Best Practices for Establishing Geothermal Legal Framework Legal Risk Management in a Geothermal Regime 5.1 1
Risk Management & Allocation Risk management and allocation are defined as follows: Risk Management includes the identification of risks, an analysis of the implications, the responding of the parties to minimize risk and the allocation of appropriate contingencies. Risk allocation is the process of identifying risks and determining how, and to what extent, they should be shared among the parties as the project development evolves. Project contracts are the obvious vehicles for this risk allocation.
Objectives of Risk Management & Allocation Allocate risks to the party best able manage them. Allocate the risk in alignment with project goals. Share risk when appropriate to accomplish project goals. Ultimately seek to allocate risks to promote team alignment with customer-oriented performance goals. Identify the risks and allocate risk in the project contracts. Continue to evaluate--risks are in constant flux.
Legal Risk Mitigation Investors try to mitigate Force Majeure risks before they invest: Political Events: country risk -- risk relating to political acts of government and to the general country context, including war, expropriation, and restrictions on repatriation of earnings.\ institutional risk risk that relates to the performance of parastatal companies and includes such risks as a failure of a government-owned power company to supply electricity to a project. Natural Events: Acts of God & nature risk that relates to the forces of nature
Force Majeure: Natural Events Natural Events may include earthquakes, floods, fire, plagues, Acts of God (as defined by contract or in applicable law) and other natural disasters. These are events that are not within the control of the host government. Parties need to look at availability & cost of insurance, likelihood of occurrence of such events & any mitigation measures that can be undertaken. Example, although the Contracting Authority will be best placed to appreciate the ramifications of common natural disasters, the Private Party should be able to obtain insurance for the majority of this risk or otherwise mitigate the occurrence of the risk.
terrorism Force Majeure: Political & Special Events riots or civil disturbances war, whether declared or not strikes (usually excluding strikes which are specific to the site or the project company or any of its subcontractors) change of law or regulation nuclear or chemical contamination pressure waves from devices travelling at supersonic speeds failure of public infrastructure.
Legal Risk Mitigation in Context of Country and Institutional Risks To mitigate project risks, investors generally require guarantees from the project sponsors. For protection specifically against political risks, investors often procure insurance or guarantees from specialized institutions, such as export credit agencies or private political risk insurers. Another source of political risk insurance for foreign investment in developing countries is the Multilateral Investment Guarantee Agency (MIGA), a specialized organization in the World Bank Group. In addition, foreign investors in developing countries often approach host governments for guarantees, particularly for political and parastatal risks.
Force Majeure Issues to Consider Who should bear risk? The risk of the political risk elements (as distinguished from Acts of God) of Force Majeure is generally allocated to the Contracting Authority. Theory: Contracting Authority is best able to manage political Force Majeure risk. Such risk relates to activities of the host country government & its relations with other countries and/or its populace, & that the Contracting Authority is only party able to bear such risk, given its size and the difficulty of obtaining totally adequate insurance. What are the consequences of a Force Majeure event? In some projects a Force Majeure event is likely to have an impact on the whole project such as lightning striking a power plant transmission substation and making it temporarily unusable. However, in other projects, it may not affect the whole network. The affected party should be under an express duty to minimize the disruption caused by Force Majeure. Care should be taken to ensure that Force Majeure events only relieve the obligations of a party to the extent that they prevent that party from performing them.
Force Majeure Issues to Consider Continued payment? To what extent (if any) should the Private Party continue to be paid even where it is unable to perform its obligations? This should be expressly stated. Other project documents? Is there a linked project agreement that may be affected also? Are the provisions in related project agreements back-toback? Example, if a project company is to receive no revenues during a Force Majeure event under a PPA, will it still be liable under, for example, a take or pay contract? Lenders will want to ensure that the definition and treatment of Force Majeure is identical in each of the project contracts. Force Majeure only excuses a party from performing under a contract to the extent that performance under that contract is hindered or prevented. Include a provision specifically referring to circumstances where a party is prevented from performing its obligations under another agreement due to Force Majeure.
Force Majeure Issues to Consider Termination for extended Force Majeure - Should there be termination in case of extended Force Majeure events? Should a maximum period be identified during which the effects of one single event or an aggregate duration of Force Majeure events over the period of the development may last before one or both of the parties can act to either remove itself from the project or obtain compensation for damages incurred. What is important is the duration of the inhibiting effects of Force Majeure. Theory is that parties will have insurance and other resources to tide them over for some period of Force Majeure, but eventually they should be entitled to terminate. Often if it agrees to continue with the project despite continuing Force Majeure, the project company s compensation during Force Majeure will increase accordingly to create an incentive to remain.
Example: Change in Tax Laws Tax Laws: The ArcGeo countries tax regimes are multidisciplinary in nature affected by legislation, economic and political decisions. These decisions are within the control of the Government and cannot be accurately be predicted by the private party. The categories of taxation for PPP include service tax, income tax, tax on dividends, income tax, withholding tax, corporate tax, however, additional tax may be due on pollution and emissions. Mitigation: Risk mitigation measures for the private party/project company include negotiating for tax exemptions and change-of-law compensations for changes in the tax regime. Legislated Incentives may mitigate: tax exemptions, tax credits, tax holidays, freedom from foreign exchange regulations (if any), exemption from certain labor laws, and import restrictions, are available in varying degree for geothermal projects in many countries.
Thank You Are there any questions? John Armstrong Arthur John Armstrong, P.C. john@armstrongpc.com 1364 Beverly Road, Suite 300 McLean. VA 22101, USA Office: +703 356 3100 Mobile: +703 220 2001 12