Tucuruí to Jurupari, Brazil
Energy - Transmission
Agência Nacional de Energia Elétrica (ANEEL, the Brazilian Electricity Regulatory Agency)
Linhas de Xingu Transmissora de Energia Ltda.
Design, Build, Finance, Operate and Maintain
10 October 2008
BRL 926.4 million (USD $423.2 million – 2008 exchange rate)
caused by permitting delays, insolvency of Project Company’s parent company
The Procuring Authority, Agência Nacional de Energia Elétrica or ANEEL, signed a PPP contract in 2008 with the Project Company, Linhas de Xingu Transmissora de Energia Ltda., to design, build, finance, operate and maintain a transmission line between Tucuruí and Jurupari in Brazil. The transmission line project is a large scale high-voltage transmission project that runs through the Amazon forest. The line runs through six municipalities, and connects three substations to the national grid.
Challenges related to environmental permitting, environmental conditions, adverse site conditions, tropical weather and protests during the construction phase of the project caused significant delays and have had a substantial impact on the Procuring Authority’s approach to future PPP contracts with respect to estimating construction timelines for transmission projects. The Procuring Authority has since introduced additional clauses in its transmission line PPP contracts in order to better manage the risks which caused the delays in the Tucuruí to Jurupari project. The project is a good example to demonstrate how lessons learned during PPP contract management can inform the structuring of future similar projects.
The transmission line connects three substations (Tucuruí Substation (500/230kV), Xingu Substation (500/230kV) and Jurupari Substation (500/230/69kV)) to the national grid as part of a wider objective to connect a number of isolated cities to the national grid, improve the reliability of the national grid and reduce fossil fuel power generation. The line runs through the difficult terrain of the Amazon and covers a linear distance of approximately 527 kilometres. The construction of such a large project through difficult terrain like the Amazon carries with it significant risks, such as environmental permitting, adverse site conditions, tropical weather and protests. These types of energy transmission projects in Brazil are often delivered in partnership with private partners transferring risks such as environmental permitting, financing and construction to the private partner. This project is an example of this type of a contract.
There have been two other similar PPP contracts signed under the broader objective, which cover more than 900 km of transmission lines and five additional substations.
The project was procured at the beginning of the Global Financial Crisis in 2008. As a result, the auction was delayed in the hope that financial conditions would improve. However, when it became evident that there is no short term solution to the effects of the Global Financial Crisis, the auction process was re-initiated, and the PPP contract awarded.
The risks related to financing, design and construction and environmental permitting in relation to the transmission lines are generally transferred to the Project Company. The Procuring Authority is responsible for monitoring the construction progress and the Project Company’s performance. The Project Company is responsible for the design and construction of the asset according to the specifications set out in the PPP contract. The Procuring Authority approves compliance of the design to the specifications of the contract and the Project Company is then responsible for securing the required construction permits and environmental permits to deliver the transmission lines. The Project Company is also required to comply with the requirements of the national grid operator, Operador Nacional do Sistema Elétrico or “ONS” (Grid Operator).
The construction phase was agreed to be completed in three years, which included the time needed to obtain relevant environmental permits; the PPP contract assumed one year for securing environmental permits. However, the time for obtaining the required environmental permits took longer than anticipated, resulting in 754 days of delay on top of the original contemplated duration of 365 days. 570 days of this delay were due to environmental permitting issues, and 184 days were due to other issues such as environmental conditions, adverse site conditions, tropical weather and protests. These delays and how they were managed is covered in more detail below under the heading “Key Events”.
The payment mechanism, as explained further below under the heading “Payment Mechanism”, prescribes that the Project Company is not entitled to any revenue until construction has completed. As a result, the Project Company had to take on additional costs due to the construction delays, until the transmission line started operation.
The contract has a term of 30 years. This means, subject to any successful claims brought by the Project Company, delays in the construction “eat into” the operations phase having the effect of automatically reducing the duration of the operations phase. The Project Company has brought claims for economic and financial rebalancing with respect to the delays with the aim of extending the term of the contract (and as a consequence, extending the operations phase) and also seeking additional compensation. These claims are discussed in more detail below under the heading “Key Events”.
Testing, and Commissioning
The Grid Operator was heavily involved in the commissioning of the transmission line. The Grid Operator was responsible for ensuring compliance of the Project Company with the Grid Operator’s specifications and procedures. This is to protect the grid from damage, facilitate a smooth integration into the grid and guarantee safe operation during the PPP contract period.
No issues or disputes were faced during the testing and commissioning of the lines. The process was smooth and final approval was given by the Procuring Authority and the Grid Operator to start the commercial operation of the transmission line on 12 June 2013; except for two transformers (500/230kV) and a Static Volt Ampere Reactive Compensator in the Jurupari Substation, which were approved some months later. The last facility to enter operation was the second transformer in Jurupari Substation, which entered operation on 8 November 2013.
The operations start date in the PPP contract was agreed as 16 October 2011. However, due to the delays faced in the construction phase, complete operations did not begin until 8 November 2013. Since the start of the commercial operation of the lines, no technical issues have been faced, and the project is considered to be a success by the Procuring Authority.
Since the start of the operations phase, the Project Company has been receiving payments as per the PPP contract. Additional to base transmission payments, the Project Company is allowed to generate revenue from other sources by providing transmission related services to other parties, on the condition that the profits are shared with the grid users. The grid users are all producers and consumers connected to the national grid; the producers being power plants with a capacity of over 30 MW, and the consumers being distribution companies and customers with loads of 5 MW or more.
Transmission related services include allowing other parties to benefit from the optical ground wire cables and providing operation and maintenance services to third parties. The details of the available third party service revenue and the revenue sharing arrangements with respect to that third party service revenue is further explained below in the payment mechanism.
The PPP contract sets key milestones that the Project Company is required to achieve. The key milestones as set out in the PPP contract are:
Failure to achieve the milestones can result in amounts becoming payable to the Procuring Authority as well as the potential calling upon of performance bonds.
The management and monitoring of the contract during the construction phase was done through management meetings and a software system called SIGET (Sistema de Gestão da Transmissão / Transmission Management System) which tracks the main milestones during the development from financial close to commercial operation. Management meetings are usually held quarterly and, if necessary, site visits and inspections are performed.
Both the Procuring Authority and the Project Company have access to the SIGET software. The Project Company is required to update the project development progress data on a monthly basis to provide the Procuring Authority with visibility over the progress.
The Procuring Authority’s more active role in the monitoring of the project ends with the commissioning phase. Its role in the monitoring of the project is then scaled back to an oversight role whereby the Procuring Authority intervenes only if and when necessary. When the transmission line entered into service, the Grid Operator took over from the Procuring Authority the performance monitoring of the Project Company. The operation is monitored in real time and the associated performance monitoring reports are made available on the public domain.
The payment mechanism is such that no revenue is available to the Project Company until the asset is complete and the transmission line is in operation. This incentivises the Project Company to complete the construction phase in the agreed time.
The Project Company base transmission revenue is set in the PPP contract, where it is referred to as the “allowed annual revenue” (RAP). The RAP is adjusted annually to take into account inflation, deductions and any other additional revenue (for example authorised expansion of the facilities). The RAP is broken down into monthly payments, and then further reviewed every five years to take into account of any scope changes requested by the Procuring Authority, any instances of force majeure and certain other changes.
The deductions to the RAP are calculated using a mechanism referred to as the “PV”. The deductions are calculated on the basis of duration of any unavailability of facilities, revenue of the facilities which are out of service, and also take into account whether the outages were planned or unplanned. The deductions are adjusted monthly and their annual cumulative total is limited to 12.5% of the RAP.
The Grid Operator (rather than the Procuring Authority itself) is responsible for paying the Project Company the base transmission revenue. The issuing of monthly bills to these users is also the responsibility of the Grid Operator, which takes demand risk, and any non-payment of power bills should not affect the Project Company’s revenue. The risk of non-payment of bills is low, as there is a large number of payers, and these groups are incentivised to pay their bills as failing to do so would result in a withdrawal of service.
Additional to base transmission payments, the Project Company is allowed to generate revenue from other sources by providing transmission related services to third parties, on the condition that the profits are shared with the grid users in the form of reduced bills in the following months. The payment for the transmission related services provided also comes from the users and beneficiaries of the transmission line, specifically power generating companies, distribution companies as well as certain consumers of power (such as industrial users).
There are two Brazilian development banks, the National Bank for Social and Economic Development (BNDES) and Banco da Amazônia. Banco da Amazônia is a public commercial bank focused on supporting development in the Amazon by providing attractive financing solutions for the eligible projects. Unlike the BNDES, Banco da Amazônia is a commercial bank where the government is the majority shareholder.
The senior debt loan for the Tucirui-Jurupari transmission line was provided by Banco da Amazônia. As Banco da Amazônia is willing to take on more risk than private commercial banks, its financing solutions provided better and more attractive interest rates. The solutions provided by the bank made the project commercially feasible for the Project Company.
Right of Way can be a major challenge for transmission line projects such as this one. In order to address this challenge, the government provides procuring authorities with the administrative power to expropriate land for public utilities, if necessary. The relevant law facilitates Right of Way for the purpose of the utility project, preventing unnecessary delays to the project and other projects considered necessary to provide a public service. Ownership of the land is maintained by the previous owner, and payment for this right with some use restrictions is approximately 30% of the value of the land. The Project Company is required to purchase land needed for the substations only.
The Procuring Authority’s team consisted of approximately three technical people, as engineers, at any given time. When needed, the team is also assisted by specialists and supported by state lawyers and external financial advisors.
There is an annual training programme provided by the Procuring Authority to its employees. The programme covers a wide range of skills considered key to successful management of PPP contracts. All the seminars, workshops and dedicated courses are provided by international market leaders and institutions such as Cigré (the Council on Large Electric Systems), universities and equipment producers.
While a training programme is provided, there is no project specific contract management manual. The relevant contract management training is mainly provided based on experience and knowledge gained from completed and ongoing projects and academic publications.
The relationship between the Procuring Authority and the Project Company is fairly transparent. The Procuring Authority recognises the importance of a good relationship with the Project Company and its positive impact on the success of the project. It was pointed out that transparency allows the Procuring Authority to help to solve challenges faced by the Project Company.
The official communication between the parties is done through formal letters, as required by the Brazilian administrative system. There are also management meetings held every three months.
The construction phase faced a two year delay due to multiple reasons including delays related to environmental permitting and associated conditions, adverse site conditions, tropical weather and protests. The majority of the delay was due to the environmental permitting taking significantly longer than expected. As a result of the delays, the revenue earning period was reduced since the contract period was fixed (subject to any successful economic and financial rebalancing claims).
Before the full entry into operations, the Project Company submitted a formal claim to the Procuring Authority for economic and financial rebalancing. The Project Company claimed a loss of BRL 418 million, which would have required an increase of 45% in the RAP to cover. The requested compensation and rebalancing was based on several claims, including in relation to: 19 months of delay to obtain environmental permits, additional construction costs caused by work stoppage due to tropical weather, compliance with additional environmental conditions, delays due to social protests and cost overruns on the erection of the towers crossing the Amazon river and interfacing issues with the Belo Monte power plant. In addition, the Project Company was also requesting a contract renegotiation with respect to the profit share mechanism on the PPP contract with respect to third party services and from the sale of carbon credits.
After reviewing the basis of the petition, the Procuring Authority concluded that responsibility for construction delays was with the Project Company as it had agreed to take on the construction risks when signing the PPP contract. The Procuring Authority also decided to continue with the requirement to share profits earned from third party services; however, it was agreed that the Project Company is not obligated to share its profits from carbon credit trading.
As the parties could not reach an agreement on all claims, the Project Company escalated the dispute to court in accordance with the dispute resolution mechanism defined in the contract. As of the writing of this case study, the dispute is still in court.
On 4 July 2017, the Project Company’s ultimate parent company, Isolux Corsan, filed for bankruptcy in its home country, Spain. This triggered the sale of some of its subsidiary companies around the world. Isolux Corsan, at the time of writing this case study, had retained some Brazilian subsidiaries which are still in operation.
The Project Company, Linhas de Xingu Transmissora de Energia Ltda., which is an indirect subsidiary of Isolux Corsan, is a Brazilian company set up in order to qualify for Brazilian transmission contracts which requires it to operate exclusively in electricity transmission. The sell-off of Isolux Corsan’s subsidiaries is still underway and so it is likely a change of ownership of the Project Company will occur at some stage.
The project highlighted an important issue with the typical timeframes that the Procuring Authority had previously set for the construction phase of its PPP contracts. Allocating the full risks related to delays caused by environmental permitting to the Project Company may not be appropriate, as the requirements can vary significantly from one administration to another. The Procuring Authority recognised that the timelines it prescribed for project companies to acquire permits and complete construction works may not always be appropriate.
New PPP contracts now define the environmental permitting as a shared risk and allow more time for permitting. The project is a good example to demonstrate how lessons learned during PPP contract management can inform the structuring of future similar projects.
In this project, the Project Company has a great deal of freedom to manage its business without the involvement of the Procuring Authority. Financing arrangements, project costs and detailed financial performance information are not shared with the Procuring Authority. This has not presented any major issues so far; however, when a Project Company or its shareholders are in financial distress, the Procuring Authority feels that its ability to provide support and ensure the success of the project is limited by the lack of knowledge.
Here, the ultimate shareholder of the Project Company is currently the subject of insolvency proceedings and the Procuring Authority will find itself in a difficult position if that were to affect the Project Company. The Procuring Authority may not have the same opportunity to prepare for, or mitigate against the risks associated with such an event because of the lack of detailed information on the financial position of the Project Company.
There is an annual training programme provided by the Procuring Authority to all its employees across a programme of projects. The programme covers a wide range of skills considered key to successful management of PPP contracts. Thereafter, individual teams/offices provide their own training programmes designed in line with specific staff and project requirements. These training programmes can be delivered either by experienced internal staff or by external training providers. Quite often seminars, workshops and dedicated courses are provided by international market leaders and institutions such as the Council on Large Electric Systems (Cigré), universities and equipment producers.