Checklist for ERPAs and Possible Investment Structures for CDM Project What you should know

Transcription

1 Checklist for ERPAs and Possible Investment Structures for CDM Project What you should know Anne Hung, Partner Baker & McKenzie GJBJ Tokyo Aoyama Aoki Law Office (Gaikokuho Joint Enterprise) is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly,reference to an office means an office of any such law firm.

2 Possible Forms of Involvement 1. Advance Payment 2. Loan and ERPA 3. Equipment Supply 4. Equity Investment

3 1. Advance Payment ERPA Advance Payment Seller Buyer CER

4 1. Advance Payment ERPA (con t) Not as powerful as a typical lender in terms of indirectly controlling the project Complete exposure to project risk if no security is taken Advantage: may not attract withholding tax if no interest is charged; may avoid need to register/report as foreign loan Only recommendable to a strong credit rating seller

5 2. Loan and ERPA Funds Loan Agreement Seller (Borrower) Buyer (Lender) ERPA CER

6 2. Loan and ERPA (con t) Better to be a stand alone loan with a right to set off against ERPA than have an advance payment Enjoy all lender s rights including: - extensive representations and undertakings - tight reporting requirements - control over bank accounts/cash flow Need to decide whether it is a project specific loan project financing or general corporate loan

7 2. Loan and ERPA (con t) Project finance requires very tight control over performance of the relevant project suitable only if CER comes from specified projects Corporate financing means lender does not enjoy specific rights over specific assets or projects e.g. CER are coming from a pool with no designated projects

8 2. Loan and ERPA (con t) Developing countries usually present challenges re onshore security because: - poor registration system for security - unclear law on enforcement - step-in not meaningful unless you have capability to take over - project size too small to warrant extensive documentation and counterparty often too unsophisticated to understand - depending the type of project, e.g. equipment supply over existing project, difficult to obtain security over whole project

9 2. Loan and ERPA (con t) Other security: - offshore registration charge (if any) - blocked bank account (offshore/onshore) - parent guarantees - bank guarantees, letter of credit - NEXI - other insurance products (MIGA) or World Bank generally very expensive

10 2. Loan and ERPA (con t) Tax: - withholding tax consider tax treaty - possible penalty or restrictions on offset need to use block account - VAT for ERPA (already covered in ERPA discussion)

11 3. Equipment Supply (con t) Sub-license Agreement License Agreement Plant Owner CER Japanese Company Technology Licensor/Supplier CDM Project Agreement Purchase Agreement - Equipment installation - Sharing of CER

12 3. Equipment Supply (con t) Generally high risk, high return Need to line up technology and supply of equipment with plant Back to back license arrangement requires careful documentation Typical risks include: - construction risk - operational risk - legal risk - counterparty risk - Kyoto risk - country risk - tax

13 3. Equipment Supply (con t) Construction Risk basically all EPC contract issues are relevant: - what are possible cost overrun? - who is responsible for design? - who is responsible for installation? - what does the price cover? - what are the import requirements? - is it proven technology?

14 3. Equipment Supply (con t) - is there sufficient delay penalty note the need to deliver CER by 2012 delay may mean significant reduction in available CER - what is the role of plant owner? - what are the payment terms? - is liquidated damage sufficient? - what is the cap for liability? - are there any bankable bonds to back up performance - is there sufficient co-ordination between supplier and plant owner?

15 3. Equipment Supply (con t) Operational Risk: - who will operate the equipment? - if plant owner, how to ensure supervision? - any penalty clause to ensure production level? Is such clause enforceable? - is plant owner required to report regularly? - who is responsible for insurance does loss of profit cover loss of CER earning?

16 3. Equipment Supply (con t) Legal Risk (local law exposure): - ownership issue (is it registrable?) - who owns the equipment? - is it a lease arrangement? - right to access to/return of equipment - how to share CER (see tax issue below) - termination clause again need to be back to back with license agreement

17 3. Equipment Supply (con t) Counter Party Risk: - who is the counterparty? - if government status, does it enjoy sovereign immunity?

18 3. Equipment Supply (con t) Kyoto Risk: - need to align timing of equipment order with CDM procedures - who is responsible for application with UN? - who is responsible for local procedures? - is it a methodology already approved? - how does investor receive CER: is it as project participant is it as CER purchaser

19 3. Equipment Supply (con t) Country Risk: - what is the status of CDM law in the country where project will be located? - does it have established Designated National Authority/CDM procedures? - what are the foreign investment requirements? may need to observe both investment requirements and CDM procedures, e.g. China

20 3. Equipment Supply (con t) Tax: - each country is different - need to check withholding tax on license/loan - how would tax authority categorise CER sharing arrangement? - need to confirm if PE arises as a result of the arrangement - need to confirm VAT if there is an ERPA

21 4. Equity Investment (Project Participant) Investor A Japanese Investor (Project Participant) CER/Dividend Income CER/Dividend Income Plant Owner CDM Project Agreement CDM Project Company License Agreement Licensor/Equip ment Supplier - could also be power plant, methane capturing, etc.

22 4. Equity Investment (con t) Not many in the market difficult to achieve closing Same as any project work (massive documentation) but with additional UN procedures as CP Need to consider investment structure - possibility of offshore structuring - possibly using holding company to improve tax position but need to consider: non-annex 1 - requirements for CDM projects if it will generate CER Annex 1 - requirements if it will trade CER

23 4. Equity Investment (con t) Need to consider funding - Often require shareholders loan as well - ERPA can be used to repay shareholders loan but usually subordinated to senior debt Need to consider all project risks construction, operational, legal, counterparty, Kyoto, country, tax Need to consider how to take CER - Dividend-in-kind - ERPA - Question of whether dividend-in-kind of CER is permitted under local corporate law and tax if so, what is the tax implication or should it be treated as a sales or service arrangement?

24 4. Equity Investment (con t) Is project company capable of trading CER? If project company is a non-annex 1 country company, can only have a sub-account in the CDM registry and it can only forward CER to project participants which have letter of approval from their DNA not very practical to use it for trading purposes.

25 4. Equity Investment (con t) Non- Annex I Project Participan t (Letter of Approval required) Participan t Forwarding Request CDM EB Pendin g Account Permanen t Holding Account Participan t Internatio nal Transactio n Log ERPA/ Assignment Annex I National Registry Account (Letter of Approval required) Participa nt Internation al Transactio n Log ERPA Annex I National Registry Account (No Letter of Approval required) Annex I Project Participan t (Letter of Approval required) Forwarding Request Temporar y Holding Account Participa nt Forwarding Request Annex I National Registry Account Particip ant ERPA/ Assignment Annex I National Registry Account (No Letter of Approval required) Forwarding Forwarding Emissions Trading