Long term contracts with output purchasers are the source of
cash flow by which the lenders may be paid. Take-or-pay contracts,
throughput agreements and tolling agreements are in substance
guarantees of cash flow for the project.
In a take-or-pay contract, the output purchaser commits himself
to make periodic payments of specified amounts whether or not the
product contracted for is delivered. His obligation to pay is thus
independent of the actualdelivery of the product. It is also
independent of the quality of the product delivered. The borrower
and the lenders are thus assured of funds for servicing the
project's debt obligations.
The throughput agreement is similar to the take-or-pay contract
except that the counter-party is the user of a facility. The most
common subject matter for a throughput agreement is a pipeline. The
user promises to pass a specified minimum amount of petroleum or
gas through the pipeline; he undertakes to make the payment
associated with the minimum use whether or not he actually passes
the minimum amount through the pipeline. The amount specified is
usually pegged to the cash flow necessary to cover the operating
cost and the debt service obligations.
The tolling agreement is a variation of the throughput
agreement. The term is applied to an agreement between a processing
facility and its customers who send their raw materials to the
facility for processing. In a tolling agreement, the customer
promises to send a minimum quantity of material at an agreed rate.
The guaranteed payment may take the form of a capacity reservation
The strictness to which a purchaser is held to his payment
obligation is largely a function of how the obligation is drafted.
As a buyer's obligation to pay is normally construed to be
dependent in some way on the seller performing his part of the
bargain, the independence of the two obligations must be manifest.
While the more developed legal systems give due recognition to
contracting parties' conscious assumption of onerous
obligations on the 'pactasuntservandaprinciple',
adjudicators in less sophisticated legal systems may subordinate
the 'pactasuntservandaprinciple' to the perceived need to
address the seeming unfairness of the obligation assumed. Parties
dealing in less developed legal systems should therefore
investigate whether the covenants they normally use have the same
Tightly drafted long-term contracts, which virtually guarantee
the cash flow to a project, are valuable as collateral. Indeed
lenders often insist on such virtual guarantees so that the
proceeds may be assigned to them as security for repayment. There
are a couple of ways by which the benefit of such contracts may be
appropriated to the exclusive benefit of lenders. The right to
receive payment may be charged or assigned to the lender. If there
are several lenders, the receivables may be assigned to a trustee
who opensan account into which the output purchasers are obliged to
make payment. The moneys in the account are thus held on trust for
the exclusive benefit of the lenders. Such arrangements enable
lenders not only to be protected against the uncertainty of future
cash flows; they also insulate lenders from the difficulties that
attend the project's insolvency.
In an infrastructural project where the government is the
purchaser of the output such as power generation projects,
the government may enter into a long-term contract for the supply
of the output at a pre-determined price. This effectively
guarantees the cash flows to the project. The risk of price
fluctuation and hence the element of market risk is removed.
Whether the government purchaser is willing to assume a payment
obligation in- dependent of the product delivery will depend on how
keen the government is to see the completion of the project. While
such commitments insulate the project from the perils of the
market, the market risk is replaced by the political and sovereign
As a conclusion in order to mitigate the risk, firstly parties
have to identify and categorize the risk and take their contractual
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