SECTION AThe Scaling Solar ProgramThe World Bank, through the action of International Finance Corporation $($IFC$),$ launched the Scaling Solar program $($Scaling Solar or Program$)$ to develop solar solutions in emerging markets, particularly in Africa, with the aim of delivering cheaper energy and ensure access to electricity to a larger number of people particularly in places with abundant sun, wind, and hydro resources.As part of the program, the World Bank supports Governments in the management, structuring and negotiation of private power concessions. The services provided by the World Bank are several and include: assessment of the site location to identify the right size and location of the PV plants; ensure that transparent and competitive tenders are carried out by the governments; lower financing costs by providing specific concessional financing solutions and create specific frameworks to ensure smooth financial close processes.The typical Scaling Solar process includes the following steps:$1.$ Project Preparationa. Technical and economic analysis b$.$ Site investigationc. Legal and regulatory analysis$2.$ Bid preparationa. Localization of tender and project documentsGantt chart is a triggerb. Attachment of financing, credit and insurance enhancements$3.$ Tender process & awarda. Request for qualification b$.$ Bidder consultationc. Request for proposalsd. Proposals reviewe. Signing of project documents$4.$ Financial Closea. Finalization of financing$/$loan agreements b$.$ Final project approvalThe first countries in Africa to benefit of the Scaling Solar program were Ethiopia and particularly Zambia, where the Scaling Solar program was officially launched between $2015$ and $2016.$Scaling Solar & Zambia: energy sector overviewZambia has $2\mathrm{.}800$ MW of installed electricity generation capacity, of which $85\%$ is hydro based. National access to electricity averages at $31\%$ with $67\%$ of the urban and $4\%$ of the rural population having access to power. Household without access to power are estimated at $7\mathrm{.}2$ million which made Zambia a perfect target for the implementation of the Program.In $1996,$ the Government of Zambia set a goal for universal electricity access for all Zambians by $2030.$ Energy has been identified as an important driving force behind economic development in Zambia, and the Government has declared its commitment to developing and maintaining energy infrastructure and services. Although there are pockets of private sector activity in generation, transmission, and distribution, the vast majority of power in Zambia is operated by ZESCO, the vertically integrated state$-$owned utility. However, the sector is opening up to new IPPs for on$-$grid and off$-$grid transactions$\mathrm{.}2$ In March $2016,$ Power Africa and USAID Zambia provided $$2$ million to support IFC Scaling Solar program in Zambia. This support helps finance the critical costs necessary to establish and implement a transparent, competitive bidding process to attract qualified solar power developers and to build institutional capacity and catalyze market growth. In $2017,$ the United States Trade and Development Agency $($USTDA$)$ provided feasibility funding for two private sector developers that aim to advance $20$ MW of geothermal generation capacity and $130$ MW of wind generation.The Chipata Power Plant $($CPP$)$: backgroundThe first project that has been awarded under the Scaling Solar Program in Zambia is the Chipata Power Plant $($CPP or Project$),$ an $85$ MW solar power plant located in the Eastern Provence of Zambia, in the municipality of Chipata, few kilometres away from the border with Malawi and Mozambique.The Project was awarded in $2016$ to a consortium made of $2$ investors $($together the Sponsors or Shareholders$)$:$-$ Industrial Development Corporation $($IDC$),$ which owns $30\%$ of CPP$,$ and$-$ International Renewable Energy Group $($IREG$),$ which owns the remaining $70\%.$IDC is a local shareholder. The IDC was incorporated in January $2014$ and is wholly owned by the Government of Zambia through the Minister of Finance. The IDC was established to create and maximise long$-$term shareholder value as an active investor and shareholder of successful state$-$owned enterprises, as well as undertake industrialisation and rural development activities through the creation of new industries.On the other hand, IREG is a large international player in the renewable energy industry, a market leading independent power producer and service provider with over $30$ years of experience across more than $20$ countries. The company delivers grid$-$scale power such as wind $($onshore and offshore$),$ solar photovoltaic and storage projects. The total capacity managed worldwide by IREG is more than $20$GW and the company has a large expertise across the whole renewable energy value chain, including construction, operation and asset management.Construction dateAccording to the original project plan submitted by the Shareholders the Project is expected to start construction on May $2017$ with Commercial Operation Date $($COD$)$ to be achieved by December $2018.$The Project is financed through a combination of sources provided by IFC and Standard Chartered Bank $($SCB$)$ as Lenders and by IDC and IREG as Shareholders. The CPP total cost is expected to be USD $90\mathrm{.}266\mathrm{.}000($equivalent to ZMW $1\mathrm{.}895\mathrm{.}586\mathrm{.}000)1$ which includes the construction costs, advisory costs and financing fees.Table $1.$ CPP total Project costsCommercial date Project Costs USD ZMW Total EPC Financing Costs$/$Lenders Fees Advisory & Transaction Costs$850000001016000425000017850000002133600089250000$Total Project Costs $9026600018955860001$ FX rate ZMW$/$USD $=21.$ Kindly assume the same exchange rate throughout the exam$\mathrm{.}3$ The role of SCBWhile IFC is a worldwide contributor in supporting international projects to boost shared prosperity and ending extreme poverty, SCB is a commercial financial institution active in supporting infrastructure assets mainly across Africa, Asia and Middle East. In Africa, SCB provides financial advisory services, financing and debt structuring for specific projects having a relevant impact from a sustainability and development point of view.The structured finance team, which counts on $20$ professionals able to deliver different kind of projects including renewable energy $($wind$,$ solar and hydro$),$ toll roads, water treatment facilities, bridges, railways, is particularly well recognized for providing first class services on limited recourse project financing and export finance solutions. This can also involve the implementation and development of integrated risk strategies to improve the bankability of projects.In $2020,$ SCB was recognized as the best bank for financing in Africa. SCBs contribution to the development of African markets is shown in several transformational infrastructure deals, including Tanzanias light railway, a huge offshore oil drilling rig in Angola and some renewable energy projects supported across the Continent.The CPP project is quite a relevant project for SCB$.$ In fact, other than being the first project of the Program, CPP represents an important opportunity for SCB to cooperate more widely with the World Bank in the context of development finance and infrastructure assets.CPPs funding structureThe Project is funded with the following mix of funding sources:$-12\mathrm{.}5\%$ through equity injections made by the Shareholders$-12\mathrm{.}5\%$ through shareholder loans made by the Shareholders$-65\%$ through a project finance facility made available by IFC and SCB $(50\%$ each$)-10\%$ through a concessional funding provided by IFCIt should be noted that the concessional funding is a particular funding instrument made available by IFC specifically for the Scaling Solar. The main scope of the concessional funding is to provide cheaper funding to projects that are located in specific markets with the ultimate aim of supporting investments that would not be feasible otherwise, either due to the higher cost of capital or due to the risk structure.The concessional funding terms provided by IFC can be summarized as follows: $-$ USD denominated$-$ max amount equal to $10\%$ of the total project costs$-$ fixed interest rate of $2\%$ per annum$-13$ years tenor $($including construction$)-$ annual repayment in equal instalments$-$ arranging and underwriting fees equal to $1\mathrm{.}5\%$ of the concessional funding amount $-$ no holiday period$-$ DSRA not applicable.On the contrary, the project finance facility provided by IFC and SCB is quite standard. The main terms and conditions applicable are:$-$ USD denominated$-$ maximum gearing equal to $70\%$ of the total project costs$4-16$ year tenor $($starting from the beginning of the construction$)-$ fixed interest rate of $6\%$ per annum$-$ sculpted repayment profile with Debt Service Cover Ratio $($DSCR$)$ minimum level of $1\mathrm{.}3$x and LoanLife Cover Ratio $1\mathrm{.}5$x$-$ default cover ratios: DSCR min $1\mathrm{.}18$x and LLCR min. $1\mathrm{.}35$x$-$ arranging and underwriting fee equal to $1\mathrm{.}5\%$ of the senior debt amount $-$ DSRA provided in the form of Letter of Credit $($unfunded$).$Table $2.$ CPP Uses & Sources at the end of the construction period. Uses $($Zar$)$Total EPC Financing Costs$/$Lenders Fees Advisory & Transaction CostsTotal AssetsCPP contractual structure $-$ PPAUSD$850000001016000425000090266000\%94,17\%1,13\%4,71\%100,00\%$Sources $($Zar $)$Hard Equity Shareholders Loan Concessional Funding Senior Debt Total LiabilitiesUSD$112832501128325090266005867290090266000\%12,50\%12,50\%10,00\%65,00\%100,00\%$ Hedge throughCurrency swarpsAt the beginning of $2016,$ the CPP project, through its Special Purpose Vehicle $($Project Company or SPV$)$ has signed a $20$ year Power Purchase Agreement $($PPA$)$ with Zesco Limited $($Zesco$)$ a state$-$owned power company in Zambia, which will buy the energy produced by the SPV at a rate of USD $91$ per GWh $($equivalent to ZMW $1\mathrm{.}911).$ The Project is expected to produce $185\mathrm{.}000$ GWh per year.Volatility of incomeThe start date of the PPA is the earlier of $1$st January $2019$ or the COD date as achieved by the plant. Underthe PPA the tariff is linked to the exchange rate between ZMW and USD, in order to offer a natural hedgesolution for the Project in respect of the funding made available by the Lenders, which is denominated in USD. ZESCO Limited is a vertically integrated electricity utility, which generates, transmits, distributes and supplies electricity in Zambia. It is a public utility, with the Government of the Republic of Zambia being a sole shareholder. Zesco is Zambia's largest power company producing about $80\%$ of the electricity consumed in the country. The company operates $9$ hydropower stations with a combined capacity of $2\mathrm{.}217$ MW and eight small thermal power plants with a combined capacity of $11\mathrm{.}3$ MW resulting in a total installed capacity of $2\mathrm{.}228$ MW$.$ The company also owns and operates power distribution and transmission lines of $9\mathrm{.}975$ km$.$ ZESCO has formed power purchase agreements with private companies that own power plants in Zambia. It purchases the power produced and feeds it directly into the national grid.CPP contractual structure $-$ EPCThe construction of CPP was awarded under a full Engineering Procurement and Construction $($EPC$)$ contract to a consortium made by IREG $(50\%)$ and a local Zambian engineering company $(50\%).$ The total cost of the EPC contract is determined as USD $85$ mln$.$Conflict of interest $-$ as a shareholder, IREG may take profits trhough EPC and declare insolvencyThe involvement of IREG in the EPC was originally recognized as an additional value for the Project for severalreasons. Firstly, with IREG being a shareholder and the EPC contractor it was considered an alignment ofinterests for the benefit of the Project even though the distinction of the roles could bring up some issues interms of conflict of interests. Secondly, the international experience of IREG was identified as a veryimportant element to ensure that the Project was completed on time and on budget. In fact, the structure Liquidated damages are better stofthePPAprovidesthatforeverydayofdelayintheconstructionactivities$($laterthan$31$ December$2018),$ the PPA is automatically reduced for the same number of days plus $7$ days. This mechanism was originally identified as a huge risk by the Shareholders and by the Lenders, and for this reason the involvement of IREG seemed to be a suitable mitigation plan.Subscontractor risk$5$ As part of the EPC contract the following guarantees were provided by IREG:$-$ Parent Company Performance Guarantee equal to $15\%$ of the total EPC contract. This guarantee isissued at Financial Close $(2016)$ and covers the performance of the contractor to deliver the plantand achieve the COD on time. This guarantee is expected to be released two months post COD.$-$ Parent Company Warranty Guarantee equal to $10\%$ of the total EPC contract. This guarantee is expected to be issued once the Parent Company Performance Guarantee is returned in order tocover the performance of the contractor for the so called warranty period $($two years post COD$).-$ Delay Liquidated Damages in the form of a bank guarantee equal to an amount of $20\mathrm{.}000$ USD for every day of delay and up to a maximum amount equal to $20\%$ of the EPC contract, which onceachieved immediately terminates the contract.CPP contractual structure O&MThe Operation & Maintenance agreement $($O&M$)$ was signed with IREG $($O&M Operator$)$ for a period of $10$ years. The corresponding contract was negotiated on a full service and maintenance basis. The Project Company will retain an option to renew the contract for additional $10$ years in case a satisfactory service is provided by the O&M Operator. In case of renewal the parties have already pre$-$agreed a price adjustment mechanism.Price adjustment mechanism may changeThe price agreed for the O&M contract is equal to $120\mathrm{.}000$ USD per MW$,$ meaning a starting annual price of $10\mathrm{.}200\mathrm{.}000$ USD $($CPI applicable from $2019).$In respect of the O&M services the O&M operator was required to put in place the following securities:$-$ a performance bond in the form of a bank guarantee equal to $10\%$ of the O&M initial contract priceto be issued at the COD and to be renewed every $2$ years; and,$-$ an availability warranty to the Project Company of $98\%$ availability.Considering the involvement of IREG as a shareholder, as EPC contractor and as O&M operator, a high level of trust was assigned to the performance capability of IREG by both the Lenders and the minority shareholder. The chart below summarizes the contractual structure of the CPP project.Exhibit $1.$ The contractual structure of CPP$.6$ TodayOn the $21$st December $2020,$ the minority shareholder of CPP convened an urgent extraordinary board meeting $($Extraordinary Meeting$)$ between the Shareholders and the Lenders to bring to the attention of the Lenders an issue in respect of the operation and maintenance of the power plant.In fact, since the COD was achieved $($December $2018)$ the minority shareholder of CPP have complained about the services rendered by the O&M Operator, IREG, observing a significant under$-$performance of the power plant compared to the original expected energy production.More in detail, for the whole $2019$ the CPP has produced $2\mathrm{.}7\%$ less than expected and the same trend has been recorded during the course of $2020($less $2\mathrm{.}6\%),$ affecting the Project and the Shareholders expectations significantly.The topic wasnt really new among the Shareholders. IDC brought the issue to the attention of the Board of Directors and to the Shareholders meeting of the Project Company twice since the Project has achieved the COD $($December $2018).$ The first time at the end of $2019$ when the first year of operation was analysed and some clarification questions were posed to IREG. The second time in October $2020.$During the discussions among the Shareholders several points were raised and there were many seriousdiscussions between IDC and IREG.Plant performnace is affected mainly by operations not designOn one hand, IDC is complaining about the services rendered by IREG and the low availability of the power plant. According to the O&M contract, IREG should provide an availability level no lower than $98\%,$ which has not been met since the COD was achieved. IDC was particularly unhappy about the timing of intervention of IREG in repairing$/$replacing some of the main components of the solar plant $($inverters$,$ transformers$)$ which already suffered a couple of failures during the first two years of operation. Additionally, IDC wasnt happy with how the plant supervisors were managing some the activities on site $($ie panel washing, grass cutting$)$ which were identified as additional elements affecting the performance of the Project.On the other hand, IREG position is that the gap in the production is largely driven by a lower than expectedirradiation for which IREG has no control or responsibility. As O&M Operator, IREG presented to the BoardEnvironmental riskAs a result of the discussions between the Shareholders, the Board Meeting of October $2020$ was concluded with the formal request of IDC to replace IREG as O&M operator. However, according to the Governance of the Project Company, ruled in the Shareholders Agreement, any decision about the replacement of one of the major party of the Project requires unanimous approval of the Shareholders, and the request was promptly rejected by IREG as well as the proposal to exercise the Project Company rights to call the guarantees provided by IREG.In its position as minority shareholder, IDC highlighted and recorded in the Board papers that, in their view, the decision of IREG was clearly affected by the huge conflict of interest that IREG was facing, being it was essentially requested to judge its own performance. This was quite clear in IDCs opinion in consideration of the fact that IREG didnt want to lose the performance securities provided under the O&M agreement, and at the same time wanted to protect the stream of revenues coming to IREG from the O&M activities.meeting of October $2020$ a detailed analysis of the irradiation, explaining the underperformance and the variability of the weather affecting the Project $($rain patterns, clouding, air$-$temperature$).$ Despite the explanation IDC felt that IREG still did not deliver as expected$\mathrm{.}7$ Considering the situation, the final decision of IDC was to call an Extraordinary Meeting by exercising one of its right under the Shareholder Agreement. The decision of IDC is to use the deadlock provision where, in the event of a deadlock, one of the Shareholders can decide to request the intervention of the Lenders whose vote will determine the way forward in respect of any contentious item unresolved among the Shareholders.As such, IDC intends to present to the Lenders its proposal to remove IREG as O&M operator, providing as supporting documentation the actual performance of the power plant and a revised projection of what the Project cash flow will look like in the future in the event that the under$-$performance is not immediately remedied. IDC also wants to present to the Lenders an official request to call the guarantees provided by the O&M operator.Questions Part AIn your position of member of the SCB structured finance team, you are invited to the meeting between IDC, IREG and IFC. Your contribution is essential because you are required to make a call on behalf of SCB on the position to be taken by the bank in respect of the Project. At the Board Meeting the Lenders are also supported by their technical advisor and legal advisor.The Lenders will also have to make a call on the impact that the deteriorated relationship among the parties might have on the Project other than the actual performance of the power plant.You have to report the situation internally and you are requested to clearly point out the following:$1.$ Please explain what the main risks affecting the Projects stakeholders in this situation are? Is thereanything that you would have structured differently to avoid this situation? How to mitigate risks$2.$ What would the impact of the replacement of IREG be for the Project and its stakeholders?$3.$ Is there any other issue that as Lender perhaps you would like to investigate or consider? If yes, please elaborate your view and your reasons.ESCROW$4.$ In your position of Senior Lender, would your position would be$?$ Would you vote in favour of the replacement of IREG as O&M operator? Please explain what would drive your decision providing an explanation of the reasons, the suggested steps and the impact of your decision$\mathrm{.}5.$ Is there any different kind of approach that would you propose to the Shareholders to solve the problem?Questions Part BAnnex A$,$ B and C in the next pages show the original business plan of the Project Company.Under the hypothesis that the Project will keep under$-$performing, you have been requested by your credit committee to perform an analysis to determine the maximum level of under$-$performance that the Project can face.Please provide your analysis and detailed calculation of what the maximum level of under$-$ performance would be sustainable for the Project and why.Calculate IRR as IRR shows the minimum rate ofreturn which equals costs of capital. This is the minimum level of under performance sustainable for the project$8$ Annex A CPP Original Cash Flow Statement CASH FLOW STATEMENT OperationTotal revenues received Total expenses paid Net Working Capital Movement Taxes Paid CashFlowFromOperationInvestmentsTotal EPC Financing Costs$/$Lenders Fees Advisory & Transaction CostsNet Cash Flow Before Financing $-$ FundingSenior Debt $-$ Drawdown Concessional Funding $-$ Drawdown Equity Drawdown Sahreholders Loan Drawdown Cash Available for Debt ServiceDebt RepaymentsSenior debt $-$ Interest PaidSenior debt $-$ Repayments Concessional Funding$-$ Interest paid Concessional Funding $-$ Repayments FreeCashFlowtoEquityEquity Cash FlowShareholder Loan $-$ Interest Paid Shareholder loans $-$ Repayments Dividends paid CashAvailableofthePeriod$2018--20191742422511084850--6339375633937563393753520374-1356068-180532-752217-202018034073$

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