1. Choice of Project Structure
Linking Central Asia and South Asia
Choice of Project Structure
Dr. Tom Breuer
CASA Executive Director
Almaty, Kazakhstan
December 13-15, 2012

2. Outline of this Presentation
Two Main Options for Project Structure
Option A: Contractual Joint Venture
Option B: Corporate Joint Venture
Conclusions of October Meeting
Draft Resolution
During this presentation I will first briefly summarize the Project Structure Report in terms of the basic parameters, the options proposed (with the sub-options) and the key recommendations of the PSR. I will then turn to make an initial response to the comments received so far.

3. Inter-Governmental Agreement
First, here we have the existing institutions. The four governments with the IGC under the aegis of the existing MOUs and the Inter-Governmental Agreement. We also have the national electricity transmission companies or bulk power purchasing agency. Since each country will have a slightly different sector structure (in terms of the separation of generation or bulk power purchasing from transmission) the sellers (generators) may be separate legal entities from the national transmission companies. For the purposes of this presentation however, I show them as combine. Suffice to say that if sellers are separated, transmission service agreements would be put in place as necessary.
In this slide, for presentation purposes I have simply put up the national transmission companies to avoid the slide becoming over busy as we proceed. We now add the EPC Contracts. As each country is going to finance and then own the assets within its own borders, there would be four separate (but identical or substantially similar) EPC Contracts. It means that each national transmission company will be vested with the ownership of the assets financed in country by its host government.
We also add the O&M contractor in respect of the DC Facilities who would be selected under a competitive bidding process. Whether or not this DC O&M contractor wants to also be in consortium with the EPC contractor will be a matter for market testing and refinement of the detailed contracting strategy for the project. The key will be to ensure that the O&M contract represents a reasonable risk and reward balance, otherwise there is a risk of there being little interest on the part of private sector operators to bid for the DC Facilities O&M agreement.
Each of the IFIs also enters into “Project Agreements” directly with the national transmission companies. In order to provide for effective coordination of activities during the development and the construction phases, the Inter-Governmental Agreement between the four governments would be supplemented by a Co-operation Agreement. This is primarily for timely provision of information to facilitate the development process and the construction activities. It will also deal with more detailed arrangements for the IGC in terms of decision making and capacity building Each of the Governments on-lends the funding to its national transmission company to enable payments under the Construction Contracts. It also allows for the vesting of title to the assets on completion of construction in the national transmission company in each country. Finally, each Government establishes a Host Government Agreement to flow down obligations under the Cooperation Agreement (the supplemental agreement to the Inter-Governmental Agreement) and to provide for the flow of information back up from the national transmission companies for the purposes of coordination and decision making at the IGC and Governmental level.

4. Key Benefits of Option A
Utilizes the existing IGA framework
Minimizes delays that may well arise in the establishment of several special purpose companies
As no project financing involved, creating shielded cash flows for the benefit the private sector investor or lender is not necessary since the IFIs will treat this as a public sector project
IGC and Secretariat role in the procurement process
Still allows for a commercially tight set of arms’-length contracts to establish the relationships between stakeholders and to provide proper performance incentive mechanisms

5. Key Benefits of Option A
Permits private sector participation through the O&M Agreement with a reasonable degree of risk transfer commensurate with the level of fee. This level may be enhanced through a combination of greater risk transfer against a higher operator fee
As the debt service, operating costs, O&M fees all sit within the national transmission companies, these are bundled with price of electricity sold under the PPA (except where separate generation companies access the system in which case TSAs would be used)
Reduces potentially adverse public perception as the existing national transmission companies are the owners of the assets comprising the Project in their respective countries

6. Inter-Governmental Agreement
There will be two EPC contracts (one for the DC Line and the other for AC) but both would be entered into by the Project Company. It is important to note that as a newly established company with limited balance sheet strength, the EPC contractors and O&M contractor may require performance and payment guarantees from the shareholders on a joint and several basis. This raises the possibility of one government being called upon to meet the obligations of another. If required, it would be critical to structure any guarantee arrangements on a several basis. Leases would need to be put in place between each of the national transmission companies and this Project Company to provide control for the Project Company and in turn allow the Project Company to subcontract O&M services
A transmission services agreement would also be needed between the Project Company and each of the national electricity transmission companies
The IFIs and donors would lend directly to each Government and would have a Project Agreement with each of the national transmission companies.
Finally, each Government on lends to its national transmission company. If others wish to invest into the project company they could do so (either by way of debt or equity) and this would require an Intercreditor Agreement with the IFIs as well as (depending on the requirements of the IFIs) direct agreements between the IFIs and the Project Company.

7. Inter-Governmental Agreement
A possible variant which is being examined is for the Project Company to take ownership of the assets rather than leasing them. Ownership by the Project Company will depend on a number of factors (financing, local laws, IFI financing requirements, etc.) and will mean that the assets of the project in one country would form collateral and be at risk in relation to failure to perform by the Project Company in another. This is being examined further and will be addressed in the finalized Project Structure Report.

8. Key Benefits of Option B
Provides a separate legal entity to hold the EPC contracts and O&M
Private sector investment can come into the Project Company more easily
Provides better optics for later third party access

9. Issues with Option B
Time taken to establish the Project Company and all aspects may lead to substantial delay
Project Company does not own the assets – its only leases them.
Private sector investor requirements
Cross collateralization issues of ownership by Project Company

10. Summary and Conclusions
While Option A is not simple, it is does assume the project will be fully funded by IFIs and donors
Use Option A and only move to Option B if specifically required by lenders during the development phase
Proceed with project development phase as a contractual joint venture – substantially strengthen the IGC / Secretariat
If move to Option B at FID/start of construction – build in rights to novate (assign) all agreements

11. Thank you! Questions?? Dr. C. Thomas Breuer Executive Director
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