Analysis of the Legal and Institutional Governing the Procurement Procedure of the Caracol CPU Project
Info: 9892 words (40 pages) Dissertation
Published: 16th Dec 2019
The ToR of the legal consultant include the following task:
Deliverable 13: Provide examples of leading practices and language used in PPP contracts: (in a short report format) elsewhere that are considered to have been successful, highlight any challenges or specific issues, and summarize their applicability to the CPU project. Use these examples, including through on the job training, to build the GOH’s capacity to develop tender documentation/ranking criteria for bid selection for the CPU.
The present study will describe the main provisions and clauses included in PPP/concession contracts as well as the provisions pertaining specifically to energy PPP projects in accordance with international best practices.
II – Structure of the Project
The concession agreement to be entered between the contracting authority/ GOH and the concessionaire for the development and implementation of the Project is part of the project contractual structure that encompasses a number of related contracts that interplay and relate to the financing, building and operation of the CPU.
However, it is important to note that the contractual structure will be finally defined, upon:
- the determination of the detailed scope of work and responsibilities and the related allocation of risks among the different stakeholders (GoH, municipalities and public entities (SONAPI), private operator/concessionaire, commercial banks/lenders, donors, equity investors, public and private power off-takers, end-users/customers etc..);
- the assessment of the Project bankability and the terms of the financing arrangements have been set out.
The following are some of the related project agreements typically necessary for a power project:
- Concession Agreement: Grants the concessionaire the right to operate the power plant and develop, finance, construct or rehabilitate related infrastructures and installations, including the right to sell power to the off-takers and the end-users;
- Grid Interconnection Agreement: Governs the connection of the power plant with the power grid;
- Fuel Supply Agreements: Establishes the availability of fuel supply and quality;
- Fuel Transportation Agreement: Provides for transporting the fuel from the fuel supplier to the power plant;
- Power Purchase Agreement: governs the sale and purchase of electrical power between the Concessionaire/power producer and the buyer/off-taker;
- Engineering, Procurement and Construction Agreement (EPC Agreement): Sets the terms and conditions for the design of the power plant and/or other related infrastructures, the procurement of materials and equipment, and the construction/rehabilitation of the CPU and other related infrastructures, such as transmission lines. The obligations created under this agreement can also be divided among multiple contracts that include one or more of these scopes;
- Operating and Maintenance Agreement (O&M Agreement): Governs the rights and responsibilities of the entity that will operate the plant and be responsible for its maintenance as well as all related infrastructures required for the fulfillment of the concessionaire’s scope of work and responsibilities under the Concession contract;
- Loan Agreement: Creates the obligation of the lender(s) to make a loan to the concessionaire to finance the operation and maintenance of the CPU and the construction, operation and maintenance of the related infrastructures, as well as the obligations of the concessionaire/borrower to comply with various covenants in the agreement.
- Equity Contribution Agreement: obliges the concessionaire to make equity or subordinated debt contributions to finance the portion of the equipment, materials and infrastructures not being financed by third party lenders.
- Sovereign Support Agreement: may include sovereign guarantees, comfort letters, put and call options, and other forms of sovereign support that enhance the creditworthiness of the public off-takers and other government entities involved in the Project.
- Credit Support Agreement: may include Partial Risk Guarantees (PRGs), letters of credit and bank guarantees from commercial banks, escrow agreements, and sponsor support.
- Direct Agreement: governs the relationship between the lenders and the parties involved in the project.
The following chart describes a typical power PPP project contractual structure:
Fig: PPA in Context – Understanding PPA – Power Africa
III – Concession contractual scheme – Main clauses and implications
At this stage of the Project, it is understood that the UCG/PPP of the MEF has decided to launch a tendering process for the transfer to a private contractor under a concession contractual framework of the following responsibilities:
- the operation and maintenance of the CPU;
- the distribution and sale of electricity so generated to the end-users and industrial off-takers;
- the collection of the corresponding fees from the end-users ;
- the rehabilitation of some electrical installations and possible expansion of the transport and distribution network to additional sites to be financed entirely by the private operator (equity investment and loans from commercial banks) .
However, as already mentioned, the detailed scope of works, responsibilities and associated risks have not been yet determined and may be adjusted during the development and negotiation phase of the Project.
- Allocation of risks between the Concessionaire and the contracting authority
The concession contractual scheme implies usually that all financial, operational and commercial risks are borne by the concessionaire, save in case of force majeure or other risks that should inherently be borne by the contracting authority. Accordingly, the political risks, such as the expropriation by the GoH of private assets impacting the CPU Project or the rise of the inflation having some detrimental consequences on the private operator’s expected income are usually assumed by the contracting authority and host government.
This allocation of risks between the public authorities and the concessionaire is based upon a generally accepted axiom that a given risk identified with respect to a PPP project is to be allocated to the party who is the most able to assess, control and manage such risks and ultimately assume their financial consequences. This principle applies also to risks that cannot be covered by an insurance coverage or provisioned because it will result in unaffordable insurance premiums or high tariffs for the services rendered under the contract.
Hence, this distribution mechanism of who bears what within a PPP contractual scheme aimed to achieving the optimization of the economic balance of the contract and the objective of best value for money for the implementation of the Project.
The following risk matrix summarizes the risk allocation between the public and the private sector under a concession contract:
Concession (Design, Financing, Build, O&M (DFBO)
|Type of risk|
|Construction Risks||Demand Risks &
|Operational & Technical Risks||Availability & Performance Risks|
|Private Operator||Public Partner||Private Operator
1. The concept of Minimum Requirements in PPP/Concession contracts
Most PPP legislation and regulations require the inclusion of specific provisions that shall be governing the:
- contract scope of work and responsibilities;
- terms and conditions according to which the contract shall be performed by the parties to the contract;
- terms of payment and modalities of remuneration of the concessionaire;
- obligations and liabilities between the contracting authority and the private operator with respect to the performance of the contract;
- exoneration/exemption of responsibilities (force majeure, adverse economic conditions) that shall be of the PPP contracts;
- conditions of early termination of the contract and related compensation;
- settlement of disputes and mechanisms of dispute resolution.
The Draft PPP Bill approved by the MEF does not depart from the international best practices and provides for clauses that shall be inserted in PPP agreements as minimum requirements. These clauses are as follows:
|PPP contract – Minimum requirements under the Haitian Draft PPP Bill|
|Any partnership contract shall contain the following clauses:
2. Concession Contract Main provisions
- Precedent conditions to Coming into force
The conditions to be fulfilled for the performance of the parties’ contractual obligations and the start of the contract term must be specified. They shall include the approval of the competent authorities, the obtaining of various permits, licenses and authorizations required for the contract implementation, the issuance of guarantees and the conclusion of financial agreements as well as all the elements necessary for the start of the contract.
In the context of the Project it will be necessary to determine the permits, approvals and other authorizations required from the relevant authorities (Municipalities concerned, MPWT, MEF, regulatory authority, CNMP etc..) for the proper implementation of the Project
The conditions under which the performance of the contract may begin before the finalization of financing agreements or when the conditions for entry into force are not met shall also be specified.
The numerous conditions precedent to the coming into force of the contract may be summarized as follows:
- Obtaining of license and permits required under applicable law and the contract terms and conditions: Example of clause : “The Concessionaire , at its sole cost and expense, shall use its best reasonable efforts to acquire and maintain in effect all permits, licenses and approvals required by all provincial and local agencies, commissions and authorities with jurisdiction over the Concessionaire , or the Concessionaire , to enable it to perform its obligations under this Agreement, provided only that the Concessionaire shall be afforded every reasonable assistance by all authorities and according all the rights and privileges available to a special purpose company, a (Haitian) or foreign national, according to the best treatment for such parties afforded by Haitian law. The Concessionaire shall have no obligation to commence activities under the Project until all necessary licenses have been obtained”
- Signing of the Power Purchase Agreement and other sureties to be issued by the parties to the contract (performance bond / bank guarantee, escrow agreement etc..),
- Signing of the land lease agreement(s) with the relevant authorities or other permits to occupy and use the land parcels where the electrical equipment and materials will be installed: Example of clause: “ Copies of documents in a form satisfactory to the Concessionaire , conveying title or equivalent lease rights of the site to the Concessionaire , or such other instruments evidencing the Concessionaire’s leasehold or other right to the occupation, use and enjoyment of the Site, including the land and all buildings, pipelines, equipment and facilities of the (CPU), for the entire duration of this Contract”
- Access to the construction site free of all liens and encumbrances;
- Signing of the construction/ rehabilitation contract (EPC), if applicable;
- Signing of the operation and maintenance agreement;
- Evidence of the effectiveness of the fuel long-term supply agreement;
- Achievement of financial close in accordance with the financial proposals submitted by the Concessionaire and signature of the financing agreements containing terms and conditions not inconsistent with this Agreement;
- A satisfactory audit of the financial model submitted by the concessionaire by a firm of internationally recognized chartered accountants (registered accountants) acceptable to the State.
- Validation and approval of the Environmental and Social Impact Study in accordance with applicable law and the contract terms and conditions
- Issuance of guarantees by the different stakeholders in accordance with the terms and conditions of the main agreement
Example of clause: “The Parties shall each use reasonable endeavors to ensure that the conditions precedent on which their respective rights and obligations are conditional are fulfilled or realized as soon as and to the extent reasonably practicable.
The Parties may, by written agreement, waive fulfilment of any of the Conditions Precedent, with the exception of the Conditions Precedent contained in Clauses………, which Conditions Precedent may not be waived or abandoned.
Each Party agrees that it will give written notice to the other Party of the status of their efforts to satisfy the conditions precedent, as soon as reasonably practicable after receipt of a written request therefor from any Party and forthwith, upon fulfilment, realization, satisfaction or waiver of each of the conditions precedent set out above together with full details of the circumstances constituting any such satisfaction or fulfilment. The date, being 5 (five) Business Days after issue of such final confirmation that all of the relevant conditions precedent have been satisfied or waived, shall be deemed to constitute the date when all of the relevant conditions precedent were so satisfied or waived.
If any of the conditions precedent, other than that contained in Clause …., has not been satisfied or waived on or before the elapse of a period of 6 (six) months from the signature date of the concession contract, then unless the parties agree otherwise in writing, any Party may, by notice to the other party, terminate this Contract (without prejudice to any obligations which any Party has already accrued under Clauses…..)”.
- Conditions precedent with regard to financial close
The conclusion of the financial agreements between the concessionaire and the lenders may not be effective for quite some time after the signing of the concession agreement and the PPA. Accordingly, the parties try to commence to fulfill their obligations under the contract before financial close is reached.
Example of clause: “The Concessionaire shall use all reasonable endeavors to procure that it reaches financial Close by no later than (…) months after the Contract effective date.
If Financial Close cannot be achieved by the Financial Close Target Date by reason solely of any Disruption in the Financial Markets which, in the reasonable opinion of the State, has a material adverse effect on the ability of the concessionaire to secure financing for the Project or to satisfy any of the conditions precedent, then the Financial Close Target Date shall be extended until the date falling (…) days after that on which such Disruption in the Financial Markets ceases to have the relevant material adverse effect.
If the Financial Close Target Date is extended by a period (or periods taken together) of 180 days or more by reason solely of any Disruption in the Financial Markets then either Party may terminate this Agreement in accordance with the terms of this Agreement.
Waiver of Conditions Precedent and Extension of Period: Any condition precedent set out herein may be waived by the contracting authority in writing in whole or in part, or the period in which such condition precedent is to be satisfied and therefore the Financial Close Target Date may, subject to Clauses ….., be extended by such period as the contracting authority considers appropriate. If the contracting authority grants any such extension, it shall issue a certificate to the concessionaire, specifying the revised target date for Financial Close.”
Consequences of Failure to Satisfy Conditions Precedent: Without prejudice to the provisions of Clause …, in the event that one or more of the conditions precedent shall not have been satisfied or waived on or before the Financial Close Target Date or such other date as may have been specified in accordance with Clause … this Agreement may be terminated by the contracting authority in accordance with Clause ….hereinafter”.
The duration of the partnership contract, the terms of its extension and the conditions for the transfer of works, assets and equipment from the concessionaire to the contracting authority, where applicable, shall be specified. This period is determined according to the amortization period of the investments or the financing mechanisms used in accordance with the definition of PPPs main characteristics under Haitian draft PPP Bill and most PPP legislations. Additionally, these provisions are particularly important because they condition the transfer at the end of the contract of works and equipment whose design and / or construction and operation have been delegated.
Example of clause: “This Contract shall become effective on the Effective Date as defined herein. The Term of this Contract shall commence on the Effective Date and shall expire on the date of the [ ] anniversary of the Effective Date, unless: (i) terminated earlier in accordance with the provisions of this Contract, or (ii) extended in accordance with Section [ ]”.
b) Object of the Contract and allocation of responsibilities between the parties
The nature of the tasks assigned to each of the parties and the modalities of their implementation must also be specified in the partnership contract. The operating conditions of the delegated service (responsibilities of the private operator, arrangements for the execution and delivery of the service, the form and nature of the operator’s relations with the users) concerning the service contracts including the management of the operation of the public facility. The maintenance and maintenance of equipment and infrastructure or Public Service Delegation (leasing contract, concession, BOT) must also be specified.
Definition of the rights granted to the concessionaire: “the exclusive right to provide electricity and electricity access services whereby the Concessionaire is appointed, in consideration of the payment of the Concession Fee, to manage, operate, maintain, upgrade, renew and expand, where appropriate, the CPU and related infrastructures and assets concessioned, at its sole risk and peril, in consideration of payment made by customers/users as defined herein to it, subject to and in accordance with the provisions of this Contract;
Subject to the terms of this Agreement, the contracting authority hereby grants to the Concessionaire, which accepts such grant:
- the exclusive right to finance, rehabilitate, manage, operate, maintain and develop the CPU and all related work and infrastructures as described in this Agreement
- an exclusive right to provide the Services within the service area as described herein, including the right to bill customers and collect, in accordance with the provisions of this agreement ;
- an exclusive concession of the Public Assets (need to be defined in the agreement); and
- an exclusive assignment to the Concessionaire of the rights held by the contracting authority, in accordance with the provisions of this agreement.
The contracting authority , in granting this Concession, grants as an integral and inextricable part thereof, the exclusive right, obligation and authority, to the Concessionaire to exercise all powers granted to the contracting authority, including the municipalities and all concerned under applicable law as the Concessionaire may deem desirable in the course of meeting its obligations under this Contract, which right, obligation and authority includes, without derogating from the generality of the grant, the power to perform excavation or construction works, install or remove machinery, or equipment, for the purpose of providing the Services and repairing, improving and/or replacing the CPU or any part thereof and to disconnect any Customer or interrupt or suspend the provision of the Services, whether in whole or in part, subject to the Concessionaire meeting its obligations in terms of this Contract.
The grant set out in this clause is subject only to compliance by the Concessionaire with any Laws or procedures relating to the environment, public health and safety and notification, approval or consent of the relevant authorities, where appropriate, and compliance by the Concessionaire with any related obligations relating to such rights and powers granted including, without limitation, the obligation to repair and make good the consequences of any such actions as may be required by any applicable law. To the extent that the contracting authority is not entitled to delegate such powers and may need to issue any form of permit or authority to the Concessionaire to exercise any of its functions, obligations, rights or powers under this Contract, the contracting authority herebyundertakes to grant such permit or authority, forthwith upon request of the Concessionaire.
The contracting authority shall not enter into any agreements or arrangements of whatsoever nature, with third parties (other than the Direct Agreement as defined herein) which may materially and adversely affect such rights and powers granted to or such obligations imposed upon the Concessionaire under this Contract.”
The ability of the concessionaire to subcontract some of its responsibilities under the contract shall be clearly defined. The limitation of the rights to assign the concession rights and obligations should not include the step-in rights that may be exercised by the lenders and/or donors as equity investors. Example of clause: “The Concessionaire shall not be entitled to sub-concession, assign, make over, cede or transfer all or any part of its rights and obligations in terms of this Contract and the grant of the Concession, at any time or in any way, whether directly or indirectly, nor shall it be entitled to pledge, encumber or otherwise utilize its rights under this Contract as security for any indebtedness whatsoever, provided that the Concessionaire may create security over its rights and obligations under this Contract in favor of its lenders in accordance with the direct agreement; provided further that notwithstanding the present Clause , any temporary assignment by the Concessionaire of its rights and obligations under this Contract pursuant to exercise by lenders of their rights in accordance with the direct agreement, shall not be deemed to be a breach of the present Clause .
The provisions of this Clause shall not be construed so as to prevent the utilization or employment by the Concessionaire of contractors, agents or subcontractors, to perform any portion of the Services, including, without limitation the purchase by the Concessionaire of potable water from another producer or sub-contracting to a third party to manage waste water treatment; provided that such utilization or employment does not purport to constitute a delegation, assignment or derogation of any of the Concessionaire’s material rights or obligations under this Contract”.
Example of clause: “The concessionaire shall be solely responsible for obtaining the financing necessary to develop all activities related to the Project in order to comply fully and in a timely manner with all its obligations under this Contract.
For the purpose of obtaining such financing, the concessionaire and / or its respective shareholders or any of them shall enter into Financing Agreements with lending institutions in accordance with the terms and conditions defined in the concessionaire’s Bid and as finally approved by the GOH/contracting authority.”
- Operation of the CPU
Example of clause: The concessionaire shall, at its own cost, be responsible for the management, operation, maintenance and repair of the CPU during the Operation Period and shall use its best endeavors to ensure that the CPU is in a good operating condition and capable of operating in a safe and stable manner within the Operating Parameters.
a) The concessionaire shall be entitled to periods of outage not exceeding (…MWH) in any year (“Allowed Energy Outage”) for the purpose of undertaking all necessary or desirable overhaul, Scheduled maintenance (as defined hereinafter), inspection and repair of the CPU. If the period of actual outage for any year is less than (.MWh) , the concessionaire shall be entitled to additional (MWh) of allowed Energy Outage for the succeeding three years equal to the number of (MWh) of Allowed Energy Outage which were not utilized during the preceding years, but not more than (… MWH per year.
(b) The concessionaire, in consultation with the contracting authority, shall determine the annual period for normal inspection, maintenance, repair and overhaul (such work is referred to as “Scheduled Maintenance”). The concessionaire shall give the contracting authority written notice prior to conducting actual work in accordance with the Scheduled Maintenance program subject to change by the CPU with the consent of the contracting authority which consent shall not be unreasonably withheld.
In pursuance of its obligations hereunder, the concessionaire shall have full right to:
- enter into contracts for the supply of materials and services.
- appoint and remove the O&M Contractor, if any, or other consultants and professional advisers:
- purchase replacement equipment and spare parts;
- (appoint, organize and direct staff, manage and supervise the CPU
- establish and maintain regular inspection, maintenance and overhaul procedures; and
- do all other things necessary for the running of the CPU within the operating Parameters and the provision of electricity supply services.”
- Billing and fee collection from the customers/users
Example of clause: “The Concessionaire has the right to receive from the Customers the amounts due for the Services and to collect the ensuing debts, according to the corresponding Tariff in force at the time for the Services in question. Customers are under an obligation to pay for the Services under sanction of disconnection and/or legal action being brought against them for recovery of outstanding debts together with all associated costs and interest thereon in accordance with the contractual relationships in existence between the Customer and the Concessionaire, whether new or assumed by the Concessionaire in terms of the transfer of Rights under Clause 29.17.
The Concessionaire shall be responsible to design, operate and maintain a system for issuing Bills and collection which meets its requirements in order to provide for the effective control, administration and reporting of Customer Bills and debt collection.
The Concessionaire shall, subject to the provisions of Clause …. below, bill Customers on a regular basis in relation to the provision of the Services in the immediately preceding Bill period.
The Concessionaire shall be entitled in its discretion to vary the individual amounts payable by, or Bill periods for, specific Customers in accordance with the provisions of ………. the Levels of Services , where required, particularly in relation to high consumption users or where a Customer has previously been disconnected for non-payment, provided that the Concessionaire shall only be entitled to charge Customers amounts not greater than the Tariff. Under no circumstances may the Concessionaire charge higher amounts than the Tariff. Where the Concessionaire so exercises its discretion, it must do so on a general basis where possible and shall not unduly discriminate between Customers or classes of Customers.
The Concessionaire shall make available to Customers, in the periods and manner determined by the Regulatory Authority, an explanatory leaflet and such details as are necessary so as to enable them to calculate the Tariff being charged to them, according to the category to which they belong and the contractual agreement and collection practices to which they are subject.
Bills must indicate, as a minimum, the following information:
- date of issue;
- due payment date;
- next bill date;
- the metered volume (where appropriate);
- place and form of payment;
- date when the reading of the meter took place, if applicable;
- interest charges for delays in payment and resulting amounts;
- discounts or rebates arising from penalties applied to the Concessionaire, where applicable;
- amount of other discounts or rebates;
- amount of any tariff increase, adjustments, extraordinary charges, or penalties levied;
- where the customer is metered, whether the volume indicated is based on an actual reading or estimated;
- taxes payable by Customers, if applicable;
- a full breakdown of the account balance, including an opening balance, a closing balance and details of any payments, charges or receipts during the billing period to which the Bill relates; and
- notification that the Customer may be subject to disconnection if the bill is not paid timeously.”
- Environmental and Social requirements:
In addition to Haitian law environmental and social requirements that must be complied with, many lenders will expect compliance with their own environmental and social requirements as part of the financing of the project. Many development financial institutions require compliance with the IFC or IDB Environmental and Social Performance Standards, while others such as the African Development Bank have their own standards In addition, a number of commercial banks require compliance with the Equator Principles . It is important to note that failure to adequately address environmental risks associated with a project’s technology may result in sanctions by local authorities. Environmental considerations may also affect the ability to access financing.
Social considerations: In addition to environmental concerns, local law and lender standards will have requirements pertaining to social considerations. These include provisions relating to gender issues, worker rights, limiting the impact of a power plant on the local community, and issues pertaining to resettlement
e) Compliance with Law and Change in Law
The concept of Change in Law has evolved to include (i) the introduction of new law, (ii) modification of existing law and/or (iii) changes in the interpretation of law by any court, tribunal, governmental entity or other authority which has applicable jurisdiction or regulatory oversight with respect to the Project or the concessionaire. “Applicable Law” in this context should be defined to cover a comprehensive range of legislative, statutory and regulatory instruments, orders, guidelines etc .
Additionally, Change in Tax Changes in tax may severely impact project revenue and could result in making a project fundamentally uneconomical. The change may come in the form of a change in tax rate, the creation of a new class of tax, or removal of relevant tax benefits that may adversely affect the project’s return on investment and/or its ability to service its debt. The consequences of a change in tax may: (i) Increase or decrease project costs; (ii) Increase or decrease the maintenance and operation costs; and (iii)Increase or decrease the revenues expected by the project company.
Example of clause: ‘the Concessionaire shall be entitled to claim for compensation to the contracting authority for all payments due to relevant authorities and all extra costs that may result from a change in laws (including those relating to taxation), regulations and Circumstances of laws or regulations, instructions or any applicable judgment of a relevant court of law or in the interpretation thereof after the Effective Date of the Contract which materially reduced, prejudiced and adversely significantly affects the implementation and / or execution of the Project and the provision of Services”
Example of clause: “The concessionaire shall as its own expenses obtain and maintain in force the following insurance policies:
- Construction/Erection All Risks Insurance (CEAR)
- Marine Cargo Insurance
- All Risks Property/Machinery Insurance
- Comprehensive General Liability Insurance
- Workmen’s Compensation Insurance
3. Energy PPP specific provisions – Power Purchase Agreement and Long-term fuel Agreement
It is important to note that most concession agreements concluded in relation to the operation of public facilities include some guarantees as to the revenue stream generated by the private operator without which the financial closing may not be possible, especially if the Project is project supported by limited recourse loans. In fact, independent power producers are rarely able to finance 100% of the project costs alone. IPPs will usually borrow money from lenders to finance power projects. The lenders are often in the back ground of the negotiations of the concession contract.
- Power Purchase Agreement (PPA) between the Concessionaire and the off-takers
Hence, one of the most important provisions associated with PPP energy projects relates to the guarantee issued by the contracting authority, the public electricity service provider or a third party operator that the electricity sold by the private operator will be purchased by the above-mentioned off-taker at an agreed price. The terms and conditions of the IPP/concessionaire’s guaranteed revenue are commonly set out in a PPA attached to the concession contract. The PPA is considered as forming an integral part of said contract as one of the main components of the security package. A PPA is a contract between the one who produces power for sale, in the present CPU project, the Concessionaire and the buyer/off-taker who seeks to purchase power. Accordingly the PPA constitutes: (i) guaranteed revenue for the concessionaire; (ii) a source of repayment with the cash flows generated by the project; and (iii) a surety for the lenders. If the PPA is not acceptable to the lenders, it may have to be renegotiated before the lenders agree to make their loans.
- Establishment of an Escrow Account in relation to the off-taker’s obligations
To address liquidity concerns, the off taker may be required to establish an escrow account for its payment obligations under the PPA. The escrow account will be required to contain an amount equal to a certain number of monthly payments under the PPA – for example, based on total expected charges for a given number of months, or based solely on the capacity charge for a given number of months.
If the off taker fails to make a payment when required under the PPA, then the project company can draw on this escrow account. This provides a buffer, so that the project company can continue to operate and to pay its debt service, even if the off taker fails to pay. After any draw on the escrow account, the off taker must immediately (or within a small number of specified days) replenish the account. If the off taker fails to replenish the escrow account (or, in some cases, obtain some form of re placement security), it will be an event of de fault under the PPA. An escrow account is function ally equivalent to a letter of credit and can be used to address short-term liquidity issues.
- Take or pay concept
The take-or-pay concept consists in requiring the power off-taker to pay the power produced by the operator at a tariff sets out in the PPA and PPP contract even if the former doesn’t take actual delivery of it. This requirement aimed at guaranteeing sufficient revenue to the power supplier in order to obtain a reasonable RoI and to ensure debt service payment.
However, the best practices in connection with power tariff structure under a PPP/ project finance project exclude take-or-pay concepts from electricity tariffs (except to the extent required to reflect any take-or-pay obligations under the fuel supply agreement that must be passed through) and introduced capacity and energy payments to better protect producers against demand volatility and consumers against the need to pay for energy that is not needed (and is therefore not generated).
- Long-term supply agreement
In a number of emerging markets, gas suppliers usually insist that long-term gas supply agreements contain a take-or-pay clause. In the context of a concession agreement, a take-or-pay clause provides that the concessionaire must purchase an agreed quantity of gas each year or pay for that quantity of gas regardless of whether the concessionaire purchases that quantity.
Example of clause: “GoH and/or the contracting authority guarantee the supply of fuel with the specification described in this Agreement. The guaranteed hourly amount of fuel to be supplied by GoH and/or the contracting authority will be no less than (………….)per hour, (………) hours per year.
GoH and/or the contracting authority shall sell and deliver to the CPU and the concessionaire shall purchase on the basis of take or pay from GoH and/or the contracting authority a minimum hourly quantity of fuel, average over each year, equal to seventy five percent (….%) of the sum of the daily stabilized consumption. In no event shall the concessionaire be obligated to take or pay for more fuel than the equivalent fuel consumption required for the offtake electricity by the off-takers (…. MW) which is equal to ……. of fuel per hour.
The concessionaire will pay to GoH and/or the contracting authority ($….. per …..fuel based on the term and conditions specified in this Agreement.
GoH and/or the contracting authority will supply the natural gas at (insert location of delivery) defined in this Agreement. In the event that the fuel supplied does not meet the Fuel Specification, the price per thousand cubic meters will be reduced by the following calculation:
If the fuel supplied will have different specifications from those specified above, and due to this change in specification the concessionaire will have a reduction in produced electricity, GoH and/or the contracting authority will pay the concessionaire a fee equal to the amount that would have been payable if the electricity output had been produced with fuel having the specifications as set out in this agreement.”
- Carry-forward and make- whole provisions:
Every take-or-pay obligation should soften the potential consequences for the purchaser of the fuel (in this case, the project company) by including carry-forward and make- whole provisions. A make-whole provision provides that if the fuel purchaser fails to purchase the take-or-pay quantity during any take-or-pay period (which is almost always a period of one year), and pays a take-or- pay payment equal to the purchase price multiplied by difference between (i) the take-or-pay quantity, and (ii) the quantity of fuel consumed, then the take-or-pay payment can be credited towards the cost of fuel in a subsequent take-or-pay period, once the take-or-pay quantity has been consumed during that period. A carry-forward provision does just the opposite. It provides that if the fuel purchaser purchases a quantity of fuel in excess of the take-or-pay quantity during a particular take-or-pay period, then the carry-forward quantity (the quantity of fuel purchased in excess of the take-or-pay quantity) will be used to reduce the take-or-pay quantity in subsequent take-or-pay periods.
Take-or-pay obligations impact the tariff that is payable under a PPA in the following manner. In the event that the off taker fails to dis patch the project company at a level that would enable the project company to consume a quantity of gas equal to the take-or-pay quantity during a take-or-pay period, then at the end of that take-or-pay period, the off taker will be required to make a payment that enables the project company to pay the take-or-pay payment to the fuel supplier.
- Tariff structure and tariff setting
These should specify the conditions under which the private partner is paid, the elements to be taken into account in the calculation of his remuneration (capital expenditure (CAPEX), operating costs (OPEX), financing) and Terms of payment (maturity, default interest).
- The conditions for reviewing and adjusting the remuneration of the private co-contractor (periodicity, calculation elements and method of indexation,
- The conditions for granting an adjustment in the event of economic conditions jeopardizing the economic and financial balance of the contract
- Financial conditions (tariffs, indexation formula, delays in payment of receipts by the delegate to the delegator, delays in payments from
The tariff structure corresponding to the operation of a power plant includes generally a payment for the capacity made available to the off-taker and a payment for energy that is actually dispatched to the off-taker.
Capacity-based tariffs were developed to balance the interests of investors and consumers in an economically efficient manner. This is achieved by ensuring that the project company/ concessionaire has a reasonable opportunity to earn revenues that are sufficient to (i) repay the capital invested in the project plus a reasonable return to the project investors and (ii) cover the fixed operating costs of the project, regardless of whether the off-taker dispatches the generation facility or not.
The off-taker’s interests are protected because the off-taker is only obligated to pay for the capacity that is made available to it, plus the energy that is dispatched by the off-taker and actually delivered to the delivery point. In general, these tariffs provide that the off-taker will pay to the concessionaire each month: A charge (a Capacity Charge) for the capacity of a generation facility that is made available to the off-taker, regardless of whether the off-taker actually dispatches the facility, and A per MWh (or per kWh) charge (the Energy Charge) for energy that is dispatched by, and delivered to, the off-taker.
4) Security Package
Nature of collateral and guarantees: The nature and the conditions for the enforcement of security rights and guarantees that may be required by donors, including private banks and insurers must be clearly specified in the contract as crucial for the financial viability of the project and sustainability in the performance of the contract.
The nature of the guarantees which may be granted by the State or any other public entity authorized to conclude partnerships and the conditions for their establishment should be the subject of a specific provision within the framework of the PPP legislation in force in accordance with the laws and regulations governing the State public and private domains as well as public assets.
a) Sureties and warranties covering the contracting authority/GoH default
- Partial Risk Guarantees (PRGs) offered by multilateral development banks are also used as risk mitigation instruments in developing markets. PRGs can be especially useful where there are concerns about the ability of a state-owned buyer or the sovereign to meet their contractual obligations to a project. PRGs will typically give partial credit protection to private lenders in circumstances where the state-owned buyer or the State fails to meet their payment obligations under the PPA. The list of trigger events for PRGs is restricted to political risk events, including the non-honoring of a financial obligation by a sovereign, including in respect of an obligation to purchase a power plant following the termination of a PPA. PRGs effectively transfer these risks to third-party multilateral institutions which are better able than private par ties to manage them. The World Bank Group and the African Development Bank, for example, provide partial risk guarantee products. These PRGs can be used to guarantee the repayment of both project loans by the concessionaire and the obligation to reimburse a bank that has issued a letter of credit on behalf of an off taker
- Political Risk Insurance
MIGA and national export credit agencies also play an important role in providing forms of credit enhancement for power pro jects in developing markets. MIGA provides political risk insurance primarily to support equity investments and shareholder loans within these projects. National export credit agencies that can be used to protect lenders and/or equity investors against certain specified political risk events. It is worth noting that a national export credit agency cover is typically tied to exports from the country of the relevant agency.
The underlying power project must have a significant per cent age of export content from exporter’s country of origin to qualify for political risk insurance from that export credit agency.
Similar to a PRG, these products enable these risks to be externalized to a third party that is better able than a private actor to bear them.
- Sureties and warranties covering concessionaire’s default
- Performance Bond: A performance bond normally takes the form a bank guarantee. The value of this bond is normally a fraction of the investment value of the Project and in theory should take into consideration the wasted cost incurred by the contracting authority and lost generation capacity. In practice, the main purpose of the bond is one of deterrent value and is typically insufficient to cover the real cost suffered by the government in the event of non-performance
Example of clause: “The concessionaire shall deliver to the contracting authority the Performance Guarantee to guarantee the compliance of its obligations with respect to the timely and otherwise compliant execution of the EPC Works under this Contract and the proper and compliant operation of the CPU and related facilities within the Applicable Standards and Norms and the Technical Specifications set out hereunder.
The contracting authority may draw on the Performance Guarantee only if, and to the extent that:
- the concessionaire or the EPC Contractor is in material delay of the delivery of the Facilities and therefore causes damage to the contracting authority , or if and to the extent it becomes apparent that the Facilities under construction deviate from the approved design and any such deviation or is not remedied by the concessionaire / or the EPC Contractor within a time and manner as reasonably requested by the contracting authority or its Technical Representative,
- the concessionaire or the O&M Contractor is in material delay or default in the delivery of the Services, and / or fails to substantially meet the Applicable Standards and Norms and the Technical Specifications set out hereunder and therefore causes damage to the contracting authority .
The Performance Guarantee shall be reduced by (%) percent of its total value on the fifth anniversary of the Completion Date and shall be reduced by another twenty five (%) percent of its original total value on the tenth anniversary of the Completion Date, provided always that the performance of the concessionaire has been, is and is expected to be satisfactory to the contracting authority..
The contracting authority shall return the Performance Guarantee to the concessionaire no later than (..) Days upon the following:
– after expiry of the Term of this Contract and final clearance notification by the contracting authority Technical and Financial Representatives;
– final cessation of provision of Services by the concessionaire, other than caused by a the concessionaire default; or
- Termination of this Contract for the contracting authority’s default
 (see http://goo.gl/ pNaCOv)
 (Integrated Safeguard System; see http://goo.gl/hWTO5p)
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