The Nam Theun 2 Hydropower (NT2) energy export project in Lao PDR, illustrates a unique blend of financing vehicles for a large power project. It closed in 2005 and began operations in 2010, allowing several years of retrospect for lessons to be learned. According to a World Bank review, “Nam Theun 2 demonstrates that it is possible to privately finance a large and complex project in a small and economically weak country. It also demonstrates how a single project can dramatically improve economic growth and contribute to poverty reduction and environmental protection (Head, 2006).”
The project was large with power production of 1,075 MW; 95% of is sold to Thailand, and the remaining 5% to Lao PDR. When the NT2 closed its financing, it was the largest ever foreign investment in Lao PDR, the world’s largest private sector cross-border power project financing deal, and the largest hydroelectric project ever to use private sector financing (World Bank, 2005).
The financing structure of NT2 was as follows:
The capital structure features a debt to equity ratio of 72/28, and the private sector supplied about 85% of the total cost. It was developed as a BOOT (Build, Own, Operate, Transfer), with the concessionaire as a locally registered SPV, the Nam Theun 2 Power Company (NTPC), of which the Government of Laos owns 25%. NTPC contracted to finance and develop the project, and then to operate it for 25 years. After that, it will revert to the State free of charge. During the concession period, the Government will receive dividends, royalties and taxes amounting to $80m/year (Head, 2012).
To make the project bankable, and secure financing, a power purchase agreement (PPA) was established between NTPC and the Electricity Generating Authority of Thailand (EGAT), to guarantee sales. This was a 25-year agreement for NTPC to supply 5,636 GWh/year to EGAT on a take-or-pay basis. The tariff was predetermined and denominated half in US$ and half in Thai Baht, to avoid exposure to local currency devaluation (Head, 2012).
Funds for the 25% equity portion of NTPC, amounted to $87 M. This was raised through concessionary loans and grants. However, money was made available to the Lao Holding State Enterprise (the Government holding company) as a loan at commercial rates. This difference in rates created an additional revenue stream for the government (Head, 2012).
International debt totaling $350m was raised from export credit agencies (ECAs), with multilateral banks insuring the debt against political risk through guarantees. (Debt coming from Thai commercial banks was uncovered for political risk.) A total of nine commercial banks participated including BNP Paribas, Societe General, Fortis Bank and Bank of Tokyo-Mitsubishi.
The project showcases the benefits of credit enhancement mechanisms now offered by the MDBs. Though, guarantees only covered $126 M (10% of the total cost), they provided sufficient confidence to leverage a much larger sum from international sources. The public sector provided only 15% of the total project cost, and much of this was concessionary lending for the purchase of the Laos government equity shares (Head, 2012).
Source: Head, “Hydro Finance Handbook,” HCI Publications, 2009.
Richard Swanson, Ph.D.
Asset valuation and project finance expert, specializing in financial and economic analysis of civil infrastructure assets.