You are on page 1of 22

Lecture 5: International Project Finance

IPF Contracts
• IPF contracts are the basis for the Project Company construction
and for the Project’s operation;

• The most important contract in case of IPF is Project Agreement;

• Not all the projects are based on a Project Agreement (those that
sell a product or a service to private-sector buyers);

• A Project Agreement could take a form of:

– An Off-take Contract: under which the Project Company produces a
product and sell it to an Offtaker;
– A Concession Agreement: under which the Project Company provides
a service to a public authority or directly to the general public.

• There are standard forms for Project Agreement provided by

– Guidelines for Infrastructure Development through Build – Operate – Transfer
– Negotiation Platform for PPP in Infrastructure Projects;
– Standardization of IPF Contracts
A. Off-take Contracts
• An Off-take Contract provides the Offtaker (purchaser for
goods and services) with a secure supply and the Project
Company with the ability to sell its products on a preagreed
• The high debt to equity ratio specific to IPFs is secured
through this kind of arrangements;
• Off-take contracts can take various forms:
– “Take – or – pay contract”: the Off-taker must take the products
at an agreed price and quantity
• All BOT/BOOT/BTO/BOO are based on this form of Project
– “Take – and – pay contract”: the Off-taker pays only for the
products taken based on an agreed price;
– “Long term sales contract” (the quantity is initially fixed and the
price is adjusted based on an index or on the market price at the
• This type of contract may have a “floor” (minimum price) and could
24/01/2018 be assimilated with a hedging contract. 3
Offtake Contracts (cont.)
• “Hedging contracts”:
– A long term forward sale of the commodities at a fixed price (it is the same with the
take-or-pay agreement);
– An agreement that if the commodity’s price falls below a certain floor level, the
product will be sold at this floor price. If the price does not fall to this level the
product is sold to the market price;
– An agreement that establish a ceiling price and a floor price for the products sold in
advance (similar to collar on interest rate);
• “Contract for differences”:
– Under this type of agreement the Project Company sells the products directly to the
market and not to the Offtaker. If the market price is bellow an agreed level, the
Offtaker will pay the difference and vice versa.
– This contract is a financial one and differs from a hedging contract.
• “Throughput contract (also known as transportation contract)”:
– This is used in pipeline financings.
– Under this type of agreement, a user of the pipeline agrees to use it to carry not less
than a certain volume of product and to pay a minimum price for this.
24/01/2018 4
Example: “Take – or – Pay” Offtake Contract Provisions
1. Power Purchase Agreement structure:
• The position of the Power Purchase Agreement in the Project Structure

Investors Lenders


The contractor The operator

Construction Operating
Contract Project Contract
Supply Support
contract Agreement
Supplier Government


• The technical characteristics of the project (output, heat rate, emissions);

• The construction / completion schedule;

24/01/2018 5
Take – or – Pay Off-take Contract Provisions
2. The Completion of the Plant:
• The Commercial Operation Date: from this day, the Tariff will be
• The performance tests (will demonstrate that the plant can achieve the
output level);
• In BOT, the owner (public body) may require other technical and
performance procedures to be fulfilled;
• The performance tests could be a part of construction contract or could
be an independent contract;
• Other conditions for COD achievement:
» Obtaining operating permits;
» Confirmation that the emissions requirements are met;
» Confirmation that operating phase insurances are in place on the agreed
» Demonstration that reserves of raw materials are sufficient for a specific
period of time

Take – or – Pay Off-take Contract Provisions

3. Operation of the Plant:

• The agree detailed operating procedures should be mentioned in
the Offtake Contract;
• The Purchaser will notify in advance its expected requirements
for outputs, and the Project Company will notify any changes in
the outputs availability;

4. Tariff:
• Usually the tariff is paid on a monthly basis;
• The tariff is composed from two main components:
– A fixed Availability Charge (Capacity Charge or Fixed Charge);
– A Output Charge: variable with the usage of the plant.

24/01/2018 7
A. Availability Charge (Fixed charge)
• This element of the Tariff is paid even if plant is not dispatched (because it
represents all the fixed costs generated by the building of the plant and make it
available for the Project Company);
• This element covers:
– Fixed operating costs: land rental, staff costs, insurance premiums, spare parts and
other maintenance costs;
– Debt service: interest payments and principal repayments;
– Equity returns: free cash flows after debt service and fixed operating costs +
• The Availability Charge could be splitted in three parts mentioned above or in
two parts (combining equity with debt);
• This Charge is established when the Project Agreement is signed;
• There is an Availability Charge risk (the fixed costs to be higher in the
future) usually assumed by the Project Company but sometimes there are
exceptions (insurance policies).
24/01/2018 8
B. Output Charge (Variable costs)
• Is covering the Project variable costs;
• It is calculated based on the current costs of raw materials involved in
the production process;
• Any other operating and maintaining costs that are variable with the
usage of the plant;
• If the plant is not dispatched this charge is not payable;
Tariff Indexation:
– The various number of elements of the Tariff are normally indexed;
– Fixed operating costs are indexed with CPI or IPI in that country;
– Debt service: not normally indexed;
– Equity return: indexed with CPI.
– Output charges are not indexed being based on current price of
representative inputs (oil, gas) in the project (but specific catalogues,
representative markets could be used for this price).

24/01/2018 9
Take – or – Pay Off-take Contract Provisions
• 4. Penalties:
• If the project does not perform as initially was set, the Project
Company will be liable to penalties that will be deducted from the
Tariff payments or paid separately by the Project Company;
• Typical penalties include:
– Late completion: due to the constructor or due to the force majeure;
– Low initial output: the difference is covered by a lump-sum or the
Availability Charge will be reduced with the difference;
– High initial “heat rate”: a higher consumption of inputs than projected
involve an additional cost that could be covered by Project Company or
a penalty paid by the constructor to PC.
– Low availability: the plant is not capable to produce the initial agreed
output or the output level is deteriorating.

24/01/2018 10
Take – or – Pay Off-take Contract Provisions
5. Term of the Project Agreement:
– The term is measured from COD;
– Alternatively the project may run for a fixed period from signature;
– The term is influenced by:
• The life of the project;
• The term of debt;
• The residual value (in BOT the Power Purchaser wants to have the project
after a short period of time due to the higher residual value).

6. Compensation for additional costs:

- Compensation should cover:
- Changes in specifications (different technology, changes in procedures);
- Changes in law;
- Latent defects;
- Problems with the access to the site.

24/01/2018 11
Take – or – Pay Off-take Contract Provisions
7. Force Majeure:
– Characteristics:
• A party subject to force majeure should not be penalized for non-
• If the products or services are not delivered because force majeure, no
payments are due from the Off-taker or Contracting Authority;
• The contract will be cancelled if the force majeure makes it
permanent impossible for the contract.
– Force majeure events:
• Natural
• Political
• Other events (unforeseen ground conditions, delay in obtaining
licenses, sabotage, national strikes, strikes at suppliers’ plants)

24/01/2018 12
Take – or – Pay Off-take Contract Provisions
8. Termination of the project Agreement:
– A project could be terminated before the end of its normal term
because of a default of the Project Company;
– It is important to negotiate what happens after a early termination
(BOT, BTO..)
» Early termination: default by the project company;
» Early termination default by the Offtaker or contracting authority;
» Early termination: Force Majeure;
» Optional Termination.

24/01/2018 13
B. Concession Agreement
• Is a contract between a public-sector entity and the Project Company,
under which a project is constructed to provide a service (rather than a
product that use an Off-take contract) to public sector or directly to the
• Concession Agreements:
– A toll road, bridge or tunnel for which the public pays tolls;
– A transportation system;
– Water and sewage system;
– Ports and Airports;
– Public sector buildings.
• Concession Agreements could be:
– “Service” Contracts: a concession agreement under which a service is
provided to a Contracting Authority but where usage risk remains with the
contracting authority being transferred in the same way as the dispatch
risk is transferred to the Purchaser in Purchase Power Agreement.
– “Toll” Contracts: The project company constructs a project to provide a
service for which private-sector users pay and the revenues are entirely
depending on the usage of the project’s facilities.
24/01/2018 14
A. “Service” Concession Contract
• In this kind of contracts is established a Unitary Charge that covers
payments for the availability of the project (services provided);
• The Unitary Charge includes fixed costs (debt service and equity
payments) and some costs related to the service provision.
• The Unitary Charge is adjustable for any period of non-availability and
penalties are payable if the services provided are not at the required
• Some risks remains at the level of the Project Company:
– Project Cost overrun;
– Availability;
– Operating costs.

24/01/2018 15
Toll Contracts
• “Real toll” – is a Concession Agreement giving a right to collect tolls or fares
from the general public;
• Typically terms for “Real toll Concession Agreement”:
– The Project Company is forced to complete the project to an agreed
engineer may be appointed to confirm the plant is being built to the
required specifications;

– The Contracting Authority makes available the land and rights of way;

– Ownership of the project facilities remains with the public sector;

– The concession is granted for a fixed period of time;

– Operating and management of the concession is in the hand of the

Project Company;

– A maximum toll or fare is set with indexation for inflation (and FX rate);
• “Shadow tolls”: the usage risk is transferred to the Project Company being not
supported by Contracting Authorities and not by the end-users;
Other IPF Contracts
• Engineering, Procurement and Construction (EPC) Contract: -
between the Project Company & the Engineering Firm.
• Operations and Maintenance (O & M) Agreement: - between the
Operations Contractor and the Project Company, obligates the
Operator to operate and maintain the project.
• Shareholders Agreement: - governs the business relationship of the
equity partners
• Inter-creditor Agreement: - an agreement between lenders or class
of lenders that describes the rights and obligations in the event of
• Supply Agreement: - agreement between the supplier of a critical
key input and the Project Company (e.g. agreement between a coal
supplier and a power station)
• Purchase Agreement: - agreement between the major user of the
project output and the Project Company (e.g. agreement between a
metropolitan council and a power station)
24/01/2018 17
Financial & Control

Site Survey: A survey carried out by an independent expert on

feasibility of the project and expected annual energy supply.

Security: Any loan agreements that are secured with lien on the land
or other assets

Shareholder Agreement: Includes the capital structure and

governance of the project company.

Management Contract: specifying management incentives.

Project Documents
Supply Agreement: Fixed price & date models may not be
available due to the fact that preparation of foundation (for
instance for off-shore farms), turbine or panel sale and the
balance of plant are governed under separate contracts.
Balance of Plant Contracts: As most BOP contractors lack
credit ratings, lenders will require holdback of some payment
until completion.
Land Agreements: The term needs to be similar to the useful
life of the plant (20 - 25 years). Contract includes definition
of payments (usually based on gross revenues), audit rights of
landowner, exclusivity, non-disturbance provisions and scope
of indemnities.
Planning Permissions
Environmental Consent: For most projects, consent will
only be given by local authorities if certain conditions are met
with respect to safeguarding the environment. This contract
may impose restrictions on the operations times or demand
additional investments.
Insurance: Risks that the sponsors and lenders cannot
allocate may have to be insured against, for instance political
Operations Documents

Interconnection Agreement: Construction of

grid connectivity, long-term feed-in agreement,
completion schedule

Turbine / Panel Service Agreement: Provided

by the supplier with term duration of the
warranty - needs to correlate to other O & M
work. Compensation usually based on a fixed

O & M Contract: Includes the scope of work,

compensation and separate fees, liability,
compliance, remedies and dispute resolution

Operating Licenses: If using patented

technology, the project company may have to
pay for operating the technology under license.
Length must aligh with useful life of plant.
Marketing Documents

•Power Purchase Agreement: The Power Purchase Agreement (mostly with a utility
company) includes details on what is being sold (i.e. power, credits, certificates), peak or
off-peak tariff. It also specifies if the electricity has to be purchased if not taken or what
happens if electricity is not produced

•Renewable Energy Certificate Qualification: (or similar) - a certificate from

government agency that project qualifies for feed-in tariffs or production tax credits.