POLITICAL AND ECONOMIC RISKS IN THE CONSTRUCTION OF INDEPENDENT POWER PROJECTS AND THEIR CONSEQUENCES
PETER JANSEN 1
Mayer, Brown, Rowe & Maw
Observers of the Dabhol Power Project will immediately recognise how a huge demand for electrical power was matched by huge risks—both political and economic. The Project survived near cancellation in the mid-1990s, but then suffered a utility default in 2000 followed by the threat of termination under the funding arrangements. The current solution to mothball the project predates the bankruptcy of Enron Corporation (one of the major players) and its flight to the shelter of Chapter 11. Before that happened, however, all the parties looked to their contracts for protection against the impending crisis.
Dabhol starkly illustrates how the risks and consequences of default flow down the contractual chain. The purpose of this article is to examine provisions in standard EPC contracts such as those based on FIDIC Silver Book and the options that these provide where there is threatened default which will affect the payment stream.
OVERALL STRUCTURE OF A TYPICAL DEAL
Most Independent Power Projects—IPPs (or other infrastructure privately financed) are likely to have what is by now quite a familiar structure. At the centre, the sponsors will have formed a special project company (SPC). They will enter into a concession agreement with the host government (or similar) to permit, establish and operate the project and a contract with the power utility (normally state controlled) to take power from it. This contract, the “power purchase agreement” (PPA), will normally contain provisions which guarantee a payment stream despite interruptions to supply or other default by the SPC. Design and construction of the project is undertaken through a “turnkey” or “EPC” contract between the SPC and the main contractor. Until the project has been completed and is producing revenue for the SPC, the EPC contract is overwhelmingly the greatest contributor to project cost.
1 The author is with the London project finance group at Mayer, Brown, Rowe & Maw and was previously an adviser to one of the parties involved in the Dabhol Power Project.
Risks in Power Projects
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