© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Steven P Janes Sherrards Solicitors London UK CASE STUDIES: ENERGY SECTOR Regional Workshop on Concessions / Public-Private Partnerships Tirana, December 2007

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Investment in the Energy Sector – Deal Structuring l Infrastructure projects in the energy sector frequently involve capital costs well in excess of €100 million l Deal structuring is complicated by the involvement of public bodies, private business and multiple participants -Multiple Ministries – Finance, Energy, Public Works, Utility -Multiple Parties – developer, Construction Contractors, Equipment Suppliers, O&M -Multiple Finance Parties – Development Finance Institution, Commercial Banks, Export Credit Agencies l There is a spectrum of Public-Private-Partnership (PPP) structuring options each with their own set of commercial risks and legal challenges l As the level of capital costs and private investment increases, deal complexity also increases -High capital costs may result in multiple lenders to share the risks -Political risk insurance may play a key role -Size of the project means high visibility in the host country -Large financial commitments by public bodies may need to be backed by sovereign guarantees

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Legal Structuring – Energy Projects Examples of Project Agreements l Power Purchase Agreement (PPA) l Fuel Supply agreement l Construction (EPC) Contract l Turbine Supply Agreement l Operation and Maintenance (O&M) Agreement l Site Conveyance Deed of Lease Agreement l Insurance Policies Security and Payment Risk Issues l Government Guarantee l Escrow/Security Agreements l Letter of Credit

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Lessons learned from Energy Projects l Enforceability of Contracts –Authority of public entity –Changing authority due to sector restructuring l Choice of Law –Local Law for Project Agreements Contract law not highly developed? –UK Law for Financing Agreements l Experienced Local Lawyers –Commercial law experience –Good relations with government officials l Coordination Between International and Local Lawyers l Team with Reputable, Respected and Experienced Local Partners

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Funder requirements for PPP Projects Steven P Janes Solicitor; Sherrards, London UK

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU What is a Public-Private Partnership? l ‘Programme-based’ PPPs v. ‘project-based’ PPPs: private investment in public infrastructure + long-term service provision + risk transfer to private sector = “partnership” l Concession model –…the user pays (tolls, fares, etc.) N.B.: Many PPPs outside U.K. are Concessions l British Private Finance Initiative (PFI) model –…the public sector pays –adopted by many countries in the last few years, e.g. –N.B.: In some countries only this model is also called a PPP

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU PPP Funding Structure Investors Construction Contractor Hard FM Contractor EquityProject-Finance Debt Project Funding Lenders Soft FM Contractor Maintenance Contract Construction Contract Soft FM Contract (e.g. cleaning, catering, security) PPP Contract Authority Project Company Sub-Contracts

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Finance and PPPs Project Finance is a specialised form of finance, based on: –“Stand-alone” project –Special purpose Project Company as the borrower –High ratio of debt to equity (“gearing” or “leverage”) –Lending based on project-specific cash flow, not corporate balance sheet or past profit record –Lenders rely on project contracts not physical assets as security—“contract-based financial engineering” –Non-recourse (i.e. no claim on investors) –Finite project life, so debt must be fully repaid (cf. corporate loan, where debt may be rolled over indefinitely) l Used in most except the smallest PPP projects

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Lender Issues l Debt is cheaper than equity, so –High gearing produces a lower-cost project, but –High gearing creates greater risk for the lender l Lenders’ return is limited—e.g. 1% over cost of funds for a bank  Project risks must be limited—“A banker is a man who lends you an umbrella when it’s not raining.” l Lenders’ approach is that risks should be allocated to those best able to bear them, e.g.: –Authority –Sub-contractors (construction / FM) –Insurance –Project company’s investors –And last of all to the lenders  Project Company should be an “empty box”

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Risk Issues l Site risks: e.g. ownership, planning permission l Construction risks: e.g. will the project be completed on time and on budget? l Usage risks: e.g. will there be enough demand for energy? l Operating risks: e.g. can the new power plant be delivered as required at the budgeted cost? l Macro-economic risks: How would the project be affected by changes in fuel costs, interest rates or inflation?