53454 Project Finance and Guarantees Project Finance & Guarantees Department January 2003 Private Sector and Infrastructure Vice Presidency IDA Guarantee supports first competitively-bid private power project in Vietnam IDA provided its first Partial Risk Guarantee The project will deliver power to EVN at US (PRG) for Vietnam in support of the Phu My 2 cents 4.1/kWh (including fuel costs based on gas Phase 2 Power Project. This is the first private price agreed with PV) on a levelized basis over infrastructure BOT project launched under an the life of the project. internationally competitive bid in Vietnam, and it is expected to set the framework for future Project Background Asia Pacific Power Deal private sector infrastructure developments in the of the Year 2002 country. Under the Power Development Project (CR " It is a significant deal in 2820-VN), IDA helped finance the 1st phase of a difficult market." The Phu My 2.2 is a 715-MW gas-fired power the Phu My 2 power project as a public project; project to be built, owned and operated by and financed technical assistance for the Mekong Energy Company Ltd. (MECO), a development of the 2nd phase as a BOT project. Project Finance project company established by the private The government issued the Request for Proposals International sponsor consortium of EDF International (EDFI in late 1997, and offered an IDA PRG of up to 56.25%), Sumitomo Corporation (28.125%) and US$75 million in support of commercial debt Tokyo Electric Power Company (TEPCO) financing as an option to the bidders. Five International (15.625%). With the total financing international bidders indicated their intention to requirements of US$480 million, it is the first use the IDA PRG option in their offers. The Best Project Finance Deal project in Vietnam with a limited recourse EDFI-led consortium was awarded the project in of the Year 2002 financing package of such a significant size. The January 1999; key project documents including project achieved financial closure in December the BOT Contract were signed and the Investment 2002 and is expected to start commercial License was issued in September 2001; and the Finance Asia operation by the end of 2004. financing documents were signed in October & Asiamoney 2002. The closure of this deal highlights the The Project interest of the government in promoting private projects in key infrastructure sectors such as The project is located in the Phu My Power power generation. Generation Center in Ba Ria ­ Vung Tau (BR- VT) province, 70km southeast of Ho Chi Minh Vietnam Power Sector City. It will be implemented under a 20-year BOT Contract. The project will sell power exclusively Electricity demand in Vietnam has increased at to state-owned Electricity of Vietnam (EVN) about 14% per annum over the period of 1995- under a 20-year Power Purchase Agreement; and 2000. In 2002 Vietnam had an installed capacity will be fueled by domestic gas supplied by state- of 6195MW, half of which was from owned Vietnam Oil and Gas Corporation or Petro hydropower plants. It has a system reserve Vietnam (PV) under a 20-year Agreement for the margin of about 8% in the dry season, leading to Sale of Natural Gas. The gas will be sourced load shedding and brownouts. To sustain the from the Nam Con Son Basin gas fields jointly projected economic growth of about 6-8% per owned by private developers and PV; and will be annum over the medium term, the country needs transported onshore by the new 400km gas to increase its electricity supplies at the rate of pipeline under construction. Power generated by about 10-14% per annum. The government has the project will be evacuated through the existing decided to promote private sector participation as transmission system augmented by the new part of its strategy to address the need for 500kV transmission line being constructed by increased power generation capacity required to EVN. sustain economic growth and reduce poverty. Project Finance Retail electricity tariffs, currently uniform across Vietnam, are set by the government and have electricity by MECO to EVN for 20 years on the basis of a two-part tariff payable in Dong. The and Guarantees been raised periodically since 1992. Average Capacity Charge consists of a Fixed Capacity January 2003 retail tariffs were raised to US 5.6 cents/kWh in Charge (FCC) and a Fixed O&M Charge; the October 2002 and are expected to be gradually Energy Charge covers a Fuel Charge (FC) increased to achieve US 7.0 cents/kWh, close to payable to PV and a Variable O&M Charge. long run marginal cost for the sector, by 2005. FCC, FC and portions of O&M Charges are indexed to the US dollar; and FC and O&M Financing Structure Charges are escalated to take account of inflation. Financing Plan $ million The total financing requirement for the project is · Agreement for the Sale of Natural Gas Debt estimated at US$480 million, including stand-by (GSA) between MECO and PV provides for the IDA PRG Loan 75 ADB GOR+Private PRI 25 financing of US$80 million, which is financed supply by PV of all of the gas requirements for ADB Loan 50 with debt of US$340 million (base debt of the project and MECO's obligations to purchase JBIC Loan 150 US$300 million; stand-by debt of US$40 million) a minimum quantity of gas from PV for 20 years. Proparco Loan 40 and sponsor equity of US$140 million (base The project is expected to consume about Total Debt 340 equity of US$100 million; stand-by equity of 0.85bcm of gas per year. Gas prices are paid in US$40 million). The debt equity ratio would be Dong but indexed to the US dollar and escalated Equity 75:25 for the base project costs; and the at a fixed rate of 2% per annum. Equity 140 contingent financing would be disbursed on the Total Sources 480 basis of a 50:50 ratio. · Water Supply Agreement (WSA) between MECO and BR-VT provincial Water Supply The debt facility consists of: two commercial Company (WSC) defines the supply of potable bank tranches, the US$75 million IDA and process mark-up water for the power station guaranteed loan and the US$25 million loan with by the WSC. ADB as the guarantor of record covered by private political risk insurance (PRI); US$50 · Land Lease Agreement (LLA) between million ADB direct loan; US$150 million JBIC MECO and the Urban Development Construction loan; and US$40 million Proparco loan. The Company (UDEC) of BR-VT province sets out commercial bank debt facilities including the the land to be leased, rent free, and provides for IDA guaranteed loan were arranged by ANZ the Certificate of Right to Use Land issued to Investment Bank, Société Générale and MECO. Sumitomo Mitsui Banking Corporation. The IDA guaranteed loan has a 16-year maturity · Government Guarantee between MECO and including a 2-year construction period. MPI. MPI on behalf of the government guarantees the performance of responsibilities Contractual Framework and obligations of each Vietnamese contractual party to MECO, including payment obligations, Key project agreements with Vietnamese under the BOT Contract, PPA, GSA, WSA and counter-parties are as follows: LLA. It also guarantees the availability, convertibility and transferability of foreign · Investment License (IL) issued by the exchange; permits off-shore accounts for project Ministry of Planning and Investment (MPI) sets financing. out the terms of the license and provides for the establishment of MECO. · Key contractual arrangements among private parties include the following: · BOT Contract between MECO and the Ministry of Industry (MOI) defines the rights and · EPC Contract between MECO and EDF- obligations of the parties. Under the contract, CNET, an engineering department of EDF. It MOI grants MECO the exclusive right to provides for a fixed price, date certain turnkey construct, own and operate the power station on completion for the entire power plant. the site. MECO will transfer the ownership of the plant to MOI free of charge at the end of the term · Technical Services Agreement for of 20 years from commercial operation of the Operations and Maintenance between MECO project. and EDF and TEPCO, under which EDF and TEPCO will provide technical services to assist · Power Purchase Agreement (PPA) between MECO in operations and maintenance. MECO and EVN provides for the sale of · Long Term Services Agreement between any payments made under the Guarantee Project Finance MECO and GE International, the major Agreement. and Guarantees equipment supplier. It provides for technical January 2003 support until the first major overhaul in year six. Benefits of the Guarantee IDA Partial Risk Guarantee · The IDA guarantee helped Vietnam in mobilizing private financing for infrastructure The IDA PRG guarantees commercial lenders development to supplement limited public against default in scheduled debt service resources. The successful financial closure of Phu payments of principal and interest resulting from My 2.2 through the deployment of the IDA PRG the government's failure to meet its payment is an important milestone for attracting further obligations (both periodic payments and private capital flows to the country. termination amounts) under the BOT Contract or Government Guarantee. The guarantee is non- · It helped mobilize long-term debt accelerable: in the event the project is terminated substantially beyond prevailing market terms for as a result of a government default, IDA would the country, contributing to the achievement of be called on to make payments only according to competitive generation tariffs. the original debt service schedule. The IDA Guarantee excludes coverage of government · It catalyzed co-financing of over $400 obligations arising in connection with a MECO million. IDA support was only US$75 million event of default. (15.6%) of total project financing. The principal categories of risks covered under the IDA PRG are as follows: For more information on the Phu My 2 Phase 2 · Breach of Contract by the government with Power Project IDA PRG, please contact: respect to its payment obligations under the BOT Contract and Government Guarantee relating to Suman Babbar, Senior Adviser, or the purchase of power by EVN, the supply of gas Tomoko Matsukawa, Senior Financial Officer, by PV, etc. Project Finance & Guarantees Department Tel: (202) 473-2029 or 473-1225 · Currency convertibility and transferability Fax: (202) 522-0761 relating to the government's undertaking to make Sbabbar or Tmatsukawa@worldbank.org sufficient foreign exchange available for local currency conversion and repatriation of debt service payments. · Vietnam political force majeure events and change in law negatively affecting the project; and expropriation. · Frustration of arbitration relating to action by the government or third parties to frustrate the dispute resolution process. The Guarantee Agreement with the lenders defines the scope of IDA's risk coverage and the trigger mechanics of the guarantee. IDA entered into the Project Agreement with MECO, under which the company covenants that it complies with World Bank environmental guidelines and other applicable requirements. IDA charges a guarantee fee of 75bp per annum on the outstanding principal amount of the guaranteed loan, payable by MECO. In parallel, IDA and Vietnam concluded the Indemnity Agreement, under which the state counter guarantees IDA for Project Finance IDA Partial Risk Guarantee for and Guarantees Vietnam: Phu My 2 Phase 2 Power Project January 2003 Contractual Structure IDA Indemnity Agreement EVN Government of Vietnam World Bank Investment License IDA Power Purchase BOT Contract IDA Project PRG Guarantee Agreement Government Guarantee Agreement Agreement PV Commercial Gas Supply IDA Guaranteed Lenders Agreement Mekong Loan Agreement ADB GOR Energy Commercial + Private BR-VT Water Company Loan Agreement Lenders EPRI Supply Co. Water Supply Agreement Loan JBIC Agreements EPC ADB Contract Technical Proparco Shareholder Land Lease Services Agreement Agreement Agreement UDEC BR-VT People's EDFI EDF-CNET ED/F TEPCO Sumitomo TEPCI Committee To obtain a copy of the brochure, The World Bank Guarantee: Catalyst for Private Capital Flows, please contact Andres Londono at (202) 473-2326, or by email at alondono1@worldbank.org