Nowadays, coal field royalty tenders are in line with expectations. Companies get the coal field operation rights to build thermal power plants nearby. They will build thermal power plants which would be in appropriate technolgy to fire the nearby coal, generate electricity, sell to the local market, get earning and pay unit rental royalty to the treasury for next 49 years. In order to reach this target, investors have 4-years of construction period, may e 2-3 years for getting project finance and selecting appropiate contractor to build the plant. Investors do not have time. Investment Money is scarce and very precious. They are expected to put their own money maybe 20-30% of the overall price. They have to put their hands under the stone, which means they have to share the project financing risk almost 20-30% from their own company sources.
The remaining 80-70% of the project cost is sourced from international financial markets. Investors look for financing package for the reliable contractor with appropriate technology at the cheapest price and payment terms. They look for their money to return at the shortest possible time period. They have to work with the best consultants to prepare ne essary “due diligence” and “environmental impact assessment” reports to present ti financial markets to secume project finance. We are taking about billions of US dollar project financing. Investor is to find a trusted international advisors for securing project finance.
For such bankable upfront reports, a few million dollars are spent to convince the international finance institutions to put money into the project. There is no escape with any short procedure, even if you release a law for “EIA is not necessary”, markets require you to submit a bankable EIA for the interested parties- funding agencies to review. Those reports are much more serious than our locally made reports. All kinds of technical- political- social risks are in very serious investigation. Advantages, disadvantages are clearly stated, net return, social impacts, political risks, return on investment are clarified. For more information on the EIA procedures, it is recommended to read annual “IFC bankable EIA” document.
With reliable and bankable “due diligence” and “EIA” reports, the agencies call for international project finance for the contruction of the thermal power plant. Project cost, risks, interests, repayment period, grace period are all clarified in the reports for the interested international financial institutions.
In the end, the financial institutions with some extra money may get interested with the project. They come together, create a partnership to share the risks and revenue. For the co-financing, they form a syndication to work together to realise the project. Syndication is made public through media sources. All participants, engineers, lawyers, financiers get a acrylic plaquates named “tombstones” to commomorate this closing of the project finance. Your writer also has a few of them on his work table. Financing contract is almost in more than 1000 pages, with wording the risks and revenues, guarantees, penalties clearly stated. All risks, each risk parameter is specified and clearly priced. Lawyers, funders, engineers, everyone earns money.
In order to receive an international funding, it is necessary to have certain minimum financial political social condtions in the country. Free, competitive, transparent Market conditions are to be secured. Rule of Law is to be maintained. Laws, rules, regualatins should not be changed arbitrarily. International laws are to be recognized and local laws are to be in line with international norms, i.e. European Union. Rule of Law, seperation of powers, freedom of speech, transparency, competitive tendering, are very important for the local markets to attract project financing. Corruption is to be avoided by all means.
If these norms are not met in the local market, then risks are increased, country financial ratings get lowered, project premiums, i.e. Interest rates get increased, investment appetite gets lowered towards that market. Projects can not attract the attention of the funders. If a market is in a mess, if risks can not be clearly identified, laws rules regulations are arbitrary, not reliable, if there is no freedom of speech, if corruption rumors are top, then international project financing institutions do have reluctance to interfere. Funds become inaccessible. Money sources dry up.
In this case, what happens when Far Eastern companies get interested in and engage with those projects in high risk environments? Nowadays, we see very cheap turnkey proposals for the thermal power plants from those sources financed by their Exim banks. There is always a high price in return. These companies put their own terms on the negotiation table. They put their own terms, and resist the investor to accept all, wait patiently till the end. They have limited or even most of the time, no guarantee, no penalty, very limited liability terms in their contract. There is no change in their contract terms. They wait until the investor accepts all as submitted. There is almost no bargaining power in the hands of the local investor. It is a trap, and investor is to accept, since there is no more option.
Bankable Environmental Impact Assessment report is not important for them. It is important that you accept all their contract terms. Wording for Plant guarantees, effieciency, performance, availability, delivery terms, delay penalties are all pointless. Most of the time, there is no necessary spare parts, spare equipment for nonstop smooth operation of the power plant. They do not use nor employ our standart contract terms which are available in our public institutes.
The simplest contract term for 2-months of uninterrupted trial period does not exist in the contract, so there is no rejection of the plant in case of plant failure. You have no right to insert your contract terms. Initial price may be too low. But in the end, project final cost accumulated is not so cheap at all.
Environmental protection, dust collection filters, sulfur retention systems are inadequate. Combustion efficiency is lower than expected for the market norms. Design is not tested nor proved in long term operation for the local domestic coal. Contractor complete their 2-year temporary acceptance operation and leave. Owner stays with a problematic plant too difficult to operate uninterrupted.
Investors, owners of the plant with this experience all around the world, do not release information on their problems, fearing lost of reputation, hide, getting matters in their hands, and turn to rehabilitation and renovation activities to spend more money to upgrade their piwer plants.
In the past, these companies would bring their low cost workers from their country for civil construction foundations and site installation of the plant. In recent years, legal regualtions are enforced to stop application of foreign workers. Now, all construction and site installations are done by domestic companies who would offer the cut throught low prices. Anyhow some opportunity for local employment is provided.
The money allocated to foreign investment is very valuable, not easy to put together. Money is not easily earned anywhere. Project finance of billion dolar thermal power plant investments is a very serious activity, hence market direction, public regulation and serious limitations are to be enforced for the safety of proper spending of investors’ public money.
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