemplated collateral.

For real property, these searches are usually of the real property records in the county where the real property is located. For other property, the location of the search is determined by the jurisdiction under whose laws the owner of the assets is organised. For entities organised under the laws of a US state, searches are generally performed at the designated filing office (usually the Secretary of State) of that state. In the case of foreign entities, searches are performed at the office of the Recorder of Deeds in Washington DC as well as the appropriate locations in any relevant foreign jurisdictions. The time and cost for searches performed in the US varies.

In general, parties should assume that real property searches will take a significant amount of time (from a week to a month or more) depending on the jurisdiction, while searches for other types of property can range from several days to two to three weeks. Similarly, the cost of these searches can vary widely from hundreds of dollars (generally for personal property) to thousands of dollars for real property, depending on a variety of factors including, among others, how extensive are the records being searched and reproduced.

Third-party security is possible in the form of a third-party guarantee, secured by the third-party's property (because the third party can grant an interest in its property).

However, if a party files for bankruptcy, pre-bankruptcy petition transfers may be challenged and subject to avoidance under the Bankruptcy Code (for example, as a fraudulent transfer if made or incurred within two years prior to the petition date, or as a preferential transfer if made or incurred within 90 days (or for insiders: one year) prior to the petition date).

If a third party is providing security for another party's debt, it may be more difficult for that party to show the requisite elements of a defence, such as new value provided in exchange for such transfer (11 U.S.C. § 547(c)).

In addition, the guarantor must receive appropriate consideration and any guarantee must not exceed the net worth of the guarantor, otherwise the guarantee and security may be deemed a fraudulent conveyance.

For real property, states generally follow one of three systems:

For personal property perfected by filing under the Uniform Commercial Code, priority is generally given to the first to properly file. There are, however, some super-priority security interests, such as purchase money security interests, that may take priority over earlier filings.

Once a party has filed for bankruptcy protection, priority is established by section 507 of the Bankruptcy Code. Generally, the administrative costs associated with a bankruptcy case are given super-priority, followed by secured debt, unsecured debt, then equity.

It is typical for a collateral agent to hold security on behalf of an entire syndicate of banks. Trustee arrangements can also be used to hold collateral but in practice are used, if at all, for holding and distributing project revenues according to the project cash flow waterfall.

Security interests in real property held through a mortgage are typically enforced by instituting judicial foreclosure proceedings in the state where the real property is located. Security interests in real property held through a deed of trust generally can be enforced directly by the secured party selling the property in foreclosure, according to procedures established by the state law of the state in which the real property is located. The secured party is generally entitled to participate in the sale as a purchaser, at least to protect its interests as secured party, although sales in which the secured party is the purchaser are likely to be subject to a higher degree of scrutiny when reviewed by a court.

Security interests in personal property are generally enforced under the terms of the Uniform Commercial Code (UCC). Under the UCC, the secured party has a variety of potential remedies, including taking possession of the collateral and sale of the collateral in a commercially reasonable manner (including by private sale), and in each case this may be accomplished extra-judicially (without court participation). Generally, prior notice must be provided to the debtor and other holders of security interests of a proposed disposition of the collateral. The secured party may purchase the collateral if sold at a public sale, and in certain other limited circumstances. The UCC allows collateral secured along with real property to be dealt with in accordance with the real property rules, should the secured party so desire.

At the time a debtor files for reorganisation or liquidation, an automatic stay takes effect (11 U.S.C. 362, Bankruptcy Code) that prevents secured parties from taking action to enforce security or from otherwise bringing actions against the debtor to enforce the debt (except through the bankruptcy court). The automatic stay is subject to relief through a court order. Any actions by a secured party done in violation of the stay are either void or voidable by action of the bankruptcy court, even if taken without the secured party's knowledge of the stay.

For those agreements that are material to the project, lenders typically require direct agreements, project assignments or other quasi-security contractual protections that enable lenders to have:

The willingness of project participants to agree to all or some of these provisions varies, but generally for non-governmental project participants, some form of direct agreement or consent to assignment is more the norm. The willingness of governmental agencies to enter these arrangements varies significantly.

The classic lender mechanisms for reducing project risk are regularly used in the US, including the following:

Foreign lenders lending into the US may be able to secure insurance against certain political risks from home government-sponsored political risk insurers.

While designed to cover many of the same risks, the typical insurance package is allocated differently during the construction and operation of a project. Under the construction contract, lenders will require either the contractor or developer during the construction of a project:

Collectively, these insurances will cover most types of damage that may occur until the project commences operations. At substantial completion of the project, or when it otherwise achieves commercial operations, the owner of the project will take out the ongoing project insurance required by the lenders. This may be addressed in the form of an operation and maintenance agreement or a general obligation of the borrower under the credit agreement. Many forms of insurance also are required by contract or by local laws. Under the credit agreement, the lenders will state the required insurance (often in a schedule to the agreement), and the owner of the project is then responsible for procuring the insurance or causing the contractor to procure the insurance during construction. The most common insurances include:

While it is possible for multilateral banks outside of the US to provide political risk insurance for projects within the US, political risk insurance and the support of a multilateral institution is not common.

The lenders are typically treated as additional insured in accordance with the policy terms, but with no obligations to the lenders, and are also typically named as loss payee.

The financing parties will typically require insurance to be taken with a non-vitiation clause.

While each transaction is different, lenders will generally want the ability to receive the proceeds of insurance for damage or destruction of the facilities or equipment that are being financed. Accordingly, receipt of insurance proceeds deposited into the controlled account structure will be a mandatory event of repayment of the debt up to the amount of insurance proceeds. Lenders will often allow an exception to this general right of the lenders for relatively minor damage to the facilities or equipment that will be repaired or replaced with the proceeds recovered from the insurance.

Historically, insurance in the US has been regulated on a state-by-state basis. In 2010, the passage of Dodd-Frank created the Federal Insurance Office to address the gaps in the regulatory framework of the states. However, there is no general insurance restriction on projects involving foreign companies.

The US is the largest insurance market in the world. There are numerous firms in both the insurance and the reinsurance market.

Many of the risks of developing a project in the US are the same development risks as those faced by developers throughout the world. Early in the project, the lead developer will conduct one or more feasibility studies to determine the viability of the project. For almost all facilities, this includes specific design parameters and specifications for the project to determine whether it can generate the necessary revenues to repay the project debt.

Once viability is confirmed, the developer must then address the construction, supply, off-take and operation of the facility. Under the broad category of "construction risks", the lender and developer must determine how to allocate the cost of the construction of the project (both the initial construction budget and cost overruns), delays in start-up caused by owner, contractor or force majeure, and performance shortfalls of the project.

Delays caused by contractor and performance shortfalls are typically the subject of liquidated damages payable by the contractor, which the lender will then have a right to recover from the developer under the financing. However, many events that result in a delay (for example, a named storm) are a risk to the project and are borne by the developer.

For "operational risk", the developer must ensure that the project can be operated and maintained in a manner to ensure the project is able to comply with the performance obligations provided in the relevant project documents. A competent project operator, who may be a third party or employees of the project company itself, is critical to ensure the ongoing performance of the project and stabilisation of revenues from the revenue source. Lenders will typically require extensive information regarding the performance of the project, consent rights for any proposed change in the operator of the project and often a reserve fund to address major maintenance items. Both supply and off-take arrangements form the backbone of the project and repayment of debt. Each individual project will have specific risks and mitigants relevant to the industry and type of project, but issues related to creditworthiness and financial stability are independent of the type of project being financed. In general, the off-take or revenue source must post sufficient security or otherwise be creditworthy to allow the developer to enforce any rights it may have under the project agreement. These agreements are typically collaterally pledged to the lenders, which would allow them to enforce them directly in the event of a foreclosure.

Certain issues that may affect projects in developing areas of the world such as political stabilisation, currency and convertibility risk, dispute resolution and an independent judiciary and authorisation risk are often not the subject of negotiations with lenders for projects based in the US.

Nearly three quarters of the states in the US have adopted some form of PPP enabling legislation, with most focused in the transportation and real estate related sectors. While in some cases this results in direct state-run PPP processes, in most states a state-sponsored agency (for example, a port authority, state transportation agency or city or municipal authority) is the agency running the process. In many states the process is subject to mandated bidding requirements applicable to government procurement. The result is that the process varies state-to-state as to:

In addition, due to the fact that grants and other funding by US federal government agencies have been such a significant part of past US infrastructure development, often federal government support is needed to develop a PPP programme.

An example of the type of programme where US Government agencies are exploring PPP approaches is the Federal Aviation Administration's Airport Investment Partnership Program, which allows commercial service airports (that is, airports that are publicly owned, have at least 2,500 passenger boardings each calendar year and receive scheduled passenger service) to be leased and general aviation airports (that I,s publicly owned airports that do not satisfy the foregoing criteria) to be sold or leased. The key feature motivating public entities owning the airport is that doing so would permit airports to use the proceeds of the PPP lease or concession for non-airport purposes and to avoid the obligation to repay federal grants that may have been used by the public entity to acquire airport land. This example highlights the complex federal, state and local jurisdictional overlay that exists in much of US infrastructure due to the prevalence of past US Government funding.

The most significant limitations on the penetration of PPP in the US have probably been:

Generally, in the US the deferral of infrastructure improvements or repair or maintenance have not been events that led to political problems for incumbent politicians, absent some immediate tragedy or significant new public inconvenience. Unlike some countries where there has been a significant acceptance of privatisation as a means of balancing budgets, jurisdictions in the US have not generally been accustomed to it, so PPP has tended to be centered around such matters as new toll roads and housing developments.

The other element that has historically been a resistive force to PPP development is the well-developed and flexible use of federal tax-exempt municipal bonds to finance public and quasi-public projects. From government-sponsored agencies with a long history of operating in that space, to segments of the financial and legal community that operate in that space largely independent of the project finance transactional world, there has historically been a well-developed path of funding and a group of professionals dedicated to that process. However, in the last few years there have been more successful unions of PPP projects with tax exempt finance, so attitudes may be changing.

PPP or PFI projects have traditionally been funded with private sector equity and either private sector debt financing or structured financing where a combination of private and tax-exempt financing is used to finance development. This differs from the financing of other infrastructure (power plants, pipelines, and real estate) which is financed almost exclusively through private capital and private financing, often at the project level. Like most developed countries, the US has a well-developed bank project finance market, as well as a broad array of non-traditional lenders, such as hedge funds and private equity funds, that are quite competitive in seeking viable investment projects. That funding capability can be used for PPP projects to structure first lien senior secured and mezzanine financing structures to fund projects.

In the US security can be given in payment streams and often in the contractual or lease concession arrangements, as well as in the equity of the sponsor entities. Usually, a sponsor cannot grant a valid foreclosable lien in the physical assets of the project that would give the lender the right to hold the asset not subject to the underlying concession arrangement. However, if there is a bankruptcy of the sponsor, the concession rights generally are not terminated by the bankruptcy and can become a valuable asset in the restructuring of the project. Generally, sponsors in PPP transactions seek to have the structure of the financing pre-approved at financial close, so that there is no later government approval needed for debt financing. In some cases, lenders seek to have the ability to enter into direct agreements with the sponsoring governmental entity (particularly if it is the revenue payer for the project) to establish control over the payments.

The US has a highly developed legal system that includes laws and regulations governing lending institutions and lending practices, as well as a court system where private rights of action may be brought. Anti-fraud and anti-bribery laws exist both on the federal level and on the individual state level. In general, discriminatory and unethical lending practices are generally prohibited (and are not broadly perceived as a risk in project financings).

Regarding social impact issues, most of the major institutional lenders have adopted or adhere to one or more of the international environmental and social protection frameworks, such as the Equator Principles or the International Finance Corporation (IFC) sustainability framework. However, the US also has specific laws that mandate the consideration of certain environmental and social criteria where formal governmental approvals (such as certain federal permits and/or state or local level zoning authorisations) are required. The principal federal law applicable to federal agency actions is the National Environmental Policy Act (NEPA). Many individual states have NEPA-equivalent laws and many localities have ordinances requiring similar impact assessments as part of their zoning approval process. These laws and ordinances generally require the developer to perform an environmental impact assessment that includes:

In some cases, required studies include noise, traffic and potential greenhouse gas impacts. Public participation in and the ability to judicially challenge project approvals are generally provided for in such laws and ordinances, giving potentially aggrieved parties the opportunity to mount challenges. In practice, lenders usually rely on a borrower's compliance with all applicable governmental approvals in finding that a proposed project satisfies relevant environmental and social impact criteria.

Projects in the US are subject to stringent and complex federal, tribal, state and local laws governing environmental protection as well as the discharge of materials into the environment. These laws may:

The federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and comparable state laws may impose joint and several liability, without regard to fault or legality of conduct, on persons considered to be responsible for the release of hazardous substances into the environment. This includes the current and past owner or operator of the site where the release occurred and anyone who disposed or arranged for the disposal of hazardous substances released at the site. In addition, federal and state regulatory agencies can seek to impose administrative, civil and criminal penalties for non-compliance with environmental laws. Citizens also have the right to bring actions to enforce environmental laws or oppose the issuance of environmental permits.

To address the risks relating to potential historic contamination, project lenders generally require borrowers to undertake a specific scope of pre-acquisition environmental assessment known as a Phase I Environmental Site Assessment, which focuses on current and historic sources of potential contamination on or affecting the project site. If significant concerns are identified, the project may be relocated to other lands or, if relocation is not a viable option, there may be some allocation of clean-up responsibility between the current landowner and the project developer.

The US differs from most other countries by virtue of having a large share of its minerals in place under private ownership. For onshore minerals, particularly hydrocarbons, the bulk are owned by private mineral owners, with the US Government having extensive holdings in the western United States, particularly in the Rocky Mountain region.

Offshore minerals (hydrocarbons being those of most interest) are owned by the sovereign. Near shore minerals (generally, within three miles of the coastline, but for some states up to three marine leagues from the coastline) are owned by the various coastal states, while continental shelf and exclusive economic zone lands further offshore are under federal jurisdiction under the Submerged Lands Act and the Outer Continental Shelf Lands Act.

In all cases, the minerals are normally leased to industry by the mineral owner through oil and gas leases that broadly resemble concessions.

Leases of oil and gas rights from the federal government can be obtained directly through a public bidding process or by transfer from an existing lease holder. In either case, the proposed lessee must go through a qualification process as mandated by applicable regulations prior to receiving title to the lease interest.

There are no general restrictions on foreign acquisition of private mineral rights or leases. However, review of an acquisition or investment by CFIUS, the foreign investment review board for the US, may be appropriate where:

US federal leases (onshore and offshore) are subject to specific legal restrictions that effectively require a US corporation to be a direct or indirect owner in the chain of ownership between the foreign investor and the lease. As any investor can set up a US corporation, this requirement is more of a structuring consideration, including a tax consideration, than an impediment to investment. Numerous foreign-owned companies invest in US federal leases through wholly-owned US corporations. Additionally, foreign investment in onshore leases is subject to a statutory requirement that the home country of the investor offer similar rights to US citizens. However, the government has rarely (and never successfully) attempted to utilise this reciprocity provision.

Royalties under leases by private mineral owners are negotiated. The level is generally driven by the prevailing royalty rate for the particular mineral in the area. While oil and gas royalties were traditionally set at one-eighth, the advent of shale development in particular led to much higher royalties, with one-fifth, or even one-quarter royalties being not uncommon in the core areas of the main shale plays.

Relevant statutes provide some restrictions on royalty rates under federal leases (generally a minimum of 12.5%), but the regulator (the Bureau of Ocean Energy Management (BOEM), in the case of the offshore and the Bureau of Land Management (BLM) in the case of the onshore) is given discretion within those bounds in setting rates for individual lease sales.

The calculation of royalties is a complex and is often the subject of litigation. In the case of leases by private mineral owners, there is no standard form of lease (although most have broadly similar provisions). One significant issue that has been frequently litigated in recent years in connection with onshore leases is whether the lessee has the ability to deduct post-production costs (gathering, treating, processing, compression and similar charges) from the proceeds of sale of production prior to applying the royalty rate.

Taxes are assessed at the federal level, and within state jurisdiction, at the state level. The most important tax is the federal income tax, which presently establishes a corporate rate of 21%. At the state level, in addition to state income taxes, various occupation taxes apply, such as a severance tax on oil and gas production, as well as property taxes on oil and gas in place (including leases).

Restrictions on the export of crude oil (excluding specific country sanctions) were lifted in December 2015. Natural gas exports still require authorisations from the US Department of Energy's Office of Fossil Energy, and separate authorisations are issued for:

Authorisations can be obtained on both a short-term basis (for transactions with terms of no longer than two years), which is easier to obtain, and long-term basis (for transactions with terms in excess of two years). Cross-border pipelines are subject to a separate national interest determination by the US Secretary of State (in the case of liquids pipelines) or the Federal Energy Regulatory Commission (in the case of natural gas pipelines) on behalf of the President. Exports of radioactive minerals are subject to a special export regime.

Beyond these specific considerations, general sanction regimes will prohibit exports of minerals to various scheduled countries without a specific licence from the US Government.

The US does not currently assess an export tax or outbound customs duty on such exports as taxes or duties on exports are explicitly prohibited under Article 1, Section 9 of the US Constitution. Excise taxes may apply on refined products.

The main incentive provided at the US federal government level that project developers take advantage of is the availability of foreign trade zone arrangements that allow developers to defer customs duties and excise tax until a plant is started in commercial production. If improvements are made on-site, the developer will pay the lower tariff rate applicable to the improved goods rather than the higher rate applicable to imported material. Subzones can be approved for a particular plant site.

In addition, various tax incentives are available at state and local levels, such as abatement of property taxes in exchange for local hiring and subcontracting.

The US is party to a number of bilateral investment treaties and free trade agreements that include investment protections. Although the treaties were presumably negotiated by the US Government with an aim of protecting outbound US investors, they offer reciprocal protection to foreign investors in the US.

US investment treaties typically include a general definition of investment and identify, as illustrative categories of protected investments, rights derived from turnkey, construction, management, production, and concession contracts, among other assets. Treaties negotiated by the US since 2004 are likely to specifically mention infrastructure project agreements as a type of investment agreement covered by the treaty. However, the scope of protection and even the remedies available to injured investors can vary materially depending on the wording of the applicable treaty, so case-specific analysis is needed.

Currently, the US has 39 bilateral investment agreements in force, and 14 free trade agreements with 20 countries, that include investment protection provisions.

On the other hand, some of the largest sources of inbound foreign investment in the US (such as key Western European countries and China) are not directly covered by US investment treaties. The US initiated negotiations toward, but then declined to join, a regional trade and investment agreement covering Asia Pacific (Comprehensive and Progressive Agreement for Trans-Pacific Partnership), and the US significantly restricted in the USMCA (the successor to the NAFTA) the availability of investor-state dispute settlement.

Taxes payable on investments in domestic companies depends on the company's entity classification for US federal income tax purposes, as well as the investor's individual circumstances.

A non-US shareholder engaged in a trade or business in the US will be subject to US federal income tax at graduated rates on interest income if the interest is "effectively connected" with its US trade or business (referred to as "effectively connected income" (ECI)). In general, if the income, gain, or loss of a non-US person for the taxable year from sources within the US consists of gain or loss from the sale or exchange of capital assets or fixed or determinable annual or periodical gains, profits and income (such as dividends and interest (FDAP income), certain factors must be taken into account in order to determine whether the income, gain, or loss is effectively connected for the taxable year with the conduct of a US trade or business by that non-US person. The principal tests to be applied are the asset-use test and the business-activities test.

Under this test, if an item of income is from assets (property) used in, or held for use in, the trade or business in the US, it is considered effectively connected. An asset is used in, or held for use in, the trade or business in the US if the asset is:

Under this test, if the conduct of the US trade or business was a material factor in producing the income, the income is considered effectively connected.

Additionally, the US imposes a withholding tax, currently at a rate of 30%, on payments to non-US persons of various types of US source FDAP income that are not ECI. US-source FDAP income includes interest paid by a resident of the US (including US corporations and US partnerships that are engaged in a US trade or business, and individual residents of the US). Certain exemptions may apply to eliminate withholding or reduce withholding rates under the portfolio debt rules or applicable tax treaties.

State level taxes and other fees may apply, the above is limited to federal level income taxes and withholding taxes.

US taxation is a complex subject and this discussion only samples some of the relevant considerations.

There are no restrictions on companies opening foreign currency accounts in the US, or abroad, provided that there are Know-Your-Customer steps (a process of a business identifying and verifying the identity of its clients) that must be taken in opening US bank accounts, under the Patriot Act and other statutes. In addition, a US project company having an interest in or signature authority over a bank or other financial account in a foreign country must report that interest to the Commissioner of Internal Revenue annually under a US Department of the Treasury, Financial Crimes Enforcement Network (FinCen) requirement.

There are no limits beyond restrictions that apply generally to payments abroad, including:

The tax treatment of payments is also important. Non-liquidating distributions of cash by a US corporation (other than in connection with a reorganisation or division of the corporation) to its shareholders in respect of their stock (shares) are treated as dividends to the extent of the US corporation's current and accumulated earnings and profits. Distributions in excess of the US corporation's current and accumulated earnings and profits are treated as non-taxable return of capital to the extent of the shareholder's tax basis in its stock, and thereafter as gain from the sale of stock.

For distributions treated as gain from the sale of stock of the US corporation, a non-US shareholder may be subject to US federal income tax on such gain if it is effectively connected with the non-US shareholder's US trade or business under the effectively connected income rules (see Question 37) or if the stock is considered a US real property interest (USRPI) and thus treated as effectively connected income. An interest (other than solely as a creditor) in a US corporation that was a US real property holding corporation (USRPHC) during the shorter of the period during which the shareholder held such interest or the five-year period ending on the date of disposition of such interest is a USRPI. Generally, a US corporation is a USRPHC if the fair market value of its USRPIs is at least 50% of the fair market value of its interests in real property and its trade or business assets (see Question 37).

There are no specific restrictions on the import of equipment from abroad for use in a project. In various cases, tariffs do apply, to increase the cost of specific imports. Recent impositions of tariffs on imports of steel and aluminium from a number of jurisdictions have in particular impacted some proposed projects.

The import must comply with its general obligations under the US custom laws. Also, the import of certain classes of equipment may be restricted to protect the economy and security of the US, to safeguard people's health and well-being, and to preserve nature. The following are examples:

Choice of law rules vary by jurisdiction, but as a general matter, US federal and state courts will recognise the parties' choice of law. A choice of foreign law should be enforced unless:

(Section 187, Restatement (Second), Conflicts of Laws.)

This principle is widely followed, including by the courts in New York and Texas.

Section 5-1401 of the New York General Obligations Law encourages the choice of New York law by permitting parties to a transaction for consideration of USD250,000 or more to choose New York law whether or not such contract, agreement or undertaking bears a reasonable relation to the state of New York.

As a second example, Chapter 271 of the Texas Business and Commerce Code provides that parties to a transaction for consideration of USD1 million or more may, with certain exceptions, agree in writing that their agreements will be governed by the laws of a particular jurisdiction if the transaction bears a reasonable relationship to the chosen jurisdiction. The statute sets out five "safe harbour" factors as to what constitutes, under Texas law, a reasonable and enforceable choice of law but is not applicable to certain types of transactions including transfers of title to real property and methods of foreclosure.

Certain statutory choice of law rules, such as Article 9 of the Uniform Commercial Code (relating to secured transactions) cannot be modified by contract.

US federal and state courts will generally enforce the parties' agreement to submit a dispute to a foreign jurisdiction. In circumstances involving contracts negotiated by commercially sophisticated parties at arm's length, New York courts will rarely disregard a forum selection clause. Narrow exceptions that may render a forum selection cause unenforceable are if the clause is unreasonable or unjust, violates public policy, or is invalid due to fraud or overreaching. Texas courts take an analogous approach.

Parties who choose New York law to govern their commercial contracts in a transaction of at least one million US dollars are permitted access to New York courts in the event of a dispute, regardless of whether the transaction has any other connection to the state of New York.

As a general matter, waivers of sovereign immunity are enforceable. The Foreign Sovereign Immunities Act (FSIA) provides that a foreign state will not be immune from the jurisdiction of US federal or state courts, or from attachment in aid of execution, or from execution on a judgment, if the foreign state has waived its immunity (either explicitly or by implication). Immunity from jurisdiction and immunity from attachment are treated separately, so a contractual provision waiving sovereign immunity should reference both jurisdiction and attachment.

As a general matter, courts in the US are regarded as fair, impartial and following the rule of law. The US has both a federal and a state court system.

According to Article III of the US Constitution, judges of US federal courts are nominated by the US President and are confirmed for life-time appointments in the US Senate. Judges in state courts are selected for a specified term by various means, including popular election and nomination and confirmation by a legislative body. Judges in both systems have varying judicial philosophies but are bound by statutes and, to a substantial degree, prior precedent.

The experience of any particular court with enforcement of security and other laws relating to a project varies, but project agreements will often designate that disputes will be adjudicated by a federal or state court located in a county of the state where the project is located and that has significant relevant expertise.

Both federal and state courts in the US routinely recognise and enforce foreign arbitration awards. The Federal Arbitration Act (FAA) applies to both international and domestic arbitration contractual provisions and awards, and includes enabling provisions for both the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention) and the Panama Inter-American Convention on International Commercial Arbitration.

Enforcement of final, conclusive and enforceable foreign judgments is subject to the Uniform Foreign Money-Judgments Recognition Act (UFMJRA) which has been adopted in various forms by substantially all states in the US. The UFMJRA has been codified as Article 53 of the Civil Practice Law and Rules (CPLR) in New York and in Texas as Chapter 36 of the Texas Civil Practice and Remedies Code (CPRC). Pursuant to the UFMJRA, a foreign judgment granting or denying recovery of a sum of money is final between the parties unless the:

The November 2021 Infrastructure Investment and Jobs Act (IIJA) is a historic, USD1.2 trillion, infrastructure bill that provides funding for projects to overhaul and improve the physical infrastructure of the United States. The IIJA provides for USD550 billion in new spending over the next five years for projects ranging from transportation to broadband to climate resilience.

Significantly, several initiatives will help in the shift towards emissions-free electricity. For example, the IIJA provides for accelerated research, development, demonstration and deployment of hydrogen from clean energy sources as well as a grant programme for funding other hydrogen-related projects.

The IIJA also creates and funds numerous programmes to tackle carbon emissions and appropriates USD100 million to implement front-end engineering and design programmes to proactively capture emissions in infrastructure and manufacturing projects including funding for the development of carbon capture, utilisation, and storage (CCUS) projects.

In addition, the administration is working to reduce regulatory burdens such as permitting applicable to private sector infrastructure investment.

At the state and local level, as noted above, there has been a slow move towards the creation of PPP units within state and local governments in the US to encourage infrastructure development, especially in the transportation sector.