MIGA Offsets Lenders’ Risk Concerns in Vietnam Power Project

July 18, 2006—Along the bustling tree-lined streets of Ho Chi Minh City, merchants wearing traditional Vietnamese “ao dais” invite customers into brightly lit shops, and restaurant owners beckon passers-by into their air conditioned establishments. In homes on the outskirts of the city, refrigerators keep food cold and electric fans provide relief from the damp heat. And farther away still, along the industrial corridor that stretches mile after mile to the south, factories churn out textiles and other products for domestic use and for export.

Just ten years ago, none of this would have been possible—at least not on a regular basis. But today, with its GDP growth hovering around 8 percent, this Asian Tiger in the making is serious about fueling that growth with reliable electricity.

Vietnam taps public and private resources to meet energy needs

Vietnam’s electricity infrastructure has long been underdeveloped and badly stretched. The problem has stemmed in part from the inability of hydroelectric and other power resources to keep pace with the country’s growing energy needs—spurred by growth in trade and commerce, urban migration, and higher living standards.  

“We had a huge drought in the north of Vietnam last summer, and there were power blackouts on a rolling basis in Hanoi,” says Klaus Rohland, the World Bank’s Country Director for Vietnam. “Not only were people sweating without air conditioning, but factories came to a standstill.”

“If businesses don’t have enough electricity, they either can’t do business or they need to shift their pattern of business,” notes Richard Spencer, a World Bank senior energy specialist based in Vietnam. “Not having electricity when they need it, in the amount and quality they need, has an economic cost.”

This unmet need has led Vietnamto turn to its neighbors for electricity during power shortages. But with the country aiming to continue its 8 percent annual growth from 2006-10, and with investment needs in the order of $1-2 billion a year to meet current and future demand, the role of the private sector is being seen as increasingly central to achieving that growth.

“In Vietnam, our financing needs are so high that you need both public and private sector interventions,” says Rohland. “The role of the private sector is, as you would expect, incredibly important.”

Fortunately, the country’s economic deregulation over the past decade and the draw of commercial opportunities have attracted foreign investors to Vietnam’s power sector. The World Bank and the Multilateral Investment Guarantee Agency (MIGA) are helping to catalyze these investments.

As a result, important developments over the past few years have been reshaping the country’s electricity sector, helping to reduce the strain placed by growing demand and overreliance on hydropower.

World Bank Group provides support across the board

The World Bank Group has been involved in the country’s energy sector for more than ten years, working on generation, transmission, distribution, and reforms. The current power portfolio stands at around $1 billion. Distribution has focused on rural delivery as well, with very good results. In 1995, some 50 percent of rural inhabitants had access to electricity. That figure today is 90 percent.

Since the early 1990s, the World Bank has not only supported the government of Vietnam in finalizing an effective legal framework for the power sector, it has also financed the Phu My 2.1 power station gas turbines through an IDA credit, provided a partial credit guarantee for Phu My 2.2 (also through IDA), as well as a political risk guarantee for Phu My 3 through MIGA.

The Phu My power complex—the largest in Vietnam—consists of five power generation plants with a combined capacity of up to 3,900 MW, located in the village of Phu My in Ba Ria-Vung Tau province about 70 kilometers from Ho Chi Minh City. The complex includes the Phu My 1 power plant, Phu My 2.1, Phu My 2.2, Phu My 3, and Phu My 4. Together, the plants are meeting about 40 percent of the country’s energy needs.

MIGA backs key addition to power complex

The Phu My 3 power plant—the first Build-Operate-Transfer (BOT) project in the country’s power sector—is a 716.8 MW (designed capacity) facility supported by MIGA. The plant began operating in 2004 and is already estimated to be providing 8-10 percent of the country’s electricity.

The Phu My 3 Power Company has a 20-year Power Purchase Agreement (PPA) with the government of Vietnamto sell capacity and net energy output to Electricity of Vietnam (EVN), which operates the national grid and distributes electricity to end-users. The agreement involves a fixed capacity charge with a yearly fixed subscription paid by EVN to Phu My 3, as well as a variable charge based on net energy output.

Phu My 3 is a combined-cycle gas-fired power plant, using natural gas piped in from the Nam  Con  Son  Basin. Natural gas, the cleanest fossil fuel available, produces up to 50 percent less carbon dioxide than traditional coal-fired power and responds to the demand for cleaner energy. Combined-cycle electricity generation improves overall efficiency.

“Phu My 3 is playing an important role in the development of Vietnam’s power sector,” says Hisashi Toyofuku, Phu My 3’s Chief Financial Officer. “The project is helping the government expand the transmission system of the country’s power sector. The power plant also fits in well with the government’s policy to use reliable domestic energy sources rather than import fuel to fulfill demand.”

Guarantees help seal complex deal

The project is a joint venture between BP, SembCorp, Kyushu Electric Power Company, and Sojitz (Nisho Iwai), a Japanese trading and investment house. Phu My 3 Power Company has the concession to finance, design, construct, own, operate and maintain the power plant and related facilities. Project financing was provided by the Japan Bank for International Cooperation (JBIC), the Asian Development Bank (ADB), and a syndicate of commercial banks. The total project investment is $385.9 million, of which equity consists of $96.5 million, and lending of $289.4 million.

Putting together such a complex deal would not have been possible without the appropriate mitigation of risks, both commercial and noncommercial. MIGA provided several guarantees: $43.2 million for the equity investment, $75 million for a nonshareholder loan, and $15 million to cover a financing swap agreement arranged by Calyon, the inter-creditor agent.

“Vietnamis still a high-risk country from a private investor’s or project company perspective,” says Toyofuku. “When we started the project, of course we had to consider competitive pricing. Our shareholders and the project company are fully aware that MIGA plays a very important role in terms of obtaining competitive pricing, and thus encouraging lenders to lend money to us. This helped us get the project going faster.”

“The involvement of MIGA alongside the ADB, JBIC, and NEXI was instrumental in the success of this ground-breaking financing in Vietnam,” says Frederic Beaujean, the Vice President for Project and Structured Finance Asia at Calyon. “It allowed this entirely private project to tap the international commercial bank market and to close a limited-recourse financing at very competitive conditions.”

Adds Annick Paccioni, Calyon’s Operational Support Manager: “This project involved a huge amount of financing and a lot of actors. And the main question for lenders is risk. MIGA’s guarantee was very important for the lenders to have the security and expertise needed to protect the loan, and for future loans as well. This allows banks to diversify.”

Project brings real change to real people

Before implementation of the Phu My projects, people in Vietnamdid not have power on a rolling basis. Frequent power cuts meant that factories came to a standstill, students were forced to study by oil lamp or candlelight at night, people didn’t have power to run fans or air conditioning. Residents today talk of electricity being considered a luxury item just ten years ago, and of the tremendous changes they’ve seen with the advent of “doi moi,” an economic, social and political reform program begun in 1986.

Phu Duc Nguyen, a 34-year old Human Resource Manager, notes: “Five years ago electricity was usually cut two to four times a week. But now we rarely experience it once a month. We are very happy, especially in hot weather. In this situation, we can use a lot of things with electricity, such as fans and air conditioners. We can sleep well.”

Businesses have benefited as well. “Electricity is now quite reliable,” says restaurant manager Mai Tan Phuoc in downtown Ho Chi Minh City. “I’m happy with this because over the past five years, the rate of power outages has been significantly reduced. And when power outages do take place, we can talk to electricity officials and they come and help us immediately. In general, the situation is much improved.”

Foreign companies investing in Phu My 3 have brought with them better know-how and technology—invaluable to a developing country like Vietnam. A “Localization Plan”—under which most positions in the company will be turned over to local staff by the year 2008— is ensuring that responsibility and knowledge are transferred smoothly from expatriates to locals.

“One of the biggest benefits of Phu My 3 is obviously the technology transfer,” says Nguyen Tich Vinh Thuy, Phu My 3’s Commercial & Planning Manager. “We are providing training to the local Vietnamese on management and technology such as the DCS, the computer system to run the plant, environmental awareness, safety awareness, and also health awareness to people working for the plant and also in the surrounding community areas.”

As the first power BOT in Vietnam, Phu My 3 is also creating a roadmap for others in terms of responsibilities and sequencing of the power plant transfer. “Phu My 3 is a good model for public-private partnership, because the government entity and the private sector have come together successfully to meet mutual needs,” says Toyofuku.

Working in a developing country is not just about investing in infrastructure and building large projects. It also involves making a difference in the community. Phu My 3 is having a significant impact on the local economy. In addition to providing jobs to local residents, the company is generating significant tax revenues—$8.8 million in 2005—and was named the best tax payer in 2004 and 2005 by the local tax authority.

Phu My 3’s commercial success also makes it possible for the company to contribute to the well-being of local residents. The company is very keen to make a positive contribution in the community in which it operates and works closely with the Ba Ria-Vung Tau People’s Committee, the municipal entity that serves local citizens.

A key community initiative has been Phu My 3’s association with the Le Loi School, where the company has worked to provide much-needed supplies such as books, computers, furniture, a library, bathrooms, musical instruments, and more. The company also sponsors training scholarships for teachers. Recently, a health-check performed on workers and key contractors of Phu My 3 was extended to 500 children in the school.

“Our goal is to improve lives and the quality of education in Vietnam,” says Nguyen. “The more educated people are, the more they can help themselves. It’s a win-win relationship.”

As a result of the company’s community outreach, the school is considered a model for others in the area. Phu My 3 is now meeting with other multinationals to pool resources and extend their social outreach.

Fueling Vietnam’s social and economic growth

By helping Vietnammeet its increasing power demand in a cost-effective, reliable manner, the project is contributing to sustainable economic growth and poverty alleviation.

“The ultimate impact for Phu My 3 as a project is meeting electrical demand in Vietnam,” says Nguyen. “To the end user, it’s about the reliability of the plant. Light is available for a student to be able to study at night, and there are no power outages in the evening. And for industries, such as our textile factories, they have the electricity needed to generate GDP growth in Vietnamand create jobs for other Vietnamese.”

For more on the Bank Group's work in Vietnam, click here and here.