The Asian Development Bank (ADB) and Multilateral Investment Guarantee Agency (Miga), a branch of the World Bank Group, are backing the construction and operation of a new power plant to help meet Vietnam ‘s need for more reliable electricity.
The ADB will assist the Phu My 3 Power Project by providing a US$40mn direct loan and a US$32mn political risk guarantee. Miga will provide political risk guarantees totalling US$138mn.
Under the project, a 716.8MW gas-fired combined cycle power plant will be constructed near the town of Phu My , about 75km from Ho Chi Minh City . It will comprise two gas turbines, two heat-recovery and steam generation systems, and one steam turbine.
The plant, expected to operate commercially by February 2004, is covered by a 23-year build-operate-transfer (BOT) contract between the Ministry of Industry and Phu My 3 BOT Power Company Ltd., a company set up in Vietnam by BP Holdings BV (a subsidiary of BP plc), SembCorp Utilities Private Limited, and the consortium of Kyushu Electric Power Co, Inc and Nissho Iwai Corporation.
Electricity of Vietnam will buy the power plant’s output under a power purchase agreement for 20 years. Vietnam Oil and Gas Corporation will provide natural gas for the plant under a gas sales agreement. At the end of the BOT contract period, the plant will be handed over to the government of Vietnam .
Demand for electricity has been growing by about 14% a year for more than a decade in Vietnam . The country’s current power supply relies heavily on hydropower, which is highly seasonal. Other sources of power, including gas turbine, diesel, and thermal plants, are therefore needed to provide a more reliable supply and meet the rising demand for electricity.
“The project is an environmentally friendly solution to the supply problem. It will feed the national power grid, as well as the industrial and residential areas in south Vietnam ,” says Kurumi Fukaya, the ADB’s project team leader. “This will make the areas served by the project attractive to investment, which can spur economic growth and help reduce poverty.”
The total cost of the Phu My 3 Power Project will be US$412mn, to be funded by shareholders (US$103mn), Japan Bank for International Cooperation (US$99mn), ADB (US$40mn), and a syndicate of international commercial lenders (US$170mn). This represents one of the largest foreign direct investments ever to go into Vietnam .
The ADB political risk guarantee covers US$32mn of the commercial debt. Miga will guarantee US$90mn of the project’s commercial debt and swap breakage, and US$48mn of equity. The project will also benefit from political risk cover from Nippon Export and Investment Insurance.
“Phu My 3 will bring many development benefits to the country,” says Philippe Valahu, Miga’s manager for Asia . “In addition to creating jobs and procuring most of the construction materials locally, the reliable supply of electricity is expected to help attract additional private capital investment flows for further infrastructure development in the country.”
The project represents the first project-specific collaboration between ADB and Miga, following the signing of a memorandum of understanding between the two institutions in September 2002.
“We have worked very closely with the ADB to harmonise our insurance policies, pool resources, and share information,” says Motomichi Ikawa, Miga’s executive vice-president. “We have tried to show the market place that several multilateral development banks can work efficiently in the same deal, and that it can be a very positive experience. We are looking forward to further collaboration with the ADB on some of the large deals we expect to see in Asia in the coming year.”
The deal also represents an important first for Miga in terms of product offerings. The project debt financing is provided at a floating interest rate, which presents obvious financial risks to the project. To offset the need to either buy an interest rate cap, or to put together a separate fund to cover severe interest rate increases, the project enterprise chose to engage in a swap that allows it to pay a fixed interest rate. “What’s innovative here is that for the first time, Miga has offered coverage for against non-payment of incurred swap losses by the BOT company to the swap provider due to covered political events,” says Valahu.
The ADB’s US$40mn loan comes from its ordinary capital resources and is repayable within 14 years, including a grace period of up to two years. Interest will be determined in accordance with ADB’s Libor-based lending facility.