For Project Bankability, Protect The Operations And Cashflows that Repay Investors
Construction gets all the attention, yet Operations is where the money is made or lost. You must protect that too.
On April 8, 2026, I issued a note in response to a question from a subscriber asking for a simple yet practical definition of bankability. Titled, “Ebun, Explain It to Me Like I’m 5: What Really Makes a Project Bankable? “
I have been following up on that note to cover specific aspects of the project and how bankability is connected to creditworthy or credible partners locked into balanced and effective contracts.
The second note I wrote in the series covered protecting demand through commercial agreements and off-take structures, ensuring that the revenue the project relies upon is contractually secured.
The third note covered protecting construction through the EPC contract, shielding the project from cost overruns and delays before revenues begin.
This current note picks up where the EPC note ended: the moment the contractor hands over the completed asset and the project transitions from construction to operations.
There is a dangerous misconception that too many developers carry through the entire project development journey.
It is the belief that financial close and construction completion are the finish line.
It is understandable.
Getting to financial close is hard.
Construction is gruelling.
They are both also newsworthy milestones. A signing ceremony occurs when financing is committed, and financing agreements are signed.
A ground-breaking ceremony and a commissioning ceremony signal the start and end of construction.
During these events, there is celebration, press photos are taken, and media announcements happen.
The instinct is to celebrate, exhale, and then move on to the next opportunity in the pipeline.
Yet after the ribbon cutting, the boring work of delivering on asset performance must now begin.
Performance is required. Not for a month. Not for a year. For years, even decades.
Performance delivered consistently to the technical and financial standards that deliver the cash flows promised when investors committed their capital.
The ink on the financing agreements may be dry. The concrete may be poured. But the true test of your project is only just beginning.
Just as you must prove you can build the asset, you must also prove you can keep it operating to expected standards.
Why Operations and Maintenance are Bankability Issues.
Project bankability is fundamentally about protecting cash flows that repay lenders and provides return to equity.
In limited-recourse or non-recourse project finance, the project company has virtually no assets of value beyond the physical infrastructure and the contracts that govern it. Lenders look entirely to the independent cash flows of the project entity as the sole source of debt repayment. Equity investors look to capture the residual cash flows to pay themselves dividends
This means operating the asset reliably is a direct, existential bankability issue.
Lenders do not walk away once the facility is built. They remain active, highly interested parties throughout the tenor of the loan. Their debt service depends exclusively on operational cash flow, measured as Cash Flow Available for Debt Service (CFADS).
This metric is derived from project revenues after paying operating and maintenance costs, but before paying debt service.
If the plant suffers frequent breakdowns, is significantly more expensive to operate, requires expensive replacement parts earlier than anticipated, operating costs rise, and CFADS falls.
When operational cash flow drops, the project’s Debt Service Coverage Ratio (DSCR) shrinks. If that ratio falls below the minimum threshold agreed in the financing documents, the project breaches its financial covenants.
Underperformance does not just mean lower dividends for equity sponsors. It triggers lender intervention.
When covenants are breached, lenders have the contractual right to:
Trap cash in reserve accounts
Initiate cash sweeps to forcibly prepay debt
Suspend distributions to equity until the project recovers
Step in and take over management of the project entirely
To attract institutional capital in the first place, you must prove that you have a comprehensive, credible strategy to manage the asset’s lifecycle in a way that delivers the promised cash flows.
This strategy must reflect realistic operating costs and rigorous maintenance schedules for a facility that will generate the cash flows required to service debt and provide an equity return for 10, 15, 25 years or even longer.
Who Is the Operator?
To manage the operational phase, the project company must assign responsibility for the day-to-day running of the facility, covering the operations and maintenance of the asset.
In a typical project finance structure, the Special Purpose Vehicle is a shell company. It is legally isolated to ring-fence risks, but it rarely possesses the deep managerial, technical, and human resources required to physically run a complex power plant, toll road, water treatment facility, or agro-processing hub.
Lenders strongly prefer a creditworthy, contracted third-party operator.
A critical distinction must be made between self-operation and third-party operation under a formal O&M agreement.
Lenders will want the SPV to enter into a formal Operations and Maintenance Agreement with a specialised company that takes on the contractual obligation to meet defined performance standards.
This preference exists for two clear reasons:
Technical expertise. A dedicated O&M contractor brings specialised domain knowledge, standardised operating procedures, and economies of scale in spare parts and technical personnel. They have encountered and resolved the exact failures your specific asset type will face.
Financial accountability. A formal O&M agreement creates a single point of responsibility. It allows the SPV to transfer the risk of operational inefficiencies to a party with the financial capacity to bear penalties if things go wrong. If the operator fails to perform, the SPV can enforce liquidated damages to cover lost revenue and protect lenders’ debt service.
What the O&M Agreement Must Contain
The O&M agreement is the contractual document that underpins how to keep the project running through its operational life. To pass investor due diligence, this agreement must be robust, equitable, and precisely aligned with the assumptions in the financial model.
A bankable O&M agreement must contain the following:
A Clear Scope of services: The agreement must explicitly define what the operator is expected to do. This covers routine daily operations, preventive maintenance schedules based on equipment manufacturer guidelines, corrective maintenance procedures for unexpected breakdowns, site security, waste management, and administrative reporting. Ambiguity here carries the same risk as ambiguity in an EPC scope of works.
Performance standards and KPIs: The contract must establish strict, measurable Key Performance Indicators that mirror or exceed the technical assumptions in the project’s financial model. For a renewable energy project, this includes guaranteed plant availability and performance ratio. For a toll road, lane availability and incident response times. For a cold storage facility, temperature consistency and energy consumption benchmarks. What the model assumes, the contract must require.
Fully or Partially Fixed Fee structures: Lenders generally prefer a fixed fee structure combined with a variable fee linked to output or verified performance. Pass-through structures, where the SPV simply reimburses the operator for all costs incurred, are strongly discouraged. They remove every incentive for the operator to be efficient and make operating costs impossible to cap in the financial model.
Balanced Incentive and penalty mechanisms: The agreement must include financial consequences in both directions. If the operator exceeds availability targets and generates additional revenue, they receive a performance bonus. If the operator fails to meet guaranteed KPIs due to negligence or poor maintenance, they pay performance liquidated damages sized to compensate the SPV for revenue lost during the period of underperformance.
Step-in rights for lenders: Through a Direct Agreement, lenders must have the right to step into the O&M contract if the SPV defaults on its loan obligations. This allows lenders to cure the default, keep the operator working, and maintain the revenue stream without the operator walking off-site. It also gives lenders the right to terminate and replace a poorly performing operator.
Reporting obligations: The operator must provide regular, detailed reports on operational performance, environmental compliance, and health and safety metrics. These reports allow the SPV, the sponsor, and the lenders to monitor the asset proactively and address minor maintenance issues before they become costly failures.
Term alignment with the financing period: The duration of the O&M contract should ideally cover the entire tenor of the senior debt. Lenders want the comfort of knowing a competent, contracted operator is in place for as long as the loan is outstanding.
Transition provisions from EPC contractor to operator: The contract must define exactly how the facility will be handed over from the construction contractor to the operator, including training protocols, transfer of operating manuals, and how the operator will interact with the EPC contractor during the warranty period.
The Transition from Construction to Operations
The handover period between the EPC contractor and the O&M operator is one of the most technically and commercially exposed moments in the entire project lifecycle.
New infrastructure is very vulnerable during the first 12 to 24 months of operation. New equipment settles. Integration issues are discovered. Operators learn the specific nuances of the plant. Failure rates are higher during this period of the operational life of the asset.
This reality demands meticulous operations readiness planning. The project team cannot wait until the final day of construction to hire and mobilise the O&M team. The operator should be on site months in advance, observing final stages of installation, participating in commissioning, and receiving direct training from original equipment manufacturers.
During this transition, several specific mechanisms protect the project:
The punch list: When the EPC contractor applies for the Provisional Acceptance Certificate, the facility is substantially complete but not perfect. The punch list catalogs all minor defects, missing items, and adjustments the EPC contractor must remedy before Final Acceptance. Managing the punch list actively is the project company’s responsibility, and it must not be delegated to the incoming operator without clear protocols.
The Defects Liability Period: Typically lasting 12 to 24 months after provisional acceptance, the DLP requires the EPC contractor to return to site and repair any latent defects or equipment failures at their own cost. The O&M agreement must define precisely how the operator identifies defects and coordinates with the EPC contractor to enforce warranty claims without inadvertently voiding them through improper maintenance.
The Independent Engineer: The IE acts as the ultimate referee during this period on behalf of lenders. The IE must physically inspect the site, verify that performance tests were conducted legitimately, certify that the punch list is manageable, and officially sign off on the transition to commercial operations. Without the IE’s certification, lenders will not release the project from the construction financing phase into operations.
Operator Creditworthiness Is Also Important
Just as with the EPC contract and the EPC contractor, a well-drafted O&M agreement is useless if the operator lacks the capacity to perform or the financial strength to back their performance guarantees.
Institutional investors will scrutinise operator creditworthiness with the same intensity applied to the contractor. They will demand:
A verifiable track record: of operating similar technologies in comparable geographic and political environments. An operator whose only experience is managing diesel generators in an urban centre will not satisfy lenders on a 50MW solar plant in a remote corridor.
Financial capacity: sufficient to absorb the liquidated damages that could become payable in the event of a major plant shutdown. The operator must have the balance sheet to honour the obligations the contract assigns to them.
A Parent Company Guarantee: where the operating entity is a local subsidiary of a larger firm, ensuring the ultimate corporate parent stands behind the subsidiary’s technical and financial obligations.
Risk allocation is entirely pointless if the counterparty cannot financially bear the obligations assigned to them.
Another Fox in the Henhouse: When the Sponsor Is Also the Operator
In many infrastructure projects, the project sponsor also serves as the O&M operator. Developers often invest equity into a project specifically to secure the long-term, steady cash flows that the O&M contract provides. This keeps institutional knowledge of the asset intact and can align the sponsor’s interests with the physical health of the facility.
But it introduces a conflict of interest that needs to be taken seriously.
The concern is straightforward. A sponsor-operator might negotiate an O&M agreement with above-market fees, weak performance guarantees, and low liability caps, effectively extracting guaranteed cash from the project through operating fees while leaving lenders to bear the consequences if the project struggles to service its debt.
Furthermore, if the sponsor-operator performs poorly, the SPV board, which is controlled by the same sponsor, is unlikely to enforce penalties or terminate the contract.
To make this arrangement bankable, lenders demand three specific protections:
Arm’s length benchmarking: The proposed O&M fees must be independently benchmarked against prevailing market rates. The sponsor cannot use their board position to force through fees that a market-rate operator would not command. In shareholder agreements, they may be excluded from voting or allow their votes to be vetoed on issues relating to the operations of the asset.
Independent performance monitoring: The lenders will retain the Independent Engineer throughout the operational phase to conduct annual technical audits, verifying that the sponsor-operator is performing the required maintenance and not cutting corners to preserve margins.
Governance firewalls: The shareholder agreement must ensure that in the event of severe operational default, lenders or non-sponsor equity partners have the voting power to terminate the sponsor’s O&M contract and bring in an independent replacement.
O&M Bankability for Smaller-Scale Projects
For readers building smaller-scale projects with capital expenditures in the range of 1 million to 15 million US dollars, Solar mini-grids, Small cold storage and agro-processing facilities, Community water treatment plants, Light manufacturing units. Localised logistics hubs, as with EPC, scale is different, expected discipline is not.
Investors will still assess operational discipline at this scale. Here is what they expect, applied proportionally:
A documented operations scope and plan: A clear description of how the facility will be run, by whom, with what staffing structure, and against what performance targets. A verbal arrangement with a local technician is not sufficient. A written service level agreement with defined scope, response times, and performance expectations is the minimum standard.
A credible local operator with a verifiable track record: The operator does not need to be an international firm. But they must be able to demonstrate that they have operated comparable assets successfully. References, site visits to facilities under their management, and evidence of technical competency are the baseline.
Remote monitoring and technology: For distributed or remote assets, remote monitoring systems, smart meters, and centralised dashboards are increasingly non-negotiable. They allow a small technical team to monitor multiple sites simultaneously and deploy field personnel only when the data signals a problem, reducing operating costs significantly.
A maintenance schedule tied to manufacturer specifications: Even at a small scale, lenders expect documented preventive maintenance schedules based on OEM guidelines, not improvised responses to breakdowns.
A defects liability period in the construction contract: The construction contractor must remain obligated to remedy failures at their own cost for a minimum period after handover, typically 12 months, and the O&M arrangements must clearly define how defects are identified and notified during this window.
Retention of a small operating reserve: Even a modest cash reserve set aside to cover unexpected maintenance costs or periods of reduced revenue protects the project’s ability to service its obligations and signals operational maturity to lenders.
Capacity building for local community members: Training community members to handle basic tier-one maintenance tasks reduces dependence on external technical resources, lowers operating costs, and builds the kind of local goodwill that reduces social risk over the long term.
Bringing It All Home
Off-take agreements with a credible offtaker protect objectively assessed demands and lock in the revenue through binding commercial agreements.
EPC contracts with a credible EPC contractor protect the construction of a well-designed asset.
O&M contracts with a credible O&M partner protect the cash flows promised to investors.
Lenders are not funding a construction project. They are funding a revenue stream that is expected to flow reliably for years. Everything that threatens that revenue stream, during construction or during operations, is a financing risk.
The O&M agreement is how you address the operational dimension of that risk.
To developers reading this: you cannot treat operations as something you will figure out after the keys are turned.
The operator selection, the O&M agreement, the transition plan, and the performance framework should all be in advanced preparation before financial close.
Lenders will ask for all of these during due diligence to assess performance risk.
The O&M agreement does for the operational phase what the EPC contract does for the construction phase. It names the party responsible for performance, defines what performance means, establishes what happens when it falls short, and gives lenders the direct rights they need to intervene if the project is at risk.
Build that agreement with the same rigour you brought to your off-take and EPC contract.
That is how you prove to institutional investors that you are not simply a developer who closes deals, but a developer who builds assets that perform and deliver promised cash flows.
Reviewed to Complete This Note
Project Finance in Theory and Practice Designing, Structuring, and Financing Private and Public Projects, 4th Edition - Stefano Gatti
Principles of Project Finance - E.R. Yescombe
Managing Infrastructure Projects 2nd Edition - Willie Tan
Notes on Project Development — For Project Bankability, Protect Demand in Commercial Agreements. Ebun Mesaiyete
Notes on Project Development — Protect Construction: Master the EPC Contract for Project Bankability. Ebun Mesaiyete, April 2026.
Notes on Project Development — Ebun, Explain It to Me Like I’m 5: What Really Makes a Project Bankable? Ebun Mesaiyete
Notes on Project Development — CFADS to Cash Sweeps: Decoding Debt in Project Finance. Ebun Mesaiyete
Notes on Project Development — The Ink Is Dry on the Financing Agreements. What Now? Ebun Mesaiyete
Notes on Project Development — The Developer’s Guide to Managing Risks on Solar Mini-Grid Projects. Ebun Mesaiyete