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Contracting and Risk

Contracting and Risk. Dakar, 14 Feb. 2008 Hanneke van Tilburg, World Bank. ERPA. Main features Making room for financing Structure of WB (as trustee) contracts Some k ey provisions. Main Features. Sale and Purchase agreement Object ERs Amount, Price and Payment ER creation

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Contracting and Risk

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  1. Contracting and Risk Dakar, 14 Feb. 2008 Hanneke van Tilburg, World Bank

  2. ERPA • Main features • Making room for financing • Structure of WB (as trustee) contracts • Some key provisions

  3. Main Features • Sale and Purchase agreement • Object ERs • Amount, Price and Payment • ER creation • Who does what? • Validation • Registration • Verification • Certification • Risk allocation - Risk is allocated to • the party best able to bear it or • the party most likely to control outcomes?

  4. Main features – WB experience • From initial “project finance approach” • Price finding, creating market • Piloting (5 years before Kyoto into force); Latvia, Uganda • … to “making room for 3rd party financing” Lending against contract revenues. In order to be financeable contracts must be clear concise and legally enforceable and contain appropriate risk allocation between buyer and seller. • risk sharing • predictability

  5. Making room for financing Lenders want to see predictability: - Operating cushion; call options for buyer & Adequate risk allocation between buyer and seller: Where risks are shifted from buyer to seller, seller and lender must be able and willing to manage. For ex. • Project completion risk • Production risk (volume) (Sweeping clauses, seniority, buffers) • Kyoto risk (Validation/Registration/Certification – VERs or CERs) • Price risk • Force Majeure (physical: insurance, adequate cure periods etc) (political) • Increased cost risk • Tax risk • Currency/convertibility risk • Transfer risk (….continued)

  6. Making room for financing (2) (….continued) Other structural issues affecting financing include: • Assignment • Events of default • Payment intervals, cure periods, use of subjective standards in contract (“could be expected to…”) etc. And: Who are the buyers? Do your due diligence!

  7. Structureof WB (trustee) contracts • Two parts • General Conditions (standard terms, conditions, rights/obligations ) • Negotiated agreement (purchase amount, price, payment, preconditions); separate models for CERs and VERs • In the case of inconsistency, the negotiated part prevails www.carbonfinance.org (document library)

  8. Key Contractual Provisionscommon to VER and CER contracts • Definitions • Transfer of legal title • Delivery and payment terms • Representations and Warrantees • Events of Defaults • Remedies • Termination events

  9. Sale and Purchase • Contract ERs • Total and annual amounts • Unit price • Purchase Commencement Date – Non convertible ERs • Additional ERs • ERs generated in addition to the Annual Amount • Transfer of additional ERs to the Trustee • Option ERs (if applicable)

  10. WB VER contracts - KP risk • WB as trustee is responsible for Registration and Verification - including contracting DOEs • WB as trustee is focal point for communicating with EB Implications: • If the project fails to be registered by the EB, the Trustee will still make payments (upon Verification) • If an unapproved methodology is used, which leads to decrease of ER production, the Trustee will still pay for the full number of contract ERs calculated on the basis of the unapproved methodology (the one used at the time of signature of the ERPA)

  11. KP risks: CDM Cycle/Rules Validation (DOE) Registration (EB) Project Monitoring Verification and Certification (DOE) Issuance of CER (EB)

  12. Costs, Taxes and Share of Proceeds • Costs • Deduction of project preparation / KP related costs from annual payment (capped) by WB (as trustee) in the Annual Payments • Taxes • Deduction of Host country taxes • Share of proceeds (UNFCCC) Borne by Trustee in VER contracts only: • 2% CER deduction for Adaptation Fund • US$ 20 Cents per CER for Admin costs

  13. Project Development • Project Entity develops and operates the Project • Project Entity informs the Trustee on the Project Commissioning Date

  14. Force Majeure Events • Extraordinary and unavoidable, beyond reasonable control • Negotiate mutually agreeable alternative arrangement • Increase Maximum Option Volume • Terminate the ERPA

  15. Events of default by Trustee - Failure to make payment - Other material breach • Remedies: - Require payment - Terminate the ERPA

  16. Events of Default by Project Entity • Transfer Failure • Dissolution/liquidation/bankruptcy (etc.) • Material delay in the construction • Material breach of terms of ERPA • Repeatedly failure to comply with CDM related rules • Failure to meet the requirements of the Monitoring Protocol or EMP

  17. Transfer Failure • Remedies: • Transfer of shortfall in the following year • Reduce annual amount and Increase Maximum Option Volume - Terminate the ERPA if it occurs during 3 consecutive reporting years or any of the last 3 years Note: some buyers will require a delivery guarantee; this may become liability rather than an asset

  18. Intentional Breach • Default due to intentional breach • Remedies: • Terminate the ERPA • Recover damage and costs

  19. Other significant clauses • Governing Law • Arbitration • In accordance with UNCITRAL • Termination

  20. Thank you

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