By Conor Owens, Mary Dunne and Michael Kennedy1
Project finance is a well understood and widely used model for carrying out infrastructure projects in Ireland across all sectors including health, education, roads, rail, waste, water, IT and energy.
PPPs are the most widely used model of project finance in Ireland. The government set up the National Development Finance Agency ('the NDFA') in 2006 to procure all infrastructure projects with a capital value in excess of 30 million. The NDFA procures all PPP projects other than in the transport and water sectors.
Roads projects are carried out by the National Roads Authority ('the NRA') and rail projects are carried out by the Railway Procurement Agency or by IarnrÃ³d Ã0ireann. Project finance is also widely used in the energy sector, particularly on renewable energy projects such as wind farms. This is not the PPP model but is a very typical structure where finance is secured by way of a power purchase agreement.
II THE YEAR IN REVIEW
Ireland has gone through a deep recession in recent years and has correspondingly seen the number of construction and project transactions diminish. Banks are not lending and the government has cut back its capital spending as part of the austerity package agreed with the IMF and ECB.
Residential construction has been the biggest area of decline. Large commercial projects and infrastructure projects are still being developed, but at a slower pace.
Banks are still lending for 25-year periods in the more straightforward PPP projects such as schools projects, but long-term finance is harder to secure for more risky projects. For example, a large number of roads PPP projects were carried out in the past decade on the basis of the user-pays PPP model, but banks will not now take a risk on traffic forecasts, and the NRA are currently developing PPP projects using the availability PPP model.
III DOCUMENTS AND TRANSACTIONAL STRUCTURES
i Transactional structures
By far the most predominant model for project finance in Ireland is the PPP model, whereby the private sector PPP company designs, builds, finances and operates or maintains the asset. In almost all cases of public infrastructure, however, the PPP company at no point owns the asset. It is usually granted a licence by the procuring entity to occupy and operate the land and asset for the length of the project finance deal - typically 25 years, or such time as is necessary to recoup the costs of construction, operation and financing, and to return a profit to the equity investors. At the end of this period the licence terminates at the same time as the project agreement, and the asset remains at all times in the ownership of the procuring public body.
The reason for the use of this model, rather than a BOT or BOL model, is to avoid landlord and tenant law in Ireland, which provides that where a tenant has leased a property and conducted a business for more than five years, it may be entitled to a perpetual lease. Furthermore, projects carried out in Ireland have typically been in the education and transport sectors, where it is desirable that the asset remains in the ownership of the state or reverst to the state.
A typical suite of documents in a PPP transaction in Ireland will include the following.
Project or concession agreement
The NDFA and NRA have carried out the majority of project finance deals in Ireland by way of PPP and both have template project agreements that have been used and banked successfully for several years. They are similar to the UK standard PFI and roads concession templates with a few important differences. This means that the key London and Spanish project finance banks such as Barclays and BBVA are very comfortable investing in Irish projects and have invested more heavily than the Irish banks.
The Irish government has a suite of construction documents that it uses for traditional construction and engineering projects, but these are not used for project finance deals as design and construction risks must be passed down fully from the PPP company to the design and construction company, almost always by way of a lump-sum fixed price contract; therefore, a bespoke contract is used. Typically, this will include a design and construction contract between the PPP company and the design and construction company, and subcontracts between the design and construction company to the design team and construction contractors. The bank and public procuring body typically require collateral warranties from all design and construction team members.
Service provider agreement and O&M agreements
This is a bespoke contract that accepts all of the operating and maintenance risk from the project agreement.
This will be the typical suite of funding documents that would be expected in any project finance deal: facility agreement, syndication documents, account documents, hedging agreement and funder direct agreements.
Equity and shareholder documents
These will consist of a joint venture agreement between the investing consortium that will be replaced by a shareholder agreement governing ownership of shares in the PPP company SPV. Unlike in the United Kingdom, the Irish government does not take shareholdings in PPP companies and so this is simply a standard company established under Irish company law with articles and a memorandum of understanding.
These relate to the establishment of the various companies involved in the transaction.
These relate to the ownership of the land being developed.
iii Delivery methods and standard forms
A variety of standard contracts are used in Ireland for private sector construction including FIDIC, JCT, NEC, MF1 and IChemE. The Royal Institute of Architects of Ireland produces its own template documents, which are also used, but modified as necessary.
Public construction contracts are carried out using a suite of standard government design, construction and engineering contracts. These have been controversial since their introduction in 2007, as they transfer most of the cost and time overrun risk to the private sector, they are cumbersome to use, and no amendment of the contracts is permitted.