The price of electricity that private producers have tendered in the third round of the Renewable Energy Independent Power Producer Procurement Programme (REIPPP) has fallen due to increased competition and experience, and the entry of developers who can finance projects off balance sheet rather than through a debt-equity mix. This has led to developers searching for ways to reduce the capital cost of projects to maintain equity returns.
The result is a move away from the usual engineering procurement and construction (EPC) turnkey contracts in favour of either split EPC or multi-contracting procurement.
While the splitting of contractual packages can bring complexity, the risks can be mitigated sufficiently.
An EPC turnkey contractor assumes the full responsibility of completing the works with a guaranteed date for delivery, at a guaranteed price. Splitting an EPC contract refers to the division of the work, to be provided by two companies under an onshore contract with a local company and an offshore contract with a foreign company. This may have tax benefits, may limit exposure to inflation or volatile local currencies and may avoid the costs of local licensing regulations being applied to works done offshore. Multi-contracting involves dividing the scope of work into separate contractual packages, with different contractors completing different aspects of the project.
While the splitting of contractual packages can bring complexity, the risks can be mitigated sufficiently, as the international market has shown, to make such a procurement strategy bankable to non-recourse debt financiers.
For detail on these alternatives, have a look at my article in Engineering News: “Multi-contracting the cheapest way to skin a cat?”
