Wolf Theiss in cooperation with local lawyers partners Samra Hadžović and Naida Čustović speak with Sam Duke about their roles on the development of the Banovići and Tuzla power plants in Bosnia, and project activity in the country’s energy sector
How did the firm get involved on the Banovići project?
Hadžović: The company was looking for a consultant to provide services in relation to the project - including legal experts as well as financial and technical consultants. They announced a public procurement tender and we participated as a member of a consortium with KPMG and VPC.
They were seeking previous experience and we needed to provide examples of similar references to win the bid. There were quite high requirements regarding the team which would be carrying out the work but all three participants of our consortium had significant experience with similar work that we could draw on to carry out this project.
There was a lot of competition, but in the end our consortium stood out because most of us working on the project had an engineering background which was expected to have significant relevance. From the start RMU Banovići had the idea to have a strategic partner. This was quite different to the way projects are usually done here in Bosnia. Strategic partnerships are not often seen.
In the beginning, the idea of the strategic partnership came from the Tuzla project. The Tuzla project first considered using a strategic partner which would help create a new project company for the construction, design and operation. Later, they decided that this would in fact not work in such project, as they did not have sufficient candidates for the execution of the project via this type of strategic partnership. So they decided to change the concept of the project and create a kind of hybrid position, which is the case in Banovići as well.
As a result, the strategic partner took the role of the EPC contractor with an obligation to secure the financing of the project via reputed bank. In practice, this is very unusual concept and is not easy to implement. EPC contractors are often very reluctant to take on any risk in connection with the financing of the project.
This has meant a very challenging project which requires coordinating different types of obligations; those of an EPC contractor and separately those of a strategic partner.
Had you worked on any large scale power projects in Bosnia before?
Čustović: Yes we have. The first project we worked on was TPP Gacko between 2005 and 2008. That was one of the largest power projects in the country. Other than that we have been working on a number of smaller projects involving hydropower plants for different clients in Bosnia. As a firm, we advised on a significant number of large scale power projects in the CEE/SEE region and we in Bosnia can benefit from and draw on the experiences of our colleagues in our other offices.
What were the biggest challenges you faced on the project?
Hadžović: To answer that, we have to go back to the strategic partnership concept, as this is something that came up again and again during the execution of the project. The strategic partner that was chosen for this project was initially very eager to be a true strategic partner; to meet expectations and to help with the financing of the project. But when it actually came to the financing of the project, the strategic partner was reluctant to fill the role and wanted to be rather just an EPC contractor.
Čustović: One of the biggest challenges is securing financing, i.e. finding suitable financial partners willing to invest in projects like this in Bosnia. Another aspect is securing the financing for a project of this size, whether or not you go for asset security. In this case the tricky part was distinguishing the assets that are suitable for securing the financing and finding the guarantors - especially as this is a strategic project for the country, so any international investors expect support from the government. Also, the transaction should be bankable.
The biggest issue is securing the governmental guarantees; firstly the question whether or not the government can issue a guarantee for such a large amount and secondly – an issue that comes from the very complex structure of the country where you have two governments playing a role in this part of the country - which of those two governments should be issuing the guarantee. Normally the entity governments are more willing as the projects are more relevant for them, but of course all investors prefer a state guarantee and in that case the issue is whether the state is willing to issue a guarantee.
Is the change in the responsibilities and obligations of the EPC contractor on these projects likely to lead to future projects being done differently?
Hadžović: I believe so. All these projects do have the support of the government because - the government has declared them strategically important, however, such projects are currently not integrated projects in Bosnia and I believe that this project structure will not be used as a model for all future projects.
Considering that approximately one year passed between the initiation of Tuzla and Banovići project, there was simply not enough time to daw on experience from the Tuzla project.
Čustović: I think in the future they will tweak the structure. They will rather adjust some parts of the model in advance using the experience from this project. Will it change the overall approach based on these projects? I think for the time being that is unlikely.
Can you point to any interesting or innovative structural elements on either project?
Hadžović: The real challenge for us in the Banovići project was that this was the first time that the client had used this type of project structure, so we needed to provide various support. They have a good team comprised of experienced and young people, but this project was constantly evolving and it remains a challenge to drive the whole project to completion. This was why our engagement was so specific and outstanding; we really provided full scope support on most issues and were also involved in more than just legal aspects.
Čustović: The client knew how the project should be carried out, but they needed guidance and in particular they needed our international experience. They aimed to have international consultants with a strong local presence as well as good local references and knowledge, but they very much relied on us to show them what the best international practice was and how to implement a large scale project in the developing country of Bosnia.
When we assembled our team we made sure to involve our experts from other offices so we could share and provide them with the international experience which they needed. We still believe that this was also a key factor on why they chose our consortium in the tender and why they were eager to also work with us on other occasions.
What were the key differences between the two projects from your perspectives?
Hadžović: In my view, it took RMU Banovići less time to negotiate the EPC contract and the loan agreement.
Čustović: RMU Banovići had a lot more experience dealing with projects like this so the process was more streamlined.
Hadžović: Elektroprivreda negotiated the financing agreement much longer. RMU Banovići started later but they were in a position to negotiate the loan agreement and submit the request for the issuance of the guarantee in less time. RMU Banovići also have a complete vision of how this project can be combined with some of their related future projects.
RMU Banovići have a specific structure and position; they are a commercially oriented entity in a majority ownership of the Federal government. Therefore, besides the goal of achieving profit, they also have a great deal of care for how the project impacts the local community. Both projects had Chinese involvement, considering how a lot of developers and banks are shying away from coal at the minute how critical was that support in getting these projects done?
Hadžović: The Chinese companies were not the only interested bidders on both projects, but without the support of the Chinese government, also owner of the selected banks, I’m sure that this project would not work.
What was the experience like working with a Chinese company, how did they differ in approach (if at all) compared to European or US developers?
Hadžović: Overall when you work with Chinese companies there is a culturaldifference you need to overcome. Projects in CEE/SEE and in particular in Bosnia are special and investors need to learn how to operate in this part and how to overcome legal obstacles that are of no relevant in other parts of the world including in Western Europe.
Čustović: When you work with Chinese companies there is a cultural difference. They do their due diligence really well. When they come to a new country they visit a lot of different law firms to gather as much information as possible. They pick up on things fast and are very well disciplined and focused.
The Balkans in general seems to have seen a lot of Chinese investment in recent years, do you expect this to continue and will it remain focused on infrastructure?
Hadžović: We see various Chinese investors in Bosnia and they are also looking at some opportunities in other parts of our CEE/SEE region. Some are also thinking about concessions involving oil. There is a lot going on but, as far as we are aware, nothing concrete at the moment.
Bosnia and Herzegovina is in the process of amending its legislation to bring it in line with the EU’s Third Energy package. Did that process have any impact on the project?
Hadžović: At this point there is no direct impact, so the project including - the EPC contract - will reflect the local legislation with much references to the Third Energy Package. However, the client also kept these EU requirements in mind when negotiating the EPC contract, including as regards environmental requirements, CO2 emissions etc. They looked to the future and incorporated a number of such aspects so that the project can continue in the future without much furtheramendments.
What is the current state of the legislation?
Hadžović: Nothing has really changed in the last two years. The only change is a new energy efficiency law that entered into force a few days ago, but apart from that everything remains the same. We are, however, definitely going in the right direction.
Čustović: I think that the changes are going slower than we initially expected but as Samra says it seems to be going the right way. Is there concern within the country about how investment in coal power might affect future EU membership given the bloc’s stance on dirty energy?
Hadžović: A couple of days ago, we participated in the Third Energy Summit also covering energy efficiency and there was a lot of talk about renewable energy.
The government is working on a lot of things and we are moving towards better use of our renewable resources. There will be more incentives, and a lot of things are planned but at the moment I cannot share anything concrete. In the end, a lot will depend on the feed-in tariffs and whether there will be subsidies to provide for attractive prices.
In our view, the government is not concerned by the development of coal power plants; they need both Tuzla and Banovići TPPs, but at the same time they are moving towards developing hydropower plants, wind power plants and solar power plants.
Čustović: The question you are asking is one we often get from financing parties when considering the bankability of projects. One of the considerations is the nature of thermal power plants, as it’s something much of the world is abandoning.
It seems that the government is thinking about this and maybe as we develop renewable resources thermal power plants will be abandoned, but there doesn’t seem to be any developments at the moment that will affect these two projects.
Which other law firms were involved on these two projects?
Čustović: We had Karanović & Nikolić as local counterpart on a very specific part of the financing, namely in relation to the sovereign guarantees (on the Banovići project).
The Chinese contractor only had technical consultants during the negotiations for the Banovići project. If they had any legal advisers we never saw them during negotiations. They relied more on the technical consultation, which was very important to them.
How likely is there to be an increase in renewable energy projects in Bosnia?
Hadžović: The development of wind power plants in Bosnia has been going really slowly. Respective legislation was first introduced in 2006, but since then not much has happened. There is one ongoing project, but the government is not that interested in wind power projects.
Overall, the emphasis for the government as regards renewables is with hydropower. Typically, there is a lot more experience in the market as regards respective hydro projects and they seem to be seen as much more reliable, especially since wind farms have to be located in areas that are not easily accessible.
If there was one piece of current legislation that affects energy or infrastructure projects that you could amend of get rid of, what would it be?
Hadžović: I wouldn’t say we would get rid of anything, unless we are free to change almost everything! Wolf Theiss is part of the foreign investors counsel in Bosnia which produced a ‘white book’, which is a publication that points out deficiencies in the various areas of legislation. As far as we have seen, the white book is also looked at by decision makers and so we are confident that our respective efforts will bear fruit.
The underlining laws relating to permits need to be changed. We have a lot of bureaucracy because of the structure of the country; a lot of parties need to issue different types of permits and sometimes, you also have to go to two levels (entity and state) to get the same permits. For foreign investors this is a major concern and takes a lot
of time.
Čustović: In addition, another point that should be considered is making sure that there is a way to make projects more bankable. That means securing the asset and a suitable security package which would require dealing with relevant rights. Especially in the case of concessions it is unclear whether the object of the concession can be used for security purposes.
Another piece of legislation that urgently needs to be changed is the regulation around the issuing of sovereign guarantees. In several projects a main issue is to obtain sovereign guarantees. When you get into the process of issuing such guarantees it gets very complicated and it is in particular not clear which government needs to issue the guarantees and how the procedure for issuing the guarantee should look like. It is very difficult to get any clarity, because the government has one view and the financing parties usually have different and more internationally driven expectations.
What about the firm’s own practice, are there any plans for expansion or shifts of focus?
Čustović: We are looking to expand our practise in Bosnia and will continue to grow. Having said this, however, we are very picky in terms of who we include in our team. In case we do not yet have the correct expert locally, we get assistance from other offices. This is a big benefit from our structure where Wolf Theiss operates a single firm with
aligned interests.
FURTHER INFORMATION
Banovići 350MW coal power plant
Tuzla coal power plant Unit 7 (450MW)
This deal record is from the new IFLR1000 Deal Data project.