Project Risk Management Plan Assignment - University Canada West

Assignment Task

Case

In September 2012, the equity shareholders of the Cookhouse Wind Farm project convened an urgent meeting to determine the fate of their project following the imminent US$209 million foreign currency convertible bond default by Suzlon Energy, the project’s equipment supplier, construction contractor, and operator. Earlier in the week, Kevin Prince, the lead transactor from Nedbank, had placed a call to investment manager Arjun Vegan of African Infrastructure Investment Managers (AIIM) expressing concerns about the bankability of Suzlon following reports of looming corporate debt restructuring actions and business rescue. With certain lenders threatening to pull out of the project due to the bankability of Suzlon, AIIM – the majority shareholder – was left to develop a plan that would hopefully avert the termination of the power purchase agreement signed with ESKOM and save the project. 

The shareholders and lenders now faced the dilemma of how to re-structure the project and associated contracts in order to 1) ensure that the deal was concluded without further delay; 2) reduce the financial risk to the senior lenders and shareholders in the event that Suzlon was wound up; and 3) ensure that the construction of the project would be completed even if Suzlon was liquidated. Beyond project completion, their plan also had to provide for the long-term economic, environmental, and social sustainability of the wind farm within the parameters of its unique operating context in rural South Africa. Whatever plan they devised, it would be constrained by the limited window for the project to achieve financial close and for construction to be completed. Missing either window would spell the end of the road for the Cookhouse Wind Farm and result in major material impacts (direct and consequential) for all stakeholders.

O&M Contract

In order to ensure a low-risk O&M regime, the corresponding contract was negotiated with Suzlon on a full service and maintenance basis. The contract was concluded on the basis of a five-year term, included in the EPC price, with the option on the part of the project company to renew for a further period of five years. The contractor was required to put a performance security in place for 25% of the contract price and provide an availability warranty to the project company of 97% availability. Consequently, losing the EPC contractor would have knock-on consequences for the project, stretching to O&M performance as well.

Suzlon and Its Crisis

Suzlon Energy, with a market capitalisation of US$873 million INR equivalent, was founded by Tulsi Tanti in 1995. Based in India, the company was a leading provider of renewable energy solutions. Suzlon Energy was founded by Tulsi Tanti in India in 1995 to ensure the energy needs of his family’s yarn-making business. Eventually, Suzlon became Tanti’s primary focus and over the next two decades the firm became a leading global provider of renewable energy solutions. In 2018, it reported a GAAP adjusted revenue of US$1.3 billion INR equivalent and net income loss of US$-63 million INR equivalent (Exhibit 5).

Dilemma

With the impending bankruptcy of Suzlon, AIIM had to contend with the possibility of a poorly built wind farm arising from the loss of a competent contractor – a disastrous outcome for ESKOM, energy users, lenders, local community, investors, and AIIM itself. South Africa required urgent electricity injection in the grid to reduce the blackouts. At the same time, the immediate Cookhouse community stood to benefit greatly from the economic and social stimulus of a large-scale energy project, or alternatively suffer the most if the wind farm was not productive. The lenders stood the most to lose financially, since they were financing 70% of the project cost. The equity investors were ultimately pension funds or institutional investors, and failure of the project due to bankruptcy of the EPC contractor could damage AIIM’s reputation. Whichever route they took, the investment managers had to develop a solution that would allow the project to reach financial close on time to avoid delay penalty payments to ESKOM or a worst-case scenario: the PPA being cancelled. Beyond project completion, their solution needed to lay the groundwork for the long-term economic, environmental, and social sustainability of South Africa’s renewable energy future.

Questions

1. Identify the risks that follow from Suzlon’s financial crisis. Use the CDC Toolkit for Project design and construction as a guide.

2. Identify the key stakeholders involved with the CWF project. Using the Total Impact Measurement and Management (TIMM) framework, explain why these stakeholders are “key” to the investment.

3. Based on your analysis of the risks and key stakeholders, what are the main advantages and disadvantages for the proposed plans (proceeding with Suzlon or finding an alternative supplier)? Use the TIMM framework (and the example in figure 4 of the core reading) to identify the environmental and social impacts of each plan, and their implications for overall investment sustainability

4. What should AIIM do? Provide a high-level plan for how you would address the material impacts highlighted by questions 1–3 as an AIIM investment manager?

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