The Projects and Construction Review

Profession:Walder Wyss Ltd
 
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Thomas Mueller-Tschumi and Francis Nordmann1

I INTRODUCTION

Supported by low interest rates and immigration, construction activity in Switzerland remains at a high level; this applies to both the residential and commercial building sectors. the number of major construction projects in particular has increased steadily over recent years. As regards public sector investments, transport-related projects are the growth drivers. It is expected that population growth and rising mobility will keep the demand high for infrastructure and transport-related construction and will pose financing problems for the public sector.

The 2010 Neumatt Burgdorf project ('the Burgdorf Project') was Switzerland's first PPP project to be carried out based on international project finance standards. The project encompasses the demolition of old buildings at the site, as well as the planning, financing, construction and operation of administrative premises and a prison (with 110 beds) and successfully started operations in 2012. The Burgdorf Project is a pilot project and it is expected that other public bodies will initiate projects of their own in future.

In March 2012, Swiss voters accepted the 'Secondary Home Initiative'. As a result, the Swiss constitution has been amended to introduce a new constitutional provision that essentially prevents the construction of new holiday homes in tourist regions where the number of holiday homes exceeds 20 per cent of the total housing; the Federal Council enacted an ordinance that entered into force on 1 January 2013.

II DOCUMENTS AND TRANSACTIONAL STRUCTURES

i Transactional structures

In Switzerland, transactional structures of project financing commonly follow international standards. Typically, the infrastructure is built and operated by a project company. Such a project company is established in the form of an SPV. In relation to the legal form of the SPV, a Swiss company (Aktiengesellschaft) is the preferred option, however, a Swiss company with limited liability (GmbH) is also viable. If a foreign SPV is used, such SPV is usually domiciled in a country having entered into a double taxation treaty with Switzerland in order to avoid withholding tax and to facilitate an exit by means of a share deal.

To a large extent, the construction of the project is financed by lenders. For this purpose the project company enters into a credit agreement with a syndicate of banks. The shares of the project company are owned by the project sponsor. Several sponsors enter into a shareholders' agreement governing their rights and duties as shareholders. The project sponsors provide the equity needed for the balance of the finance in the form of share capital, contribution to the general reserves of the project company and subordinated debt.

The project company has no employees at its own, but will generally outsource its constructional and operational duties to subcontractors, ideally to a general contractor in order to avoid interface issues.

ii Documentation

Again, documentation in Swiss project finance transactions is consistent with international standards. In major projects, in particular if syndication of the loan is intended, the credit agreement is based on the standard form issued by the Loan Market Association ('LMA').

For smaller projects, Swiss banks usually provide shorter standard forms of their own. Project finance requires the mitigation of the completion risk. As a result, the project company usually mandates a total or a general contractor, which takes sole responsibility for the proper delivery of all construction work on a turnkey basis for a fixed price on the basis of a construction contract. The design and planning work is either included in the contract (total contractor) or is performed by a general planner. A facility manager enters into an operating and maintenance agreement with the project company. In order to mitigate all operational risks, such agreement is usually concluded as a general contractor agreement. In addition to the operating and maintenance agreement, the parties may enter into service-level agreements.

In PPP projects, in many cases a governmental concession is required. Such concession is granted either in form of a unilateral decree or a contract governed by public law. Further, as the case may be, the project company enters into agreements with (equipment) suppliers and purchasers.

Other typical ancillary contracts include interest hedge agreements, insurance contracts, direct agreements (between the project contractors and the lenders) and appointment of independent experts.

iii Delivery methods and standard forms

In a Swiss domestic set-up, parties often use the standard form for general contractor issued by the Swiss Engineers and Architects Association ('SIA'), which has also prepared various general conditions of which SIA Rule 118 (General Conditions for constructive works) is widely used. Such general conditions only apply if specifically agreed by the parties. As an exception, the Swiss Supreme Court has ruled that two Swiss construction companies were deemed to have tacitly accepted the SIA standards (judgment of 3 December 2007; 4A 393/2007).

As regards public procurement, the KBOB (the coordination conference of the responsible federal and cantonal clients and owners) provides a standard form for general and total contractor agreement. KBOB contracts are nowadays used more often for private projects, too.

In the international context, the most frequently used standard forms are the various sets of conditions issued by the Geneva-based FIDIC.

III RISK ALLOCATION AND MANAGEMENT

i Management of risk

The management of risks is essential in the context of project finance and requires a tailor-made analysis of each project to identify and assess these risks and determine who should bear them. In general, the parties will have to deal with different types of risk. Completion risk is the risk that the project will not be completed in time or at all. In the case of cash-flow related lending (as is the case in project finance), completion in due time is crucial, as interest continues to accrue and may not be covered by the projected cash flow. Usually, the completion risk is mitigated from the project company to the total contractor who must accept contractual penalties and provide a completion guarantee. In addition, the lenders may insist on additional guarantees by the sponsors.

There can be a...

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