ProjectFinance 35904 andGuarantees June 2005 ProjectFinanceandGuaranteesGroup IDA Guarantee Paves Renewed Interest in Private Hydropower ­ the Nam Theun 2 Project Largest Cross Border Project Financing in East Asia Since 1995, the development of the Nam Theun 2 internationally financed IPPs in Asia since the 1997 hydropower project (NT2) has been a top priority for financial crisis. NT2 also represents a significant step the Government of Lao PDR (GOL). On June 10, in the cooperation between Laos and Thailand. Its "The NT2 proposals taken as a whole represent a promising 2005, NT2, with an estimated cost (excluding commercial operations are planned to start in late development package for Laos: contingencies) of US$ 1.25 billion reached Financial 2009. the net environmental, economic Close. The project has been sponsored by Electricité The Project and social benefits substantially de France (EDF) of France, Italian-Thai Development outweigh the downside costs." Public Company Limited (ITD) of Thailand and The Project consists of two key components Electricity Generating Public Company Limited supported by the World Bank Group: (i) a hydropower The International Advisory (EGCO) of Thailand. facility with an installed capacity of 1,070 megawatts Group (MW), providing 995 MW of power for export to The completion of the NT2 project financing Thailand and an additional 75 MW for domestic use; establishes a number of significant milestones. It is and (ii) management of the project's environmental the largest ever foreign investment in the Lao PDR; and social impacts on the Nakai Plateau, in the NT2 the world's largest private sector cross-border power watershed and in the downstream areas of the Nam project financing; the largest private sector Theun (NT) and Xe Bang Fai (XBF) rivers. hydroelectric project financing; and one of the largest Nam Theun Nakai Dam "Nam Theun 2 has the potential to provide a model for major Nam Theun development projects involving Mekong Power environmental and resettlement Station issues." Independent Panel of Experts XeBangFai Revenues to GOL from the NT2 project, comprising · The implementation of the Social and the Resource Usage Charges (royalties), taxes and Environment Management Framework and First the GOL's share of the project company's dividends, Operational Plan (SEMFOP) for the NT2 watershed are expected to become available at first exports of which comprises the preparation and implementation power to EGAT. Revenues to GOL from NT2 are of land use plans in a participatory manner in the expected to rise gradually in the early years, watershed; design and implementation of programs averaging US$80 million per year over the 25-year to prevent loss of forest cover, wildlife trade and non- life of the concession. It is expected that NT2 sustainable resource use; compensation for revenues will account for between 3 to 5 percent of livelihood impacts due to resource access total revenues to Lao PDR from 2005 to 2020, restrictions; and technical assistance to strengthen "NT2 has long been regarded equivalent to about 60 percent of domestically the capacity of GOL's Watershed Management and by the Government as an financed expenditure on education and health. Protection Agency (WMPA). essential component of the Detailed revenue management arrangements have long-term development plans also been agreed with GOL to ensure that the Contractual Structure for the Lao PDR. The project revenues to GOL from NT2 will be allocated to The NT2 hydropower project is being implemented by has an important role to play in priority expenditure programs for poverty reduction Nam Theun 2 Power Company Limited (NTPC), funding key elements of the and environmental conservation and management. which was established on August 27, 2002, as a National Growth and Poverty limited liability company incorporated under Lao PDR Eradication Strategy (NGPES)." The NT2 hydropower facility comprises a dam 39 meters high and a 450 km2 reservoir on the Nam law. Some of the key contractual agreements are: His Excellency Somdy Theun river and the Nakai plateau. Water from the · The Concession Agreement (CA) signed on Douangdy, Vice-Minister of reservoir would be transferred to an above-ground October 3, 2002 (as amended) between NTPC and Finance of the Lao PDR power station located at the foot of the Nakai the GOL is the basis on which the Government escarpment (a drop of about 350 meters) through an granted NTPC a concession to develop, own, underground shaft, from where it would be finance, construct, and operate the hydroelectric discharged into a regulating pond and a 27 kms plant and related facilities, and to transfer the project downstream channel, and then into the XBF river. to GOL at the end of the concession period. The CA The project includes a 130 km, double circuit 500 kV is for a period of 25 years from the Commercial transmission line to the Thai border and about 70 Operations Date under the power purchase kms of a 115 kV transmission line and 220 kV agreement between NTPC and the Electricity connections to the regional Lao PDR grid. Generating Authority of Thailand (EGAT). The CA Four areas are impacted to different degrees by the contains detailed provisions regarding the rights and project: (i) the Nakai Plateau; (ii) the NT2 watershed; obligations of both the GOL and NTPC; in addition to (iii) the downstream area along the XBF river and its provisions normal for this type of a commercial tributaries; and (iv) the area along the lower Nam transaction, it also includes specific detailed Theun river and its tributaries. The environmental and provisions relating to environment and social social mitigation measures that are financed as part mitigation measures to be undertaken by NTPC and of the project will support the following key activities: GOL. · The implementation of the Social Development · The Shareholders Agreement (SA) signed on September 19, 2001 among EDFI, GOL, EGCO, and "We are committed to fully Plan that comprises the design and construction of ITD was acceded to by NTPC following its comply with the NT2 social and resettlement villages for project-affected persons and incorporation in September 2002. The SA, as environmental risk-mitigation the provision of basic infrastructure and social amended, sets out the rights and obligations of the plans, studied and prepared services for affected people on the Nakai Plateau; over 10 years, in accordance Shareholders, provides for the objectives, with the discipline required by · The implementation of the Environmental establishment, management and operation of NTPC, our shareholders and financing Assessment and Management Plan (EAMP) that and agrees on the Articles of Association of NTPC. partners, including the bilateral comprises environmental mitigation measures on the The SA has duration of 45 years from signing. and multilateral development Nakai Plateau and in the downstream areas; and · The Head Construction Contract (HCC) signed institutions." design and implementation of adaptive wildlife management programs on the Nakai Plateau and on April 14, 2005 between NTPC and EDF (the Head Contractor or HC) is a turnkey, price-capped Bernard Tribollet, CEO, water quality monitoring and management programs engineering, procurement and construction contract. NTPC in the reservoir and the downstream areas. The HC in turn has subcontracted the construction works under five principal subcontracts, three relating Technology and Environment Agency (STEA) has to the civil works and two relating to the been set up for coordinating EAMP activities. In Equity Providers electromechanical works. The HC will provide key addition, the Watershed Management and Protection project management and plant operations personnel. Authority (WMPA) will be responsible for ensuring The four subcontractors participating in the five conservation and protection of the NT2 watershed, as subcontracts are ITD of Thailand, Nishimatsu set forth in the SEMFOP. Contracting Company of Japan, General Electric of Project Cost and Financing the USA and Mitsubishi-Sumitomo Electric of Japan ­ all well-known firms with considerable relevant The estimated base cost of the project (excluding any experience in their respective fields. contingencies) is US$1,250 million; of this amount, about US$1,201 million is the cost of the hydro-power · The EGAT Power Purchase Agreement ("EGAT component comprising: (i) the Head Construction PPA") was signed on November 8, 2003 between Contract (HCC) (US$722 million equivalent); (ii) NTPC and EGAT. This is the key contract for the financing charges (US$250 million); and (iii) project under which NTPC shall make available to development and various pre-operating costs EGAT generating capacity of up to 995 MW and (US$229 million). electrical energy of 5,636 GWh per year to be purchased at an agreed tariff on a take-or-pay basis. Overall, NTPC has budgeted US$90.5 million for The EGAT PPA is for a period of 25 years from the environmental and social impact mitigation and Commercial Operations Date and includes provisions compensation program, of which US$45.8 million will detailing the rights and obligations of EGAT and be incurred during the construction phase and will be NTPC, including performance obligations of EGAT financed as capital costs; the remaining US$44.7 and NTPC, Events of Default, Force Majeure and million will be funded out of revenues over the 25- Termination Events. In addition, the EGAT PPA year operating period. NTPC has also budgeted allocates the hydrological risk to EGAT and NTPC US$5.1 million for external monitoring, of which US$3.0 million will be incurred during the Commercial Debt only; GOL does not take any hydrological risk construction phase and have been financed as Providers associated with the project, except as a shareholder in NTPC. capital costs. · The EDL Power Purchase Agreement (or "EDL Environmental mitigation measures have also been PPA") was signed on November 8, 2003 between incorporated within the project's technical designs NTPC and EDL. It defines the obligation of NTPC to (for a regulating pond, river bank protection, aeration make available generating capacity of up to 75 MW weirs and other measures) that represent a capital and electrical energy of 200 GWh per year to EDL to cost of approximately US$60 million. be purchased at an agreed tariff on a take-or-pay The base project cost has been funded 28 percent by basis. The EDL PPA will be for a period of 25 years equity (US$350 million) and 72 percent by debt from Commercial Operations Date under the EGAT (US$900 million). The additional US$200 million of PPA. contingent costs are being financed 50 percent by · The GOL Undertaking between GOL and EGAT equity and 50 percent by debt, on a pari-passu basis. identifies and establishes the parameters and Project equity is being provided by the four framework that are required by all parties to effect a shareholders of NTPC -- EDFI (35%); ITD (15%); smooth transition of the project and the Project EGCO (25%); and Lao Holding State Enterprise Agreements following NTPC default or prolonged Lao (LHSE, a newly created state enterprise to hold PDR Political Force Majeure under either the CA GOL's 25% equity in NTPC). and/or the EGAT PPA. Under the GOL Undertaking, NTPC has also secured US$1,000 million of debt the GOL recognizes that EGAT has certain rights financing for the project, including contingencies. The under the EGAT PPA to step-in and/or purchase the following institutions will provide loans to NTPC project, and that EGAT is able to enforce its security and/or guarantees to private lenders to mobilize the rights against GOL under the EGAT PPA and the CA. debt package for the project: (i) Multilaterals including · The Technical Services and Personnel the World Bank Group (IDA and MIGA); (ii) bilateral Management Contracts include the operating and agencies; and (iii) export credit agencies (ECAs), maintenance arrangements for the project. NTPC will along with a consortium of 14 international private undertake the operation of the project itself, with the commercial banks -- nine international dollar lenders provision of technical support and staffing from EDF and seven Thai lendersi. and EGCO (acting through its subsidiary EGCO Multilateral and Bilateral Support to the Project Engineering & Service Co., Ltd. (ESCO)). Overall, The international dollar lenders to the project four Technical Services and Personnel Management indicated to NTPC that without the availability of Contracts have been entered into by NTPC with EDF adequate political risk mitigation, both in Lao PDR and ESCO. and in Thailand, they would not be able to lend to In addition, GOL has established specialized units for NTPC for the project. Consequently, GOL and NTPC the smooth implementation of the Project. A requested the World Bank to provide risk mitigation to Resettlement Committee has been set up to guide support the international lending package for NTPC. plateau resettlement and downstream livelihoods For a project the size of NT2 located in Lao PDR, programs. A Resettlement Management Unit (RMU) support through the use of multilateral guarantees supports this committee. An Environmental offered the only practical solution. Through Management Unit (EMU), under the GOL's Science, guarantees and modest direct lending, the Uses and Sources of Funds Uses of Funds THB Millions USD Millions Total USD Million Equivalent Development Costs 80 72 74 Environmental/Social Costs 0 49 49 Head Construction Contract 12,847 401 722 Financing Costs 4,271 144 250 Guarantors and Export NTPC General and Administrative, incl. Working Capital 414 36 46 Credit Agencies Pre-operating and Other Costs 568 94 109 Total Base Costs 18,180 795 1,250 Contingencies 0 200 200 Total 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 87 Contingent Equity 0 100 100 Total Base Equity 192 345 350 Total Project Equity 192 445 450 Debt Thai Commercial Lenders 20,000 500 Commercial Loans covered by ECA's - Coface, GIEK and EKN 200 200 Commercial Loans covered by ADB PRG 42 42 Commercial Loans covered by IDA PRG 42 42 Commercial Loans covered by MIGA Guarantees 42 42 Thai Exim Bank 30 30 Nordic Investment Bank 34 34 ADB OCR Loan 50 50 AFD 30 30 Proparco 30 30 Total Debt 20,000 500 1,000 Total Project Financing 20,192 945 1,450 multilaterals and bilaterals (IFIs) were able to use Risk Allocation in the Transaction limited amounts of public resources to mobilize over The Project has been structured as a limited recourse US$1,150 million in limited recourse private funding. financing and the allocation of risks follows the Debt guarantees from IDA, MIGA and ADB are traditional private project financing approach where Multilaterals and supporting about US$126 million of private financing the completion risk ultimately rests with the private Bilaterals to the project and direct loans of about US$144 project company and/or its contractors. The project million from IFIs have also been provided to structure allocates commercial and political risks to NTPC(private shareholders' equity and long-term various parties responsible for specific project private commercial bank debt, including bonding activities -- the plant construction risk rests with the facilities). HC, who has in turn has passed on substantial Government of Lao PDR Equity in the Project portions of that risk to the five subcontractors under lump sum, fixed price subcontracts. The geological LHSE holds GOL's share in NT2. LHSE's base equity risk is shared amongst the HC and the requirements of US$87.5 million is funded by: subcontractors through a target pricing mechanism, (i) an IDA grant of US$20 million equivalent; with the residual risk (negligible when compared to (ii) an Agence Française de Développement (AFD) construction costs) is taken by NTPC. The HC retains grant of Euro5 million (about US$6.5 million); a substantial risk for timely and within budget (iii) an European Investment Bank (EIB) loan of completion of the hydro facility with large amounts of about Euro40 million (of which about US$42.5 million associated liabilities. would be applied to base equity after deducting The Thai political risk associated with the offtake Interest During Construction (IDC)); and arrangements is taken by the private parties, (iv) an Asian Development Bank (ADB) loan of about including the Thai Baht commercial lenders. US$20 million (of which about US$15.5 million would Responsibility for the timely completion of the be applied towards base equity, after deducting IDC). transmission line (in Thailand) that will evacuate the Remaining base equity needs of US$ 3 million will be power rests with EGAT. For a portion of the debt, the funded by the "GOL Contribution" provided by NTPC Thai political risk is also backed by MIGA and ADB to GOL. GOL's contingent equity requirement of guarantees, and ECA cover to private international US$25 million is to be funded by setting aside the dollar lenders. The risk of delays on account of GOL remaining US$25 million of the GOL Contribution to rests with GOL, which is being backed by IDA, MIGA, be paid to GOL by NTPC. ADB and ECAs for the benefit of the private international dollar lenders. Thai commercial banks are uncovered for both Lao and Thai political risks. Allocation of Key Risks* Phase Risks/Obligation NTPC Equity Lao PDRiii IDA PRG Holders, Project Sponsors and Private Participantsii Pre-Construction Project design "We see Nam Theun 2 not as a Pre-construction works project per se, but as a vehicle Financing through which to make Construction Cost overruns considerable progress in the Construction delays effort of poverty reduction." Operation Operation and maintenance Shengman Zhang, Tariffs Managing Director, World Transmission Bank Hydrological "B-period" Tariffs Concession Term Thai Baht devaluation Lao Political force majeure Changes in Lao PDR law Natural force majeureiv Lao ­ Expropriation Thailand Political Force "NT2 is an outstanding Majeure example of infrastructure that Thailand - Expropriation can contribute to both growth *Based on a simple analysis of key Project Agreements. and poverty reduction. The strong regional cooperation we Risk Coverage under the IDA Guarantee World Bank Participation have seen already was and is The IDA Partial Risk Guarantee (PRG) covers a NT2 is one of the few hydropower projects to be essential to its conception and US$42 million commercial debt tranche provided to undertaken based on a BOT scheme under private implementation. Our NTPC by nine (9) international dollar lenders with ownership. It is the first private hydropower cross involvement in NT2 does not stop with the signing of the door-to-door maturity of 16.5 years. The IDA PRG border project to be undertaken for export purposes. guarantee. That is when it backs any debt service default on the covered The World Bank was a catalyst for the successful really starts." tranche resulting from a limited set of activities and financing of NT2 and the project would not have been actions that are under GOL's control. Specifically the possible without the involvement of the World Bank. Jemal-ud-din Kassum, following risks are covered under the IDA PRG: The World Bank's best practice environment and Regional Vice President, · Expropriation by the Lao PDR; social implementation, its economic and financial East Asia and Pacific assessment and transparency principles allowed Region, The World Bank · Timely issuance and renewal of permits for other multilateral and bilateral agencies to support construction and operation; the project. · Change in Laws, taxes and duties regime; The NT2 CA was negotiated considering all of the · Other specific GOL obligations of a sovereign requirements of the World Bank -- it includes nature defined in the CA and other related detailed obligations of all parties supporting the agreements and deemed critical for obtaining project particularly in respect of environment and finance; and social mitigation measures making it a · Natural force majeure events that are beyond the comprehensive document when compared to other control of NTPC and that cannot be insured in the private transactions of similar size and scope. public or private insurance market. "Nam Theun 2 ably NT2 project financing is one of the first large lending demonstrates the use of World The IDA PRG only covers Lao sovereign risks as package that is conditioned upon common Bank Guarantees to support defined in the key project agreements, and does not environmental and social principles that all lenders Public-Private Partnerships for cover any Thai sovereign risks (even though the have subscribed to, i.e. a default by NTPC on infrastructure development." project sells electricity to the Thai utility EGAT and is environmental and social matters will lead to a default subject to the offtake risk arising out of the EGAT under the commercial as well as multilateral and Kathy Sierra, Vice PPA). The PRG is non-accelerable i.e. in case of a bilateral financings. President, Infrastructure, call on the guarantee, the outstanding guaranteed The World Bank loan balance would be paid out as per the underlying NT2 is the largest financing package put together by loan repayment schedule, and the principal payments the private sector in recent years. NT2 PRG is the would not be accelerated. As with other guarantees first IDA Guarantee to support hydropower of similar nature, the IDA PRG does not create any development. NT2 is the first project to use a mix of additional contingent liabilities for GOL since it backs IDA, MIGA and ADB guarantees. About US$ 42 the commitments already made by the GOL in million of IDA PRG achieved about US$ 1.15 billion connection with the project. of private lending and investment, a ratio of 1:28 -- confirming the benefit of World Bank guarantees in mobilizing private capital. It is expected that the IDA PRG will help in establishing a track record for Lao PDR's performance for future private projects. Nam Theun 2 Shareholders' Agreement Contractual Structure GOL Equity Funding LHSE EDFI EGCO ITD ADB MIGA World Bank Shareholders Agreement & Equity PRG / PRI THB US$ Banks Banks Technical Services and Management Services Coverage ESCO Agreements Loans Multilateral & Bilateral ECAs Agencies EDF EIB Nam Theun 2 Power Company Head Construction Concession Contract Agreement AFD Construction EDL EGAT Sub-Contracts PPA PPA EM1 & EM2 GOL CW1, CW2, & Undertaking CW3 EDL EGAT GOL i The US$ senior debt facilities include those covered by political risk guarantees from IDA (World Bank), ADB and MIGA; export credit agency support from COFACE of France, EKN of Sweden and GIEK of Norway; and direct loans from ADB, Nordic Investment Bank (NIB), Agence Française de Développement (AFD), PROPARCO and Export-Import Bank of Thailand. Nine international commercial banks (ANZ Bank, BNP Paribas, Bank of Tokyo Mitsubishi, Calyon, Fortis Bank, ING, KBC, SG and Standard Chartered) and seven Thai commercial banks (Bangkok Bank, Bank of Ayudhya, KASIKORNBANK, Krung Thai Bank, Siam City Bank, Siam Commercial Bank and Thai Military Bank) are providing long-term loans to NTPC. ii Including EGAT as an offtaker; Engineering, Procurement and Construction (EPC) contractors; project lenders and GOL, as a shareholder in NTPC. Some risks may not affect all of the listed parties but only some. iii Excludes risks taken by GOL as an NTPC shareholder. iv Natural force majeure: acts of God, earthquakes, fires, typhoons, etc. For more information on the Nam Theun 2 Hydropower Project and the World Bank's Partial Risk Guarantee, please contact Pankaj Gupta at 202-473-6188 or pgupta2@worldbank.org of the Project Finance and Guarantees Group, The World Bank. To obtain a copy of the brochure, The World Bank Guarantee: Catalyst for Private Capital Flows, please contact Andres Londoño at 202-473-2326 or alondono1@worldbank.org