Even by project finance standards, the $154 million Thu Duc water project in Vietnam was a long time in the making. According to Gilles Fabre-Rousseau, international financing manager at Suez's water business subsidiary Ondeo Services, the build operate transfer (BOT) contract for the water treatment facility was awarded in the middle of 1998, banks were approached at the end of 2000 with requests for funding and financial close was not reached until July 2001.

But then this was Vietnam's first BOT project and a project financing in a jurisdiction with little in the way of structured finance-friendly legal architecture. Add to the mix the fact that the project was won by a consortium of three sponsors (Suez Lyonnais de Eaux, Pilencon Engineering of Malaysia and Tractebel) and that financing was arranged by three lead commercial banks: Fortis Bank, Credit Lyonnais and ANZ Investment Bank. Also involved were the Asian Development Bank, the Malaysian Export Import Bank and three export credit agencies, MECIB, Office National Ducroire and Coface. It is not, therefore, difficult to see why the deal took so long to complete.

The project comprises $48 million of equity and $106 million of debt. There are a total of six tranches in the debt financing package ? the sixth being a $4.5 million contingency debt tranche. ADB provided the loan for the largest tranche ($29.7 million) plus $1.3 million to the contingency debt amount. Malaysia's Export Import Bank provided the second tranche of $13 million and $600,000 to the contingency loan. The term on the Mexim tranche is 12.5 years. The three commercial banks provided the funds for the remaining tranches, the third of which is supported by political risk cover from Coface. The Coface loan amount, with a maturity of 14.5 years, is $23.2 million (including $1.3 million for the contingency debt).

Office National Ducroire (OND) provided 90% political risk cover for an equal amount ($23.2 million) and also extended political risk insurance on a $15 million export credit loan with a maturity of 12.5 years. Considering the amount of effort it took to put together a project financing structure, observers may well ask why the sponsors did not choose to finance the relatively small investment outlay on a corporate basis. But as Fabre-Rousseau says, ?It was always going to be a project deal because of the economic environment in the country and the need to mitigate the sponsors' risks for such type of project.?

Thu Duc is notable for being the first foreign-owned build-operate-transfer (BOT) project in Vietnam. The offtaker in the development is Ho Chi Minh City Water Supply Co and the concession agreement has been signed for a period of 25 years with the People's Committee of Ho Chi Minh City. According to a banker involved in the transaction, meeting the strict requirements of the export credit agencies and, above all, the Asian Development Bank in an economy so unused to complex international financings was the key challenge. ?At least half the structure seemed new to the Vietnamese,? says the financier. ?The other half of the financing scheme was hindered by local financial controls and the process of getting approvals.?

Fabre-Rousseau concurs. ?The complex system of onshore and offshore accounts would have been difficult anywhere but the transferability and convertibility issues made them all the more so.? The Vietnamese currency, the Dong, is not freely convertible nor is hard currency a readily available commodity. The three banks originally tried to tackle the foreign exchange problem by seeking an availability guarantee from the State Bank of Vietnam. But when it became apparent that this was not feasible, the arrangers went for a more practical approach. ?What we secured instead was priority of access to US dollars at the state bank level, ahead of the majority of other foreign lenders to the country,? says Geert Lippens, head of global export and project finance Asia at Fortis Bank in Singapore. ?Fortunately, throughout the process the Vietnamese government was reasonably accommodating both in adjusting the law and granting the relevant licenses and approvals,? says Fabre-Rousseau.

Having completed the transaction, the payoff for the key sponsor (Suez) will not just be the expected profits from the running of the treatment plant. Fabre-Rousseau says that the Suez group will be able to use the experience gleaned from this market-making deal in future Vietnamese financings. ?Overall, we were very satisfied with the deal, but having completed a material investment in terms of money and time on the project financing in order to build a workable framework it was important to get an adequate return.? Apart from the returns from the water project itself a return will be realized for Suez as a group ? particularly if the organization is involved in other Vietnamese project financings in the next few years. Tractebel may be involved in the upcoming power project, Phu My 3. Water sector projects similar to Thu Duc are not expected within this time frame.

A number of banks declined participation in the financing because of the small size of the deal. Fortis, financial adviser since 1999, was willing to take up the challenge not just because of its close ties to Suez but in order to chalk up more project finance experience, highlighting its increasing ambitions in the Asian project finance market.

While ANZ acted as the insurance bank and Credit Lyonnais as the Coface agent, Fortis took most of the other roles including the coordinating, documentation, financial modeling and technical modeling. This deal marks the first time that Fortis has been so heavily involved in each of the above roles (particularly documentation) since it was formed from the merger of Generale Bank, ASLK-CGER, VSB Bank and MeesPierson.