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Legal issues in infrastructure: Risk Allocation & Mitigation (July 2017)

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Identifying risk in infrastructure projects is essential for allocation and potential mitigation strategies. We highlight some of the key risks and consider how they may best be managed

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Legal issues in infrastructure: Risk Allocation & Mitigation (July 2017)

  1. 1. Legal Issues in Infrastructure Risk Allocation & Mitigation Ran Chakrabarti Le Meridien, New Delhi 11 July 2017
  2. 2. OVERVIEW  Risk Identification  What can happen and what consequences are likely to flow?  Risk Allocation & Mitigation  Implications under key project documentation and mitigation strategies?  Particular Nuances  Common occurrences and implications?  Project Structuring  Understanding the flow of cash through the project and potential blockages? 2
  3. 3. RISK PROBABILITY CONSEQUENCE DOMINO EFFECT MITIGATION Delay in Conditions Precedent High Construction Delay Liabilities under the Off-take Agreement Extension of Required Commercial Operation Date Change in Design or Specification Depends Construction Delay Liabilities under the Off-take Agreement Extension of Required Commercial Operation Date Delay or Suspension of Works Depends Construction Delay Liabilities under the Off-take Agreement Extension of Required Commercial Operation Date Variations & Price Variation Depends Construction Delay Liabilities under the Off-take Agreement Extension of Required Commercial Operation Date Off-taker Default Depends Event of Default under the Off-take Agreement Event of Default under the Finance Documents Off-taker Guarantee? Borrower Default Depends Event of Default under the Project Documents Event of Default under the Finance Documents Sponsor Support or Lender Step In with Suitable Substitute Contractor Default Depends Event of Default under the Project Documents Event of Default under the Finance Documents Performance Bond, Parent Company Guarantee Change in Law Depends Project Viability? Project Termination Government Guarantee Force Majeure (Political & Natural) Depends Project Viability? Project Termination Insurance Government Guarantee RISK IDENTIFICATION
  4. 4. CONTRACT Force Majeure Change in Law Borrower Default Off-taker Default Authority Default EPC Contractor Default Concession Agreement Termination should be mitigated by Government discharging debt Borrower Insurance? Termination should be mitigated by Government discharging debt. Increases Costs? Termination should be mitigated through Lender Step-In. In some projects, Government discharges debt on the basis that the asset will revert to it Not Applicable Termination should be mitigated by Government discharging debt Not Applicable EPC Contract Delay beyond a long stop date could lead to termination. Lender Step-In? Degradation of equipment in storage? Increased Costs? Lender Step-In? Not Applicable Not Applicable Liquidated Damages (Pass through) Parent Company Guarantee Bank Guarantee & Advance Payment Bond Off-take Agreement Lender Step-In? Borrower Insurance to discharge debt? Increased Costs? Tariff Revision? Termination? Lender Step-In? Off-taker Guarantee? Not Applicable Not Applicable RISK ALLOCATION & MITIGATION
  5. 5. PARTICULAR NUANCES  Force Majeure  Change in Law and the Supreme Court on Compensatory Tariffs  Equipment Supply & Services – degradation of material in storage?  Defects liability for degraded equipment?  Notice to vary the works, cancelling components affected?  Guarantees  Performance Guarantees given by the Contractor are worthless  Bank Guarantees and Advance Payment Bonds essential  Injunctive relief for Contractors in very limited circumstances 5
  6. 6. PROJECT STRUCTURING Project Company EPC Contract EPC Contractor EPC Bank Guarantee O&M Contract O&M Contractor O&M Bank Guarantee Leases & Concession Agreement State Authority Common Terms Agreement Security Trust & Intercreditor Agreement Security Documents & Direct Agreements Lenders Accounts Agreement Security Trustee Off-take Contract Off-taker Subscription & Shareholders Agreement EPC Sub Contractor EPC Sub Contracts & Guarantees Shareholder 2 Shareholder 1 Sponsor Support Agreement Parties Equity Documents Finance Documents Project Documents

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