Project Finance

ACKNOWLEDGEMENT This book is an expanded and partly rewritten version ofmy dissertation that I vvrote as part of my postgraduate study pursed at Queen Mary, U.of London. Taking the opportunity, I would like to thank my professor and supervisor Graham Roberts of Queen Mary, U.of London, for his constant encouragement and enthusiasm, helpful comments and guidance on the content of this work. I vvould also like to thank Mr. Deniş Petkovic, head of International Finance and Projects Practice at Withers LLP -a London based international Icnvfirm-, for his guidance on finding the right topic to write my dissertation on. Finally I should also express my gratitude to Mr. Vedat Carbaş, without whose encouragement and support I could have never imagined to publish this book. As a general disclaimer, as with anyproject of this kind, I remain, alone, responsible for any and ali shortcomings to this work may have. I yet acknowledge its merits will be judged by those vvho use this book. M. Tank Güleryüz, May 2013, istanbul PREFACE As an alternative financing method to other traditional financing methods, project finance is a financing method whereby the large public infrastructure projects are carried out by the private sector. Various parties involved in pro¬jects financed through project finance are entering into a va-riety of independent contracts with a view to allocate risks among such parties. This situation hovvever gives rise to the necessity as regards the probable risks vvhich may arise out of projects that the critical negotiations are to be conducted among the various parties as far as the legal aspect of the mitigation techniques are concerned. The aim of this book is to examine construction risks and the legal aspect of the majör techniques as to mitigate such risks arising out of construction of alternative energy projects, i.e., instalation of wind energy facility projects, fi¬nanced through project finance vvithin the context of Turk-ish lavv. From this aspect, a threefold examination is con¬ducted in the book. Firstly, the basic structure of project finance and its implementation in Turkey along with its historical development is dealt with. Following this, con¬struction contracts and construction risks, which may arise while the projects are constructed, are examined with an assumption that Turkish lavv is applicable. Finally yet im-portantly, legal aspect of the majör techniques as to mitigate construction risks are analysed from the participating par¬ties perspectives. ÖNSÖZ Proje finansmanı klasik finansman yöntemlerine al¬ternatif bir finansman yöntemi olarak, yüksek hacimli kamu altyapı yatırımlarının özel sektör eliyle yürütülmes¬ini sağlayan bir finansman yöntemidir. Proje finansmanın kullanıldığı projelerde çok sayıda taraf, çok sayıda ve bir birinden bağımsız sözleşmesel ilişki içersine girerek risklerin dağıtılmasını sağlamaya çalışmaktadır. Bu du¬rum ise, projede ortaya çıkabilecek olası riskler açısından taraflar arasında ciddi müzakerelerin yapılması zaruretini doğurmaktadır. Bu kitabın konusu, Türk hukuku bağlamında proje finansmanı uygulanarak finanse edilen rüzgar santral¬leri gibi alternative enerji projelerinin inşaasmda ortaya çıkan inşaat rizikoları ve bu rizikoların taraflar arasındaki müzakerelerde azaltılmasını sağlayacak hukuki müessese¬lerin incelenmesidir. Kitapta bu yönüyle üçlü bir inceleme yapılmıştır. İlk olarak, proje finansmanın temel yapısına ve tarihsel gelişimi ile birlikte proje finansmanın ülkemizdeki uygulamasına değinilmiştir. Bu hususu takiben ikinci olarak, inşaat sözleşmelerine konu projelerin inşası esnasında or¬taya çıkabilecek inşaat rizikoları Türk hukuku bağlamında incelenmiştir. Nihayet son olarak, inşaat projelerinin inşası esnasında ortaya çıkabilecek rizikoların katılımcı tarafların perspektifinden müzakere edilmesine ve azaltılmasına ola¬nak sağlayan hukuki müesseseler analiz edilmiştir. CONTENTS ACKNOWLEDGEMENT V PREFACE VII ÖNSÖZ IX INTRODUCTION I CHAPTER ONE ÜNDERSTANDING OF PROJECT FINANCE AND ITS IMPLEMENTATION İN TURKEY I. BASIC DEFINITIONS AND STRUCTURE OF INTERNATIONAL PROJECT FINANCE 5 II. THE IMPLEMENTATION OF PROJECT FINANCE İN THE DEVELOPING WORLD 7 III. GENERAL DISCUSSION OF RISKS ASSOCIATED WITH INTERNATIONAL PROJECT FINANCE 13 IV. THE USE OF PROJECT FINANCE İN TURKEYS ENERGY SECTOR 18 A. Turkeys BOT Experience 18 B. The Energy Report of the Turkish Court of Accounts on the BOT Law 23 CHAPTER TWO CONSTRUCTION RISKS ASSOCIATED WİTH PROJECT FINANCING I. CONSTRUCTION CONTRACTS 25 II. GENERAL DISCUSSION OF CONSTRUCTION RISKS INHERENT İN INTERNATIONAL PROJECT FINANCING 28 A. Risk of Construction Cost Overruns 30 1. Inaccurate Engineering Plans: The Design of The Work 31 2. Underestimation of Cost 32 3. Increase in Subcontractors Cost 33 4. Unanticipated Increase due to Variation in Work 33 5. Force Majeure 35 B. Risk of Delay in Completion and Non-Completion 40 C. Risk of Failure to Achieve Target Performance: Defective Performance 43 1. Takeover 44 2. Latent Defects 45 CHAPTER THREE THE MAJÖR TECHNIQÜES TO MITIGATE CONSTRUCTION RISKS I. THE USE OF TURNKEY/EPC CONTRACTS 49 A. Advantages and Drawbacks of the Turnkey Contracts 53 B. The FIDIC Silver Book Example as a Turnkey Contract 54 C. Evaluation 56 II. BACK-TO-BACK CONTRACTS 57 A. Back-to-Back Exercise between the Concession Agreement and the Construction Contract 58 B. Back-to Back Exercise between the Loan Agreement and the Construction Contract 61 C. Evaluation 64 III. THE LENDERS STEP-IN /STEP-OUT RIGHTS 65 IV. LIOUIDATED DAMAGES 68 CONCLUSION BIBLIOGRAPHY