EPC Contracts and Project Finance
in Power & Water Projects
The perspective of the sponsors … and lenders
Sebastien BERNARD
General Counsel, Middle East
Veolia
The Basics of Project Finance
What is Project Finance?
PPPs – BOTs…
Debt
Project finance is
the financing of longterm
infrastructure,
industrial projects and
public services based
upon a non-recourse
or limited recourse
financial structure, in
which project debt
and
equity
used
to finance the project
are paid back from the
cash flow generated by
the project.
Equity
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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Components of Project Finance
Important to note:
• Fits large projects
only (high
development &
structuring costs!)
• A business model
well established in
the Middle East
• A positive trend
(budgetary
constraints of GCC
countries), but some
challenges…
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
Asset
based
•Long
term
financing
of
infrastructure
&
industrial
projects…
•…based upon the projected
cash flows of the project rather
than balance sheet of the
sponsors
Funding
SPV
•Investors
(“sponsors”)
providing equity
•Syndicate of banks or other
lending institutions providing
(non-recourse) loans to the
operation, secured by the
project assets
•SPC created for each project,
thereby shielding other assets
owned by a project sponsor
from the detrimental effects of
a project failure
•The SPV has no assets other
than the project
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• Location: Sur,
Sharqiyah Directorate,
Oman
• Offtaker: Oman
Power & Water
Procurement
Company (OPWP)
• Desalinated water:
131,000 cmd (RO),
incl. extension
• Project costs: $200
Mn
• Main private
developer: Veolia
• Contract type: WPABOO 20 years
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
Mirfa IWPP
• Location: 140 km
north of Jizan, KSA
• Offtaker: Water &
Electricity Company
(WEC)
• Power: 850 MW
• Desalinated water:
212,000 cmd (RO)
• Project cost: $1,831
Mn
• Main private
developer: Acwa
Power
• Contract type: PWPABOO 20 years
Sur IWP
Shuqaiq IWPP
Some projects developed under PF (ME)
• Location: 120 km
from Abu Dhabi,
U.A.E.
• Offtaker: Abu Dhabi
Water and Electricity
Company (ADWEC)
• Power: 1,600 MW
• Desalinated water:
238,665 cmd (RO)
• Project costs: $1,500
Mn
• Main private
developer: GDF Suez
(Engie)
• Contract type: PWPABOO 25 years
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Why Project Finance (sponsors perspective)?
Cost of debt <
cost of capital
Highly
leverage debt
(hence little
equity)
Possibility to
deconsolidate
under IFRS
Rules
Non-recourse
financing
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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Simplified scheme for an IPP/ IWP (contracts)
Authority/ Offtaker
WPA/ PPA
Shareholder 1
Shareholder 2
Project Company
Shareholder 3
Facilities
agreement
Lenders
EPC Contract
EPC Contractor
Shareholders
agreement
O&M Contract
O&M Contractor
Input supply
agreements
Input suppliers
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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Typical scheme for an IPP/ IWP (cash flows)
Authority/ Offtaker
Payments
Shareholder 1
Shareholder 2
Equity
Loan
Project Company
Lenders
Loan repayment
Shareholder 3
EPC Contractor
O&M Contractor
Input suppliers
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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The criticality of the EPC
component
General considerations
Largest part of total
project costs
Bankability & risk
allocation
Why such a
criticality?
Securing revenue
generation
Lien given to the lenders
on the assets
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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Securing the overall economical equation
Conformity of
the output to
the required
specifications
A good quality asset
is vital for the overall
economical equation
Generation of
cash (revenues)
as per the
model/ LDs kept
to a minimum
Profitability for
the sponsors
(IRR/ ROE)
Debt repayment
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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Weight of EPC in total project costs
Largest portion of
the total project
costs (Capex)
Insurance, bank guarantees,
construction supervision,
development costs
Other
costs (10%)
Financing costs
(ca. 20%)
EPC (ca. 70%)
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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Lien over the assets
1. Loan
4. Debt repayment
Sponsors
Lenders
An issue in the
construction will
negatively
impact the value
of the assets,
hence the value
of the lien given
to the lenders
3. Revenues
5. Security over
the assets
2. Capex
The financing is typically secured by the project assets. Lenders are given a
lien on these assets and are able to assume control of a project if the project
company has difficulties complying with the loan terms
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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Bankability & risk allocation
Risks have to taken by each of the
parties in the best position to do so
A bankable EPC contract is a contract with a risk allocation
between the EPC contractor and the EPC Project
Company that satisfies the lenders
Focus on
Lenders
O&M risks
EPC risks
Ability (or lack thereof)
of the contractor to
claim additional costs or
extensions of time
Project
Company
O&M
EPC
Technical risks; price to a
lesser extent
Security provided by the
contractor
for
its
performance
+
Contractual risks; range
of different factors
Result
The less comfortable the lenders are with these
provisions, the greater amount of equity support the
sponsors will have to provide; worse case: the project
becomes unbankable
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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Key features of an EPC
contract – lenders perspective
The difficult role of the project sponsors
Lenders
Sponsors
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
EPC
Contractor
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Back to back as a general matter
WPA/ PPA
RFP
Other
project
documents
EPC Contract
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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Balance of risks in EPC contracts
Adequacy of the
EPC contract
with the RFP/
project
documents
Direct
agreement
Protection
of the
lenders
Security & PCG
Due diligence
over the EPC
contractor’s
technical
capabilities
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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Balance of risks in EPC contracts
Single point
of
responsibility
Fixed contract
price
Termination
Fixed
completion
date
Defect
liability
Performance
guarantees
Variations
Security
Liability
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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Balance of risks in EPC contracts
Single point
of
responsibility
Fixed contract
price
Termination
Fixed
completion
date
Defect
liability
Performance
guarantees
Variations
Security
Liability
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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Balance of risks in EPC contracts
Single point
of
responsibility
Fixed contract
price
Termination
Fixed
completion
date
Defect
liability
Performance
guarantees
Variations
Security
Liability
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
21
Balance of risks in EPC contracts
Single point
of
responsibility
Fixed contract
price
Termination
Fixed
completion
date
Defect
liability
Performance
guarantees
Variations
Security
Liability
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
22
Balance of risks in EPC contracts
Single point
of
responsibility
Fixed contract
price
Termination
Fixed
completion
date
Defect
liability
Performance
guarantees
Variations
Security
Liability
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
23
Balance of risks in EPC contracts
Single point
of
responsibility
Fixed contract
price
Termination
Fixed
completion
date
Defect
liability
Performance
guarantees
Variations
Security
Liability
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
24
Balance of risks in EPC contracts
Single point
of
responsibility
Fixed contract
price
Termination
Fixed
completion
date
Defect
liability
Performance
guarantees
Variations
Security
Liability
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
25
Balance of risks in EPC contracts
Single point
of
responsibility
Fixed contract
price
Termination
Defect
liability
Fixed
completion
date
Performance
guarantees
Variations
Security
Liability
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
26
Balance of risks in EPC contracts
Single point
of
responsibility
Fixed contract
price
Termination
Fixed
completion
date
Defect
liability
Performance
guarantees
Variations
Security
Liability
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
27
Balance of risks in EPC contracts
Single point of
responsibility
Fixed contract
price
Termination
Fixed
completion
date
Defect
liability
Performance
guarantees
Variations
Security
Liability
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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Conclusion
Success factors
Transparence/ full
picture
Profile of the EPC
contractor
Making the lenders
comfortable/
selection of the LLAs
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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What we want to achieve…
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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What we do not want to achieve…
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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Q&A
Questions?
2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016
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