Professional Documents
Culture Documents
August 2013
Risk Analysis
Pre Completion Post Completion
Underwriting/Syndication/Participation
Sole or Joint Underwriting Hold Level Pricing and Fee Structure Market Flex, Clear Market
Sponsors
Execution Capability (track record, depth of management) Ability to bring in equity and support cost over runs
Contractual Foundations
PPAs (Off-taker and Project SPV)
Fixed and Variable Components of Tariff Linkage to cost of fuel Take or Pay Availability Based Tariff
Transportation Contracts
LNG Charters (dedicated vessels, demurrage Gas through Pipelines Imported coal through dry bulk vessels
Contractual Foundations
Construction Contracts e.g. LSTK (Project SPV and EPC Contractor)
Liquidated Damages Work men Insurance Pass through for FX and other escalations
Technology License Agreements O&M Agreements Shortfall Guarantee/Completion Guarantees (Sponsors and Lenders)
Guarantees from sponsors to ensure timely completion of construction phase Shortfall undertaking to ensure min DSCR
Structure
Concessionaire/Offtaker
Concession/Offtake Agreement Third Party Legal and engineering financial due diligence Firms
Project SPV
EPC Contract
Contractor
Sponsor
Risk Framework
Market and/or Price Risk
Demand reduction (economic down turn),Substitution, Technology obsolescence, Competition
Construction/Completion Risk
Site Acquisition/ Rehabilitation, Cost Escalation / Time Overrun Risk, Contingency / Event Risk
Political Risk Approvals, change in laws, political instability/war strife, exchange control Financial Closure Risk Interest Rate, Exchange Rate Risk Technology Operational
Mezzanine finance
Riskier than senior debt with lower security Generally bullet or ballooning with back ended repayment Higher pricing than senior debt used to achieve necessary leverage caps and improve RoE on project
Assignment Agreements for all material contracts like EPC, Concession Agreement, PPA, FSA etc which gives lenders step in rights Escrow of cashflows and waterfall mechanism Insurance Loss Payee rights DSRA
PPPs contd..
Service Contracts
Shorter Duration (1-3 yrs) Multiple contracts for various activities Useful when its important to keep entity public but infuse efficiencies in certain operations Need monitoring Easier to sell politically Cant be useful to attract capital investment
PPPs contd..
Management Contracts
Ownership is public but most functions transferred incl management and operations Performance targets clearly defined in terms of improvement of the utility (hospital, bus terminal etc) Incentives linked to performance Capital Investment (asset replacement or expansion) remains with the Public Sector Tariff setting is also responsibility of Public Sector Brings focus on profitability all across Good starting point before complete privatisation Possibility of mis-use/abuse to inflate performance should be checked through independent monitoring
PPPs contd..
Lease Contracts
Operator provides service at own expenses and is allowed to charge a fee Duration is upto 10 years All losses to the head of the operator but so also the upside of profits Fixed lease payments irrespective of revenue achievement Drives efficiency but can also lead to neglect on maintenance expenditure to improve profitability during lease period.
PPPs contd..
Concession Agreements/ BOT
Private sector responsible for operation, maintenance, collection, management, financing etc Normally concession is for existing asset and may involve capacity addition to it or just pure operation Private Operator also responsible for capital investments (e.g. distribution concessions link tariff hikes to capital investment for improvement of distribution network) Tenor of concession is 25-30 yrs
PPPs contd..
Concession Agreements/ BOT
May involve viability gap financing from the Government to assist in capital investment BOT is a specialised concession where a new infrastructure asset is created under the Concession and the builder has the right to operate and charge fee for the same to users
No No Partial Yes
Yes No No No
Yes No Partial No
Yes No Partial No
Yes Yes No No
Yes No Yes No
Operation
Market
Interest Rate
Payment
Regulatory
Project Specific
Project Specific
Project Specific Project Specific
Power
Medium
Low
Low
High
High
Some progress made through adoption of Shunglu committee recommendations in July 2011 by states Total Debt of Power Sector i.e. State , Central Utilities and Private Utilities is Rs 6.5 trillion
40% by Banks, 30% by PFC, REC and Infra Finance Cos 25% from Bonds, Govts and ECBs
Delays lead to cost over run and financial closure of the same leads to further delays
Actual 16GW installed wind capacity (18-19% CAGR over last 5 years) Actual 400+ MW of solar capacity after a great start in 2011, capacity additions have sputtered in last 2 years. 40 GW of installed hydro power Actual Generation of renewable energy was 20 bn kwhr as compared to 40 bn by Brazil and 60 bn by China (2010)
Not very favourable state govt policies on renewable energy Poor financial health of discoms means pressure on tariffs (solar and wind projects with high capital costs need higher tariffs) Perceived technology risk and absence of successful renewable energy debt financing case studies means banks are wary
Multi-lateral agencies have emerged as backstops for political/country risks but project viability is being evaluated on stand alone limited recourse basis (non recourse financing is RARE) Renewable energy projects will have limited predictability of cash flows given insufficient track record
Solar projects have limited merchant attraction due to peak non peak production, high marginal costs/tariffs need PPAs to attract lenders Wind power faces similar issues with climate change risks making merchant or limited period PPAs unacceptable. Relatively new technology
Sponsor exits are restricted under project financing esp renewable energy project financing
Strong policy support including semi-conductor policy for generation of PV in India to reduce capital costs for solar Incentives which are long term and predictable Monitoring of RPOs and incentivise states/discoms for the same (pass through in tariff needed) Greater involvement of ECAs, Multilateral financiers RECs are internationally key component of renewable energy project financing Renewable Power Obligations on state utilities/discoms encourage capacity additions worldwide Wind power technology has improved and become standardised. Also reliability of performance has increased. Wind studies have got better. Utilities owning wind power projects is becoming the norm. This mitigates the input price volatility of fossil fuel based power plants
Weak financial state of SEBs/discoms which are the main off-takers in most projects
Power sector reforms have picked up pace and financials of many state discoms have improved Limit exposure to top 10 SEBs Criticality of project to the state and merit order ranking on tariff For mega projects risk spread across several SEBs as off-takers Significant demand supply gap
Already identified land with survey reports on extent of rehabilitation and opposition expected State governments active participation Conservative assumptions on project completion timelines and costs to arrive at debt sizing Acquisition of land and Environmental clearances for the coal land (in case of captive mining) would be a pre-requisite for loan sanctions In case of coal being purchased or imported, long term supply contracts or linkages need to be established.. Also critical infrastructure incl coal handling , rail connectivity and coal washeries etc is critical For gas based projects firm supply contracts with penalties for non supply would be a precondition. Contingent equity undertakings from sponsor for cost runs based on sensitivities on DSCR as a result of project cost escalations. EPC contracts would have covenants covering Liquidated damages Performance bonds/guarantees In cases where the sponsor is executing the project through various small contracts for supply and construction, a construction completion guarantee from Sponsor isbe taken
Constraints on fuel supply and quality Inability to achieve pass through of costs overruns