There is a marked improvement in sentiment among bankers and sponsors about deal prospects in Vietnam this year. The last internationally syndicated project finance deal was a refinancing of the Phu Mi 2.2 power deal back in 2005. But this year at least three international deals could close, with more in the pipeline for completion next year.

"It has been years since energy projects were internationally financed in Vietnam, but we are very optimistic about 2010," says Conor McCoole, head of project and export finance for Asia at Standard Chartered. "We are tipping it for activity after a long interlude." With such a long hiatus between closed deals, bankers, advisers and sponsors have been using the time to develop new projects and fine tune structures. "The projects have now been a long time in development," says McCoole. "This is a very important growth market for us."

Twin catalysts for the market in private sector-financed infrastructure projects are a decrease in the availability of public sector financing and the new government decree – Decree 108 – which sets the framework for project financings in the country. Most of Vietnam's recent infrastructure investments have been financed with government funds and official development assistance from foreign governments. Both these amounts are set to decrease in coming years.

This decrease coincides with the realisation that the country's infrastructure will need much greater investment if it wants to ease significant restrictions on economic activity. According to government statistics, foreign direct investment in the country declined by 78% in 2009 from 2008 and recent surveys from PricewaterhouseCoopers and the Japan Bank for International Cooperation (JBIC) say that the biggest impediment for foreign investors coming into the country is poor infrastructure.

To create a more alluring environment for private sector infrastructure investment, the government issued Decree 108 on 15 January 2010. This decree replaces a previous Decree 78, issued in May 2007, which made it difficult for private lenders to enforce security over projects in the country. Decree 108 gives the Ministry of Planning and Investment much greater control over which projects go ahead or not, and streamlines project tendering and award processes. The decree also gives more clarity in areas such as taxation and security interests. It makes it clear that lenders to Vietnamese projects have the right to take control if the project gets into difficulty, a key first.

Nghi Son 2: A reluctant flag-bearer

As a result of the new decree, a number of projects that have been on the drawing board for a several years are now looking as if they might reach close. The most high profile deal is the Nghi Son 2 power financing. So far, eight bidding consortiums have pre-qualified: China Resources Power; Datang Power International; China Power International, Vinacomin and Lilama; EdF, Sumitomo and China Guodian (advised by HSBC); International Power (advised by Standard Chartered); Marubeni, Kepco and J-Power (advised by SMBC); One Energy and Electricity Generating of Thailand (advised by ANZ); and Suez and Mitsui (advised by Fortis Bank).

Bidding was intended to have closed by November 2009 but was then extended to May 2010. Much of this delay is understood to have been caused by the bidding groups' need to understand the new Decree and how it would affect the financing packages for the project. However, bankers speaking off the record say that there have also been delays caused by ground conditions at the project site.

The 25-year build-operate transfer concession involves building a coal-fired power plant of two 560MW units in the north central province of Thanh Hoa. The Ministry of Industry and Trade in Vietnam is leading the project and it is widely seen as the flagship that will lead other Vietnamese projects bank into international financial waters. The International Finance Corporation is advising the government on the project and is leading the bidding process. The IFC refused to comment on why the project has been delayed and what this might mean for the overall BOT programme in Vietnam.

Key to the project's success will be the GGU, or Government Guarantee and Undertaking. The GGU is extended by the government to the Electricity of Vietnam (EVN) which covers EVN's non-payment risk as offtaker. Other risks are mitigated by a dual tariff structure under which the fixed costs and variable costs of the project are paid for separately. The fixed costs are covered by the capacity charge and reflect the total capacity at the plant that is made available for the offtaker. The variable costs are covered by the energy charges and reflect the actual amount of electricity used by EVN.

According to the request for proposals, the dual tariff structure is designed so that "capacity charges should allow the BOT company to generate sufficient revenues to recover its capital amortisation, pay its fixed costs, service its project debt and realise equity returns for its sponsors. energy charges would be paid based on the volume of energy delivered by the BOT company to the offtaker and are designed to cover fuel costs (at specified heat rates) and variable operating and maintenance costs."

Do fuel companies make better offtakers?

This guarantee has the effect of minimising potential offtaker non-payment risk down the road. But it is really a reflection of the difficulty that borrowers and sponsors have in taking exposure to Vietnamese companies that do not have an explicit government guarantee. EVN is a case in point. It is in the process of being privatised (or equitised, in Vietnamese parlance). However, without an explicit guarantee from the Ministry of Finance, a project with an EVN offtake contract would be impossible to finance. In 2009 EVN went to the market to arrange a $342 million corporate facility to upgrade its transmission lines. The facility has backing from the Asian Development Bank and yet still has not closed, reflecting the difficulties corporate Vietnam has in attracting bank funding.

EVN has further issues as a result of the recent currency devaluation. In November 2009 the government cut the value of the dong and raised interest rates in order to curb inflation running at an annualised 28%. It was also an attempt to win back some currency competitiveness against the Chinese Renminbi, which is pegged to the US dollar. For EVN the devaluation put more pressure on its financing abilities, especially for international projects, as the dong portion of its revenues has decreased in dollar terms, reducing its coverage ratios for dollar obligations.

Moreover, EVN is facing increased competition in the power generation sector as a result of changes in regulation. PetroVietnam Power, a subsidiary of PetroVietnam, the national oil and gas group, is now active in the market. A third domestic entrant to the market this year is Vinacomin Power, a subsidiary of the state coal company.

PetroVietnam Power is sponsoring the 750MW Nhon Trach 2 power project south of Ho Chi Minh City in a consortium that includes J-Power of Japan. PVN mandated Citi as sole lead arranger of the debt for the project in the middle of 2009 and has named Siemens its equipment provider, in a deal worth a reported $375 million. Backing for the financing will thus come from Hermes, the German ECA. The tenor of the financing being sought is 12 years with an all in cost of between 5% and 7%.

"Pricing can be pretty competitive these days for Vietnamese projects," says Gary Chan, managing director, global banking head for Citi in Vietnam. "However if you look at the offshore syndicated loan market in general, it is there but only available for a handful of top borrowers and tenors are typically capped at three to five years. For longer-tenor financing, it really comes down to government support and agency backing."

ECAs and DFIs move on ports

The country's first domestic private sector-sponsored IPP is also approaching financing. The ITA Group is a Vietnamese property developer that builds and run business parks. It is now diversifying into infrastructure. It is building a new Kien Luong 1,200MW thermal power plant, which benefits from a government offtake guarantee. ITA has appointed Standard Chartered as adviser and will be seeking financing in coming months.

Alongside the government guarantees, the ECAs' involvement will be crucial. "Agency appetite for Vietnam remains keen," says Dung Ho, head of project & export finance (power) for Asia at Standard Chartered. "Many of them do not have that much exposure to the country in the private sector and so they want to expand. The ADB and others still have country lines open for the country."

Alongside the German, Japanese and Korean ECAs, the international DFIs are busy, not only helping craft the new project regime but also in individual deals. The IFC, on top of advising on Nghi Son 2, also debuted its Infrastructure Crisis Facility in Vietnam. The facility was established to provide both debt and equity to worthwhile projects that had stalled as a result of the financial crisis. The first deal from the facility was the financing of the SP-SSA International Container Services container-handling facility on the Cai Mep river. This $285 million project is sponsored by Carrix (49%), Vinalines (34%) and Saigon Port (17%). The container port will serve Ho Chi Minh City, 85km away on the Cai Mep river. The 60-hectare facility has three berths of 14m depths, and six cranes.

Overall the port sector could end up being the most active sector in the country, and 70% of the activity is in the Cai Mep–Thi Vai area, where a host of the world's major port operators have either begun construction of various port projects or have announced plans to do so. Perhaps the furthest along is Cai Mep International Terminal, a joint venture between Vinalines, Saigon Port and APM Terminals. Formed in 2007, the project company is developing the 1.1 million TEU container port, which is due for completion in late 2010.

In February 2009 Calyon, with backing from EKF, the Danish ECA, signed a $200 million club deal with Cai Mep International Terminal Company for the construction and operation of the port. Further down the river, Saigon International Terminals Vietnam arranged a club deal in December 2009 for $130 million from a syndicate of banks that comprised Bank of Tokyo-Mitsubishi UFJ, HSBC, Natixis and Oversea-Chinese Banking Corporation.

A second Cai Mep port project is being developed by Mitsui OSK Lines, Wan Hai and Hanjin, along with local partner Saigon Newport, to be opened in 2011. In September 2009, Formosa Plastics of Taiwan announced plans to develop a $1.2 billion deep water port in Son Duong, what it claims will be the largest deepwater port in Southeast Asia. According to bankers working in the sector, however, much of the debt for these port developments will have to sit on the balance sheets of large international shipping companies because Vietnamese partners lack access to the equity to back a project financing.

For projects to close in 2010, the presence of government guarantees will be crucial. "The appetite in the market is very much driven by whether the key state-owned enterprises or the government is directly behind the project or not, especially the large deals," says Chan at Citi.