GENERALLY

A project sponsor has two options for project operation. It can decide either to operate the project itself, without an operating agreement, or retain an operator to operate the project for it. If the project company retains an operator, it is sometimes an affiliate of a project sponsor.

Operating Agreement

Similar to the project finance construction contract, operation and maintenance agreements in international project financings must serve to provide the project sponsor with a facility that performs within certain agreed-upon performance criteria, and that operates at a fixed or reasonably predictable cost. Similar to the contractor's responsibility in a project, an operator should likewise be responsible for all aspects of project operation and maintenance.

As discussed below, the risk that operating and maintenance costs will exceed the budgeted estimate and the funds available from project revenues is a significant risk in a project financing. If operating costs exceed estimates, the additional money needed for project operation will need to come from reserve accounts, if there are any, or from funds that would otherwise be used to pay debt service or distribute to the equity owners.

Project finance operation and maintenance agreements typically contain each of the following provisions: a detailed scope of work; a fixed or variable (but predictable) price for all of the work necessary to operate the project; performance guarantees; liquidated damages for failure to satisfy performance guarantees; and a showing of financial creditworthiness of the operator.