A Report on Project Finance of Nam Theun 2 Power Company Limited (NTPC)

2012-05-30T07:13:00.001-07:00

EXECUTIVE SUMMARY

The Nam Theun 2 (NT2) Hydropower Project is the largest foreign investment in Lao PDR. The total project cost was US$1.2 billion and was expected to provide Lao PDR with up to US$1.9 billion of total revenue; a US$150 million in additional annual revenue.

The objectives of the Project are to promote economic growth by assisting the Lao’s government to develop its hydropower resources in an environmentally and socially sustainable manner and to enhance power trade in the Greater Mekong Subregion. The revenues accruing to the Borrower from the Project will be used to finance priority poverty reduction and environmental programs. The Project will also enhance biodiversity conservation in the Nakai Nam Theun National Protected Area.

Full-scale construction activities followed after the financial close on 15 June 2005. The commercial operation of NT2 started in December 2009.

THE PROJECT

Hydroelectric Power Facility

1. a 1,070-megawatt trans-basin diversion power plant on the Nam Theun River;

2. a 450-square kilometer (km2) reservoir on the Nakai Plateau;

3. a 39-meter-high dam northwest of the plateau;

4. a powerhouse 350 meters below the plateau;

5. a regulating pond below the powerhouse; and

6. a 27-kilometer (km) channel from the regulating pond to the Xe Bang Fai River Basin, also a tributary of the Mekong river.

Social Development

1. The design and construction of resettlement villages for Project affected Persons relocating away from the inundation zone;

2. The provision of basic infrastructure and social services on the Nakai Plateau for Project Affected Persons; and

3. The design and delivery of livelihood programs for Project Affected Persons.

Production

1. export 5,354 gigawatt-hours (GWh) of electricity to Thailand,

2. supply about 200–300 GWh of electricity to consumers in the Lao People’s Democratic Republic (Lao PDR), and

3. Generate about $1.9 billion of revenue for the Government over the 25-year operating period.

Monitoring and Evaluation

NT2 has a robust, multi-layer monitoring and evaluation framework consisting of the following elements:

Supervision of physical implementation of the hydropower project by professional engineering firms under contract to the Nam Theun 2 Power Company Limited (NTPC) and the Government of Lao PDR, re[1]spectively.
Lenders’ Engineer to monitor progress in project construction, and implementation of environmental and social management plans through review of monthly and half-yearly progress reports submitted by implementing agencies and through quarterly site visits.
Dam Safety Review Panel to advice on technical construction, operations, and dam safety issues.
Independent Monitoring Agencies, reporting to the Government of Lao implementing agencies, to monitor progress on resettlement, environmental impact mitigation, and watershed management issues.
Panel of Environmental and Social Experts (POE), reporting to Government, to advise on environmental and social issues. The POE normally visits the Lao PDR once or twice per year (or more often at the Government’s request). The latest visit took place in February 2010 and their reports are publicly available.
International Advisory Group (IAG), advising the World Bank’s President on implementation of the project, covering revenue management arrangements as well as environmental and social aspects. The IAG normally visits Lao PDR at least once per year. The latest visit took place in November 2009 and their reports are available to the public.
Regular supervision by staff of the World Bank, other international financial institutions and Bilateral agencies in the form of site visits and management and technical missions.

Structure of NTPC

The Project will be developed by a private company, the Nam Theun 2 Power Company Limited (NTPC), which is owned by a consortium comprising:

1. Electricité de France International (EdFI) of France (35%): Head Contractor. In addition to supplying financial backing and coordinating construction of the Project, EDF also supplies technical services and personnel management to NTPC. An energy market leader in Europe, the EDF Group is an integrated energy company operating in all branches of the industry: generation, transmission, distribution, and the trading and sale of energy.

2. Electricity Generating Public Company (EGCO) of Thailand (25%): EGCO was established in 1992 in accordance with the Thai government’s privatisation policy for the energy sector. The first independent power producer in Thailand, EGCO was created to acquire some of the assets of EGAT and to supply generating capacity and electrical energy to EGAT under long-term power purchase agreements.

3. Italian Thai Development Public Company Limited (ITD) of Thailand(15%), and

4. Government of the Lao PDR (25%). Lao Holding State Enterprise (LHSE) is a state-owned company, established in February 2005 to hold the Lao government’s shares in NTPC. LHSE was created as the entity through which the government’s Nam Theun 2 revenue will pass. LHSE replaced Electricité du Laos (EDL) as the government shareholder in NTPC.

Life of the Project

The Project is structured as a build-own-operate-transfer project. It has a concession period of 31 years, of which the operating period is 25 years. At the end of the concession period, the project facilities will be transferred to the Government free of charge.

Full construction of the Project is expected to begin in 2005 and to be completed in 2009. The reservoir will be inundated by 2008 and power generation is expected to begin in 2009.

Country

Laos is a landlocked country in Southeast Asia, lying mostly between latitudes 14° and 23°N (a small area is south of 14°), and longitudes 100° and 108°E. Its thickly forested landscape consists mostly of rugged mountains, the highest of which is Phou Bia at 2,818 metres (9,245 ft), with some plains and plateaus. The Mekong River forms a large part of the western boundary with Thailand, whereas the mountains of the Annamite Chain form most of the eastern border with Vietnam. The climate is tropical and monsoon.

There is a distinct rainy season from May to November, followed by a dry season from December to April. Local tradition holds that there are three seasons (rainy, cold and hot) as the latter two months of the climatologically defined dry season are noticeably hotter than the earlier four months. The capital and largest city of Laos is Vientiane and other major cities include Luang Prabang, Savannakhet and Pakse.

In 1993, the Laos government set aside 21% of the nation's land area for habitat conservation preservation. The country is one of four in the opium poppy growing region known as the "Golden Triangle". According to the October 2007 UNODC fact book "Opium Poppy Cultivation in South East Asia," the poppy cultivation area was 15 square kilometres (5.8 sq mi), down from 18 square kilometres (6.9 sq mi) in 2006.

Economy

The Lao economy depends heavily on investment and trade with its neighbours, Thailand, Vietnam, and, especially in the north, China. Pakxe has also experienced growth based on cross-border trade with Thailand and Vietnam. In 2011, the Lao Securities Exchange began trading.

Subsistence agriculture still accounts for half of the GDP and provides 80% of employment. Only 4.01% of the country is arable land, and 0.34% used as permanent crop land, the lowest percentage in the Greater Mekong Subregion. Rice dominates agriculture, with about 80% of the arable land area used for growing rice. Approximately 77% of Lao farm households are self-sufficient in rice.

Production has increased by an annual rate of 5% between 1990 and 2005, this has been done due to the development, release and widespread adoption of improved rice varieties, and via economic reforms, , and Lao PDR achieved a net balance of rice imports and exports for the first time in 1999. The higher varieties of rice that the Lao PDR may have are in the Greater Mekong Sub region. Since 1995 the Lao government has been working with the International Rice Research Institute to collect seed samples of each of the thousands of rice varieties found in Laos.

The economy receives development aid from the IMF, ADB and other international sources, and foreign direct investment for development of the society, industry, hydropower and mining, most notably copper and gold. Tourism is the fastest-growing industry in the country. Economic development in Laos has been hampered by brain drain, with a skilled emigration rate of 37.4% in 2000.

Political Environment

Laos is a communist single-party socialist republic. The only legal political party is the Lao People's Revolutionary Party (LPRP). The head of state is PresidentChoummaly Sayasone, who is also the General Secretary of the Lao People's Revolutionary Party. The head of government is Prime Minister Thongsing Thammavong, who is also a senior member of the Politburo of Revolutionary Party. Government policies are determined by the party through the all-powerful eleven-member Political Bureau and the 61-member Central Committee. Important government decisions are vetted by the Council of Ministers.

Financing

Requirement

A total finance package worth US$1,580 million in capital commitments to NTPC was completed in May 2005. This funds the total base Project cost of $1,250 million, plus additional amounts for contingency and ancillary bonding facilities.

Total Cost of Construction	1250
DEBT	846
ADB	50
other banks	796
EQUITY	404
(EdFI) of France	141.4
(EGCO) of Thailand	101
Italian Thai Development Public Company Limited	60.6
Government of the Lao PDR	101

Government of the Lao PDR equity finance	101
ADB	20
World Bank	20
AFdD	6
EIB	55

Total Guarantee	330
World Bank	42
MIGA	91
ADB	50
Other Banks	183

Debt Financing

The total amount of debt raised by NTPC is $846 million. Out of this, 50 million was financed by Asian Development Bank (ADB) and the rest $796 million long term loans to NTPC is financed by nine international commercial banks (ANZ, BNP Paribas, BOTM, Calyon, Fortis Bank, ING, KBC, SG and Standard Chartered) and seven Thai commercial banks (Bangkok Bank, Bank of Ayudhya, Kasikornbank, Krung Thai Bank, Siam City Bank, Siam Commercial Bank and Thai Military Bank).

Equity Financing

The total equity required for the project is $404 million. Electricité de France International (EdFI) of France which is having 35% of stake in the company provided $141.4 million. Electricity Generating Public Company (EGCO) of Thailand having 25% stake in the company provided $101 million.

Italian Thai Development Public Company Limited (ITD) of Thailand having 15% stake in the company provided $60.6 million.

Government of Laos PDR was required to provide $101 million for its 25% stake in NTPC.

Government Equity was financed by:

a US$20-million long-term loan from the Asian Development Bank at a rate of LIBOR + 0.6%,
a US$20 million IDA Grant for NTSEP (Nam Theun 2 Social and Environment Project). This was to be used for management of environmental and social impacts and independent monitoring and evaluation of the NT2 project)
Agence Franaise de Developpement ($6 million) and
EIB will provide $55 million^{^[2]}

Guarantee

The US$ 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 agency support from COFACE of France, EKN of Sweden and GIEK of Norway, and direct loans from a number of multilateral and bilateral development agencies including the ADB, Nordic Investment Bank, Agence Française de Développement (AFD), PROPARCO and the Export-Import Bank of Thailand.

a. US$42 million IDA Partial Risk Guarantee^{^[3]}

b. US$91 million in MIGA Guarantees^{^[4]}

a $50 million political risk guarantee to NTPC^{^[5]}

Financial Analysis

The analysis is done taking ‘All Fund’ provider point of view. The operating life of the project is considered to be of 25 years after which it will be passed on to Government of Laos. Therefore the analysis starts at 2004 when the construction will begin and ends in 2034. The first phase of construction will end in December 2008 when the reservoir will be inundated. The production will start from 2009.

The assumptions include:

a. All the generated electricity will be bought up at pre determined rate by the parties involved.

b. Since government is developing this as a social project and is also an equity holder in the company, therefore the project won’t be taxed.

c. The operation and management cost estimation is more than naturally expected expenditure to make the financial analysis of the project, a conservative one.

d. The discount rate of 12% takes into account the political and other project related risk.

YEAR	NET GENERATION (GWh)	SALES	CAPITAL INVESTMENT	O &M COST	Net cash Flow
2004	0	0	73		-73
2005	0	0	185.5		-185.5
2006	0	0	207.2		-207.2
2007	0	0	230.2		-230.2
2008	0	0	200.9		-200.9
2009	833	31.6	124.1	2.4	-94.9
2010	5,603	253.7	7.3	18.5	227.9
2011	5,532	250.6		17.7	232.9
2012	5,546	251.5		17.9	233.6
2013	5,554	252.1		15.9	236.2
2014	5,554	252.1		14.6	237.5
2015	5,554	252.1		19	233.1
2016	5,554	252.1		13.5	238.6
2017	5,554	252.1		14	238.1
2018	5,554	252.1		13.1	239
2019	5,554	252.1		13.1	239
2020	5,554	252.1		16.4	235.7
2021	5,554	252.1		24.4	227.7
2022	5,554	252.1		15.6	236.5
2023	5,554	252.1		15.6	236.5
2024	5,554	252.1		13.8	238.3
2025	5,554	252.1		14	238.1
2026	5,554	252.1		12.6	239.5
2027	5,554	252.1		18.7	233.4
2028	5,554	252.1		12.3	239.8
2029	5,554	252.1		13.8	238.3
2030	5,554	252.1		13.3	238.8
2031	5,554	252.1		15.5	236.6
2032	5,554	252.1		16.2	235.9
2033	5,554	252.1		17.4	234.7
2034	4,628	208.9		14.8	194.1
			NPV @ 12%	$263.55
			IRR	15.821%

The Net Present Value at 12% is estimated to be USD 263.55 million and Internal Rate of Return to 15.821% from all funds provider point of view. Thus the project is considered financially viable.

Social Benefits of NTPC

Given the relatively small size of Lao PDR’s economy and population, the Nam Theun 2

Hydroelectric Project (the Project) has the potential to have quite significant macroeconomic impacts. The large capital investment (approximately $1.2 billion) will generate a very sizable income stream for the next three decades and beyond.

Employment

Since Lao PDR’s economy is not fully employed, this large construction project will have a significant impact on output and employment. It is estimated that the Nam Theun 2 project could lead to an almost doubling in private investment during the construction phase (IMF, 2003). Approximately $350 million will be spent in Lao PDR during the 4.5 year construction period for civil works. The construction phase (approximately 54 months) will employ up to 4,000 workers, and an estimated 16,000 dependents and job seekers (for various support services) will concentrate in the site area. There will also be multiplier effects, as the first round of income leads to expenditure and income for others, who in turn spend.

GDP

The macroeconomic impact of the Nam Theun 2 project is expected to be positive as a result of the boost to GDP growth driven mainly by a sharp increase in private sector investment during the construction phase. While most of the investment will be incurred for imported equipment, civil works will directly employ some 4,000 workers. Together with multiplier effects, GDP growth could be spurred by up to a full percentage point in each year of the construction phase.

Exchange Rate Effects

An increase in capital inflows (during the construction phase) and a sharp increase in export earnings (from the sale of power to Thailand) could be expected to result in appreciation of the domestic currency.

Conclusion

The financial analysis suggests that the project in consideration is a profitable one. Looking at the social benefit that this project is going to bring, it is important for the government of Laos to take up this project.

Reference

1. REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN TO THE LAO PEOPLE’S DEMOCRATIC REPUBLIC FOR THE GREATER MEKONG SUBREGION: NAM THEUN 2 HYDROELECTRIC PROJECT, published by ASIAN DEVELOPMENT BANK, 2005

2. LOAN AGREEMENT (Ordinary Operations)(Greater Mekong Subregion: Nam Theun 2 Hydroelectric Project) between LAO PEOPLE'S DEMOCRATIC REPUBLIC andASIAN DEVELOPMENT BANK, Loan Number 2162-LAO, 26^th April 2005.

3. SIXTH IAG REPORT WORLD BANK’S HANDLING OF SOCIAL, ENVIRONMENTAL, GOVERNANCE AND FINANCIAL ISSUES IN THE NAM THEUN 2 HYDROPOWER PROJECT Lao PDR, April2006.

4. N2T Factsheet given in ADB website.

[1] http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/LAOPRDEXTN/0,,contentMDK:21109109~pagePK:141137~piPK:141127~theSitePK:293684,00.html

[2] http://groups.yahoo.com/group/archive-laonews/message/10015

[3] http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/LAOPRDEXTN/0,,contentMDK:21109109~pagePK:141137~piPK:141127~theSitePK:293684,00.html

[4] http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/LAOPRDEXTN/0,,contentMDK:21109109~pagePK:141137~piPK:141127~theSitePK:293684,00.html

[5] LOAN NUMBER 2162-LAO

Financial Research and Personal Views

A Report on Project Finance of Nam Theun 2 Power Company Limited (NTPC)