Consumo de alimentos y su relación con la calidad de vida

Many details need to be sorted out for project finance transactions to be closed. However, for lenders the technical issues are all related either to the limited- or non-recourse nature of the finance provided or to the reputation risk potentially associated with these large developments.

The non-recourse or limited recourse nature of the transactions means lenders rely predominantly or solely on the project’s cash flows to repay the loans. Thus the project’s technical performance is critical to its financial viability. Firstly, there needs to be confidence in the projected capex and the programme to bring the plant into commercial operation. Cover ratios and thus the viability of a project are particularly sensitive to delays in the start of commercial operations and extended capital spend. Similarly, it is evident that a clear view of performance in operations is needed – for opex, availability and generation capacity over a period often of 10 to 25 years. For all these parameters a consensus on project ‘pessimistic’ scenarios is critical to enable bank funding on a non-recourse basis.

There are always issues in a project which call into question the expected capital costs, schedule or performance. These are typically dealt with in one of four ways: they are designed out, allocated to the contractor (or another party) through the contract(s), insured against or contingency (or other support) is added to the project. In the case of reputation risk, the usual reference is international standards as a means of understanding whether good practice has been followed.

The key principles are set out below.

(I) COnFIDenCe In The CAPITAl COSTS

The first technical requirement for non-recourse project finance to be possible is to have confidence that the capital cost estimates are firm. Having a single strong contract on an Engineer Procure and Construct (EPC) basis – or in some cases a small number of EPC contracts – is key to achieving this. Strong EPC contracts provide a brief functional requirement for a project and leave it to the contractor to design and deliver it. Transfer of design and delivery risks to the Contractor removes key sources of cost overrun from the project company. Reducing the work to a single contract also removes the cost uncertainty associated with managing interfaces. In practice, there is very significant scrutiny of EPC contracts to gain confidence that the allocation of risks is fully understood and that the owner’s requirements are appropriate and functionally stated. This is to avoid the need for changes after contract signature to remove ambiguity, correct mistakes or adjust for the conditions encountered.

In a number of parts of the industry there are parties trying to move away from the model of a single EPC contract and in some cases this has been forced where no one party is willing to take on all the delivery risk. There is not space to debate the specific issues here, however, it is clear that there is a price premium attached to an EPC contract as the contractor needs to take responsibility for a range of uncertain scenarios. Some owners are keen to keep this premium instead as a contingency, especially where the owner feels experienced in project management or where the price premium is perceived to be very high.

(II) COnFIDenCe In The PrOGrAMMe

Achieving commercial operations on time is generally critical to project viability as interest on the construction loans compounds if the start of revenue generation is delayed. It is typical to include in the EPC contracts ‘liquidated damage’ mechanisms. These aim to hold the owner whole in the event of late completion – i.e., to provide compensation such that they are financially no worse off than if the project had completed on time.

Such liquidated damages provide a strong incentive to the contractor to observe the planned schedule.

Separate to the examination of the contracts it is important to have confidence that the contractor – and importantly the team the contractor is allocating to the project – have the right experience in delivery of projects of a similar nature. Experience should be demonstrated across all parts of the supply chain for critical equipment, including the manufacture or key components and the logistics of transportation as well as construction, assembly and commissioning. Incentives are of no value if the contractor is unable to deliver. Equally, there are always caps on liquidated damages – both in the daily rate and in the aggregate amount payable. The project company needs to demonstrate either that it can deliver the project, even under pessimistic scenarios, before the aggregate cap on damages is reached or to provide a form of contingency to cover the impacts of any further delay.

(III) COnFIDenCe In PerFOrMAnCe AnD OPex

Assuming a suitable agreement for power purchase is in place, the project’s cash flows and ability to service its debt are driven by the availability of the plant, its technical capability and on-going operational and maintenance costs. Operation and maintenance agreements (OMA) typically do not transfer significant risk to the operator. This is because contracts are often only around 5 years in duration and therefore it can lead to a skewed incentive to reduce maintenance spend, to deliver profit not while putting at risk longer term project performance. The main sources of comfort in the operational performance are therefore:

• The robustness of the plant delivered by the EPC contractor – its longevity

• The suitability of the performance testing in the EPC contract

• The competence of the operator and the ability to replace them, if necessary, for a similarly competent party at a similar fee level

• Availability of funds for on-going maintenance and a suitable programme.

In passing over to the EPC contractor the responsibility to design the plant, the owner has less control over the plant which is delivered. Performance tests should show the plant’s ability to deliver the capacity and flexibility specified in the short term but they do not guarantee long-term performance. Confidence in longer term robustness comes from the standards applied to the design and construction. These are not always easy to measure – especially in the case of civil engineering works. Where civil works are particularly significant, more prescriptive requirements are often included in the contracts. This may dilute the transfer of the design risk to the contractor, and hence increase the risk of cost increases to the project during construction. The balance of longer term robustness versus confidence in capital costs is assessed prior to EPC signature and financial close so documents can be adjusted as appropriate.

(Iv) rePuTATIOn

In addition to these broadly financial indicators, reputation risk is a key aspect considered by international project finance lenders as well as by some developers and contractors.

Large infrastructure projects often have significant impacts on local communities and attract the attention of wider stakeholder groups who may be vocal if their voice is not being heard. When poorly designed and developed, such projects can cause significant harm. In addition, failure to engage early on with stakeholders can lead to delay and additional cost which compound the problems.

Standards have evolved which cover best practice in identifying, mitigating and managing environmental and social impacts. The Equator Principles is a set of 10 principles [reference] broadly based on IFC (International Finance Corporation) performance standards, which is currently adopted on a voluntary basis by the majority of international banks. Even banks who are not signatories tend to consider the Equator Principles as they will need to show that projects are compliant in order to attract other lenders.

Locally developed and funded projects are usually developed in line with local environmental and social standards. The move to international standards needs to

be considered early on in a project’s development. There are often some differences in environmental standards on particular pollutants between international and local standards, however, the most significant difference is often in the area of public consultation.