There are important issues which are common to any of these types of Project Agreement, namely: contract term, Payment Mechanism, contract monitoring by the Offtaker and or Contracting Authority, performance bonding and other guarantees, Compensation Events, Excusing Causes, Relief Events, Step-In by the Offtaker and or Contracting Authority, termination of the Project Agreement and related compensation, change of ownership and dispute resolutions.
Sub-Contracts and Other Related Agreements
The key provisions usually found in the major Sub-Contracts, i.e. the Project Contracts that may be signed by the Project Company, apart from the Project Agreement, as well as other related Agreements. These are the Construction Contract, O&M and or Maintenance Contract(s), Building-Services Contract, Fuel or other Input-Supply Contract, Insurance, Site lease, Permits and other rights — not a contract as such, but an important underpinning for all the Project Contracts.
The Parent-company guarantees for Sub-Contractors, Direct Agreements, which link the lenders (and the Offtaker and or Contracting Authority) to the Project Contracts.
Commercial Risks (also known as project risks) are those inherent in the project itself, or the market in which it operates. The main questions to be considered in the commercial risk-analysis process can be summarized as Commercial Viability and the question: Does the project make overall commercial sense for all parties?
• Construction Risks: Can the project be built on time and on budget?
• Revenue Risks: Will its operating revenues be as projected?
• Operating Risks: Is the project capable of operating at the projected performance level and cost?
• Input Supply Risks: Can raw materials or other inputs be obtained at the projected costs?
• Force majeure Risks: How can the project cope with force majeure events?
• Environmental Risks: What effect will the project have on its surrounding environment?
• Residual-Value Risk: What happens to the project after the end of the Project Agreement?
• Contract Mismatch: Do the Project Contracts fit together properly?
• Sponsor Support: Is there a need for more recourse to the Sponsors?
• Risks for the Offtakes and or Contracting Authority: Are these reasonable?
The due-diligence process must examine the risks inherent in the project under these different subjects. Considered must be also the extent to which these are covered or mitigated by contractual arrangements, and whether remaining risks left with the Project Company are reasonable and acceptable to lenders.
External macro-economic risks (also known as financial risks), namely changes in interest rates, inflation, and currency exchange-rates do not relate to the project, but to the economic environment in which it operates. These risks need to be analysed and mitigated (hedged) in the same way as the specific commercial risks. A mismatch between a short-term loan and a long-term project is another form of macro- economic risk.
However before looking at these macro-economic risks in detail, some basic financial concepts which lie behind calculations of the effect of these risks, as well as other cash-flow related issues have to be reviewed, as these all relate to adjusting cash-flow calculations for the time value of money.
Regulatory and Political Risks All major projects have also political aspects.
The Project Company may therefore be subject to political risks relating to the project’s presence in a particular country and its relationship with the Host Government, rather than to the more general commercial and macro-economic risk aspects of the project. These political risks are of major importance and have to be considered accordingly.
There are two main areas of risk relating to government actions: First the ‘regulatory’ or ‘change in law’ risks, which affect all projects to some extent, and second the ‘investment’ risks, which mainly affect cross-border project investments, primarily in developing countries. Linked to the latter are ‘quasi-political’ risks, which relate to government taking indirect action against the project.
One has to be aware and deal with the particular issues arising from ‘sub-sovereign’ risks where the Offtaker and or Contracting Authority is a state or local government instead of the central government. A Government Support Agreement may help to deal with such issues. Political-risk insurance may be available to cover these risks.
We prefer to work with qualified clients with good banking relation to leverage a client’s financial possibilities for project finance. Chances to materialize a transaction can be very high if the borrower’s company is of substance. If you would like to discuss this further, please use the reply form, or call 00353860325153. This number also works on Whatsapp, Signal, Telegram and WeChat.
In our blog post 3 OF 3 of “The need for Guarantees to enable Funding and Project Finance”, we deal with
· Financial Structuring
· The Financial Model
· Project-Finance Loan Documentation
· Public-Sector Financial Support
· Export-Credit Agencies and Development-Finance Institutions
· Recent Market Developments and Prospects for Project Finance
NOTE: The content of this report is an abstract based on the 577-page book we make available to our contracted clients providing guideline to successfully structure project finance with the help of third-party collateral and Prime Bank Guarantees. It is widely read by private sector investors and lenders who intend to make project finance deals.