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  Tunnel and Underground Risk in Hydro power – a Lender’s Technical Advisor’s Perspective

  This paper explores the role of the Lender’s Technical Advisor (LTA) in identifying and mitigating risks in hydropower projects on behalf of the project lenders, in particular for the tunnel and underground aspects. It describes the typical services required to manage the four key phases of: due diligence, prefinancial close, construction financing and operational financing for hydropower projects. It draws upon the author’s experience of undertaking LTA roles across each of these phases and project types across a range of geographies. There are differing types of risk in both large and small hydro projects (contractual, commercial, participant, geotechnical, completion, country, technology, reputational, environmental and social, etc) and many of these are discussed with regard to how the lenders may be exposed if the risk eventuates and how the lenders perceive the risks. Those risks also vary with time and the perception of the risks also varies between parties, depending upon which party will be mostly impacted. The risk evolution throughout the pre-financial close to operational phases for a hydropower scheme differs for each type of risk. There are several unique features and risks associated with hydropower projects that financiers, and the borrower, need to be aware of. The rather misleading concept of a bankable feasibility study is briefly explored and discusses what that really means, since stakeholders have differing standpoints. We also discuss who decides whether a feasibility study report can be considered bankable. The paper draws on case studies from the Asia Pacific and African regions to illustrate the key elements in hydro project financing from the LTA’s perspective, together with the author’s recent and current experience on multiple hydropower projects ranging from 5MW to 500MW, across Asia and Africa in the run-of-river, storage reservoir and pumped storage type of hydropower plants, each having differing reliance on underground works. Tunnelling; Underground; Risk; Financing; Hydropower; Lenders. The lenders normally prepare the request for proposal for the LTA services, tailored to their needs for the particular project and their perceived key areas for concern, but with a fairly common underlying terms of reference for most LTA roles. The LTA - also termed the Independent Engineer, Bankers’ Engineer or Lenders’ Independent Consultant - is selected jointly by the lenders and the project developer (the borrower) but usually contractually appointed and paid by the developer. However, the LTA’s selection process is rarely as straightforward as just described, given that the lenders tend to look for experience, reputation and quality, whereas the developer will additionally be looking for the most competitive price for those services.

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