Early stages of the project
In early 1994 President Fidel Ramos recog-
nised the need for an irrigation and hydro-
electric project that would provide increased
water flows for irrigation to the rice-growing
area of central Luzon; would be environmen-
tally sound, technically feasible and econom-
ically viable; and would require no flooding
or relocation of local residents. He directed
the Philippine Department of Agriculture
and the NPC to work together with other
interested agencies to develop a combined
irrigation and hydroelectric project.
Shortly afterwards the project company
approached the Philippine government with a proposal to develop the project on a build-oper-
ate-transfer (BOT) basis. After a public solicitation for competing proposals the National
Irrigation Administration (NIA) selected CE Casecnan as the BOT developer and entered into
a project agreement with the company.
Under the Project Agreement CE Casecnan is committed to develop, finance and con-
struct the project over an estimated four-year construction period, and then own and operate
the project for a 20 year ‘cooperation period’. The project is expected to operate for at least 30
more years beyond the cooperation period. During the cooperation period the NIA is obliged
to accept delivery of all water and energy. As long as the project is physically cap-able of oper-
ating NIA will pay the company a guaranteed fee for the delivery of water and electricity,
regardless of the amounts actually delivered or generated. In addition NIA will pay a fee for
the delivery of all electricity in excess of a threshold amount, up to a defined limit. All fees
paid by NIA to the company will be paid in US dollars. The guaranteed fees for the delivery
of water and energy are expected to provide about 70 per cent of the company’s anticipated
revenues. The Project Agreement protects the company from increases in Philippine taxes or
a change in Philippine law. It also exempts CE Casecnan from various Philippine taxes during
the construction period, including value-added taxes, documentary and stamp taxes, withhold-
ing taxes on bonds and contracts, registration fees, and customs duties. If certain force majeure
events occur the NIA is obliged to buy the project for an amount that always exceeds the
amount of its outstanding debt. At the end of the cooperation period the company will be trans-
ferred ‘as is’ to the NPC and the NIA for no additional consideration.
The project was originally to be constructed on a joint and several basis by Hanbo
Corporation and You One Engineering and Construction Company, Ltd, both of which are
South Korean corporations, pursuant to a fixed-price, date-certain, turnkey construction con-
tract, which was guaranteed on a joint and several basis. Hanbo, which held a controlling inter-
est in You One, was an international construction company. You One was a leading contractor
in tunnel projects with more than 25 years’ experience in tunnel construction, using both drill-
and-blast and tunnel boring machine methods. The total cost of the project, including devel-
opment, construction, testing and startup, was estimated to be approximately US$495 million.
The South Korean contractors failed and were replaced in 1997. Replacement of the EPC
contractors, tunnel-drilling difficulties and other problems resulted in a cost overrun. These
events are discussed in detail below.
CASECNAN WATER & ENERGY COMPANY, THE PHILIPPINESExhibit 15.2
Estimated project capital cost
(US$ thousands)Turnkey construction contract 235,700
Initial materials and spares 1,000
Construction administration costs 15,184
Financing costs 19,289
Commercial insurance during construction 7,250
Project contingency 20,000
Debt Service Reserve Fund 42,462
Interest during construction 154,448
Total estimated cost 495,333