Total Investment Capital of Phu My 2.2 Thermal Power Plant Project

- Water Supply Agreement (WSA) signed between MECO and Ba Ria - Vung Tau Province Water Supply Company, according to which the project will be provided with clean water and a roadmap for increasing water prices;

- The Land Lease Agreement (LLA) signed between MECO and the Infrastructure Development and Construction Company of Ba Ria - Vung Tau province determines the leased land area, land rental price and MECO will be granted a Certificate of Land Use Rights;

- The Government guarantee is signed between the Ministry of Planning and Investment representing the Government to guarantee the responsibilities and obligations under the signed contracts of Vietnamese partners with MECO, including payment obligations under BOT, PPA, GSA, WSA and LLA contracts. The Government also guarantees the foreign exchange supply for the project, allowing the project to open an account abroad.

In addition to the above contracts, the initiators and DNDA also signed the following contracts:

- The EPC contract was signed between MECO and EDF-CNET, the construction division of EDF. The contract stipulates the fixed cost and the handover date of the power plant;

- Maintenance contract between MECO, EDF and TEPCO under which EDF and TEPCO will support MECO with project operations and maintenance services;

- Long-term service contract signed between MECO and GE International, a major equipment supplier. GE will provide technical support until the first major overhaul in 6 years.

Partial Risk Guarantee of the International Development Association (IDA)

IDA's Partial Risk Guarantee (PRD) covers commercial banks against the risk of principal and interest payments due to the government's failure to fulfill its obligations.

payments under BOT contracts or government guarantees. The main risks covered by IDA include:

- Breach of contract: The Government breached its payment obligations under the BOT contract and government guarantees related to EVN's power purchase, PV's gas supply, etc.;

- Foreign exchange issues related to the government's commitment to guarantee foreign exchange for project debt payments;

- Risk of political system collapse and changes in laws in Vietnam adversely affecting the project and nationalization.

The guarantee agreement with the lending commercial banks defines the type of risk that IDA covers and the mechanism of the guarantee. IDA enters into a project agreement with MECO under which the company agrees to meet the World Bank’s environmental and other requirements. IDA requires a guarantee fee of 0.75% per year on the outstanding balance of the guarantee. At the same time, IDA and the government enter into an indemnity agreement under which the government guarantees to IDA any payments made by IDA under the guarantee agreement.

Project structure

The structure of Phu My 2.2 Thermal Power Plant project is shown in Figure

2.1. From the structure of this project, it is possible to see the following participants and the characteristics of this grant:

- The borrower is Mekong Energy Company Limited (MECO) and not the initiators;

- The initiators are those who support the project in the form of contributing equity capital to establish DNDA (MECO), providing technical support and receiving benefits such as providing equipment, design and construction, and providing maintenance services;

- The loan is co-financed by a multinational financial institution and overseas commercial banks.

- Commercial loans are guaranteed against political risks by IDA under the WB and ADB while loans from development organizations such as ADB, JBIC and Propaco do not require guarantees;

- Contracts that bind responsibilities include: Contract for gas supply for the project from PV, Contract for long-term land lease and clean water supply from agencies under the People's Committee of Ba Ria - Vung Tau province; Contract for electricity consumption from EVN, Contracts for construction, support and provision of technical services from corporations and companies of the initiators, foreign exchange guarantee commitment from the State Bank of Vietnam.

Assessing the success of the funding for the Phu My 2.2 Thermal Power Plant project.

From the practice of negotiating contract structure, guarantee structure, choosing ownership structure and TTDA structure for Phu My 2.2 Thermal Power Plant Project, we can draw lessons from the successful implementation of a TTDA by the participating parties, which is considered a typical success story for TTDA in Vietnam, as follows:

The first is the choice of DNDA ownership structure.

From the figure 2.1 above, it can be seen that DNDA is Mekong Energy Company Limited, established from the capital contribution of 3 owners: French International Electric Power Company (EDF) contributing 56.25% of capital, Japanese International Electric Power Company (TEPCO) contributing 15.625% of capital and Sumitomo Company of Sumitomo Group of Japan contributing 18.125% of capital. These are famous power companies and corporations in the world with a lot of experience in building and operating power plants in the host countries. Thanks to the experience in designing and operating power plants along with abundant financial capacity, the project implementation process took place on schedule and achieved the quality according to the original design. In other words, the

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EDFI

TEPCO

Sumitomo

56.25%

15.625%

28.125%

Figure 2.1: Phu My 2.2 project structure

Technical Support

Equity contribution

EDF & TEPCO

EDF

JBIC

Propaco

150 million USD

140 million USD

Company Limited

The oranges

contract

Design & Construction

Equipment supply

COFIVA,

Sumitomo

40 million

Energy

Technical service

ADB

Commercial Loans

USD

50 million USD

Debt 340 million USD

Mekong - MECO Ltd.

Purchase Contract Share

Gas supply

technique

General Electric

(SG, ANZ,

Sumitomo Mitsui)

100 million

USD

electricity

CS HT

Land and

water

Petro Vietnam

BR-VT People's Committee

75 million USD

25 million USD

Risk insurance

Electricity Corporation

Swap Guarantee

WB ADB

politics

Vietnam (EVN)

money

State Bank of Vietnam

Source: Project finance and Guarantees [60]

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Choosing investors with strong financial potential and reputable construction contractors and equipment suppliers has helped sponsoring banks significantly limit risks that may occur during the construction phase of the project.

The second is the selection of the financing structure for the Phu My 2.2 Thermal Power Plant Project.

Also from Figure 2.1. above, it can be seen that the financing structure chosen by the parties for the Phu My 2.2 Thermal Power Plant Project is a co-financing structure between development organizations and commercial banks. Specifically, the Phu My 2.2 Thermal Power Plant Project was co-financed by the Asian Development Bank (ADB), the Japan Bank for International Cooperation (JBIC), the French Development Agency (Propaco), and commercial banks including: ANZ Investment Bank, Société Générale and Sumitomo Muitsui Banking Corporation. As mentioned in section 1.3.7.5 of chapter 1 on the co-financing structure with the WB and development banks, one of the advantages for commercial banks when participating in co-financing with development banks is to be assured of political risks and the issue of debt repayment pressure from development banks. On the other hand, development banks are also well-known organizations and have a lot of experience in arranging funding for many projects in many countries around the world. In other words, the participation of development banks in co-financing for investment projects in developing countries will lead to an increase in the success rate of many TTDA projects.

Third is the issue of structuring contracts.

To ensure the success of the project construction and operation process, the participating parties must sign a series of input and output contracts for the project, including: Construction contract signed between MECO and TEPCO and Equipment supply contract with EDF, Gas supply contract for the project from PV, Long-term land lease contract and clean water supply from agencies under the People's Committee of Ba Ria - Vung Tau province; Electricity offtake contract from EVN, support and provision of technical services (repair, maintenance, repair, spare parts replacement,

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etc.) from the corporations and parent companies of the project initiators. It can be said that these are necessary and important contracts to ensure the full supply of input factors for the construction and operation of the project. On the other hand, EVN also guarantees to purchase all electricity output to ensure that the project generates enough cash flow to repay the financing banks.

Fourth is the issue of guaranteeing funding banks.

To provide necessary guarantees to the investor (owner of the DNDA), the Government of Vietnam guarantees the responsibilities and contractual obligations of the Vietnamese partners with MECO, including payment obligations under the BOT, PPA, GSA, WSA and LLA contracts. The Government also guarantees the foreign exchange supply for the project, allowing the project to open accounts abroad. The commercial loans of commercial banks are guaranteed by IDA under the World Bank and ADB for political risks, including the government's breach of payment obligations under the BOT contract and government guarantees related to the offtake of electricity by EVN, the supply of gas by PV, foreign exchange commitments, changes in Vietnamese laws that adversely affect the project and nationalization. However, the Government of Vietnam must sign with IDA a contract to indemnify any payments made by IDA under the guarantee contract with commercial banks.

2.3.4.2. Phu My Bridge BOT Project

If the Phu My 2.2 Thermal Power Plant Project is considered one of the typical successes that the TTDA method brings to Vietnam, on the contrary, the Phu My Bridge BOT Project in Ho Chi Minh City is considered one of the typical failures of applying the TTDA method in Vietnam. From this project, the main contents can be summarized as follows [39]:

Necessity of the project

Phu My Bridge Project is a project to build a bridge over the Saigon River with the aim of completing the belt road according to the socio-economic development plan.