Profiling Nam Theun 27 May 2010
Nam Theun 2 is one of the largest foreign investment project ever undertaken in Laos and is being developed as a venture with neighbouring Thailand. As the project begins full commercial supply to Thailand, we take a look at the history behind this important scheme
Lao PDR is one of the world’s least developed countries. However, the Lao government is taking steps to alleviate poverty and move the country away from this ‘least developed’ status by 2020. The hydro power sector, which is one of the county’s major sources of growth, has the potential to generate significant revenue and play a vital role in this regeneration.
The potential for hydro power projects on the Nam Theun river was first identified in the mid 1970s. In the early 1990s the government of Lao viewed the 1070MW Nam Theun 2 hydro power project in Khammouane province as being key to social and economic development within the country. Detailed studies of project proposals were carried out over the following decades.
During 1989-91 a World Bank feasibility study was undertaken by the Snowy Mountains Engineering Corp. Then in 1993 an agreement to develop the project, in accordance with World Bank guidelines, was signed between the government of Lao PDR and private sponsors.
The Asian financial crisis during 1997-8 forced a delay in developing the project. While the design and preparation of comprehensive social, economic and environmental safeguards took more than ten years, construction finally got underway in earnest in June 2005. All construction, environmental and social activities are currently on track for the scheduled start of commercial operation in December 2009. The environmental and social programme is set to continue from 2010-2015.
Independent panels of experts describe the Nam Theun 2 project as having the greatest potential to achieve the country’s development goals. With a total cost of almost US$1.6B, equivalent to more than 85% of annual GDP, the project is pivotal to the country’s economic fortunes. The scheme is forecasted to generate average annual revenues of US$80M to the Lao PDR in the form of taxes, royalty charges and dividends over the life of the project concession. Under the terms of a revenue-generated management programme to be implemented by the government and under supervision of the World Bank and the Asian Development Bank, more than US$2B of income revenue will be generated over the project’s initial 25-year operating period. This will be used to reduce poverty and assist development in the country.
At the end of the concession the project will be transferred to the government free of charge with all revenue then accruing to the government. It is predicted that Nam Theun 2 will be one of the largest single sources of foreign exchange income to Lao PDR.
The project is seen to exemplify how the government is working with the private sector and multilateral organisations to develop a model of sustainable development, with a strong focus on economic, social and environmental factors. A robust environmental and social impact safeguards programme has been designed with several of the participating financial institutions, and will be fully funded as part of the project’s budget.
Nam Theun 2 is a 1070MW transbasin hydro power scheme. It will divert the upper flow of the Nam Theun river from the Nakai plateau, into the Xe Bang Fai river in the Khammouane plain in Lao PDR. It is capable of producing 6000GWh per year.
Of the total installed capacity, 995MW will be sold to the Electricity Generating Authority of Thailand (EGAT) on the basis of a long term, take-or-pay power purchase agreement which was signed in 2003. Electricite du Laos (EDL) will also be supplied with 75MW of generating capacity.
The project is owned by the Nam Theun 2 Power Company (NTPC), which is a limited company incorporated under the law of Lao PDR. NTPC will build, own, operate and then transfer the project to the government at the end of a 25-year operating period.
NTPC’s shareholders are:
• 35% – Electricitie de France (edf). NTPC has also contracted the main construction activities at Nam Theun 2 to EDF, where it will act as head contractor under a turnkey contract. EDF is one of the largest electric utilities in the world with a total generating capacity exceeding 100,000MW in France, 21,000MW of which comes from hydro power.
• 25% – Lao Holding State Enterprise (LHSE). This is a state-owned company under the jurisdiction of the Ministry of Finance in Lao PDR. It was established in February 2005 to have responsibility for holding the government of Lao PDR’s shares in NTPC. It was created as an entity through which the government’s Nam Theun 2 revenue will pass.
• 25% – Electricity Generating Public Company (EGCO) of Thailand. This is a leading owner and operator of independent power plants in Thailand.
• 15% – Italian-Thai Development Public Company Limited of Thailand. ITD is the largest publicly listed infrastructure construction company in Thailand.
Financial close for the project was achieved in June 2005 and is described as being complex, innovative and ambitious. In total, 26 financial institutions provided debt finance for the project under 11 different debt facilities. As such the Nam Theun 2 project represents the largest and most diverse form of project financing ever undertaken in Asia.
Many of the solutions pioneered in this financing are expected to establish NT2 as a valued model of project finance for public-private partnerships.
A total of US$1.58B in capital commitments for NTPC was completed in May 2005 to finance the total base project cost of US$1.25B, plus additional amounts for contingency and ancillary bonding facilities. The senior debt facilities include political risk guarantees from the Asian Development Bank (ADB), the World Bank and the Multilateral Investment Guarantee Agency (MIGA). Export credit support was provided by COFACE of France, EKN of Sweden and GIEK of Norway. Direct loans were also provided from a number of multilateral and bilateral development agencies including the ADB, Nordic Investment Bank, Agence Francaise de Development, PROPARCO and the Export-Import bank of Thailand.
Long term loans are being provided to NTPC by:
• Nine international commercial banks – ANZ, BNP Apribas, BOTM, Calyon, Fortis Bank, ING, KBC, SG and Standard Chartered.
• Seven Thai commercial banks – Bangkok Bank, Bank of Ayudhya, Kasikornbank, Krung Thai Bank, Siam City Bank, Siam Commercial Bank and Thai Military Bank.
In addition to senior loan facilities, shareholders are completing the project financing by contributing equity pro-rata their respective participation in NTPC. The equity contribution of LHSE is financed by loans, grants and other financing from institutions including the AFD, ADB, European Investment Bank and the World Bank.
The project is a prime example of the changes which have taken place in structuring project-financed deals, such as detailing political risk mitigation, currency risk beyond historical exchange rates and greater environmental assessment work.
Political risk mitigation
The challenges of a cross-border deal and an undeveloped regulatory framework had to be overcome in order to work out the mechanisms for successful financing of the Nam Theun 2 project.
The contractual structure was developed under two aspects: to ensure that Thai political risks were satisfactorily addressed under the PPA with EGAT; and that the Lao PDR political risks were allocated to the government under the concession agreement consistent with precedents for emerging market projects.
But the risk allocation proved to be problematic as neither the government nor EGAT was prepared to bear risks across the Mekong river boundary. Furthermore, the backers would not assume the consequences of force majeure in the other’s country or the other partner. And, should the project not get that far in development there was a need to have clarity, and agreement, on any potential competing claims if Nam Theun 2 had to be shelved. Clearly, there were many barriers to overcome and have the parties amicably work together.
There were further challenges at the start of the concession negotiations for NTPC and its advisers. A strategy was also implemented to compensate for uncertainties surrounding the legal framework in Lao PDR which, some believed, was not sufficiently developed in a number of areas. NTPC gained clarifications on contradictory existing laws as concession arrangements moved through the legal approval process.
A key major risk mitigation factor was the involvement of the major finance organisations, including the World Bank, Asian Development Bank (ADB), European Investment Bank (EIB), Nordic Investment Bank (NIB), European development finance institutions and export credit agencies. They were to provide a combination of both debt and equity-related financing. In addition, the institutions would ensure, through ongoing monitoring, that the revenue management programme would be properly implemented, and that royalty, tax and dividend revenues would be channelled as appropriate to fund social and economic development.
In respect of potential Thai political risks, the highly attractive 2009 tariff of approximately US$0.04/kWh meant that EGAT would enjoy sustained economic advantages from the PPA, thus reducing the risks of breach of contract. Comfort was also drawn from the unbroken 30-year history of cross-border sales between Lao PDR and Thailand, and the memorandum of understanding on electricity exchanges between the countries. The involvement of all the major Thai commercial banks and Thai-Exim added a further level of reassurance to the non-Thai parties.
As such, it became increasingly evident during the project’s development that the single greatest risk mitigant was the project itself. It was not in the interests of any party to do anything to prejudice a project that was both a supplier of cheap electricity to EGAT and a significant source of revenues for Lao PDR.
Limiting foreign exchange risk
Structuring the currency profile of the funding to match that of the upfront project costs and later revenues, mitigated currency risk and provided a natural hedge against the tariff structure. This required that the underlying long-term debt structure be dominated half in Thai baht, raised from Thai commercial lenders, but the volume was significantly higher than for any other Lao PDR project.
Environmental and social impact mitigation
From the earliest stage of development, the sponsors were keenly aware of the requirement to establish the highest standards for the mitigation of environmental and social impacts, while conforming to the requirements of a project-financed deal and the accessible skills of developers in the energy sector.
The involvement of the World Bank, ADB, EIB, other organisations and commercial banks meant that the project was required to meet an unparalleled number of institutional requirements and international guidelines. The environmental and social mitigation obligations of the sponsors were developed in liaison with a number of agencies, public consultation, and workshops guided by safeguard planning documents, enshrined within the concession agreement.
The project was contractually committed to spend more than US$100M in mitigating environmental and social impacts during the construction period, meaning the obligations were significant. The sum included US$60M on technical design modifications following discussions with affected parties. On top, a further US$60M was allocated for livelihood improvement, watershed management protection and related costs during the concession period.
NTPC and the government have the joint responsibility for the implementation of resettlement and social development activities. NTPC says that it is committed to achieving its ultimate goal of ‘harnessing Lao PDR’s strength of hydro power, and the will and commitment of its people, into a development success story capable of improving lives, reducing poverty and giving Lao citizens a better hope for the future.’
The government has agreed with the World Bank to implement a poverty reduction fund that is being sourced initially from International Development Agency (IDA) funds and then from government taxes, royalties and dividend revenues once the project starts operation. Special administrative units have benn established to ensure the effective management and allocation of financial resources gained from the project.
The project has been described as being a cornerstone for the reduction of poverty in Laos. Direct benefits for the local people include:
• 270km of roads to be built or upgraded – 150km of national road and 120km of local road.
• Major improvements in living conditions for the 6500 people who have had to resettled.
• A US$16M development programme for 221 villages in the downstream areas.
• Employment for 5-7000 Lao workers for a period of 3-5 years.
• US$1M per year, paid for by the project for the protection of the 4000km2 Nakai Nam Theun National biodiversity catchment area.
As HE Khambai Damlath, governor of Khammouane Province, said: “The development of the Nam Theun 2 project is something that the Khammouane people have been waiting for a long time to have the chance to contribute to the socio-economic development of our province and country. NT2 does not only produce electricity for export to other countries and for domestic consumption, but it also encompasses development of infrastructure, human resources, community and preservation of the environment of the province. It also provides a lot of job opportunities for people.
“This is why we can say that this project is truly multi-purpose in terms of its contribution to the development of Khammouane province and poverty reduction for the people,” he said.
The Nam Theun 2 project encompasses an area of 200x50km and involves three provinces: Bolikhamxay – dam area; Khammouane – reservoir, power plant, channel and roads; Savannakhet – transmission lines to Thailand.
The scheme makes optimum use of the area’s unique topographical situation. The natural geography of the Nakai Plateau and surrounding area allows for a hydro project with a significant head of water without the need for a high dam. Water from the reservoir drops 350m to the power station at the bottom of the Nakai escarpment.
• 39m high, 436m long concrete gravity dam with a crest length of 325m. It has an integrated spillway with 13 small earthen saddle dams along the west bank of the reservoir.
• Catchment area of 4013km2 with an average annual runoff of 7527Mm3.
• 450km2 reservoir (FSL) with an active storage of 3530Mm3.
• Minimum operating reservoir level at 70km2.
• Average net head of water of 348m.
• 4km long headrace channel.
• Powerhouse comprising 4x250MW Francis turbines (for supply of 5636GWh of power to EGAT each year) and 2x37.5MW Pelton turbines (for 300GWh power supply to EDL each year).
• A double circuit 115kV transmission line to Mahaxai in Laos.
• 138km long double circuit 500kV transmission line to the Thai border
• 160km long double circuit 500kV transmission line from the Thai border to Roi Et (a substation built and funded by EGAT).
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