The concept of sponsors getting a development fee paid on financial close of an infrastructure project has been debated for many years by all stakeholders in a project (in particular sponsors and lenders) but it now becoming a generally accepted idea with the debate now being more in relation to (i) the quantum of the development fee and (ii) when the development fee is paid.

A very general range for a “typical” development fee is between 3 to 5% of the capital cost of the project. The size of the development fee though is normally set in the context of how long the development process has been, how innovative the project is for that country or sector and the nature of the risk taken by the sponsors.  Although sponsors would always prefer the development fee to be paid on financial close many lenders may prefer at least some of the fee to only be payable on the commercial operations date of the infrastructure being financed. To the extent sponsors are prepared to accept that idea, sometimes lenders may be a little more flexible in the amount being suggested.

It should be noted that a development fee is not the only element of what might be recovered by sponsors on a typical infrastructure project. In addition the following elements might be considered for recovery: (i) third party development costs (often injected as a development loan) (ii0 interest on such a development loan applied to fund third party costs and (iii) internal costs of the sponsors.

Each of these cost elements should be structured through a robust Development Agreement signed between the sponsors and the project company at the earliest possible stage in the development process such that the  understanding of the parties is reflected in legal terms.

Trinity can assist all parties involved in a project in considering what is normal and reasonable in the undertaking of an infrastructure project in sub-Saharan Africa.

Bankability of a PPA (or indeed any complex document) is a multi-faceted concept that depends on numerous factors. Arguably the most important factor is the structure of the financing and the nature of financial institution providing that financing.

What is bankable in the eyes of a commercial bank providing debt on a corporate finance basis is unlikely to be bankable in the eyes of a development finance institution providing limited recourse debt financing. Most of the power projects on which we advise are structured as project finance or limited recourse transactions. We have assumed this structure for the purposes of the rest of this discussion of bankability.

Bankability is not a static concept. It changes over time and, to some extent, through negotiation. It depends on numerous factors on each and every transaction. Those factors include (i) political risk; (ii) size/capacity of the power plant; (iii) fuel source; (iv) track record and creditworthiness of each of the stakeholders (government, offtaker, sponsor, contractor, operator, fuel supplier (if any)); (v) state and stability of the grid; and (vi) structure of precedent transactions in the country/market/sector. Despite the complexity of the concept of bankability, it is possible to highlight a handful of key risks that any PPA must allocate in a particular manner to attract debt financing.

These key risks include (i) a termination regime which, in most (if not all) circumstances requires the offtaker (or possibly the government through a government support package) to pay compensation that will keep the lenders whole; (ii) some form of liquid credit enhancement (often a letter of credit) to support the offtaker’s monthly tariff payment obligations;  (iii) mechanics that hold the seller harmless in financial terms in respect of events and circumstances that increase costs or decrease revenue; and (iv) provisions that protect the seller against events and circumstances that are beyond its reasonable control and which prevent it performing its obligations or enjoying its rights under the PPA (including political risks).

Other important risks in a PPA that need to be resolved in a bankable manner include construction- and performance-related risks. However, these require not just the PPA to be  structured in a certain way but, more importantly, for those risks to be passed through to the construction contractor and operator on a like-for-like or “back-to-back” basis.

The above is a high-level summary of some of the aspects of bankability in the context of a PPA. Bankability is a test that can be applied to any and all of the components that go to make a limited recourse independent power project. We’d be very happy to help you navigate through those issues.

Dans les pays francophones, la production d’énergie constitue généralement un service public qui nécessite habituellement une concession/PPP de production d’énergie. Durant la phase de développement, le sponsor veillera à ce que le processus d’attribution du PPP par appel d’offres ou en gré à gré respecte la loi PPP.

Par ailleurs, le sponsor s’assurera que le contenu du contrat de PPP est conforme à la fois à la loi sur l’électricité et à la loi PPP, notamment en matière de sûretés, mise à disposition du domaine public par l’Etat et indemnités de résiliation. Enfin, le sponsor vérifiera si l’Etat élabore une nouvelle loi PPP et si celle-ci contient des dispositions transitoires précisant ses modalités d’application à un contrat PPP encore en cours de négociation.

The Silver Book is a standard form of engineering, procurement and construction (EPC) contract published by FIDIC, the international federation of consulting engineers. First published in 1999, and newly revised in late 2017, the Silver Book is probably the best-known and most widely used template form EPC contract for international power projects.

In recent years, it has become the de facto starting point for the construction arrangements of many of Sub-Saharan Africa’s biggest IPPs. Like any standard template, it can never be all things to all people, and in the context of limited recourse project financing, it requires a number of amendments to be bankable. Nonetheless, the Silver Book is a framework that is now recognised and understood by developers, contractors and lenders alike, where a lump sum turnkey contract is required.

Every power project needs a supply of fuel to generate electricity. Depending on the project, the fuel might be coal, gas, oil, sunlight, wind, tide, waves, biomass or waste. Very often, the nature of the fuel and its availability will dictate the terms of the power purchase agreement. So, for example, in renewable projects, the power purchase agreement is generally structured on a “must take” basis, with the offtaker being obliged to accept power from the project whenever the plant generates (e.g when the wind is blowing or the sun is shining). Because the “fuel supply” is intermittent, a typical renewable deal will not involve the sale of “capacity” to the offtaker as the project cannot guarantee exactly when and to what extent it will be able to generate. However, the project and its sponsors will generally assume the “fuel availability risk” by pricing the electricity tariff based on their assessment of the likely wind or sun conditions at the project site and the resulting quantity of electricity that they believe can be generated. For thermal projects, as the availability and quality of the fuel and therefore the capacity of the plant from one hour to the next is more certain, most projects are structured around a capacity payment (i.e. an amount paid by the offtaker to ensure that the plant is available to generate as and when required by the offtaker) and an energy payment (normally covering the cost of the fuel and variable O&M costs required to generate the electricity as required by the offtaker). However, even in thermal deals, the project and its sponsors assume the “fuel availability risk” because without fuel, the project will not be able to declare itself available and therefore will not be entitled to claim its capacity payment which generally covers debt service, fixed O&M and equity return. As a consequence of all of this, the fuel supply issues are normally critical to the bankability of each project.

Broadly, the choice lies between ordinary equity and a combination of ordinary equity and either preferred shares or shareholder loans / loan notes.  This is a critical aspect to agree early in a project, before too much value is created within the project.  It will be driven by both the tax requirements and status of the various investors – for example, certain investors cannot hold debt instruments; as well as the rules applying to the holding company, including the extent to which interest and dividends are treated differently from a withholding tax perspective.  From the holding company’s perspective key drivers are the ability to make distributions and whether interest payable on shareholder loans is tax deductible, as well as any thin capitalisation and capital adequacy requirements.  In many jurisdictions dividends can only be paid out of distributable profits, hence the advantage of being able to repatriate cash by way of payment of interest and repayment of shareholder loans.

Financing off-grid projects requires more innovative structuring and diverse financing products than conventional project financing for on-grid IPPs. Trinity has advised both lenders and developers and has sought to utilise a tool kit of different solutions which take into account the relevant market and size of projects.

Multi-source funding: DFI and grant funding and a number of specifically created donor funding platforms allow access to debt financing, and can partner with local banks to support working capital requirements.  Off-grid developers can seek to leverage the financial strength of their parent companies to raise corporate bonds to fund projects at the local level.  In some cases developers hope to access “newer” types of investment funding through online crowd-funding platforms.

Upscaling projects: Bundling together initiatives within districts and regions into one financing to increase investment appetite by diversifying portfolio.

Pay-as you go structures: Provides some measure of offtake payment security and potential to securitise pay-as you-go off-grid portfolios through bond structures.

Security: Security can be given over inventory and project revenues and bank accounts, together with establishing escrow accounts or share options for the benefit of lenders.

A partial risk guarantee (PRG) is a financial product provided by entities such as the World Bank Group, that guarantees private sector lenders or investors through shareholder loans against the risk of a government entity failing to perform its contractual obligations with respect to a project.  Political risk insurance (PRI) is an insurance product provided by commercial insurers, DFIs or multilateral agencies, which provides financial protection to lenders and investors who run the risk of losing their investments or returns due to political events that are the responsibility of the relevant host government.

Need an expert on the subject? 

Ask [email protected] or any other member of the Trinity team. 

Dans un financement de projet, le ratio dette/equity à respecter varie selon le type de projet (infrastructures, énergie, mine) et la situation géographique bien qu’un ratio de 75 : 25 soit assez classique. Plusieurs options existent pour structurer les apports en fonds propres : ils peuvent être apportés en amont par les actionnaires (c’est la structure la plus sécurisante pour les prêteurs) ou être mis à disposition au fur et à mesure avec la dette, en respectant le ratio dette/equity ou encore être mis à disposition in fine – dans ce cas un crédit relais fonds propres peut être octroyé par des prêteurs (souvent mezzanine). Afin de sécuriser les fonds propres qui seront mis à disposition au fur et à mesure ou à la fin de la période de construction , les prêteurs seront vigilants à demander la mise en place de garanties (prenant souvent la forme de L/C bancaire) afin de garantir la mise à disposition des fonds propres. Il est important que l’instrument juridique choisi soit autonome et appelable à première demande afin d’apporter aux prêteurs la sécurité d’avoir les fonds propres qui sont mis à disposition et ne pas avoir d’insuffisance de trésorerie (funding shortfalls) pendant la période de construction.

The US government offers a number of support options for development projects.  For most commercial international development projects, the main options are (i) Overseas Private Investment Corporation (OPIC), which offers direct and guaranteed loans, support for investment funds and political risk insurance coverage for development projects meeting certain US nexus requirements (generally at least 25% ultimate beneficial ownership by US persons), soon to be reborn as the US Development Finance Corporation, without such nexus requirements; (ii) Export-Import Bank of the United States, which offers loan guarantees, credit insurance and other products to support the export of US-origin goods and services to projects in eligible countries; and (iii) US Trade and Development Agency (USTDA), which provides financial and technical assistance support for early-stage development projects that utilize US-origin goods and services, including support for feasibility studies and pilot projects.  Support for certain projects may also be available from the United States Agency for International Development (USAID), Millennium Challenge Corporation (MCC), and other US government agencies.

Joint development agreements are agreements that govern the relationship of parties developing a project. They are flexible contracts typically used where there is uncertainty as to the structure, rights and viability of a project. JDAs set out the responsibilities of the parties during development (including allocation of development activities and obligations relating to funding development costs) and rights in respect of the project (including level of ownership interest, decision making through a management committee and rights to receive a development fee (if relevant)). JDAs are typically entered into on commencement of development through to a milestone event such as financing. At that point, more substantive shareholders’ or joint venture agreements are entered into. Need an expert on the subject?

Need an expert on the subject? 

Ask [email protected] or any other member of the Trinity team. 

On any limited recourse financing, a key risk for lenders is whether the project will be completed within budget and on schedule. A turnkey EPC Contract with liquidated damages, performance bonds and/or retention monies provisions will mitigate this risk to a large extent. However, it is not always possible for the contractor to offer a turnkey contract or otherwise assume the desired level of construction risk so, on many projects, sponsors are required by lenders to offer additional support.  Whether sponsor support is required and the form it might take is largely dictated by the scale and complexity of the project, the relevant market, the level of risk assumed by the contractor and type of technology deployed.

The most robust form of sponsor completion support, typically seen in complex oil and gas and infrastructure projects or projects using untested technology, is a completion guarantee.  Under a completion guarantee, sponsors are required to guarantee repayment in full of any debt financing until completion has taken place in accordance with a long stop date and other parameters agreed prior to financial close. On other projects which utilise proven technology or which are otherwise perceived by lenders as being less risky, sponsor support can take the form of  a contingent contractual obligation to fund cost overruns up to an agreed amount by way of standby equity contributions or subordinated loan facilities.  Depending on the creditworthiness of the sponsors, these obligations may be supported by parent company guarantees, bank guarantees, letters of credit or cash collateral for the benefit of lenders. Other forms of sponsor support may include an undertaking to prepay the debt to enable the project company to meet cover ratios at completion or fund reserve accounts.  Since such support is typically released upon the project passing the completion test, it is important for all parties, with the help of their technical, financial and legal advisors, to engage early to agree the technical and other parameters which constitute the completion test.