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(as well as the mining company, if they are separate entities) might look for a long-term O&M contract from an operator to ensure that their long-term transportation/usage agreements can be honored through the provisioning of such services. Ultimately, the synchronization of contract durations results in a simpler financial structure, which is a best practice. Contracts should be back-to-back in nature and have sufficient liquidated damages provisions to ensure project risks are mitigated. Formal procedures for communication and dispute resolution must be established Having a formal mechanism for communication and dispute resolution between the public and various private sector participants is extremely important for the success of the project. Such a mechanism should be contractually established and the participants should develop the discipline to follow it. If any dispute arises during the development or operation of the project, having such a mechanism in place will improve the chances of successful resolution. In fact, lenders might consider the establishment of such a mechanism as a critical bankability factor. Notwithstanding this recommendation, a common sense best practice is to have frequent and honest communication between all parties involved. Where possible, the mining-related infrastructures should be considered when mining royalties are negotiated The mining company itself can often hold ownership and/or control of the mine-related infrastructure. In many cases, this ownership model provides certain distinct advantages, such as a simpler financial structure and potentially lower operating costs. In this case, it is preferable to negotiate the various issues concerning the infrastructure component (such as transportation tariffs, open access, physical facility specifications) when the mining royalties are negotiated. The infrastructure will be seen as a necessary cost center in the supply chain for bringing the product to market. Royalties are another cost for the mining company. In general, all of these should be negotiated together—so that the mining company can evaluate the whole project’s expected return—at the same time. If one part of the project is generally agreed on, but there is a serious disagreement on other parts, negotiating all significant issues concurrently will probably lead to quicker resolution. If the opposite happens, not only will the negotiation process take longer, but also it will jeopardize any preliminary financing plan (that the sponsor will likely have in active consideration), and can, in extreme cases, expose the project parties to accusations of bad faith.
8.2. MAIN CHALLENGES TO OVERCOME As all large scale projects, mining-related infrastructure transactions present a unique set of challenges. When the complexities of both PPP and project finance factors are included, such challenges are magnified. Some of the most critical challenges are reviewed in this section. Host government misunderstanding of the nature of the private sector and their risk/reward concerns The rise in commodity prices of the past decade, the new commercial viability this trend brought to a number of stranded mining projects, and the need to develop infrastructure in order to exploit these mines has (rightly) been seen by host governments as a major development driver that is suddenly available for use. At the same time, the desire to extract as much value as possible without giving proper consideration to the concerns of the private sector has led to projects being delayed, and has increased the risk of projects being cancelled, especially at the higher end of the cost of production spectrum (and, in particular, if the current slump in commodity prices continues). The alignment of the interests of the private and the public sector parties is critical for the success of a project. For that alignment to be achieved, the public sector must understand how the private sector evaluates a project.
DESIGNING BANKABLE PPP STRUCTURES: BEST PRACTICES AND RECOMMENDATIONS
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