So we talked about completion risk being the biggest risk and of course the sponsors are generally the people who are on the hook for completion risks. They are the people who tell the financiers, the sponsors tell the financiers, this is the project, this is what we're going to do, this is how we're going to build it, and this is what it's going to do. And the financiers are very clear on saying, well, that's all very well, but you are on the hook, you owe us the capital back, our capital back, if the project doesn't complete. If it's not complete, you will pay us back. Well, how at that point does the project become non recourse to the sponsors, and they have the walk away option. But how does it become non recourse in a standalone entity? There is something called a completion agreement. The completion agreement is a contract between the sponsors and the financiers that says, once you pass this thresholds, we agree, this project is complete and it's non recourse to the sponsors other than whatever their direct contractual applications are and the equity that they put in. Completion agreements fall into two components, generally. The first component is physical completion. Is it built and does it look like what was anticipated? Is it up to the engineering standards and plans that was anticipated? Does it work the way that it was anticipated? This is the physical completion. Sometimes those completion tests are purely visual, is it there or is it not? And sometimes they're operational, does it work to certain standards? And finally, there's an economic completion, because project financing is cash flow lending and project financiers expect the project to produce cash flow. It's all very well if the project works in its physical form, but if it doesn't have the right cost structure, it doesn't have the right revenue stream, there isn't enough cash flow there and the project may fail. So there's an economic completion test, which basically is, in synopsis says, okay, I see you've built the project and it's all there, but does it have the cash flow that we're anticipating? And does it have the cash flow in the form that we anticipate? You told us what you're going to do, you told us what the markets were going to look like, you told us what the contracts were going to look like, this is what we're anticipating. So a completion agreement will have a physical component and it will have an economic component. Is it there, does it work, does it produce the cash flow that we anticipate? The completion agreement, there may be reliance on others. If there's more than one plant in this project, do you have separate plants, completion agreements for different parts of the plant, how do they work together, what are the reliance on third parties? There's no point, as I just talked earlier on about your project, where you've got 95% complete, but if the environmental plant doesn't work, the plant can't start up because it can't get its permits. So even though 95% of it is complete, 5% isn't. How do you deal with that risk? Is there one overall completion agreement with the sponsors are there lots of sub-agreements with different parties? How do you manage that? That is a very critical part of the completion agreement. For us financiers, the completion agreement should be comprehensive. For sponsors and other contract parties, they want to try and limit those risks to those parties that can best manage those risks, and they really don't want to be providing yet another level of risk mitigation on something that they can't deal with. How do the sponsors provide their completion agreement? They could provide a direct guarantee to the financiers, the banks and the institutional investors. They could provide a back stop agreement that says, well we'll be providing all of the money to either provide debt service for a long period of time, we'll cover the cost overruns. And many times the project financiers are willing to accept an additional contribution of capital as being sufficient, because they don't feel that there's a risk that the project won't work at all, it just might not work up to its expected performance. Every completion agreement needs to have the timing issues clearly defined, when is it expected to be complete, and what is the final date that we're not, as financiers, going to give you any more time to try and complete it at this point. You said you were going to build it in three years, and we're already at five years. Sorry, it's time for you to take full responsibility of the project. We as financiers don't give you any more time to resolve that situation. That you as sponsors, you buy our debt out and you deal with the project yourself. So you need to have expectation, they need to be clearly physical and economic, and define their terms, and there needs to be timing expectations built in there too. One little note I put down here, sometimes completion agreements aren't totally comprehensive. And in certain jurisdictions you can get what's called a sovereign risk carve out. Which means that if the project can't complete, not because you didn't build the project, but because you as sponsors or EPC contractors were prevented from doing it for some sort of defined sovereign event. Then the financiers either have to have separate insurance for that or they take that risk themselves. If you got multiple sponsors developing this, you need a development shareholder agreement. This is very important for project financing overall because project financing is all about contractual relationships and you need to understand how all the parties are going to work together. And not just work together today but work together for the whole life of the project. So if you have a developer/shareholder agreement, there's a whole series of issues that need to be addressed in that shareholders agreement. You need the scope of the project. Write down and clearly define what the scope of the project is. This should be reasonably narrow. You can always extend the scope of the project later on. But at the beginning, it's important to define exactly what developers and other shareholders, what the scope of the project is and it's clearly defined. You need to define what the management roles are, who's managing the project and who's got which responsibilities. What are the rules for decision making? How does the project make decisions if you have multiple shareholders or sponsors, and what is their relationship? Who votes, how do they vote? Who has the certain responsibilities? That agreement should also talk about funding and distributions, and how those funding and distributions work. Just not in the normal course of business, but what happens if the project is doing well or badly, and has got more cash flow or less cash flow, and how do those funding and distributions work? And what happens if one of the sponsors doesn't fund and the other one does? How does that relationship work? Even though everybody enters into these projects with the full expectation, or generally do, that they're going to be there for the duration of a project, there needs to be a clear strategy and understanding of what happens if somebody is either forced to withdraw or has to withdraw contractually or has to withdraw voluntarily. How do you deal deal with withdrawals? There's nothing worse than being in a project where one of the sponsors doesn't want to be there or can't be there, but you can't deal with it. So dealing with the withdrawal and sales is a very important part of these agreements. And finally, if there are going to be reserved roles then they need to be clearly defined in this document. So for instance, many of the large EPC contractors that build roads have their own project companies on the side that invest in the toll roads and become equity owners of toll roads. And there is clearly a defined roll out. The only reason they're doing that is because they want their parent company to be able to build the toll road in the first place. And there's nothing wrong with this, it just needs to be clearly defined in the document so that the other members of the sponsoring group clearly understand that this is a reserved role for the project. So just continuing here with the government, and some of these issues we've already talked about here, but government involvement is always going to be legislative. In the overall fashion, they're going to drive a regulatory environment. If they exist, governments will provide the concession arrangements, if there's a concession here. And governments may become either through a direct investment, they may be either a direct investor that will have equity rights, and they may get that as part of the project and they may get it as a carried interest, i.e., they haven't paid for it. Or on the other hand, they may be a direct investor and put capital in themselves. So governments can play many, many roles in a project. Sometimes governments have financial returns, but very often government participates in these projects for development benefits or some sorts of other benefits to the community. If you're with the government as one of the sponsors here, or you're thinking about the government issues, you need to be able to think as a stakeholder, what are their issues? First of all, they'd like to see economic execution. They're not there to increase cost. They would like to see economic execution. They would like to see a politically acceptable institution. Governments are political. Some of them are more political that others, but they want to see a solution that is politically acceptable. They don't want to be on the front pages of the newspaper or on everybody's mobile phones for doing something that's not politically acceptable. If it's an infrastructure or similar other project where government services are involved, they want to see the quality of the services there. Because even though the private industry may be involved in delivering those services, at the end of the day, it falls on the government. So they are going to have a keen interest in making sure that there's a quality of services provided that they're anticipating. Sometimes governments are involved in these projects because they get taxes and royalties. And so you have to be careful, you want to make sure you design a project that doesn't compromise those expected tax and royalty streams. Governments, there will often be, especially in infrastructure projects, buyout rights. You want to understand what those buyout rights are. Every government will want to have some sort of buyout rights and infrastructure project. If for whatever reason it becomes politically unacceptable to keep it in this current form, they need to be able to buy it out. And good project documents are going to ensure that if there is a buyout there that full compensation is paid unless there's some other cause for it, but compensation should be paid so that investors and financiers are fully compensated for it. And finally, unless you've got a specific government support there generally, governments are looking to provide the minimal amount of support for projects. They've got enough things to do themselves, they don't need to be supporting projects that they don't need to be supporting. Government agreements. There can be specific support agreements which mitigate specific risks that a project may have, so a risk that the project sponsors are unwilling to take. So if it's an infrastructure project, they may be unwilling to take the traffic risk on a road. The government may have to give specific support for that and say, well, we want the road and we will guarantee you if there aren't sufficient tolls to make a certain revenue, we will make up that revenue. So maybe a specific support agreement there. These sometimes can be direct agreements, or sometimes they can be part of the concession agreement. A concession agreement is where the government continues to own the asset but they have allowed a party, generally a project company, to operate that asset for a number of years. And the concession agreement says that they have to provide certain services on that project. So you may construct a road or you may construct a hospital, or you may construct police stations or traffic lights. And then as a project, you may be required to operate those over a 15 or 20 year period and the government pays a certain amount of money for the use of those assets over that 15 or 20 year period, during which time as a project company you recapture your capital cost and get your operating cost and a financial return. But at the end of this, at the end of the concession, the asset, which was always owned by the government, returns to management of the government. And finally, governments are always in the business of issuing permits and approvals.
