MASTER IN INTERNATIONA LAW, FOREIGN TRADE AND INTERNATIONAL RELATIONS

REGULATED SECTORS: ENERGY & INFRASTRUCTURE

MADRID, 23 NOVEMBER AND 8 DECEMBER 2020

LECTURER: MANUEL MORAL

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 INDEX
1. Energy & Infrastructure sector overview
1. Energy & Infrastructure sector overview
2. Green Deal
3. Players

2. Legal framework
1. Legal certainty
2. Long term, stable cash flows driven investments

3. Origination of Projects
1. Tender processes
2. Auctions
3. M&A

4. Project scheme overview

5. Development of the Project and securement of the Project Site

1. Permits, licenses and authorizations (PLA)
2. Land securement
3. Ready to Build Status (RTBS)

6. Construction of the Project and contractual scheme

1. Type of construction agreements
2. EPC agreements
3. Key clauses in EPC agreements

7. Operation and Project proceeds

1. Operation of the Project
2. Proceeds: Availability / User pays / PPA

8. Hand back / Dismantling

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 1. E&I sector overview
“INFRASTRUCTURE” means:

• The basic systems and services, such as transport and power supplies, that a country or
organization uses in order to work effectively.

• The basic systems and services that are needed in order to support an economy, for example,
transport and communication systems and electricity and water supplies.

Infrastructure classification:

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 1. E&I sector overview
Global infrastructure spending has increased from 1.8 TRILLION in 2007 to 2.3 trillion in 2015.
This represents an average annual growth of 2,9% per year, 12% of total global investment.

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 1. E&I sector overview
Due to the economic and demographic growth, it is foreseen that infrastructure investment will
reach 3.8 trillion in 2040.

Where is the money invested?

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 1. E&I sector overview
Why investing in Energy and Infrastructure?

Public sector / political rational:

“In the short-term, building or upgrading transport or energy networks, for example, can boost aggregate
demand through increased construction activity and employment.”

“In the long-term, infrastructure investment can boost economic growth by increasing the potential supply
capacity of an economy. For example, improving transport facilities could make workers more mobile, so making
labor markets more efficient and increasing productivity.”

While there are a number of other factors which influence labor productivity, including skills and technology, there
is a strong positive correlation between the quality of physical infrastructure and labor productivity.” source, PWC

Private sector rational:

Infrastructure assets have the potential to deliver steady long-term returns with fewer major ups and downs.

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 1. E&I sector overview
EUROPEAN GREEN DEAL: New financing mechanism to boost renewable energy.

Commissioner for Energy, Kadri Simson, said about European green deal:

“To reduce Europe’s greenhouse gas emissions, we need to significantly increase the share
of renewable energy. This mechanism provides an additional tool to facilitate investment in
clean energy projects. It will encourage cooperation between Member States and give a
practical boost to our green recovery efforts in the coming years. It can help stimulate
Europe’s economies by getting large-scale projects off the ground and by supporting local
SMEs and creating jobs.”

Selected objectives the EU wants to achieve by revising its renewable energy law:

- Get at least 32% of its energy from renewables by 2030.

- Increasing the deployment of renewables in the power, heating and cooling, and transport
sectors.

- Better use of waste heat from the likes of industry or data centers.

- Improved integration of renewables in buildings.

- Promoting development and use of renewable and other low-carbon fuels in hard-to-
decarbonize sectors such as industry and heavy-duty transport, aviation and shipping.

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 1. E&I sector overview
Climate change agreements have given an impulse in renewable energy infrastructure projects. It is estimated
that 39.6 trillion will be invested in the low-carbon energy sources.

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 1. E&I sector overview
Main players (Investors)

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 1. E&I sector overview
Main players (Infra companies)

Company Revenue (Billions) Country

Strabag 70 Austria
TechnipFMC 45 UK
Larsen and Toubro 43 India
n 3Skanska 34 Sweden
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Hochtief 33 Germany
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China State Construction Engineering Corp 33 China
Bouygues 28 France
Bechtel 22 USA
ACS 18 Spain
Vinci 17 France
Power Construction Corp of China 13 China
China Communications Construction Group 13 China
Balfour Beatty 9 USA
Laing O´Rourke 8,5 UK
Kiewit Corp 4,5 USA
Whiting-Turner 3 USA

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 2. Legal framework
2.1 Legal certainty

To what do we refer to as legal framework when we refer to an E&I Project?

The legal framework is the combination of laws, rules, regulations and contracts that are going to
govern the Project.

The legal framework will be influenced by i) the relevant authority by means of laws and
regulations that apply generally to the Project, and ii) the main parties in the Project who will be
reaching specific agreements in relation to the Project.

A solid and balanced legal framework attracts investments:

• Shows commitment and good governance.

• Allocates responsibility to different agents.

• Investors are always seeking for certainty, and E&I Projects are foreseen in the long term due
to the high amount of investment required and the design life of the asset.

• Drastic changes in the legal framework can have an impact in the profitability of the project
(i.e. feed-in tariff in renewable projects in Spain or claw back tax in Portugal).

• Simple to understand, transparent and predictable, and that encourages private investments.

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 2. Legal framework
2.2 Long-term and stable cash flows driven investments

- E&I Projects require long term investments.

- E&I Projects require very frequently to be financed, thus the cash flow generated should be
stable and predictable .

- Design life should last for 10/20+ years depending on the asset because:

- The high amount invested in the construction and operation require a long-term
exploitation to recover the investment and reach the break even for profitability.

- Although a minimum design life is guaranteed by the Contractor in the construction

agreement, the end of the design life does not mean the dismantling of the assets.

- E&I investments are not only focused on the construction, but also in the operation,
maintenance and refurbishment of an asset.

- Infrastructure assets brig stable yield, lover volatility and less sensitivity to economic
cycles.

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 3. Origination of the Projects
3.1 Tender Process

Origination by public authorities by means of:

• Open tender.
• Open tender with pass – fail pre-qualification (or two stage tender).
• Restricted procedure or shortlisted bidders (with one bid).
• Negotiated process (shortlisting with negotiations).
• Dialogue interaction process (shortlisted bidders receive tender rules).

Tender, Award and Contract Signing / Closing (and Financial Closing when financing is required).

Example of the main steps in a typical tender process:

• Launch the tender.

• Shortlist bidders in a first selection process.
• Interact and negotiate Project Agreement.
• Request for Proposals (RFP).
• Negotiate the proposals.
• Award.
• Contract Signature.
• [Contract Closing in case of conditions precedent to be satisfied between signing and closing.]
• Financial Closing.

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 3. Origination of the Projects
3.2. Energy auctions

Public auctions for energy capacity in renewable energy projects:

• A limited capacity of Mw is offered to the market: Only those awarded with capacity can
develop and build the Project.

• Bidders can make offers to build power plants in the form that they deem convenient (solar,
wind, hydro, etc.).

• Bidders have to put in place a bank guarantee to participate in the auction (x Euros per MW
offered in the auction). This prevents speculation or sponsors with not sufficient solvency.

• Bank guarantee is enforced in case the bidder is awarded with capacity and the power plant is
not built within the mandatory deadline.

• Bids submitted tend to reduce the price (price being a public subsidy) to zero or close to zero,
i.e. the Project has to be profitable by it´s own means and income generated with the sale of
the electricity.

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 3. Origination of the Projects
3.3. M&A

Origination by acquisition of Projects or capacity:

Investors can also invest in E&I projects by the acquisition of special purpose vehicles that are
the beneficiaries of the capacity awarded in an auction or the Project awarded in a tender
process.

Acquisition of Projects awarded in a tender process:

• Project agreement and tender rules may forbid transfer of the SPV and the underlying Project
until the Project has been commissioned or has been operated for a minimum of x years.
• If there are several sponsors/investors owning the SPV, shareholders agreements may be in
place and provide ROFO or preemptive rights to the existing shareholders. In case of a partial
transfer of shares by one of the shareholders.

Acquisition of Projects awarded in an auction (renewable energy):

• Normally an SPV is the entity awarded with the capacity.

• The SPV can be freely transferred to another investor, although this depends on the
jurisdiction (i.e. Portugal is now more restrictive with the transfer of SPVs. Now only allowed
after commissioning).
• Normally the buyer has to replace the bank guarantees placed by the initial investor.
• Development of the capacity is normally done by the seller of the SPV, or by a third party
developer.

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4. Project scheme overview

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 5. Development of the Project and securement of Project site
5.1 PLA

PLA stands for Permits, Licenses and Authorizations, that are necessary for the construction of
the Project.

PLA phase involves different administrations that are going to analyze the information provided by
the sponsor and verify that the legal requirements are satisfied for each Permit, License or
Authorization.

PLA implies among other, the following:

Administrative authorization: The relevant public authority approves the activity in which the
project consists. The sponsor normally has to provide the administration with the design, site
location, characteristics of the Project, etc.

Works license: The relevant public authority (normally the town hall where the Project is located)
approved the commencement of the works. Construction tax is normally due when the work
license is requested.

Business activity: Once the Project has been built and commissioned, the sponsor has to request
the business activity license, that will enable to exploitation of the Project.

Who has to grant the permit?? Depending on the size or capacity of a Project, PLA´s have to
be dealt with by different public authorities, for example, when a power plant´s capacity is more
than 50MW, PLAs are issued at a state level instead of at a regional or municipal level.

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 5. Development of the Project and securement of Project site
5.2. Land securement

Projects need a site to be built… the securement of the land is a key milestone in the
development phase of the project. No land – no project.

For large infrastructure projects, the public authority is normally who bears the risk of securing the
land. This, depending on the jurisdiction can be done by means of bilateral acquisitions or general
expropriation procedures.

The characteristics of the land is very important for the sponsor, if the site does not fit for the
purpose of the Project, construction costs can suffer a dramatic increase (proper allocation of
risks is required). The land has to be also free of any contamination, otherwise, the sponsor has
to spend a lot of money in the cleaning of the land-based and subsoil contamination.

For smaller, or more privately originated Projects (PV or wind energy projects), the land needs to
be secured by the sponsor by the acquisition or lease of land plots. This requires bilateral
negotiations with each of the landowners.

When the sponsor has not been able to secure all the land needed for the construction of the
Project, some jurisdictions allow an expropriation procedure based on the public interests of the
Project. Normally, the more land already secured, the more feasible the expropriation approval
can be gathered.

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 5. Development of the Project and securement of Project site
5.3. RTBS

Normally RTBS determines the end of the development phase. Only when a Project is Ready to
Build construction phase can start.

Key milestones for a Project to be RTB:

• PLA´s.

• Guarantees requested by the Public Authorities.

• Land securement.

• Project agreements agreed and closed.

• Other conditions precedent for commencement of the works have been satisfied or waived
(insurances, final approval of the design, etc.).

• Financial close has occurred.

• Example of RTBS definition.

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 6. Construction of the Project and Contractual Scheme
6.1 Type of construction contracts

D/B/F/O/M

• Design
• Build
• Finance
• Operate
• Maintain

• FIDIC contracts

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 6. Construction of the Project and Contractual Scheme

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 6. Construction of the Project and Contractual Scheme
6.2 EPC agreements

What does EPC mean? Engineering, Procurement and Construction – Turnkey lump sum.

Main terms and conditions of an EPC agreement:

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 6. Construction of the Project and Contractual Scheme
6.3 Key clauses of the EPC contracts

Lump sum and turnkey engineering, procurement and construction contract in respect of the
Project.

Obligations of the Sponsor

• RTBS:

• PLA.
• Land securement.

• Notice to Proceed

• Payments: Advance Payments / Milestone payment (progress certified by the technical

advisor, independent certifier or project manager) / PAC / FAC. Payment as a security
(withholding). LUMP SUM!

Obligations of the Contractor

• Single point of responsibility.

• Fixed contract price.

• Fixed completion date.

• Tests PAC / FAC.

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 6. Construction of the Project and Contractual Scheme
• Guarantees

• Advance payment?
• Construction.
• Performance.
• PCG.

• Liability: Defect liability period. Caps and % over Contract Price.

• Payment of Penalties:

• Delay.
• Performance.
• Aggregate limitation of liability.

Events of Default

Related to the default of the parties in the fulfilment of their obligations.

Termination by the sponsor:

• Contractor becomes insolvent.

• Failure to comply with a material obligation.

• Failure to maintain the required insurances.

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 6. Construction of the Project and Contractual Scheme
• Failure to maintain or renewal of the bank guarantees.

• Failure to pass Tests.

• Abandonment of the Site.

• Delay penalties cap is reached.

• Performance penalties cap is reached.

• Joint penalties cap is reached.

• Contractor made a material misrepresentation.

• Contractor assigns the contract to a third party without consent.

• Failure by the Contractor to maintain or renewal of the bank guarantees.

Termination by the contractor:

• Sponsor becomes insolvent.

• Failure to comply with a material obligation.

• Payment default.

• Suspension of the works for x days or longer.

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 6. Construction of the Project and Contractual Scheme
• Failure to maintain or renewal of the bank guarantees.

• FM event lasting more than x days.

Provisional and Final Acceptance

• Provisional Acceptance is one of the main milestones of a Project. Construction works are
completed or almost completed (punch list).

• Provisional Acceptance triggers payments.

• The Project is or is about to be connected / operative / commissioned.

• A list of requirements has to be included in the contract and be checked by the sponsor and
the technical advisor.

• Final Acceptance takes place when the Project has shown that is fully connected / operational
and no further items are pending to be completed by the Contractor.

• Normally triggers the guarantee period.

• Is now when the Project is handled to the asset management team, the construction
guarantee is given back to the contractor and the performance guarantee is given to the
sponsor.

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 7. Operation of the Project and Project Proceeds
7.1 Operation of the Project

• The operation of the Project can be done by the sponsor, the Public Authority or a third party.

• Operation term is normally regulated in the Law, the Project Agreement or the end of the
designed life of the asset.

7.2 Proceeds: Availability / User pays

• The operation of the project can be done by the sponsor, the Public Authority or a third party.

• Operation term is normally regulated in the Law, the Project Agreement or the end of the
designed life of the asset.

• Once the Project has been commissioned, is the legal framework and more specifically the
project agreement where the Project proceeds are regulated.

• Availability: When the usage level of the asset is not relevant, but it is still paramount that the
asset be available for use by the final users, for instance health workers in a hospital, then
payment should be based on the availability concept. If the asset is available -> Payments are
made.

• User-pays: Payment collected by the private party directly from users of the service.

• PPA with an offtaker: Power Purchase Agreement.

• Merchant.
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 8. Hand back / Dismantling
• Once the operation term is over:

• Hand back: Regulated in the Project Agreement. Transfer of the Project to the Public
Authority.

• Dismantling

• Dismantling works.

• Dismantling guarantee.

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 THANKS!

Sources: EIB / World Bank / PWC / EY / Aquila Capital / Bloomberg / IPE Real Assets / John Hancock Investment Mgmt. / REN21 / Global Infrastructure Hub / K-
Infra / Council of European Development Bank / statista.com / APMG

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