From race to relax?
Taiwan, not a place which usually looms large in the international
project finance business, has been one of the most active project
finance markets in recent months with a spate of power project
financings. Local bankers are working hard to push through finance
deals for Sunba Power's NT$20 ($600 million) power plant, Star
Energy Power's NT$8.24 billion generating facility and Chia Hui's
NT$10.8 billion 670MW power station. These latest deals come on the
heels of a NT$8 billion transaction for Kuo Kuang Power to finance
a gas-fired project in northern county of Taoyuan.
This is a market in which foreign banks rarely tread ? no foreign banks will be involved in the three latest power deals and no international institutions were involved in the Kuo Kuang facility. If foreign banks are involved in the Taiwanese market it is in an advisory capacity. ABN Amro, notably, advised US energy company NRG on the recent acquisition of a majority stake in Hsin Yu Energy Development Co.
The chief hurdle for international banks stems from the fact that Taiwanese power projects are able to secure low interest loans from the government which are on offer to encourage the private sector to enter the market. These loans are typically called CEPD loans as they are approved by the Council for Economic Planning and Development (CEPD). The funds come from the national postal savings system and are on-lent by local banks. The government does not permit foreign banks to participate in the on-lending scheme, says Vincent Wu, assistant vice-president at China Development Industrial Bank (CDIB)'s project finance & development department.
Vincent Chi vice-president at Chinatrust Commercial Bank says that CEPD loans are not necessarily a permanent fixture in the market. However, the use of postal savings funds will probably be approved by the central government for all of the power financings this year and the scheme is likely to be withdrawn only when the government deems that electricity supply and demand forecasts are more favourably balanced. The significant advantage for local banks is only likely to disappear, therefore, at the time when Taiwan does not need new power generating capacity.
In addition, the local New Taiwan Dollar market is highly liquid and the domestic banking system fiercely competitive. ?Domestic banks are willing to provide floating rate financing at very long tenor. When local banks' own margins are added to the low interest CEPD loans, the all in cost of funds is still very low,? says one Hong Kong-based project finance banker, ?because the Taiwanese financing community is used to operating at such low margins.?
There is no indication that Taiwanese banks are worried about over-exposure to the private power sector as they gear up to finance the next three power projects. Thomas Wu, senior manager at Bank of Taiwan (BOT), expects the recently launched four tranche deal for Star (which BOT is arranging) to attract about 20 Taiwanese banks, a similar level of response as for the Kuo Kuang facility in which 18 local financial institutions participated.
A further indication that the local banking community is willing to absorb as many power project financings as are thrown into the market, pricing on power project debt has not risen for the last 18 months. ?We've seen a pretty stable 65 to 75 basis point spread since the beginning of 1999, which is much lower than the pricing of international power transactions,? says Judy Mao, manager of CDIB's project finance & development department. ?There aren't going to be that many other large scale projects to finance in Taiwan for the rest of this year or in 2002 which helps to keep appetite high,? adds Bank of Taiwan's Wu.
The heightened fragility of the Taiwanese finance industry is not likely to provide a window of opportunity for international project banks either. Over the last two years non-performing loan ratios (NPL) have been rising leading to severe difficulties for Taiwan's weaker banks. Vincent Wu points out that several Taiwanese banks are trying to shrink their loan books as a result of serious NPL problems and are effectively out of the lending business in the short term. But Merrill Lynch's banking analyst in Taipei, Sophia Cheng says that NPL ratios at the better managed end of the banking spectrum have stabilized. ?There's still plenty of liquidity to go around,? she says.
And even if margins were attractive for foreign banks, several sources say that international institutions would be reluctant to lend to Taiwanese power projects. ?The power purchase agreements (PPAs) that we've seen are not financeable,? says a second Hong Kong banking source, alluding to serious mismatches between the typical power purchase agreement and gas sales agreement.
Several of the financings are not limited recourse project financings in the traditional sense. ?What you see are a lot of so called project financings backed by corporate guarantees,? adds the Hong Kong source.
That's not to say that at least some of the new IPP ventures aren't good projects. The 1,298 MW Hoping project sponsored by Taiwan Cement and China Light & Power which came to market several years ago was a popular transaction for many international bankers ? at least as far as the economics of the project and credit of the sponsors were concerned. Yet the contractual and financing hurdles stopped any non-Taiwanese banks getting involved in the arranging or provision of finance.
Outside interests
Like foreign banks, foreign power companies are also scarce in Taiwan. This, despite new regulations issued by the government in July 1998 which allow foreign investors to buy up to 50% of electric transmission and distribution assets compared with 30% previously.
The key stumbling blocks for foreign power companies have been: the dominance and hard bargaining of Taiwan Power, the state-run power company which controls 80% of the domestic electricity market, unfavourable PPAs (almost all the substantial commercial risks are borne by the IPPs) and thin and vague legal documentation. ?Foreign power companies aren't comfortable with the fact that contracts are not spelt out in great detail,? says Wu at CDIB. ?Those foreign companies that do get involved, such as Singapore Power, are already quite familiar with legal standards similar to our own,? he adds.
For all its shortcomings the Taiwan market is not off limits as far as foreign electricity companies are concerned. According to Richard Krause, vice-president of project finance and structured debt at ABN Amro in Singapore, deregulation is still generating considerable interest. ?Taiwan is a relatively stable market, it is dominated by an offtaker with a very strong credit rating and up until last year, it had consistently strong economic growth. There aren't that many countries in Asia which have those credentials,? he says.
The most recent entry by a foreign player into the Taiwan market was NRG's purchase of shares in Hsin Yu. The move surprised many market observers in Taipei. Hsin Yu may have been snapped up by NRG at a good price, thanks to Taiwan's slumping stock market, but banking sources in the capital say that Hsin Yu's main asset, a 170 MW combined cycle co-generation facility in Hsinchu, has been making a net loss every month since it opened.
Krause confirms that the plant did make a net income loss for the first six months of the year. However, he says that it is expected to make a modest net profit for the full financial year once operating figures for the peak season between June and September are put into the equation.
Krause adds that NRG was interested in Hsin Yu partly because of its expansion program. Hsin Yu was set up to sell electricity directly to large corporates at the Hsinchu Science park, home to some of the world's largest semi-conductor and computer manufacturers. Hsin Yu is now working on a phase II expansion program involving the construction of further power generating facilities to provide electricity to Taiwan's industrial base.
Hsin Yu has the right to sell power to Taipower on a take or pay basis, but wrapping up further contracts with industrial partners will be crucial. Private co-generation facilities are obliged to sell power to Taipower at a discount and find it difficult to make money from sales to the state-run entity. This is particularly true for Hsin Yu since it uses relatively expensive liquefied natural gas.
For similar reasons, good acquisition targets in Taiwan are scarce. ?Co-generation assets which are coal-fired are better bets than LNG facilities because of lower production costs,? says one Taipei-based banker. Nevertheless, two or three foreign power companies are looking at acquisitions in Taiwan, says Vincent Wu, without disclosing names. Singapore Power and Marubeni invested in the Ever Power IPP. A local banking official says that Everfortune is selling down a 15% stake in the venture, because of its financial difficulties, opening the way up for increased involvement by the two existing foreign sponsors, or for a new foreign sponsor to join in.
The acquisition option may nevertheless prove to be the easiest way for foreign companies to launch into the Taiwan power business. One of the biggest problems facing IPPs, and one which generally requires local know how and resources to overcome, is finding a suitable site in the heavily populated north of land. ?Intense public opposition and nimbyism means that land acquisition is very difficult for new IPPs,? says a government official.
The rash of IPP projects, including four new LNG-fired projects with a total capacity of 3,000 MW which were approved in June 2000, means that there is little commercial rationale for launching into the Taiwan market with another IPP plan in the short term. It is no surprise therefore that the three power station programs currently in the financing markets are expected to be the last until 2003.
Forecast demand growth for new electricity has fallen from 5% down to 3.3% per year because of the substantial economic slowdown. Taipower officials now expect a reserve margin of about 30% by 2006.
Privatization of Taipower
The partial privatization of Taipower was originally slated for this year. For political reasons (delays in passing the enabling legislation) and because of the continuing local stock market slump (Taipower is scheduled to be privatized through a public floatation of about 70% of its market capital) observers do not now expect the privatization to occur even in 2002.
In other Asia countries, notably the Philippines, power sector deregulation has caused considerable uncertainty for IPP sponsors. Most financiers, however, are confident that existing contractual agreements between the IPPs and Taipower as off-taker will hold up in the post-privatization environment. ?I don't see there being any great impact on contractual agreements if the privatization goes ahead,? says Thomas Wu, ?they [Taipower] will still be obliged to adhere by the take or pay formula.?
Judy Mao at CDIB says that independent power producers will have the option to terminate their PPA agreements once Taipower is privatized, but they are very unlikely to do this since they would then be forced to try and sell electricity to thousands of end users when none have built the necessary processing infrastructure to allow them to perform that function.
Deregulation ? the Energy Commission view
For every analyst and power industry expert in Taiwan there is a different view about how the deregulation of the local electricity industry will proceed. That shouldn't be too surprising ? even in the central government, officials are still uncertain about the shape of industry reform.
Dr Liang-Jyi Fang, secretary general of the Energy Commission, the regulatory body which oversees the power industry, says that while there is only one official draft legislation document for the privatization of Taiwan Power, there are another seven competing bills which could eventually form the base privatization model. Each bill is sponsored by a different commercial interest group or political party. ?In Taiwan's fast changing political environment it is immensely difficult to predict which model will eventually be adopted,? says a local banker involved in several power project financings.
Taipower, the state-owned electric power utility, currently dominates Taiwan's electric power sector. The official draft electricity law proposes that Taipower be partially sold off but remain as the only transmission and distribution company in Taiwan. The government would keep about 30% of Taipower and the rest would be disposed through a public floatation on the stock market. Observers says Taipower's generation assets would be split into several new firms if the official draft bill does become law but Fang says the separate sell-off of generating assets is, ?by no means guaranteed.?
?What is certainly likely,? says Fang, ?is that the distribution and transmission assets remain under state control for the foreseeable future.? Fang says this is because electricity is viewed as a national security issue. ?Taiwan is very susceptible to natural events which can knock out the power grid, such as typhoons and earthquakes. The government feels its necessary to keep control of the power system to ensure that power can be up and running again as soon as possible if it gets knocked out.? Fang does believe that distribution will be partially opened up to the private sector, but not in this upcoming round of industry deregulation.
The privatization of Chinese Petroleum Corp (CPC) will probably take place before Taipower is sold. Fang says that the petroleum law which authorizes the sale of CPC is likely to be passed soon, ?by the end of this year,? he says. Market conditions permitting, CPC is therefore a strong candidate for a listing in 2002. The timetable for a new electricity law is much less clear. It is highly unlikely that the law will be passed this year.
The good news for foreign power companies with ambitions for the Taiwanese market is that the Energy Commission is urging the government to do away with the investment ceiling for foreign investors in a single electricity asset (the ceiling is currently 49%). Fang adds that the Taiwanese government is not taking a strong position on industry consolidation and mergers and acquisitions will largely go unchallenged.
Fang adds that the Energy Commission is also going to propose another round of IPP power station developments over the next few years. Although electricity demand projections have been reduced by Taiwan Power because of slower economic growth, Fang says that an addition 8,000 MW in generating capacity is likely to be needed between now and 2012.
Much but not all of this new generating capacity will be built by the private sector. At the end of last year government figures calculated Taipower's installed capacity at 27,000 MW, co-generation plants accounted for 5,100 MW of generation capacity, captive power stations for about 3,500 MW and IPPs for 2,200 MW. Fang says that by 2005 total IPP generating capacity will approach about 19% of total MW capacity in Taiwan. ?We think this ratio is a good one,? says Fang, indicating that thereafter further IPPs will not be approved unless electricity demand continues to rise.
This is a market in which foreign banks rarely tread ? no foreign banks will be involved in the three latest power deals and no international institutions were involved in the Kuo Kuang facility. If foreign banks are involved in the Taiwanese market it is in an advisory capacity. ABN Amro, notably, advised US energy company NRG on the recent acquisition of a majority stake in Hsin Yu Energy Development Co.
The chief hurdle for international banks stems from the fact that Taiwanese power projects are able to secure low interest loans from the government which are on offer to encourage the private sector to enter the market. These loans are typically called CEPD loans as they are approved by the Council for Economic Planning and Development (CEPD). The funds come from the national postal savings system and are on-lent by local banks. The government does not permit foreign banks to participate in the on-lending scheme, says Vincent Wu, assistant vice-president at China Development Industrial Bank (CDIB)'s project finance & development department.
Vincent Chi vice-president at Chinatrust Commercial Bank says that CEPD loans are not necessarily a permanent fixture in the market. However, the use of postal savings funds will probably be approved by the central government for all of the power financings this year and the scheme is likely to be withdrawn only when the government deems that electricity supply and demand forecasts are more favourably balanced. The significant advantage for local banks is only likely to disappear, therefore, at the time when Taiwan does not need new power generating capacity.
In addition, the local New Taiwan Dollar market is highly liquid and the domestic banking system fiercely competitive. ?Domestic banks are willing to provide floating rate financing at very long tenor. When local banks' own margins are added to the low interest CEPD loans, the all in cost of funds is still very low,? says one Hong Kong-based project finance banker, ?because the Taiwanese financing community is used to operating at such low margins.?
There is no indication that Taiwanese banks are worried about over-exposure to the private power sector as they gear up to finance the next three power projects. Thomas Wu, senior manager at Bank of Taiwan (BOT), expects the recently launched four tranche deal for Star (which BOT is arranging) to attract about 20 Taiwanese banks, a similar level of response as for the Kuo Kuang facility in which 18 local financial institutions participated.
A further indication that the local banking community is willing to absorb as many power project financings as are thrown into the market, pricing on power project debt has not risen for the last 18 months. ?We've seen a pretty stable 65 to 75 basis point spread since the beginning of 1999, which is much lower than the pricing of international power transactions,? says Judy Mao, manager of CDIB's project finance & development department. ?There aren't going to be that many other large scale projects to finance in Taiwan for the rest of this year or in 2002 which helps to keep appetite high,? adds Bank of Taiwan's Wu.
The heightened fragility of the Taiwanese finance industry is not likely to provide a window of opportunity for international project banks either. Over the last two years non-performing loan ratios (NPL) have been rising leading to severe difficulties for Taiwan's weaker banks. Vincent Wu points out that several Taiwanese banks are trying to shrink their loan books as a result of serious NPL problems and are effectively out of the lending business in the short term. But Merrill Lynch's banking analyst in Taipei, Sophia Cheng says that NPL ratios at the better managed end of the banking spectrum have stabilized. ?There's still plenty of liquidity to go around,? she says.
And even if margins were attractive for foreign banks, several sources say that international institutions would be reluctant to lend to Taiwanese power projects. ?The power purchase agreements (PPAs) that we've seen are not financeable,? says a second Hong Kong banking source, alluding to serious mismatches between the typical power purchase agreement and gas sales agreement.
Several of the financings are not limited recourse project financings in the traditional sense. ?What you see are a lot of so called project financings backed by corporate guarantees,? adds the Hong Kong source.
That's not to say that at least some of the new IPP ventures aren't good projects. The 1,298 MW Hoping project sponsored by Taiwan Cement and China Light & Power which came to market several years ago was a popular transaction for many international bankers ? at least as far as the economics of the project and credit of the sponsors were concerned. Yet the contractual and financing hurdles stopped any non-Taiwanese banks getting involved in the arranging or provision of finance.
Outside interests
Like foreign banks, foreign power companies are also scarce in Taiwan. This, despite new regulations issued by the government in July 1998 which allow foreign investors to buy up to 50% of electric transmission and distribution assets compared with 30% previously.
The key stumbling blocks for foreign power companies have been: the dominance and hard bargaining of Taiwan Power, the state-run power company which controls 80% of the domestic electricity market, unfavourable PPAs (almost all the substantial commercial risks are borne by the IPPs) and thin and vague legal documentation. ?Foreign power companies aren't comfortable with the fact that contracts are not spelt out in great detail,? says Wu at CDIB. ?Those foreign companies that do get involved, such as Singapore Power, are already quite familiar with legal standards similar to our own,? he adds.
For all its shortcomings the Taiwan market is not off limits as far as foreign electricity companies are concerned. According to Richard Krause, vice-president of project finance and structured debt at ABN Amro in Singapore, deregulation is still generating considerable interest. ?Taiwan is a relatively stable market, it is dominated by an offtaker with a very strong credit rating and up until last year, it had consistently strong economic growth. There aren't that many countries in Asia which have those credentials,? he says.
The most recent entry by a foreign player into the Taiwan market was NRG's purchase of shares in Hsin Yu. The move surprised many market observers in Taipei. Hsin Yu may have been snapped up by NRG at a good price, thanks to Taiwan's slumping stock market, but banking sources in the capital say that Hsin Yu's main asset, a 170 MW combined cycle co-generation facility in Hsinchu, has been making a net loss every month since it opened.
Krause confirms that the plant did make a net income loss for the first six months of the year. However, he says that it is expected to make a modest net profit for the full financial year once operating figures for the peak season between June and September are put into the equation.
Krause adds that NRG was interested in Hsin Yu partly because of its expansion program. Hsin Yu was set up to sell electricity directly to large corporates at the Hsinchu Science park, home to some of the world's largest semi-conductor and computer manufacturers. Hsin Yu is now working on a phase II expansion program involving the construction of further power generating facilities to provide electricity to Taiwan's industrial base.
Hsin Yu has the right to sell power to Taipower on a take or pay basis, but wrapping up further contracts with industrial partners will be crucial. Private co-generation facilities are obliged to sell power to Taipower at a discount and find it difficult to make money from sales to the state-run entity. This is particularly true for Hsin Yu since it uses relatively expensive liquefied natural gas.
For similar reasons, good acquisition targets in Taiwan are scarce. ?Co-generation assets which are coal-fired are better bets than LNG facilities because of lower production costs,? says one Taipei-based banker. Nevertheless, two or three foreign power companies are looking at acquisitions in Taiwan, says Vincent Wu, without disclosing names. Singapore Power and Marubeni invested in the Ever Power IPP. A local banking official says that Everfortune is selling down a 15% stake in the venture, because of its financial difficulties, opening the way up for increased involvement by the two existing foreign sponsors, or for a new foreign sponsor to join in.
The acquisition option may nevertheless prove to be the easiest way for foreign companies to launch into the Taiwan power business. One of the biggest problems facing IPPs, and one which generally requires local know how and resources to overcome, is finding a suitable site in the heavily populated north of land. ?Intense public opposition and nimbyism means that land acquisition is very difficult for new IPPs,? says a government official.
The rash of IPP projects, including four new LNG-fired projects with a total capacity of 3,000 MW which were approved in June 2000, means that there is little commercial rationale for launching into the Taiwan market with another IPP plan in the short term. It is no surprise therefore that the three power station programs currently in the financing markets are expected to be the last until 2003.
Forecast demand growth for new electricity has fallen from 5% down to 3.3% per year because of the substantial economic slowdown. Taipower officials now expect a reserve margin of about 30% by 2006.
Privatization of Taipower
The partial privatization of Taipower was originally slated for this year. For political reasons (delays in passing the enabling legislation) and because of the continuing local stock market slump (Taipower is scheduled to be privatized through a public floatation of about 70% of its market capital) observers do not now expect the privatization to occur even in 2002.
In other Asia countries, notably the Philippines, power sector deregulation has caused considerable uncertainty for IPP sponsors. Most financiers, however, are confident that existing contractual agreements between the IPPs and Taipower as off-taker will hold up in the post-privatization environment. ?I don't see there being any great impact on contractual agreements if the privatization goes ahead,? says Thomas Wu, ?they [Taipower] will still be obliged to adhere by the take or pay formula.?
Judy Mao at CDIB says that independent power producers will have the option to terminate their PPA agreements once Taipower is privatized, but they are very unlikely to do this since they would then be forced to try and sell electricity to thousands of end users when none have built the necessary processing infrastructure to allow them to perform that function.
Deregulation ? the Energy Commission view
For every analyst and power industry expert in Taiwan there is a different view about how the deregulation of the local electricity industry will proceed. That shouldn't be too surprising ? even in the central government, officials are still uncertain about the shape of industry reform.
Dr Liang-Jyi Fang, secretary general of the Energy Commission, the regulatory body which oversees the power industry, says that while there is only one official draft legislation document for the privatization of Taiwan Power, there are another seven competing bills which could eventually form the base privatization model. Each bill is sponsored by a different commercial interest group or political party. ?In Taiwan's fast changing political environment it is immensely difficult to predict which model will eventually be adopted,? says a local banker involved in several power project financings.
Taipower, the state-owned electric power utility, currently dominates Taiwan's electric power sector. The official draft electricity law proposes that Taipower be partially sold off but remain as the only transmission and distribution company in Taiwan. The government would keep about 30% of Taipower and the rest would be disposed through a public floatation on the stock market. Observers says Taipower's generation assets would be split into several new firms if the official draft bill does become law but Fang says the separate sell-off of generating assets is, ?by no means guaranteed.?
?What is certainly likely,? says Fang, ?is that the distribution and transmission assets remain under state control for the foreseeable future.? Fang says this is because electricity is viewed as a national security issue. ?Taiwan is very susceptible to natural events which can knock out the power grid, such as typhoons and earthquakes. The government feels its necessary to keep control of the power system to ensure that power can be up and running again as soon as possible if it gets knocked out.? Fang does believe that distribution will be partially opened up to the private sector, but not in this upcoming round of industry deregulation.
The privatization of Chinese Petroleum Corp (CPC) will probably take place before Taipower is sold. Fang says that the petroleum law which authorizes the sale of CPC is likely to be passed soon, ?by the end of this year,? he says. Market conditions permitting, CPC is therefore a strong candidate for a listing in 2002. The timetable for a new electricity law is much less clear. It is highly unlikely that the law will be passed this year.
The good news for foreign power companies with ambitions for the Taiwanese market is that the Energy Commission is urging the government to do away with the investment ceiling for foreign investors in a single electricity asset (the ceiling is currently 49%). Fang adds that the Taiwanese government is not taking a strong position on industry consolidation and mergers and acquisitions will largely go unchallenged.
Fang adds that the Energy Commission is also going to propose another round of IPP power station developments over the next few years. Although electricity demand projections have been reduced by Taiwan Power because of slower economic growth, Fang says that an addition 8,000 MW in generating capacity is likely to be needed between now and 2012.
Much but not all of this new generating capacity will be built by the private sector. At the end of last year government figures calculated Taipower's installed capacity at 27,000 MW, co-generation plants accounted for 5,100 MW of generation capacity, captive power stations for about 3,500 MW and IPPs for 2,200 MW. Fang says that by 2005 total IPP generating capacity will approach about 19% of total MW capacity in Taiwan. ?We think this ratio is a good one,? says Fang, indicating that thereafter further IPPs will not be approved unless electricity demand continues to rise.
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