1. Bucharest 21 January 2003 Legal Issues of Project Finance

2. Bucharest 21 January 2003 Introduction uThe Contractual Framework Ý Project Documents ‘ Concession Contract ‘ Construction Contract ‘ O&M Contract Ý Financing Agreements  Credit Facility  Direct Agreements  Security Agreements

3. Bucharest 21 January 2003 Construction Companies The Parties Involved Contractor Operator Shareholders Governmental Authority Consumers / Offtaker Performance Bond Banks Concession / Project Company Lenders Insurance Companies Sub-contracts Pledge of shares Revenues Concession Agreement Construction Contract Support Agreements Credit FacilitiesSecurities O&M Contract Supplier Shareholders Agreement

4. Bucharest 21 January 2003 Project Documents uThe Concession Contract Ýis essentially a licence granted by a governmental or quasi governmental authority to the concessionaire (Project Company “PC”) to build a project facility or piece of infrastructure, operate it for a fixed period of time (ie: 30 years) (ie: BOT, DBFO) Ýis the “master” project document in the sense that the other project documents must be “ back to back” with the Concession Agreement, relates to issue of “ bankability ” of the project

5. Bucharest 21 January 2003 Project Documents uEssential Elements of a Concession Contract Ýobligation on PC to design the facility/infrastructure to a stated specification by a stated date (liquidated damages) Ýprovisions enabling the grantor to inspect design and monitor progress of the project Ýobligation on the PC to operate the facility/infrastructure and to maintain it to stated level for a stated time Ýprovisions entitling the PC to charge relevant fees/fares

6. Bucharest 21 January 2003 Project Documents Cont… Essential Elements of a Concession Contract ÝRight for the Grantor to intervene and run the project itself should the PC fail to carry out the project or fail to meet standards ( a “step-in” right for the grantor) Ý“offtake agreement” may be rolled into the Concession Ýperformance targets during operational phase (liquidated damages, bonuses) Ýforce majeure, termination, arbitration etc...

7. Bucharest 21 January 2003 The Turnkey Construction Contract DESIGN - BUILD CONTRACT

8. Bucharest 21 January 2003 Project Documents uThe Turnkey Construction Contract ÝProject Company contracts with one entity (the Contractor) to undertake the design, procurement and construction of a facility for a fixed price ÝObjectives: ÝSingle point of responsibility ÝLimit time/cost overruns (for PC) ÝContractor may sub-contract part of the Works, (ie: FOE)

9. Bucharest 21 January 2003 Project Documents uEssential Elements of a Turnkey Construction Contract Ý Contractor provides design based on functional requirements submitted by PC Ý PC has a right to inspect comment on design specifications submitted by Contractor ÝContractor to construct facility by a fixed date, subject to extensions ÝLiquidated Damages “for delay”

10. Bucharest 21 January 2003 Project Documents Cont... Essential Elements of a Construction Contract ÝFixed Price (subject to “variations”), based on “milestone payments” upon the issue of various interim certificates Ý Takeover ÝPerformance tests ÝPerformance Bonds posted by Contractor, “first demand”

11. Bucharest 21 January 2003 Project Documents Cont... Essential Elements of a Construction Contract ÝDefects Liability Period (ie: a warranty to “make good” any defects discovered within a certain period) ÝInsurance - “All Risks” policy, Third Party Liability ÝLimitation of Liability ÝForce Majeure, Arbitration, Termination etc..

12. Bucharest 21 January 2003 Project Documents uSplitting the Turnkey Construction Contract Þ In order to avoid double taxation or disadvantageous tax rates, it may be preferable to split the turnkey contract Ý Off-shore Equipment Supply Agreement Ý On-shore Installation and Construction Agreement

13. Bucharest 21 January 2003 Project Documents uThe Operation and Maintenance Contract ÝDifferent Approaches to O&M responsibility Ü O&M function performed by the Project Company itself Ü Project Company enters into an O&M agreement with a third party, related (ie: a shareholder of PC) or not Ü Project Company can share the O&M role with a third party O&M and O&M contractor Ü Operating function can be split from the maintenance function

14. Bucharest 21 January 2003 Project Documents uEssential Elements of an O&M Contract ÝClear description of scope of services ÞRoutine Maintenance, Scheduled Maintenance (A,B,C Inspections), Unscheduled Maintenance Ý Standard/Level to be adhered to by the O&M Contractor ÝA general standard “Good Utility Practice” ÝEnumerated performance standards/levels

15. Bucharest 21 January 2003 Project Documents - O&M Contract ÝPrice: Fee + Performance Related Remuneration ÝFee Ý“All in ”, Operator provides all O&M services for a fixed price Ý“ Cost + Fee”, Operator reimbursed for its costs, and is paid a fee representing its profit ÝSticks and Carrots (key issue of bankability) ÝLiquidated damages for failure to maintain guaranteed levels of performance ÝBonus for achieving better than guaranteed levels of performance

16. Bucharest 21 January 2003 Project Documents - O&M Contract ÝProcedure for mobilising operator (“Notice to Proceed) ÝLimitation of Liability u Operator will limit its liability to a percentage of the fees paid to him in any given year (50-100%) u In addition, in the case of an “all in” remuneration, there may be a cap on liability on a “per incident” basis Ý Performance Bonds, Parent Company Guarantees

17. Bucharest 21 January 2003 Financing Agreements uCredit Facility ÝThe Term Sheet (3 pages or 50 pages ) ÝNegotiation now or later ÝNot a contract, only of moral value ÝSets principal terms for final documentation ÝConcerns of Project Company ÝCan you request disbursements when you need them, in the amount and currency you need ? ÝIs it too restrictive on the activities of the PC (ie: no dividends, capital expenditures, other debt)?

18. Bucharest 21 January 2003 Financing Agreements uPrincipal Characteristics of a Credit Facility ÝProject Cost and Financing Plan ÝAvailability ÝConditions Precedent ÝPrepayment ÝRepayment ÝInterest and Interest Periods ÝFees ÝReps and Warranties

19. Bucharest 21 January 2003 Financing Agreements uCont… Principal Characteristics of a Credit Facility ÝPositive and Negative Covenants Ýratios, restriction on dividends and capital expenditures Ýinformational covenants, to monitor PC performance Ýshould not be too onerous or restrictive ÝEvents of Default and acceleration ÝChoice of Law

20. Bucharest 21 January 2003 Financing Agreements uDirect Agreements = “Step in Rights” ÝAgreements entered into between the Lenders, the PC and the various parties to the key Project Documents which allow the Lenders to “step into the shoes” of the PC ÝAggressive function = allows Lenders to seize control of the PC’s rights upon default under Credit Facility (ie: upon enforcement of security) ÝDefensive Function = protects the Lenders against a precipitous termination of a Project Document

21. Bucharest 21 January 2003 Financing Agreements uEssential Elements of a Direct Agreement ÝConsent from 3rd party to assignment of PC’s rights under the Project Document Ýundertaking from 3rd party that it will not exercise any right of termination without first giving notice to the Bank Ýagreement from 3rd party that it will allow the Lenders to assume the PC’s rights and obligations under the relevant Contract

22. Bucharest 21 January 2003 Financing Agreements uSecurity Agreements ÝNo Recourse ÝNo personal guarantees /Suretyship by Sponsors ÝLimited Project Support Agreement (Costs) ÝPledge on Shares held in Project Company ÝLimited Recourse ÝProject Support Agreement (financial ratios) ÝThird Party Undertaking

23. Bucharest 21 January 2003 Financing Agreements ÝCategories of Security – Assets ÝImmovable vs. Movable ÝTangible vs. Intangible ÝPresent vs. Future ÝFixed vs. Floating charge

24. Bucharest 21 January 2003 Ý Limited security Ý Public vs. Private Assets No security may be registered against Public Assets Ý Assets of the Concession No security may be registered against assets necessary to provide public service Ý Cash Flow Consideration Ý Security on cash flow Ý Generate future cash flow (Direct Agreements) Financing Agreements

25. Bucharest 21 January 2003 Financing Agreements ÝSecurity on cash flow Ý Security instruments Security interest on present and future claims Accounts receivable Bank Accounts Compensation in case of early termination of concession Insurance proceeds Assignment of contract rights

26. Bucharest 21 January 2003 Financing Agreements ÝQuasi Security Delegation of income stream Escrow Agreement ÝChoice of Law and Jurisdiction Foreign vs. Domestic

27. Bucharest 21 January 2003 Financing Agreements uConclusion - Domestic Security Law ÝThe law should enable the quick, cheap and simple creation of a proprietary security right without depriving the person giving the security of the use of his assets ÝSecurity should be available (a) over all types of assets (b) to secure all types of debts and (c) between all types of persons ÝThere should be an effective means of publicising the existence of security rights ÝThe cost of taking, maintaining and enforcing security should be low

28. Bucharest 21 January 2003 Financing Agreements ÝIf the secured debt is not paid, the holder of the security should be able to have the charged assets realised and to have the proceeds applied towards satisfaction of his claim prior to other creditors ÝEnforcement procedures should enable prompt realisation at market value of the assets given as security ÝThe law should establish rules governing competing rights over persons holding security and other persons claiming rights in the assets given as security. ÝThe security right should continue to be effective and enforceable after the bankruptcy or insolvency of the person who has given it ÝAs far as possible the parties should be able to adapt security to the needs of their particular transactions