Phu My's flight
n Monday 6 January 2003, a little over 12 months since the
financing ?kick-off' meeting took place somewhat inauspiciously at
the Hong Kong International Arbitration Centre, first drawdown
occurred under the limited recourse loan facilities for the Phu My
2.2 power project. As a project with many firsts, the financing was
a milestone both for the country and emerging market project
finance generally and was completed in an exceptionally fast
timeframe
Background
The Phu My 2.2 project is a 715MW gas-fired, combined cycle power plant currently being developed approx. 85km south-east of Ho Chi Minh City, Vietnam. The project evolved out of discussions between the World Bank and the Government of Vietnam and the World Bank's desire to see the Government employ greater private sector involvement in Vietnam's rapidly growing but cash strapped power sector. In October 1997, under the darkening clouds of the breaking Asian economic crisis, the Ministry of Industry of Vietnam (MOI) launched an international competitive tender for the project. The level of response was impressive and almost unimaginable today. From some 32 expressions of interest ten international consortia purchased the bid documents and six consortia led by Electricité de France (EDF), AES, Enron, Mitsubishi Corporation, Sithe and Tractebel submitted very competitive bids which were opened in front of the bidders in April 1998. The EDF-led consortium was selected as the preferred bidder in January 1999. Detailed negotiation of project agreements followed, leading to the execution of the agreements and issuance of an investment license for the project in September 2001. Then came the financing ...
The Phu My 2.2 project has a reasonably classical emerging market power project finance structure ? a special purpose project company builds a power plant under a fixed price, date certain engineering, procurement and construction (EPC) contract and then sells capacity and power to a utility offtaker under a power purchase agreement (PPA), purchasing fuel under a long term gas supply agreement (GSA), with the Vietnamese counterparty obligations supported under a government guarantee, etc. Minor variations abound such as the effective coordination of links and agreements between the project company and the various Vietnamese Government counterparties under an additional document (the BOT Contract). However, these do not change the conclusion that the project structure, and the basic risk allocation under it, is classic in nature and this article will not seek to further outline such structure, which will be familiar to most readers of Project Finance.
What sets the Phu My 2.2 financing apart is where it was done ? Vietnam. This is where the material firsts were ? including the first large international project financing and the first power project financing to reach first drawdown in Vietnam and the first interest rate swaps ever done in Vietnam, just to name a few. This article's focus is what was done to overcome the main Vietnamese specific issues that arose during the financing process and the legal framework that made it possible.
The authors believe the success of the project's financing rests on three pillars ? first the strong commercial rationale of the project, being an efficient, environmentally friendly and cost competitive project fuelled by indigenous fuel from the offshore Nam Con Son Basin and designed to meet strong continued power demand growth in the greater Ho Chi Minh City region, the industrial heartland of Vietnam; second the commitment to, and perseverance with, the project by the Vietnamese Government; and last but not least the complementary and considerable strengths each party involved brought to the project and the financing. Thus, though it was the project's location in Vietnam that presented the major challenges for the project, several Vietnamese factors were also critical parts of the financing's success.
As with all complex project financings, the story of the Phu My 2.2 project revolves around the parties involved. The main parties involved in the financing process were:
? The project company/borrower ? Mekong Energy Company Ltd. (MECO).
? The sponsors ? EDF, Sumitomo Corporation and the Tokyo Electric Power Company (TEPCO).
? The lenders and other parties providing guarantees or political risk insurance for the financing ? coordinating lead arrangers SG, ANZ and SMBC (the CLAs); the multilateral/bilateral agencies of Asian Development Bank (?ADB?), Japan Bank for International Cooperation (JBIC), Société de Promotion et de Participation pour la Coopération Economique (Proparco) and the World Bank (collectively, but strictly incorrectly, known as the MLAs in deal discussions?); and Sovereign Risk Insurance.
? The Vietnamese project counterparties (collectively known as the VPC's in deal discussions) ? MOI as the project's coordinating agency, Electricity of Vietnam (EVN) as the project's offtaker, PetroVietnam as the project's fuel supplier, the State Bank of Vietnam (SBV) and the Ministries of Finance, Justice and Planning and Investment, just to name a few.
? The advisors ? in particular ANZ (1997 to 2001) then SG (2002) as financial advisor to the borrower; legal counsel to the lenders ? Clifford Chance (international), VILAF-Hong Duc (local) and Freshfields (JBIC); legal counsel to the borrower ? Allen & Overy (international) and GLN (local); and the lenders' technical, insurance and Vietnamese tax advisors ? PB Power, Willis and PriceWaterhouseCoopers respectively.
The complementary strengths these parties brought to the project and its financing were and are considerable. On the sponsor side, EDF is one of the world's largest utilities. Sumitomo Corporation is a major investor in Vietnam with considerable on the ground experience and TEPCO is the world's largest and most experienced operator of combined cycle technology and was the first company to employ the General Electric ?F' technology advanced combined cycle turbines utilised by the project. On the lender side, the CLAs are three of the most experienced banks in Asian emerging market project finance and the MLAs are the most important aid/development agencies supporting Vietnam's development and economic growth.
A deal in Vietnam?
1. Financial plan
Vietnam has been at the periphery of what was achievable in limited recourse finance and many forms of debt, and particularly commercial debt, had previously either not been available or available only in very limited amounts. Hence, the finance plan employed for the project revolved primarily around the MLAs. This served a number of purposes:
? Made available the volume of funds required by the project; and
? Brought direct (guarantees) and/or indirect (the comfort brought by their presence) political risk insurance to the project. In emerging markets like Vietnam, such support remains indispensable.
International commercial banks led by the CLAs then essentially made up the balance of the financing with the CLAs also bringing the important organisational, structuring and process driving services essential for completing a financing of this nature.
The final financial plan for the project includes $340 million of limited recourse loans provided by the lenders and $140 million of equity provided by the sponsors. The loans, which range in tenor from 11 to 16 years, are broken down as follows:
Facility Amount ($)
JBIC Loan Facility 150 million
Proparco Loan Facility 40 million
ADB OCR Loan Facility 50 million
ADB PRG Facility1 25 million
IDA Guaranteed Facility1 75 million
Total 340 million
1Provided by international commercial banks
The JBIC Loan Facility, the Proparco Loan Facility and the ADB OCR Loan Facility are direct loans from those MLAs.
The ADB PRG Facility is a loan provided by the international commercial banks with extended political risk insurance provided by ADB, but backed-off by ADB to Sovereign Risk Insurance, a private political risk insurer. Thus, ADB takes no risk under this facility. The primary purpose of the structure is to enable the private insurer to directly share ADB's preferred credit status and can essentially be seen as a ?B' loan structure for the insurer.
The IDA Guaranteed Facility is a loan provided by the international commercial banks with a partial risk guarantee from the International Development Association (IDA) of the World Bank.
The financial plan developed by the sponsors and their advisors dealt successfully with the issues in raising funds in Vietnam. Minor changes were required by the CLAs reflecting a critical concern of the CLAs, driven by past history and the particular concerns of providing loans to Vietnam, to ensure that any political risk insurance provided actually ?worked' and provided genuine cover for the risks being insured.
One major complication of the financial plan was the intercreditor issues it created. This was a mix of the ?normal' intercreditor issues created by any multi-party project financing and the specific requirement of the CLAs, again driven by past history and the particular concerns of providing loans to Vietnam, to ensure that the ability of the commercial banks to access the political risk insurance would not be fettered by intercreditor voting arrangements. After several months of intermittent (though at times intensive) discussions on the issue the lenders, supported in their efforts to reach an agreement by the sponsors, were able to craft an agreement that met the concerns of all parties.
2. Political risk
Political risk was an issue of primary concern for the lenders throughout the financing process. This encompassed a range of issues including the risk of breach of contract by the VPCs and foreign exchange availability and transferability.
Political risk issues were solved in a number of ways:
? Contractual ? the Phu My 2.2 documents were heavily negotiated by the sponsors and subsequently further tightened by the lenders to ensure that all political risks were passed back to the Government of Vietnam.
? Commercial ? the lenders were greatly comforted by the strong commercial rationale of the project and in particular its highly competitive tariff, its use of indigenous fuel, its complementary mix of highly experienced sponsors and the clear need for additional generating capacity in Vietnam, which lowers the political risk profile of the project.
? Self insurance ? the presence in the financial plan of the main development/aid agencies for Vietnam ? namely ADB, JBIC, the World Bank and Proparco/Agence Française de Dévelopment provides significant comfort.
? Acceptance ? each lender understood coming into the deal that the project was in Vietnam and that whilst all contractual and other care would be taken, no contractual structure alone could protect the lenders from all political risks. As each lender was an experienced provider of emerging market limited recourse finance, each lender was able to quickly understand and accept a certain level of risk inherent in doing business in the country. This factor was to prove critical in the ability of the financing to be closed in the timeframe it was. In addition, as the process of negotiating the requirements of the lenders with the Vietnamese Government progressed and the results of each day's negotiations were reviewed among the lender working group and their advisors each evening over an occasional Graham Green, the intangible but important factors of trust and confidence emerged. Whilst being extremely tough negotiators, the Vietnamese Government and in particular the coordinating agency, MOI, impressed the lenders with their relatively high level of professionalism, integrity and support for the project.
? Political risk insurance ? for international commercial bank lenders driven primarily by risk/return considerations but with understandably lower ceilings on the political risk side of the equation than the MLAs, the above listed factors would be insufficient in themselves to support a financing in a country like Vietnam. Hence, extended political risk insurance from IDA and Sovereign Risk Insurance was sourced to cover the international commercial bank loans for defined political risks.
3. Legal framework
The Vietnamese Government's commitment to attracting foreign investment for infrastructure projects is evidenced by its proactive approach to the introduction of a legal framework intended to support such investment. Some examples of this improved legal framework include:
BOT Contract ? Decree 62 (1998) and Decree 02 (1999) were promulgated for Build-Operate-Transfer Contracts, Build-Transfer-Operate Contracts and Build-Transfer Contracts with foreign investors to be legal in Vietnam; one key element of Decrees 62 and 02 is the concept of an ?Authorised State Body? which in the case of the Phu My 2.2 project was the MOI; the Authorised State Body is charged with the responsibility of acting as a ?window? for the sponsors and the lenders to use in their negotiations with all of the interested Vietnamese parties; Decree 02 also permits the parties to a BOT Contract (and other contracts pursuant to which the Vietnamese parties' obligations are guaranteed by an authorised Vietnamese authority) to select a foreign law as the governing law of the contracts, provided that such a choice of governing law is not contrary to the laws of Vietnam and it is approved by the Ministry of Justice.
Security ? Decree 165 (1999) and the establishment in June 2002 of the National Office for Registration of Security Transactions (NORST) are two significant steps taken by the Vietnamese Government to improve lenders' prospects of taking effective security in Vietnam; Decree 165 permits certain security interests to be created under Vietnamese law in favour of offshore parties, for example, a pledge of onshore bank accounts; NORST's creation means that effective Vietnamese security may now be registered in Vietnam; there are difficult areas relating to offshore lenders taking effective security over land use rights but in this project it was possible to effect such a security interest following a specific approval from the Government of Vietnam of the relevant security instrument.
Foreign Exchange ? Under Vietnamese law, foreign invested projects are entitled to convert Vietnamese Dong into foreign currency without being required to obtain an approval from SBV. Being entitled to convert is some comfort, but availability of sufficient levels of foreign currency was an issue for a project generating revenue in Dong with USD debt obligations. The Foreign Investment Law of Vietnam does however have three classifications for foreign invested projects for the purpose of availability of foreign currency. These classifications are (i) especially important projects; (ii) infrastructure and other important projects; and (iii) other ordinary projects. Given the Vietnamese Government's view that this project is one of national importance it comes within the first classification which enables it to receive a guarantee of foreign currency availability from the Government. This guarantee of availability requires an onshore bank to act as a converting bank. In an effort to clarify how this converting bank function is to be discharged, the SBV issued SBV Decision 218 in 2002. Decision 218 includes a detailed conversion procedure which, in conjunction with appropriate contractual arrangements between the project company and the converting bank and the relevant Government guarantee, was considered by lenders and sponsors to be appropriate mitigation of the risks of availability of foreign currency and conversion of Dong revenue into dollars.
This legal framework is clear evidence of the commitment of the Vietnamese Government to the attraction of foreign investment. However, taking the framework forward and achieving a successful financing of the Phu My 2.2 project under it was a challenge that was principally overcome by the efforts and approach of the VPCs, the sponsors, MECO, the lenders and their respective advisers. All parties worked hard to test, develop and utilise the framework and, as is to be expected when new laws and procedures are being used as a foundation, all parties were required to be pragmatic and open minded whilst protecting their various and at times, competing interests.
4. Vietnamese negotiations
Early in the financing process, following completion of due diligence, a lender working group (one of many!) was formed to negotiate the lenders' requirements and complete the financing process with the VPCs. This working group consisted of SG as documentation bank, JBIC, ADB, Clifford Chance and VILAF. MOI, as the Authorised State Body, coordinated sessions and effectively acted as lead negotiator for the VPCs. Negotiations took place in a series of meetings over a period of several months in Hanoi. The meeting process was supplemented by regular explanation and follow up with individual VPC's by VILAF in Vietnam, which clearly demonstrated the importance of local membership of the negotiation team.
Some of the topics dealt with by the working group were:
? Vietnam Project Documents and Acknowledgements & Consents ? following the lenders' due diligence process there were a number of material issues with the underlying Vietnamese project documents which the lenders required to be raised with the VPCs for clarification. These items were discussed with the VPCs and where necessary were incorporated into amendment and clarification documentation. The working group had meetings with each of the VPC's to discuss acknowledgements and consents from each of them in respect of the lenders' step-in rights and security interests that MECO had created in favour of the lenders. These acknowledgements and consents were ultimately obtained from six VPCs following a number of meetings and drafts with the final text reflecting a cohesive and reasonable step-in regime acceptable to all parties.
? SBV Approvals ? Pursuant to Vietnamese law, the final form of the finance and security documents for this project had to be submitted to SBV for its approval prior to their execution and following their execution had to be registered with SBV. The English version of these documents included a common terms agreement of some 250 pages supported by in excess of 20 other finance and security documents, including ISDA Master Agreements and schedules for the interest rate swaps. Reflecting the tight timeframe, Vietnamese translations were made prior to the final finance and security documents being completed and the Vietnamese drafts tracked the English language versions as they were finalised. Ultimately, the entire bundle (in English and Vietnamese) was submitted to SBV for its approval. It had been estimated that this approval process would take one month but with the dedicated support of VILAF who met repeatedly with SBV and assisted them with the approval process, the approval was obtained for the finance and security documents (and including the first approval for interest swaps in Vietnam) in a much shorter timeframe.
Conclusion
The Phu My 2.2 financing has set a clear benchmark for projects to follow in Vietnam. The financing is a first but with continued strong demand growth and the support of the Vietnamese Government, it will certainly not be the last. The financing of one other power station is expected to be completed during the course of 2003 and more will almost certainly follow. This may also be good news for the Vietnamese art industry if the number of paintings having been acquired during the course of the Phu My 2.2 project by many of parties involved is indicative of the trend.
The benefits the Phu My 2.2 project brings to Vietnam are considerable. These include a highly competitive tariff and a state of the art power plant, at no capital cost to the Vietnam Government. As a market precedent, the project also punches above its weight and can be expected to act as a catalyst for further investment and fund flows in the country as other investors, supported by their lenders, see from the project that such things are possible in Vietnam.
The project's financing also demonstrates clearly that sponsors and lenders will continue to invest and provide funds for projects that make commercial sense, are appropriately structured and are supported by the host government, even though such projects may otherwise be located in difficult markets.
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Background
The Phu My 2.2 project is a 715MW gas-fired, combined cycle power plant currently being developed approx. 85km south-east of Ho Chi Minh City, Vietnam. The project evolved out of discussions between the World Bank and the Government of Vietnam and the World Bank's desire to see the Government employ greater private sector involvement in Vietnam's rapidly growing but cash strapped power sector. In October 1997, under the darkening clouds of the breaking Asian economic crisis, the Ministry of Industry of Vietnam (MOI) launched an international competitive tender for the project. The level of response was impressive and almost unimaginable today. From some 32 expressions of interest ten international consortia purchased the bid documents and six consortia led by Electricité de France (EDF), AES, Enron, Mitsubishi Corporation, Sithe and Tractebel submitted very competitive bids which were opened in front of the bidders in April 1998. The EDF-led consortium was selected as the preferred bidder in January 1999. Detailed negotiation of project agreements followed, leading to the execution of the agreements and issuance of an investment license for the project in September 2001. Then came the financing ...
The Phu My 2.2 project has a reasonably classical emerging market power project finance structure ? a special purpose project company builds a power plant under a fixed price, date certain engineering, procurement and construction (EPC) contract and then sells capacity and power to a utility offtaker under a power purchase agreement (PPA), purchasing fuel under a long term gas supply agreement (GSA), with the Vietnamese counterparty obligations supported under a government guarantee, etc. Minor variations abound such as the effective coordination of links and agreements between the project company and the various Vietnamese Government counterparties under an additional document (the BOT Contract). However, these do not change the conclusion that the project structure, and the basic risk allocation under it, is classic in nature and this article will not seek to further outline such structure, which will be familiar to most readers of Project Finance.
What sets the Phu My 2.2 financing apart is where it was done ? Vietnam. This is where the material firsts were ? including the first large international project financing and the first power project financing to reach first drawdown in Vietnam and the first interest rate swaps ever done in Vietnam, just to name a few. This article's focus is what was done to overcome the main Vietnamese specific issues that arose during the financing process and the legal framework that made it possible.
The authors believe the success of the project's financing rests on three pillars ? first the strong commercial rationale of the project, being an efficient, environmentally friendly and cost competitive project fuelled by indigenous fuel from the offshore Nam Con Son Basin and designed to meet strong continued power demand growth in the greater Ho Chi Minh City region, the industrial heartland of Vietnam; second the commitment to, and perseverance with, the project by the Vietnamese Government; and last but not least the complementary and considerable strengths each party involved brought to the project and the financing. Thus, though it was the project's location in Vietnam that presented the major challenges for the project, several Vietnamese factors were also critical parts of the financing's success.
As with all complex project financings, the story of the Phu My 2.2 project revolves around the parties involved. The main parties involved in the financing process were:
? The project company/borrower ? Mekong Energy Company Ltd. (MECO).
? The sponsors ? EDF, Sumitomo Corporation and the Tokyo Electric Power Company (TEPCO).
? The lenders and other parties providing guarantees or political risk insurance for the financing ? coordinating lead arrangers SG, ANZ and SMBC (the CLAs); the multilateral/bilateral agencies of Asian Development Bank (?ADB?), Japan Bank for International Cooperation (JBIC), Société de Promotion et de Participation pour la Coopération Economique (Proparco) and the World Bank (collectively, but strictly incorrectly, known as the MLAs in deal discussions?); and Sovereign Risk Insurance.
? The Vietnamese project counterparties (collectively known as the VPC's in deal discussions) ? MOI as the project's coordinating agency, Electricity of Vietnam (EVN) as the project's offtaker, PetroVietnam as the project's fuel supplier, the State Bank of Vietnam (SBV) and the Ministries of Finance, Justice and Planning and Investment, just to name a few.
? The advisors ? in particular ANZ (1997 to 2001) then SG (2002) as financial advisor to the borrower; legal counsel to the lenders ? Clifford Chance (international), VILAF-Hong Duc (local) and Freshfields (JBIC); legal counsel to the borrower ? Allen & Overy (international) and GLN (local); and the lenders' technical, insurance and Vietnamese tax advisors ? PB Power, Willis and PriceWaterhouseCoopers respectively.
The complementary strengths these parties brought to the project and its financing were and are considerable. On the sponsor side, EDF is one of the world's largest utilities. Sumitomo Corporation is a major investor in Vietnam with considerable on the ground experience and TEPCO is the world's largest and most experienced operator of combined cycle technology and was the first company to employ the General Electric ?F' technology advanced combined cycle turbines utilised by the project. On the lender side, the CLAs are three of the most experienced banks in Asian emerging market project finance and the MLAs are the most important aid/development agencies supporting Vietnam's development and economic growth.
A deal in Vietnam?
1. Financial plan
Vietnam has been at the periphery of what was achievable in limited recourse finance and many forms of debt, and particularly commercial debt, had previously either not been available or available only in very limited amounts. Hence, the finance plan employed for the project revolved primarily around the MLAs. This served a number of purposes:
? Made available the volume of funds required by the project; and
? Brought direct (guarantees) and/or indirect (the comfort brought by their presence) political risk insurance to the project. In emerging markets like Vietnam, such support remains indispensable.
International commercial banks led by the CLAs then essentially made up the balance of the financing with the CLAs also bringing the important organisational, structuring and process driving services essential for completing a financing of this nature.
The final financial plan for the project includes $340 million of limited recourse loans provided by the lenders and $140 million of equity provided by the sponsors. The loans, which range in tenor from 11 to 16 years, are broken down as follows:
Facility Amount ($)
JBIC Loan Facility 150 million
Proparco Loan Facility 40 million
ADB OCR Loan Facility 50 million
ADB PRG Facility1 25 million
IDA Guaranteed Facility1 75 million
Total 340 million
1Provided by international commercial banks
The JBIC Loan Facility, the Proparco Loan Facility and the ADB OCR Loan Facility are direct loans from those MLAs.
The ADB PRG Facility is a loan provided by the international commercial banks with extended political risk insurance provided by ADB, but backed-off by ADB to Sovereign Risk Insurance, a private political risk insurer. Thus, ADB takes no risk under this facility. The primary purpose of the structure is to enable the private insurer to directly share ADB's preferred credit status and can essentially be seen as a ?B' loan structure for the insurer.
The IDA Guaranteed Facility is a loan provided by the international commercial banks with a partial risk guarantee from the International Development Association (IDA) of the World Bank.
The financial plan developed by the sponsors and their advisors dealt successfully with the issues in raising funds in Vietnam. Minor changes were required by the CLAs reflecting a critical concern of the CLAs, driven by past history and the particular concerns of providing loans to Vietnam, to ensure that any political risk insurance provided actually ?worked' and provided genuine cover for the risks being insured.
One major complication of the financial plan was the intercreditor issues it created. This was a mix of the ?normal' intercreditor issues created by any multi-party project financing and the specific requirement of the CLAs, again driven by past history and the particular concerns of providing loans to Vietnam, to ensure that the ability of the commercial banks to access the political risk insurance would not be fettered by intercreditor voting arrangements. After several months of intermittent (though at times intensive) discussions on the issue the lenders, supported in their efforts to reach an agreement by the sponsors, were able to craft an agreement that met the concerns of all parties.
2. Political risk
Political risk was an issue of primary concern for the lenders throughout the financing process. This encompassed a range of issues including the risk of breach of contract by the VPCs and foreign exchange availability and transferability.
Political risk issues were solved in a number of ways:
? Contractual ? the Phu My 2.2 documents were heavily negotiated by the sponsors and subsequently further tightened by the lenders to ensure that all political risks were passed back to the Government of Vietnam.
? Commercial ? the lenders were greatly comforted by the strong commercial rationale of the project and in particular its highly competitive tariff, its use of indigenous fuel, its complementary mix of highly experienced sponsors and the clear need for additional generating capacity in Vietnam, which lowers the political risk profile of the project.
? Self insurance ? the presence in the financial plan of the main development/aid agencies for Vietnam ? namely ADB, JBIC, the World Bank and Proparco/Agence Française de Dévelopment provides significant comfort.
? Acceptance ? each lender understood coming into the deal that the project was in Vietnam and that whilst all contractual and other care would be taken, no contractual structure alone could protect the lenders from all political risks. As each lender was an experienced provider of emerging market limited recourse finance, each lender was able to quickly understand and accept a certain level of risk inherent in doing business in the country. This factor was to prove critical in the ability of the financing to be closed in the timeframe it was. In addition, as the process of negotiating the requirements of the lenders with the Vietnamese Government progressed and the results of each day's negotiations were reviewed among the lender working group and their advisors each evening over an occasional Graham Green, the intangible but important factors of trust and confidence emerged. Whilst being extremely tough negotiators, the Vietnamese Government and in particular the coordinating agency, MOI, impressed the lenders with their relatively high level of professionalism, integrity and support for the project.
? Political risk insurance ? for international commercial bank lenders driven primarily by risk/return considerations but with understandably lower ceilings on the political risk side of the equation than the MLAs, the above listed factors would be insufficient in themselves to support a financing in a country like Vietnam. Hence, extended political risk insurance from IDA and Sovereign Risk Insurance was sourced to cover the international commercial bank loans for defined political risks.
3. Legal framework
The Vietnamese Government's commitment to attracting foreign investment for infrastructure projects is evidenced by its proactive approach to the introduction of a legal framework intended to support such investment. Some examples of this improved legal framework include:
BOT Contract ? Decree 62 (1998) and Decree 02 (1999) were promulgated for Build-Operate-Transfer Contracts, Build-Transfer-Operate Contracts and Build-Transfer Contracts with foreign investors to be legal in Vietnam; one key element of Decrees 62 and 02 is the concept of an ?Authorised State Body? which in the case of the Phu My 2.2 project was the MOI; the Authorised State Body is charged with the responsibility of acting as a ?window? for the sponsors and the lenders to use in their negotiations with all of the interested Vietnamese parties; Decree 02 also permits the parties to a BOT Contract (and other contracts pursuant to which the Vietnamese parties' obligations are guaranteed by an authorised Vietnamese authority) to select a foreign law as the governing law of the contracts, provided that such a choice of governing law is not contrary to the laws of Vietnam and it is approved by the Ministry of Justice.
Security ? Decree 165 (1999) and the establishment in June 2002 of the National Office for Registration of Security Transactions (NORST) are two significant steps taken by the Vietnamese Government to improve lenders' prospects of taking effective security in Vietnam; Decree 165 permits certain security interests to be created under Vietnamese law in favour of offshore parties, for example, a pledge of onshore bank accounts; NORST's creation means that effective Vietnamese security may now be registered in Vietnam; there are difficult areas relating to offshore lenders taking effective security over land use rights but in this project it was possible to effect such a security interest following a specific approval from the Government of Vietnam of the relevant security instrument.
Foreign Exchange ? Under Vietnamese law, foreign invested projects are entitled to convert Vietnamese Dong into foreign currency without being required to obtain an approval from SBV. Being entitled to convert is some comfort, but availability of sufficient levels of foreign currency was an issue for a project generating revenue in Dong with USD debt obligations. The Foreign Investment Law of Vietnam does however have three classifications for foreign invested projects for the purpose of availability of foreign currency. These classifications are (i) especially important projects; (ii) infrastructure and other important projects; and (iii) other ordinary projects. Given the Vietnamese Government's view that this project is one of national importance it comes within the first classification which enables it to receive a guarantee of foreign currency availability from the Government. This guarantee of availability requires an onshore bank to act as a converting bank. In an effort to clarify how this converting bank function is to be discharged, the SBV issued SBV Decision 218 in 2002. Decision 218 includes a detailed conversion procedure which, in conjunction with appropriate contractual arrangements between the project company and the converting bank and the relevant Government guarantee, was considered by lenders and sponsors to be appropriate mitigation of the risks of availability of foreign currency and conversion of Dong revenue into dollars.
This legal framework is clear evidence of the commitment of the Vietnamese Government to the attraction of foreign investment. However, taking the framework forward and achieving a successful financing of the Phu My 2.2 project under it was a challenge that was principally overcome by the efforts and approach of the VPCs, the sponsors, MECO, the lenders and their respective advisers. All parties worked hard to test, develop and utilise the framework and, as is to be expected when new laws and procedures are being used as a foundation, all parties were required to be pragmatic and open minded whilst protecting their various and at times, competing interests.
4. Vietnamese negotiations
Early in the financing process, following completion of due diligence, a lender working group (one of many!) was formed to negotiate the lenders' requirements and complete the financing process with the VPCs. This working group consisted of SG as documentation bank, JBIC, ADB, Clifford Chance and VILAF. MOI, as the Authorised State Body, coordinated sessions and effectively acted as lead negotiator for the VPCs. Negotiations took place in a series of meetings over a period of several months in Hanoi. The meeting process was supplemented by regular explanation and follow up with individual VPC's by VILAF in Vietnam, which clearly demonstrated the importance of local membership of the negotiation team.
Some of the topics dealt with by the working group were:
? Vietnam Project Documents and Acknowledgements & Consents ? following the lenders' due diligence process there were a number of material issues with the underlying Vietnamese project documents which the lenders required to be raised with the VPCs for clarification. These items were discussed with the VPCs and where necessary were incorporated into amendment and clarification documentation. The working group had meetings with each of the VPC's to discuss acknowledgements and consents from each of them in respect of the lenders' step-in rights and security interests that MECO had created in favour of the lenders. These acknowledgements and consents were ultimately obtained from six VPCs following a number of meetings and drafts with the final text reflecting a cohesive and reasonable step-in regime acceptable to all parties.
? SBV Approvals ? Pursuant to Vietnamese law, the final form of the finance and security documents for this project had to be submitted to SBV for its approval prior to their execution and following their execution had to be registered with SBV. The English version of these documents included a common terms agreement of some 250 pages supported by in excess of 20 other finance and security documents, including ISDA Master Agreements and schedules for the interest rate swaps. Reflecting the tight timeframe, Vietnamese translations were made prior to the final finance and security documents being completed and the Vietnamese drafts tracked the English language versions as they were finalised. Ultimately, the entire bundle (in English and Vietnamese) was submitted to SBV for its approval. It had been estimated that this approval process would take one month but with the dedicated support of VILAF who met repeatedly with SBV and assisted them with the approval process, the approval was obtained for the finance and security documents (and including the first approval for interest swaps in Vietnam) in a much shorter timeframe.
Conclusion
The Phu My 2.2 financing has set a clear benchmark for projects to follow in Vietnam. The financing is a first but with continued strong demand growth and the support of the Vietnamese Government, it will certainly not be the last. The financing of one other power station is expected to be completed during the course of 2003 and more will almost certainly follow. This may also be good news for the Vietnamese art industry if the number of paintings having been acquired during the course of the Phu My 2.2 project by many of parties involved is indicative of the trend.
The benefits the Phu My 2.2 project brings to Vietnam are considerable. These include a highly competitive tariff and a state of the art power plant, at no capital cost to the Vietnam Government. As a market precedent, the project also punches above its weight and can be expected to act as a catalyst for further investment and fund flows in the country as other investors, supported by their lenders, see from the project that such things are possible in Vietnam.
The project's financing also demonstrates clearly that sponsors and lenders will continue to invest and provide funds for projects that make commercial sense, are appropriately structured and are supported by the host government, even though such projects may otherwise be located in difficult markets.
Back to contents
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