In BOT project financing, it is generally the contractor, which
takes full liability for the construction risks according to the
commonly accepted rule that risks, should be borne by the party
best able to take responsibility for them or manage them.The
project company, which has limited financial resources, is not in a
position to bear any significant part of the major construction
risks and certain legal devices should be used to ensure that the
construction risks are transferred from the project company to the
contractor or other relevant parties.
First of all, it is important to ensure that the contractor
accepts liability under the construction contract, without
exception, for all of the relevant obligations, which fall to the
concession holder under the concession agreement.
However the coexistence of different applicable legal systems,
one to the concession contract (generally the local law) and one to
the construction contract (sometimes a legal system more familiar
to the concession holder and the contractor) may make this exercise
In addition, and to improve transparency, "if and
when " or "pass-through " clauses may
be introduced to limit the contractor's rights (right of remedy
or right to payment) to cases where the concession holder has been
granted the same rights by the granting authority and such rights
are actually honored (provided the concession holder is not itself
liable for the events giving rise to such rights).Finally,
transparency may be extended to arbitration awards through the
operation of multi-party arbitration clauses, which allow the
granting authority, the concession holder and contractor to resolve
together in any dispute relating to construction with a minimum of
time and expense.
Besides the obligations transferred under the concession
agreement, contractors should be prepared to bear the financial
consequences of contingencies, incorporating appropriate accounting
provisions in their prices and cover for the numerous events
included in the insurance policies in addition to the performance
bond that a bank will issue on behalf of the contractor.The
question is therefore who bears liability for any additional
construction costs in excess of the construction risk limits
accepted by the contractor.In order to cover this risk, the lenders
sometimes provide special "stand by " credit,
available to finance additional construction costs.
Apart from such credit, lenders are very reticent to accept
liability for any additional costs. They are concerned that they
will be obliged to continue supporting a project, which goes off
course financially in the construction stage for fear of losing
their entire investment before even reaching the operations stage.
To assuage these fears, undertakings from the sponsors,
(stand-by capital) and also from the granting authority
concerning satisfactory completion and construction cost overruns
will sometimes be necessary in order to secure financing.
Aside from these legal and financial devices, a change of
attitude is needed, particularly between the employer and the
contractor. Effort need to be made to try and establish a true
partnership, concentrating on satisfactory completion of the
project within the projected budget and time frame and avoiding the
traditional conflicts between these two parties. On the other hand,
when we come to the structural links, which may in certain cases
exist between contractors and concession holders should bolster
confidence to a level that is not found in traditional
employer/contractor relationships, even if relationships between
companies in the same corporate group may at times be strained.
Moreover, Even if there are no such structural links, informal
relationships between sponsors and contractors, working together
long-term on numerous projects, should also contribute to
minimizing construction risks in project financing. In this respect
the Japanese and a number of leading European companies are already
showing the way forward.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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