Contents
Chapter 1
Introduction 1
Chapter 2
What Is Project Finance? 5
§2.1 Development of Project Finance 5
§2.2 Features of Project Finance 7
§2.3 Project Finance and Privatization 9
§2.4 Project Finance and Structured Finance 11
§2.5 Why Use Project Finance? 13
§2.5.1 Why Investors Use Project Finance 14
§2.5.2 The Benefits of Project Finance to Third Parties 17
Chapter 3
The Project Finance Markets 21
§3.1 Commercial Banks 22
§3.1.1 Areas of Activity 22
§3.1.2 Banks in the Market 24
v
§3.2 Bond Issues 27
§3.3 Mezzanine and Subordinated Debt 27
§3.4 Lease Finance 28
§3.5 Vendor Finance 30
§3.6 Public-Sector Finance 31
Chapter 4
Project Development and Management 33
§4.1 Sponsors and Other Investors 33
§4.2 Project Development 36
§4.3 The Role of Advisers 37
§4.4 Joint-Venture Issues 38
§4.5 The Project Company 39
§4.5.1 Structure 39
§4.5.2 Shareholder Agreement 40
§4.5.3 Management and Operations 41
§4.6 Public Procurement 42
§4.6.1 Prequalification 43
§4.6.2 Request for Proposals 43
§4.6.3 Bid Negotiation to Contract Signing 46
§4.6.4 Competitive Bidding for Other Project Contracts 47
Chapter 5
Working with Lenders 49
§5.1 Commercial Banks 49
§5.1.1 Advisers and Lead Managers 50
§5.1.2 Letters of Intent 53
§5.1.3 Lenders and the Public-Procurement Process 54
§5.1.4 Bank Roles 54
§5.1.5 Financial Model 55
§5.1.6 Term Sheet, Underwriting, and Documentation 55
§5.1.7 Information Memorandum and Syndication 57
§5.1.8 Agency Operation 58
§5.2 Bond Issues 59
§5.2.1 The Investment Bank and the Ratings Agencies 60
§5.2.2 Rule 144A 61
§5.2.3 Wrapped Bonds 62
§5.2.4 Bond Paying Agents and Trustees 62
vi Contents
§5.3 Loans versus Bonds 63
§5.4 The Roles of the Lenders’ Advisers 63
§5.4.1 Legal Advisers 63
§5.4.2 Lenders’ Engineer 63
§5.4.3 Insurance Adviser 65
§5.4.4 Model Auditor 66
§5.4.5 Other Advisers 66
§5.4.6 Preappointment of Lenders’ Advisers 66
§5.4.7 Use of Advisers’ Time 67
Chapter 6
Project Contracts: (1) The Project Agreement 69
§6.1 Offtake Contract 70
§6.1.1 Types of Offtake Contract 70
§6.1.2 PPA Structure 72
§6.1.3 Completion of the Plant 73
§6.1.4 Operation of the Plant 74
§6.1.5 Tariff 74
§6.1.6 Tariff Indexation 77
§6.1.7 Penalties 77
§6.2 Concession Agreement 79
§6.2.1 Service Contracts 81
§6.2.2 Toll Contracts 83
§6.3 Term of Project Agreement 86
§6.4 Control of Project Design and Construction, Contracts,
and Financing 87
§6.5 Compensation for Additional Costs 88
§6.5.1 Breach by the Offtaker or Contracting Authority 88
§6.5.2 Change in Specifications 88
§6.5.3 Changes in Law 89
§6.5.4 Latent Defects 89
§6.6 Force Majeure 89
§6.7 Step-in by the Offtaker or Contracting Authority 91
§6.8 Termination of the Project Agreement 91
§6.8.1 Early Termination: Default by the Project Company 92
§6.8.2 Early Termination: Default by the Offtaker
or Contracting Authority 96
§6.8.3 Early Termination: Force Majeure 98
§6.8.4 Optional Termination 98
§6.8.5 Tax Implications of a Termination Sum Payment 99
Contents vii
§6.8.6 Final Maturity of a BOOT/BOT/BTO Contract 99
§6.9 Effect of Debt Refinancing or Equity Resale
on the Project Agreement 100
§6.9.1 Debt Refinancing 100
§6.9.2 Equity Sale 101
§6.9.3 Does It Matter? 102
Chapter 7
Project Contracts: (2) Ancillary Contracts 105
§7.1 EPC Contract 105
§7.1.1 Scope of Contract 107
§7.1.2 Commencement of the Works 108
§7.1.3 Owner’s Risks 108
§7.1.4 Contract Price, Payments, and Variations 109
§7.1.5 Construction Supervision 110
§7.1.6 Completion 110
§7.1.7 Force Majeure 111
§7.1.8 Liquidated Damages and Termination 111
§7.1.9 Suspension and Termination by the
EPC Contractor 113
§7.1.10 Security 114
§7.1.11 Dispute Resolution 114
§7.2 Operation and Maintenance Contract(s) 115
§7.2.1 Scope of Contract 115
§7.2.2 Services 115
§7.2.3 Fee Basis 116
§7.2.4 Incentives and Penalties 116
§7.2.5 Major Maintenance Contract 117
§7.3 Fuel or Other Input Supply Contract 117
§7.3.1 Supply Basis 117
§7.3.2 Physical Delivery Risks 120
§7.3.3 Pricing Basis 120
§7.3.4 Security 120
§7.3.5 Force Majeure and Change of Law 121
§7.3.6 Default and Termination 121
§7.4 Permits and Other Rights 122
§7.4.1 Project Permits 122
§7.4.2 Investment and Financing Permits 124
§7.4.3 Rights of Way and Easements 124
§7.4.4 Shared Facilities 124
viii Contents
§7.5 Government Support Agreement 125
§7.6 Insurance 127
§7.6.1 Construction Phase Insurances 127
§7.6.2 Operating Phase Insurances 130
§7.6.3 Deductibles 130
§7.6.4 Lender Requirements 131
§7.6.5 Reinsurance 132
§7.7 Direct Agreements 133
Chapter 8
Commercial Risks 137
§8.1 Categories of Project Finance Risk 137
§8.2 Risk Evaluation and Allocation 137
§8.3 Analysis of Commercial Risks 139
§8.4 Commercial Viability 140
§8.5 Completion Risks 141
§8.5.1 Site Acquisition and Access 141
§8.5.2 Permits 142
§8.5.3 The EPC Contractor 143
§8.5.4 Construction Cost Overruns 146
§8.5.5 Revenue during Construction 150
§8.5.6 Delay in Completion 150
§8.5.7 Inadequate Performance on Completion 152
§8.5.8 Third-Party Risks 152
§8.5.9 Projects without a Fixed-Price, Date-Certain,
EPC Contract 154
§8.6 Environmental Risks 155
§8.7 Operating Risks 155
§8.7.1 Technology 156
§8.7.2 General Project Operation 157
§8.7.3 General Operating Cost Overruns 158
§8.7.4 Project Availability 158
§8.7.5 Maintenance 159
§8.7.6 Degradation 160
§8.8 Revenue Risks 160
§8.8.1 Offtake Contracts 161
§8.8.2 Concession Agreements 162
§8.2.3 Hedging Contracts 163
§8.8.4 Contracts for Differences 163
§8.8.5 Long-Term Sales Contracts 164
Contents ix

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