Nam Theun 2 The World Bank Group

1. Nam 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. A classical project finance structure … • 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 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 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

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 Power house Lenders’ due diligence has departed from usual issues scrutinised in conventional thermal IPP projects. • 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 Water intake Access tunnel 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

12. A financing structure to match the Project economics • 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 Equity Commitment US$ 450 million USD Debt US$ 500 m. THB Debt THB 20,000 m. (USD 500 m. equiv) Bonding Debt Facilities USD 131.5 m. 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 2002 ADB 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 Coface is fronting the insurance for EKN & GIEK under a reinsurance scheme • 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

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

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 parties. • Inclusion of detailed E&S obligations in concessions could be replicated in future large infrastructure projects. • Due Diligence should be of high quality. • Fine balance between requirements and cost implications. • Common E&S regime acceptance by all lenders and guarantors facilitates project implementation. • Harmonization of IFI safeguards requirements is a replicable innovation.

22. Thank You Suman Babbar Finance & Guarantees The World Bank Group www.worldbank.org/guarantees

23. Contractual Structure

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 Equity

25. Nam Theun 2: Financing Plan

26. Using IDA PRG to mobilize private debt financing…….. EGAT (primary offtaker) Government of Laos (as concessionaire) IDA Indemnity Agreement PPA CA IDA Project Agreement Private Equity NTPC (SPV) SHA • Limited GOL Performance • Obligations • Permits, Consents • Change in Law • Political FM • Termination of the CA GOL Equity IDA Guarantee Agreement CTA THB & non-WB Guaranteed US$ Commercial Debt WB Guaranteed US$ Debt

27. Tripartite Agreement (disbursement arrangements) Loan and Development Shareholders Grant Agreement Agreement LHSE MOF IDA Shareholders Agreement NTSEP Project Agreement GOL Special NTPC Account Equity Contribution Agreement Key Finance Documents/Agreements Drawdown Request / Withdrawal Application Lenders Flow of Funds Using IDA Grant to finance E&S expenditures (as GOL Equity)……..

28. Key Lessons Learnt...for large Hydros • PRG Lenders were made accountable for Prohibited Activities undertaken by Company and/or Head Contractor. • PRGs provide appropriate risk mitigation for large private hydropower schemes. • Political risks • Cross border risks • Optimization 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.