Principles of Project Finance

may seriously delay the project and affect its overall viability.

• The cost of the product or service sold under a Project Agreement is not

competitive (or is likely to become uncompetitive) with current prices for the

same product or service, or too high in relation to the ability of end-users to

pay for it. The Offtaker or Contracting Authority, squeezed between the Pro-

ject Company and the end-users, will inevitably try to find a way out of the

contract.

• A power station project depends on the state power company as Power Pur-

chaser connecting the plant to the national grid system; the Power Purchaser

is obliged to pay the Availability Charge even if the grid connection is not

made. Although this is a reasonable provision for a PPA, a “white elephant”

plant is of no use to the Power Purchaser, who will try to find any way to get

out of the PPA if the grid connection cannot be funded or completed

• An Input Supplier, relying on the open market to source supplies, faces a

large increase in the free-market price for the product concerned, which is

not reflected in the long-term sales price in the Input Supply Contract, be-

cause the contract price is not linked to the free-market price. Disputes or

even default on the Input Supply Contract are highly likely.

§8.5 COMPLETION RISKS

The first detailed due-diligence question is whether the project can be com-

pleted on time and on budget—this question obviously mainly revolves around

the risks inherent in the construction process.

The key completion risks include:

• Site acquisition and access (cf. §8.5.1)

• Permits (cf. §8.5.2)

• Risks relating to the EPC Contractor (cf. §8.5.3)

• Construction cost overrun (cf. §8.5.4)

• Revenue during construction (cf. §8.5.5)

• Delay in completion (cf. §8.5.6)

• Inadequate performance on completion (cf. §8.5.7)

• Third-party risks (cf. §8.5.8)

The position where there is no final-price date-certain EPC Contract also needs to

be considered (cf. §8.5.9).

§8.5.1 S

ITE

A

CQUISITION AND

A

CCESS

Lenders will not normally take on this risk, and therefore only lend when the

Project Company has clear title and access to the project site and any additional

land needed during construction. This is mainly likely to be a problem in a

§8.5 Completion Risks 141