The legal structure of the HPP investments on risk mitigation in WBs

The legal structure of the HPP investments on risk mitigation in WBs

Annalise by Dr Lorenc Gordani

Legal Adviser in Albania Energy Market

hpp investments on risk mitigation legal structure of the hpp structure of the hpp investments minimum requirements of the applicable requirements of the applicable laws

The use of PPP normally is seen has a way to the financing of infrastructure and industrial projects based upon the cash flows of the project given (project finance). The contracts are granted, according to the concession law (concession granting contract (public contract)) or following public procurement procedure (as a public procurement contract). Then, the operator finances the construction of the power plant and benefits from fees (or tariffs) paid along the operation of the plant.

The subjects and rights of PPP are clearly identified: the ministry responsible for energy acts as the Contracting Authority. The law contains provisions that reassure a fair and transparent procedure for seeking proposals. The legislation and the regulations for concessions define the principles and detailed procedures for the evaluation and granting of the concession (that makes them seems formally long). Earlier, following unsolicited proposals of the private investors is carried out complex feasibility studies in their project proposal in accordance with minimum requirements of the applicable laws (that rise the cost due to deep studies need).

Nerveless, the financial analysis have been relatively rare and conducted in a limit cases. In theory, when private investors initiate unsolicited proposals, it is need to carry out a well done feasibility study in their project proposal above the minimum requirements of the applicable laws. As it is highly recommended that when the authorities, in the moment that identify areas for concessions has to pretend a financial sustainability studies performance on the project from private investors. In last, before announcing the concession approve of contract, authority have to ensure the economic impact of the agreement in accordance with the request standards.

Further, the provisions governing the contract of the project provide clear guidance on key issues that will be covered, and are quite flexible, allowing parties to freely negotiate its terms. The Ministry responsible for energy as contracting authority for the concession granted secured proposes, for the participation of private sector, by financial model with an internal return rate (IRR) up to 16% (or a return within 7-8 year). Then, the partnership focal point based in analyse of the Concessionary Agreement (CA), and the related documents: as what is signed in bona fide is law among parties.

Under the contract terms, the sale of power generated by the operator is guaranteed through the Power Purchase Agreements (PPA) signed between the investor and operator charged with the public service obligation with tariffs regulated by energy authority, using up to here mostly the “feed-in” model. When the return of investment it is not made by a fixed tariff in contract it is determine every year by an independent authority. This happen to the situation like hydroelectricity where the production depends on hydrological situation (highly variable with huge different levels of rainfalls among the years).

hpp investments on risk mitigation legal structure of the hpp structure of the hpp investments minimum requirements of the applicable requirements of the applicable laws

The PPP legislation may go through many revisions and amendments during the years, resulting in a challenging situation even for operator that deals daily with any aspects of a concession. The above, reveal an objective obstacle on clarification of the legislation stratified over time that apparently increase the risks for the potential investors willing to (enter) operate. In specific, there is always a need to provide more investor confidence, particularly through clearer and predictable framework on the transfer aspect related to the concession contracts.

However, the legal framework used in the WBs countries is the most recent and one of the best developed in the EU. The problems are caused by the lack of practical experience in economic assessment and law enforcement. A preliminary risk identification and allocation is a key component of any project finance. A project may be subject to a number of technical, environmental, economic and political risks, particularly in developing countries and emerging markets. In attempt to harmonize with the EU Directive 2004/18/EC, the new law and regulation introduced the concept of partnership (PPP) to the extension of rights, responsibilities of each party and risk allocation during the concession period. Changes all reflected to the new legislation of the WBs countries.

All the concession agreement, allocate the risk of issues of the necessary documents and permits to the public authority. Then, strictly legal talking there is only lack of capacity in management dealing and eventually enforcement of law, on non-transparent process (in both entities FBiH and RS), lengthy and burdensome administrative procedures for permitting, construction and licensing (Montenegro); uncertainty caused by legislative legal changes in the former Yugoslav Republic of Macedonia – Fyrom); complexity and confusing, due to the lack of experience of local authorities in RES specific procedures (Kosovo).[1]

As a professional in the field of energy, of course is positive to hear that in 2014 were introduced streamlined, simplified and coordinated procedures for authorization and licensing that during 2016, have dramatically improved contractual framework for the development of RES generation, by adopting standard PPA and standard direct agreement for financing RES projects (i.e. Serbia). As it wish that the same to be extended very soon in all the WBs, consider that at least the above will help in reduce the perception of risk but above all will for sure affect the rate of interest of granting loans.

For more on above please find the related presentation Legal Granting Issues on Hydroelectric Resources in the Western Balkans kept by Dr Lorenc Gordani.

[1] Regional Strategy for Sustainable Hydropower in the Western Balkans (Draft), WBIF, March 2017.

Disclaimer: The ownership and the opinion expressed pertain to the author. While all the effort are made to ensure the accuracy of this publication, it is not intended to provide legal advices as individual situations may differ and should be discussed with an expert. For any specific technical or legal advice on the information provided and related topics, contact us through “lorenc_gordani@albaniaenergy.org”.

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