USAID-Funded Nepal Hydropower Development
Project (NHDP)
November 29, 2018
This document was prepared for the United States Agency for International Development Nepal (USAID/Nepal) by Deloitte
Consulting LLP on Contract No. AID-367-TO-15-00003. The contents are not the responsibility of USAID, and do not
necessarily reflect the views of the United States Government.
Hydropower Financing: Traditional Project Finance,
EPC and EPC-F
Name of Facilitator: Sreeram Pethi
Designation: Senior Financial Advisor
Date: 29 November 2018
Training Objectives
By the end of this session, participants should be able to:
• Growing role of Chinese Infrastructure funding
• Understanding Engineering, Procurement, Construction and Financing (EPC-
F contract)
• EPC vs EPC-F
• EPC –F: Nepal Context
Growing role of Chinese Infrastructure Funding
Introduction
• China is a major funder of developing country infrastructure, lending ~$40
billion annually through policy banks.
• Starting in 2013 China “branded” the program under Belt and Road Initiative
(BRI)
• The BRI consists of two major components:
– Silk Route Economic Belt: overland rail and pipeline connections between
China and Europe via Western China and Central Asia; and
– 21st Century Maritime Silk Road: a seaborne trade route linking China to
Europe via South Asia and the Horn of Africa
• Growing appetite for debt among developing countries driving demand for
additional funds including Chinese financing
– Increased borrowing to bridge budget deficits (Demand side factor)
– Increased Infrastructure spending (Demand side factor)
– Increased appetite for debt of developing countries due to prospect of
higher returns (Supply side factor)
Rising preference for Chinese financing
• Chinese financing is been preferred
– China provides funding in situations where many other traditional
countries are not willing to provide finance
– Chinese government interaction with developing countries does not
prescribe solutions and does not present itself as a expert on developing
countries problems
– China frames its interactions in the context of Infrastructure cooperation
and multilateral engagement with bodies and emphasises its developing
country status
Reasons for increased China lending to developing countries
• Chinese funding provides business opportunities for Chinese contractors
– it creates a situation where countries are getting into debt with China and
China then pays itself through contracting
• Securing resources: China’s financing to in many developing countries is
linked to securing the continent’s natural resources by providing infrastructure
paid for by commodity backed loans
• Enables faster and cheaper transportation of natural resources to the
Chinese economy.
• Better infrastructure in developing countries will facilitate the penetration of
Chinese goods deeper into the continent
• To further its geopolitical control over the continent and pursue strategic
interests. Countries has often consider this as “Debt trap”
• Financing from China opens economies up to Chinese entrepreneurs.
Understanding Engineering, Procurement, Construction
and Financing [EPC-F]
Introduction to EPC-F
• Project financing mechanism in which the EPC contractor also arranges
financing for the project, through tie-ups with financing institutions.
• This model has been implemented for project development, especially in
developing countries.
• It is useful when EPC contractors have better access to low cost financing,
including EXIM financing (In China, Japan, Korea)
• Some examples of proposed EPCF financing in Nepal
– 48.8 MW Khimti -2 hydro power project by Chongqing water Turbine works
– 1200 MW Budhigandaki Hydro electric company by China Gezhouba
Group corporation (Reservoir based project)
Traditional Project Financing
Parent
Off taker
EPC
Contractor
Lender
Host
country
government
Project
Company
Loan $
Equity
Investment
EPC
Contract
O&M
Contractor
PPA
PDA/IA/PA
O&M
Agreement
Distinguishing Features of Chinese Financing
Resource
Security
Chinese
Content
Government
Involvement
Security and
Credit
Comfort
Typical Chinese EPC-F Funding
Parent
Chinese
Off taker
Chinese
EPC
Contractor
Chinese
Lender
Host
country
government
Project
Company
Loan
$
Equity
Investment
EPC
Contract
O&M
Contractor
PPA
PDA/IA/PA
O&M
Agreement
Chinese
Government
Chinese
Content
Resource
Security
Framework
agreement
Government
Involvement
Chinese
Government
Sovereign
Guarantee
Security and
credit comfort
EPC vs. EPC-F
Difference between EPC and EPC-F
S No
Parameter Project Finance Model (EPC) EPCF Model
1
Developer
selection
Developer
for the project is selected by
the
Government
either through Memorandum
of
Understanding
(MoU) or open competitive
bid
process
(QCBS/ least cost, etc.).
The
developer
could be a public sector or
private
sector
company.
The
developer would generally be a public
sector
company/
authority in the host country responsible
for
project
development and sale of electricity.
Government
can
extend same type of concessions/ benefits
made
available
to the private developer under a
concession
agreement
.
2
Project
Financing
The
project financing is the responsibility
of
project
developer which owns the
project
company
and has to mobilize debt and
equity
as
per the requirements of
project.
Government
is expected to provide
sovereign
guarantees
but not mandatory.
The
project financing is generally tied and provided by
a
foreign
country/ National Bank of the foreign
country/
development
agencies affiliated to a foreign country.
Host
Government
is responsible for arranging the
counterpart
funding
and for providing sovereign guarantees to
the
project
and lenders.
3
Contractor
selection
There are a number of variations to the
traditional project finance model. Under the
traditional model, the EPC contractor will be
selected by the SPV and subsequently
approved by the lenders prior to financial
close (FC) on the basis of cost, schedule, and
outputs. At a minimum, Lenders’ advisors will
review and approve the final EPC contract
.
The
EPC contractor will be responsible to finance a
large
portion
of the project. The EPC selection criteria
is
determined
on the basis of the availability of finance
which
may
be offered by EPC or available through a
separate
framework/
arrangement. The selection process tends
to
be
restrictive to a particular country or set
of
manufacturers
Difference between EPC and EPC-F
S No
Parameter Project Finance Model (EPC) EPCF Model
4
Off
-taker risk
Developer
needs to factor the off-taker risk
in
the
bid process/ negotiations. The
lenders
tend
to be directly exposed to the off-
taker
risk
and hence do their own due diligence
and
also
require step-in rights for the project
The
off-taker risk is responsibility of the project
company
and
the host government.
5
Project Contract
framework
Concession
Agreement, PPA, TSA.
Lenders
can enter into a separate
agreement
with
Government to safeguard
their
investment
. The lenders to not typically
have
any
financial liabilities to the
government
under
the Lender’s Agreement.
Concession
Agreement (optional), PPA, TSA,
Government
to
Government Agreement.
Government
has to provide sovereign guarantee
to
safeguard
lenders’ interests and provide payment
security
guarantees
on behalf of off-taker, usually
government
owned
entity.
6
Financing
Cost
Directly
related to project risk and
market
rates
. These costs are negotiated
between
the
Lender and the Developer.
Linked
to MOU/Bilateral Agreement between the
Host
Government
and Government of country extending
the
EPC
tied financing. The expectation is that it would
be
concessional
loan.
7
Loan
terms
Because
project finance is on a non-
recourse
basis,
payment of the loan must be
covered
by
the steam of income generated by
the
SPV
. The lenders must therefore find
their
loan
repayment security in the
project’s
feasibility,
additional security such as
partial
risk
guarantees. Lenders are
mainly
interested
in security through the
loan
repayment
period.
There
is generally a guarantee mechanism for
the
lenders
. The arrangement has to be set out in the
bilateral
agreement
between the two Governments.
Difference between EPC and EPC-F
S No
Parameter Project Finance Model (EPC) EPCF Model
8
Project
cost
The
EPC contracts are fixed price with
limited
scope
for cost and schedule variation.
Project
costs
will be monitored by the lenders and
the
SPV’s
engineers.
The
ability to pass through escalated
costs
are
determined by the regulatory framework.
The
project cost is set by the SPV on the basis of the
EPC
bids
. Pass through of additional costs will be
determined
by
the regulatory framework. In a competitive bid
situation
escalated
costs resulting from geology or hydrology
will
normally
be passed through to end consumers.
9
O&M
performance
O&M
performance parameters are
generally
included
in the PPA; they are also
made
applicable
to the O&M contractor by way
of
the
O&M contract between the SPV and
the
contractor
. Failure to achieve the
required
performance
parameters may result
in
liquidated
damages.
O&M
is the responsibility of the project company and
is
generally
not the responsibility of EPC contract.
10
Conflict
resolution
Usually
by way of independent arbitration
or
mechanism
of the regulator.
Part
of the EPC contract. Needs to be defined to cover
all
penalties
.
EPC-F: Nepal Context
Suitability of EPC-F for various types of projects
Evaluation of EPC-F Proposals: Technical and financial
capability
Financial Capability
a) The historical net worth of the
EPC
-F contractor as compared to
project cost
-F
b) Historical average annual turnover
of the EPC
-
F contractor as compared
to project cost
c) The EPC
-F contractor’s ability to
provide a bank guarantee in respect
of the construction works
Evaluation of EPC-F Proposals: Commercial Evaluation
Models
Evaluation Criteria
Remarks
Model 1:
EPC + Debt
Financing
Based solely on the EPC costs. The
bidder with lowest EPC costs will have
the highest commercial score
This model is preferred in more mature
financing markets where equity funding is not
a concern and the debt market is more
mature.
Under this Model, negotiations on financing
arrangements are preferred rather than
considering financing costs during the
evaluation
Model 2:
EPC + Debt
Financing
This model considers a combination of
EPC costs and debt financing costs. NPV
of cash flows related to financing of EPC
cost is calculated. The bidder with lowest
NPV will have the highest commercial
score
This model is preferred in developing
countries where debt markets are less mature
and where there may be wide variations in the
availability and cost of debt financing
Model 3:
EPC+ Debt
Financing +
Equity
This model considers a combination of the
EPC cost and the overall financing costs.
The NPV of cash flows related to overall
financing of EPC cost is calculated. The
bidder with lowest NPV will have the
highest commercial score
This model is considered where both equity and debt
financing is a concern and the contractor is
expected to bring in both equity and debt.
Elements of EPC-F Framework for consideration
Key Elements
Remarks
Project Development
Activities including Land
acquisition etc.
Project Development activities to be undertaken by Project sponsor including clearance
land acquisition, R&R, clearance etc.
Project Selection
ROR projects >100 MW to be preferred initially. Other hydro projects including reservoir
based projects to be considered post successful implementation of initial projects
Availability of DPR and
engineering specifications
DPR and engineering specifications must be prepared before the issue of tender for EPC-
F
Bankability of PPA
The project should have a bankable PPA at the time of issue of tender for EPC
-F
Sovereign guarantee
The financing for the project must be backed by sovereign guarantee
Special purpose vehicle
(SPV)
The project must be owned by a separate SPV
Equity infusion by GoN
GoN shall infuse equity equivalent to at least 20
-25% of the project cost.
Handover of project
The project will be handed over to the Project SPV after commissioning and stabilisation,
after satisfactory performance trials have been conducted
Payment to EPC
-F
contractor
Milestone based payments, linked to progress in project construction and commissioning.
Only 10
-15% of the cost should be held back after project handover, for an additional
period of 1
-2 years.
USAID’s NEPAL Hydropower Development Project
Kathmandu, Nepal
THANK YOU!