IPF contracts

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IPF contracts
ACADEMY OF ECONOMIC STUDIES FACULTY OF
INTERNATIONAL BUSINESS AND ECONOMICS
Lecture 5

• Lect. Cristian PAUN

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IPF Contracts

• IPF contracts are the basis for the Project
  Company construction and for the Projects
  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 Offtake 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 UNIDO
• Guidelines for Infrastructure Development through
  Build Operate Transfer Project
• Negotiation Platform for PPP in Infrastructure
  Projects
• Standardization of IPF Contracts

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A. Offtake Contracts

• An Offtake 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 basis
• The high debt to equity ratio specific to IPFs is
  secured through this kind of arrangements
• Offtake contracts can take various forms
• Take or pay contract the Offtaker must take
  the products at an agreed price and quantity
• All BOT/BOOT/BTO/BOO are based on this form of
  Project Agreement
• Take and pay contract the Offtaker 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 time)
• This type of contract may have a floor (minimum
  price) and could be assimilated with a hedging
  contract.

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Offtake Contracts

• 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 commoditys 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.

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Take or Pay Offtake Contract Provisions

• Power Purchase Agreement structure
• The position of the Power Purchase Agreement in
  the Project Structure

• The technical characteristics of the project
  (output, heat rate, emissions)
• The construction / completion schedule

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Take or Pay Offtake Contract Provisions

• 2. The Completion of the Plant
• The Commercial Operation Date from this day, the
  Tariff will be payable
• The performance tests (will demonstrate that the
  plant can achieve the output level)
• In BOT the owner 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 basis
• Demonstration that reserves of raw materials are
  sufficient for a specific period of time

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Take or Pay Offtake 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.

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Availability 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 taxes.
• The Availability Charge could be spitted in three
  parts mentioned above or in two parts (combining
  equity with debt)
• This Charge is established when the Project
  Agreement is signed
• This is a risk assumed by the Project Company
  (the fixed costs to be higher in the future) but
  sometimes there are exceptions (insurance
  policies).

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Output Charge

• Is covering the Project variable costs
• It is calculated based on the actual 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 input (oil, gas)
  in the project (but specific catalogues,
  representative markets could be used for this
  price).

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Take or Pay Offtake 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.

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Take or Pay Offtake 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.

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Take or Pay Offtake Contract Provisions

• 7. Force Majeure
• Characteristics
• A party subject to force majeure should not be
  penalized for non-performance
• If the products or services are not delivered
  because force majeure, no payments are due from
  the Offtaker 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)

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Take or Pay Offtake 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.

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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 Offtake contract) to public
  sector or directly to the public.
• 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 PPA.
• 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 projects
  facilities.

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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 nonavailability and penalties are payable if
  the services provided are not at the required
  standard.
• Some risks remains at the level of the Project
  Company
• Project Cost overrun
• Availability
• Operating costs.

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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 supported by
  Contracting Authorities not by the end users

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Other IPF Contracts

• Construction Contracts
• Operation and Maintenance Contracts
• Fuel or Other Input Supply Contract
• Permits and other rights (project permits,
  investment and financing permits, rights of way)
• Government support agreement
• Operating phase insurances
• Direct Agreements with the lenders