The 1990s were golden years for lawyers specializing in project finance. Legal publications were aglow with praise for this "hot" new growth practice. The field became a magnet for the alumni of government agencies, especially the Export-Import Bank and the Overseas Private Insurance Corporation (OPIC), where designing financial strategies and political risk insurance are key tools of the trade.

But things have changed. These days, project lawyers spend more time on claims and rescue than on structuring new deals. The business slowed after the slide in the global economy, and damaging experience with legal and political risks, which lawyers are hired to handle, only added to the gloom.

Two lessons overshadow the field. One was the 2002 meltdown in the Argentine economy, where peso devaluation surprised project investors, banks, and lawyers in ways they are not supposed to. The other, the September 11 terror attacks, dug a hole in the political risk insurance market that is meant to protect against non-commercial assaults on international business.

Both mishaps still reverberate in project finance circles, where strategists agonize over what went wrong, and plot to build in stronger protection for the future.

The Argentine case blindsided the project community and its lawyers. A key factor after devaluation was that sorting out its impact on projects was done under Argentine law, not, says Kenneth Hansen, a partner in international law firm Chadbourne Parke, "under New York or English law, which are widely used in project structuring."

The result: since the peso was pegged to the dollar, and payments were required under Argentina's economic plan to be made at the old rate, they were mostly worthless. Project lawyers are still baffled by that blunder.

It's even more puzzling when the cost of legal services is factored in. It's not uncommon for these fees to amount to $1 million, to cover thousands of pages of complex documents. "A million dollars may seem like a lot, but it's a small price for a project in the $100-200 million range," said Hansen.

But if the Argentine gaffe is not likely to be repeated, the 9/11 impact on the political risk market will be pondered for some time. Political risk cover was a growth product in the 1990s, as East European, Latin American and Asian governments sold off infrastructure to private owners.

It protects investors and lenders against purely political events such as revolution, civil strife, and terror, as well as governmental actions like expropriation and blocking funds.

But, "up until a year and a half ago, both buyers and sellers of political violence insurance tended to treat it as an afterthought," says Felton (Mac) Johnston, who used to run OPIC's insurance operations, and now advises government and private insurers.

Traditional property and casualty insurers often threw it in at no extra charge, while the ranks of specialty political units grew dramatically (Zurich Financial and Bermuda giants Ace and XL Capital entered the field). But now, getting cover is often harder, and the price has risen, says Julie Martin, also an OPIC veteran, who handles the product for big broker Marsh & McLennan.

And, the "substantial increases in other insurance costs have so dramatically affected budgets, some risk managers may be less likely to consider political cover," she remarks.

But project finance enjoys a built-in floor: multilateral lenders like the World Bank and government export credit agencies like ExImBank are still active. And don't worry about the lawyers. Typically, they command $400 an hour fees in Washington and up to $600 in New York. They'll get by.

Sidebar: Resources

Overseas Private Investment Corp., www.opic.gov
Zurich North America, www.zurichna.com
Marsh & McLennan Companies, www.marshcredit.com
ACE Bermuda Insurance, www.acelimited.com
XL Capital , www.xlcapital.com