1

Nam Theun 2Nam Theun 2

The World Bank Group

2

Ensuring sponsors’ and lenders’ involvement

A double objective: Satisfy sponsors’ requirements in order to secure equity

financing under a limited recourse scheme Meet lenders’ requirements to attract in excess of USD

1 billion of debt financing

The response primarily rests with the alignment of interests of parties as a risk mitigant under a well developed contractual framework

Strong project rationale Adequate risk allocation and sharing

3

A classical project finance structure, but …

The Nam Theun 2 project has a standard emerging market power project finance

structure … A SPC (NTPC) to implement the Project on a BOOT

basis under a limited recourse finance scheme A turnkey construction contract A Concession Agreement with the Govt of Laos A main PPA with EGAT as offtaker and a PPA with EdL

…but some challenges to overcome

… but combines a few specific and innovative features in response to various

challenges

4

Nam Theun 2 Power Company Limited (“NTPC”) is a Lao company established in Aug. 2002 by :

35% EDF International (EDFI)

25% Electricity Generating Public Company Limited (EGCO)

25% Government of the Lao PDR (GOL)

15% Italian-Thai Development Public Company Limited (ITD)

EDF is acting as Head Contractor, managing three Civil Work subcontracts and two Electromechanical Works subcontracts.

EDF & EGCO are also providing personnel & technical assistance

A classical project finance structure …

experienced sponsors have brought their development expertise

experienced sponsors have brought their development expertise

5

Meeting lenders’ requirements under an acceptable project framework, risk allocation & timeframe

2004-05 prevailing financial market conditions were attractive

high liquidity in bank market, relatively low interest rate environment & few good power projects in the region to attract investments

but Lao risk assessment led to full political risk cover requirement from Lenders & standard emerging market contractual risk allocation

Sponsors require effective financing phase management and timely completion of financing plan

the project financing plan was clear and adequately structured from the outset, project agreements were detailed and based on international standards

these conditions, under proper management, contributed to a smooth and relatively brief financing phase (15 months)

Timely project development is possible with appropriate expertiseTimely project development is possible with appropriate expertise

6

Designing a financeable contractual

framework

7

The response: documentation & risk allocation consistent with international

practice All standard risk allocation requirements are

addressed in the Concession Agreement and the PPA

Obligations of host government conformed to standard practice Force Majeure and compensation protection Termination and associated compensation Allocation of land and associated rights Tax incentives and dividend repatriation

The Concession Agreement also addresses specific issues to enhance the existing regulatory framework

List and agreed forms of Governmental approvals Granting of security rights and direct agreement Applicable laws and exemptions to laws

International practice to be followed to meet sponsors’ and lenders’ expectations

International practice to be followed to meet sponsors’ and lenders’ expectations

8

The response: detailed E&S plans allocating responsibilities

The E&S dimension of the project had to be properly addressed to enable project financing: costs, contingencies, liabilities to be clearly expressed to avoid uncertainties or direct recourse to shareholders

A satisfactory E&S structure underpinned by: Founder E&S documents

Concession Agreement (CA) SESIA, EAMP, SDP (incl. RAP), SEMFOP, CIA

Wrap up of E&S obligations, breaches, remedies & defaults in the finance documents

On-going monitoring and progressive and adaptive joint implementation carried out by the Govt of Laos and NTPC through coordination with the IFIs.

E&S obligations back-stopped by bonds in favour of the Govt of Laos USD 16.5 m. of letters of credit financed under the Project finance

plan

9

Emphasis on specific issues of lenders’ due diligence in an hydro project

During construction Specific civil works, e.g. tunnelling Specific construction critical path

To assess appropriate level of contractor’s liabilities

During operation Reliability of hydrology regime Relationship between hydrology,

operating regime and revenues

To assess certainty of take or pay structure

Lenders’ due diligence has departed from usual issues scrutinised in conventional thermal IPP projects.

Access tunnel

Power house

Water intake

Proper risk allocation and contractual documentation allows financeability

Proper risk allocation and contractual documentation allows financeability

10

Structuring a bankable

financing plan evolving around MLAs and local

funding

11

A suitable response to allow a smooth financing phase

The finance plan is built on a limited recourse project finance scheme

Substantial financing amount required: raising USD 1,581 million eq. in a country without access to commercial funding

The Project finance plan revolves primarily around MLAs, BLAs and ECAs to allow the Project bankability given

the quantum of financing required the perceived sovereign risks Laos unproven track record re. private investments

Strong involvement of Thai commercial banks to allow local currency funding and mitigate forex risk

detailed finance plan and documentation proposed to the Lenders enabled a smooth due diligence phase

detailed finance plan and documentation proposed to the Lenders enabled a smooth due diligence phase

12

A financing structure to match the Project economics

Equi

ty

USD

Deb

t

THB

Deb

t

Con

tinge

nt D

ebt

USD

Con

tinge

nt D

ebt

THB

Bond

ing

Deb

tFa

ciliti

es

Con

tinge

nt E

quity

350

450 450

50 50

131.5100

Total Base Financing

= USD equiv. 1,250

million

Contingent Financing and

Bonding Facilities

=

USD equiv. 331.5 million

Equity Equity CommitmentCommitment

US$ 450 million

USD DebtUSD Debt

US$ 500 m.

THB DebtTHB Debt

THB 20,000 m.

(USD 500 m. equiv)

Bonding Debt Bonding Debt FacilitiesFacilities

USD 131.5 m.

The funding structure matches the cost and revenue profiles (½ THB - ½ USD)

Contin-gent debt & equity funding can cope with a 12-month delay scenario

a natural hedge is provided against foreign exchange risk a natural hedge is provided against foreign exchange risk

13

A requirement for MLA support

Early market sounding has shown expectations from ECAs and commercial banks for a strong IFI / World Bank involvement in the Project

to ensure compliance with highest E&S standards

to share or cover political risk Involvement of the World Group from 1995 substitution of MIGA for IFC due to lack of

attractiveness of “B” loans post Asian crisis

Involvement of the ADB from 2002ADB and MIGA provide pioneering dual-country PRI to accommodate the cross-border nature of the deal

14

Diverse ECA, MLA and BLA & Thai commercial banks participation

World Bank Group and ADB were joined by ECAs upon selection of the electro-mechanical equipment suppliers

Coface (France) EKN (Sweden) GIEK (Norway)

and a MLA, Nordic Investment Bank and by other institutions to complete the finance

plan AFD (French Agency for Development) Proparco (subsidiary of AFD) Thai Exim

All these institutions act as either PRI providers (PRI and commercial risk cover from ECAs) or direct lenders.

Commercial facilities were allocated to 7 Thai banks and 9 international banks on a club-deal basis.

7 Thai commercial banks provide in THB half of the long term loan facilities, and together with Thai Exim, all of the US$131 m. long term L/Cs

Coface is fronting the insurance for EKN &

GIEK under a reinsurance scheme

15

A resulting complex financing structure …

The finance plan comprises 27 financial institutions: 5 MLAs; 4 ECAs; 2 BLAs; 16 Thai & international commercial banks.

d. to d. tenor: USD 16.5 yrs THB 15 yrs

i.e. up to 12 year repayment

… but detailed preparation enabled timely financial close … but detailed preparation enabled timely financial close

16

The Project….

US$ 1.45 billion,1070 MW project in Lao PDR, the largest ever foreign investment in the country.

The project is being implemented by Nam Theun 2 Power Company limited (NTPC), which was established as a limited liability company.

As part of the Concession Agreement (CA), NTPC will develop, finance, construct and operate the plant system.

After a period of 25 years, the plant will revert back to the Government of Laos (GOL).

NT2 will primarily export electricity to EGAT of Thailand. About 5% would be for domestic use.

17

Background….

Project identified in the 1980s. Concession awarded in 1993. Project subject to a long anti-dam campaign. Project preparation discontinued following Asian

financial crisis (1997). Preparation resumed successfully in 2001 when the

parties agreed on a mutually binding set of actions to reach financial close.

Since 2001, extensive due diligence has been undertaken by project participants.

Took about 4 years of preparation (2001-2005) Financial Close - June 15, 2005.

18

Challenges faced in Financing NT2….

Largest private financing in the region at the time. Non-availability of US$ debt (about 500m) w/out cover.

– Export Credits– Political Risk Guarantees– Direct US$ loans– EGAT credit risk– Tenors and pricing

Availability of THB debt (about US$ 500m equivalent).– Non availability of long-term fixed-rate debt– Project location outside Thailand

Cross Border Risk. Funding for GOL Equity (about US$ 90m); HIPC.

19

Bank Group Support….

IDA Grant– To finance E&S expenditures (as GOL Equity in

NTPC) IDA Guarantee

– To mobilize private capital by mitigating Lao PDR political risks

– Covered GOL obligations under project documents IDA Credit to GOL for associated impacts – LeNs MIGA guarantee

– Covered key Thai & Lao political risks

20

World Bank key Due Diligence comprised…

Safeguards – Environment Management, Social Development & Resettlement Plans

Economic/Financial – Financing and Economic viability, Power Sector Analysis – Laos and Thailand, Regional Economic Least-Cost Analysis

Procurement Review Study of Alternatives Economic Impact Study Technical – DSRP Reports, Feasibility Studies Commercial Due Diligence – PPA, CA, SHA, other

Financing Docs

21

Key Lessons Learnt...for large Hydros

Long arduous negotiations on the Concession. Concession deemed “fair” by all partiesConcession deemed “fair” by all parties.– Inclusion of detailed E&S obligations in concessions could

be replicated in future large infrastructure projects. Due Diligence should be of high qualityDue Diligence should be of high quality.

– Fine balance between requirements and cost implications.

Common E&S regimeCommon E&S regime acceptance by all lenders and guarantors facilitates project implementation.

– Harmonization of IFI safeguards requirements is a replicable innovation.

22

Thank YouThank You

Suman BabbarSuman Babbar

Finance & GuaranteesThe World Bank Group

www.worldbank.org/guarantees

23

Contractual Structure

LHSE EGCO EDFI

Nam Theun 2 Power Company

Shareholders Agreement & Equity

Head Construction Contract

EM1 & EM2 CW1, CW2, &

CW3

Construction Sub-Contracts

GOL EGAT EDL

EGAT PPA

EDL PPA

Concession Agreement

Technical Services and Management Services

Agreements

GOL Undertaking

ITD

ECAs

MIGA

Loans

PRG / PRI

ESCO Multilateral & Bilateral Agencies

US$ Banks

World Bank

THB Banks

EIB

ADB

GOL Equity Funding

AFD

EDF

Shareholders’ Agreement

Coverage

24

Global Financial Stake in NT2

WB (US$ 62 million); MIGA (US$ 42 million); ADB (US$ 110 million)

EIB and NIB (about US$ 85 million) European ECA’s (US$ 200 million) French Development Agencies (US$ 60 million) Nine International Dollar Banks (US$ 500 million) Seven Thai Commercial Banks (US$ 500 million

equivalent) Thai Exim (US$ 30 million)

Excluding Private EquityExcluding Private Equity

25

Nam Theun 2: Financing PlanUses of Funds THB Millions USD Millions Total USD Million EquivalentDevelopment Costs 80 72 74Environmental/Social Costs 0 49 49Head Construction Contract 12,847 401 722Financing Costs 4,271 144 250NTPC General and Administrative, incl. Working Capital 414 36 46Pre-operating and Other Costs 568 94 109Total Base Costs 18,180 795 1,250Contingencies 0 200 200Total Project Cost 18,180 995 1,450

Sources of Funds THB Millions USD Millions Total USD Million Equivalent

Equity EDFI 67 121 122 ITD 29 52 52 EGCO 48 86 87 GOL 48 86 87Contingent Equity 0 100 100Total Base Equity 192 345 350Total Project Equity 192 445 450DebtThai Commercial Lenders 20,000 500Commercial Loans covered by ECA's - Coface, GIEK and EKN 200 200Commercial Loans covered by ADB PRG 42 42Commercial Loans covered by IDA PRG 42 42Commercial Loans covered by MIGA Guarantees 42 42Thai Exim Bank 30 30Nordic Investment Bank 34 34ADB OCR Loan 50 50AFD 30 30Proparco 30 30Total Debt 20,000 500 1,000

Total Project Financing 20,192 945 1,450

26

Using IDA PRG to mobilize private debt financing……..

NTPC (SPV)

GOLEquity

PrivateEquity

EGAT(primary offtaker)

Government of Laos(as concessionaire)

THB & non-WBGuaranteed

US$ Commercial Debt

WB GuaranteedUS$ Debt

Limited GOL PerformanceObligations• Permits, Consents• Change in Law• Political FM• Termination of the CA

PPAPPA CACA

CTACTA

IDAIDAGuaranteeGuaranteeAgreementAgreement

SHASHA

IDAIDAIndemnityIndemnityAgreementAgreement

IDAIDAProjectProjectAgreementAgreement

27

Using IDA Grant to finance E&S expenditures (as GOL Equity)……..

LHSE

Lenders

NTPC

IDA

MOF

Loan andShareholdersAgreement

DevelopmentGrant

Agreement

NTSEPProject

Agreement

ShareholdersAgreement

GOL SpecialAccount

Drawdown Request / Withdrawal Application

Finance Documents/Agreements

Flow of Funds

EquityContributionAgreement

TripartiteAgreement

(disbursementarrangements)

Key

28

Key Lessons Learnt...for large Hydros

PRG Lenders were made accountable for Prohibited Lenders were made accountable for Prohibited Activities undertaken by Company and/or Head Activities undertaken by Company and/or Head ContractorContractor.

PRGs provide appropriate risk mitigationPRGs provide appropriate risk mitigation for large private hydropower schemes.

– Political risks– Cross border risks

Optimization of the Financing PackageOptimization of the Financing Package is essential.– Over-commitment by lenders/guarantors– Over 25 project participants– Number of overlapping institutional requirements– Inter-guarantor and lender coordination

29

Rationale for Bank involvement

The project generates revenues (US$ 80 million on average), through socially and environmentally sustainable development of NT2’s hydropower potential.

NT2 revenues finance Lao PDR's poverty reduction and development strategy, key elements of Lao PDR's NGPES and the GOL’s MDG targets in 2015 (about 3% to 5% of gross revenues).

The use of NT2 revenues for these purposes was envisioned in the Decision Framework agreed between the GOL and the Bank in 2001 and reiterated in the Government's Letter of Implementation Policy (GLIP) in 2005.