Overview on the recent developments in the power sector
The recent increasing interest from investors in the energy sector in general and renewable energy in particular has prompted the Government to work on the revision of the National Power Master Plan VII (amended) to attract more investment in the sector as well as to ensure a stable and clean supply of energy in the country. To achieve that goal, the Government should improve the transmission and distribution system, encourage both small and large-scale renewable energy projects by a sound regulatory regime, as well as accelerate decision-making process for other sources of power projects. The Government is also working on improvements of the Power Purchase Agreement template (PPA) to bring it to a more bankable and acceptable level to both international and domestic banks. In particular, the PPA is not bankable due to the following main reasons: • There is no clear risk allocation framework between the Government and private sector; • There is no Government guarantee in terms of foreign exchange convertibility; • It is not clear whether the PPA is a “take or pay” agreement; • Procurement and negotiation of PPPs are not transparent and usually takes much time; and • International arbitration is not a dispute settlement method provided in the PPA. The Electricity Regulatory of Vietnam under the Ministry of Industry and Trade (“MOIT”) has been tasked with a study on direct PPAs Pilot Scheme. In general, direct PPA is an agreement made between the power generator and a corporate customer in which the power is physically delivered and sold to the corporate customer for its operations. The MOIT planned the pilot to be implemented as early as the first quarter of 2019. The pilot should set a target of at least new 300 – 500 MW power generation.
Solar power projects – Amazing development!
Vietnam’s potential capacity for solar power is considered to be similar as Spain or China, but solar power projects capacity, prior to 2017, is extremely low i.e., less than 10 MW. However, hundreds of solar power projects have been approved by the end of 2017. According to the MOIT, the combined capacity of all approved solar power projects, which will operate prior to 30 June 2019, is over 3 GW. The solar FIT of US9.35 cents/kWh will continue to apply beyond the original COD (i.e. 30 June 2019). The deadline shall be likely extended for another half a year or another year for solar projects across Vietnam, except for projects in Ninh Thuan. This policy is not yet formally adopted but very likely will be publicized at the end of this year. For solar projects in Ninh Thuan, the COD deadline extension will be longer (i.e. for another one and a half year from 30 June 2019). The current template solar PPA may also be amended and take effect from 01 July 2019.
How to achieve non-recourse financing for renewable power projects
Given the current bankability status of PPAs, it is important to secure a loan for the projects which is guaranteed by a charge on specific assets or on the revenues generated from a specific project or assets. This is how a non-recourse financing works. If the borrower defaults and the security does not realise the full value of the loan, the lender cannot recover the shortfall from the borrower or from its other assets or revenues. In essence, the ability to reach non-recourse financing arrangement will mostly depend on the negotiation between the lenders and the borrowers, e.g. whether or not the collateral is sufficient to cover the repayment obligations, as well as the potential economy benefits of the projects, from the lenders’ point of view. Meanwhile, the concept of non-recourse financing is barely introduced in Vietnam, and it is quite difficult to find a bank in Vietnam which is willing to finance projects on non-recourse basis. Generally speaking, non-recourse financing may be very costly (in terms of interest rates) and requires a lot of effort to negotiate with stakeholders. It is essential that the investor use a special purpose vehicle (“SPV”) so that the SPV will be the borrower of the project financing arrangement, while the investor is to be the sponsor of the deal. Since the SPV shall not have any projects other than project assets, the lenders will have to rely heavily on the financial prospects of the project to minimize their risk. A full recourse finance deal will mean that the sponsor (or any other asset-rich entities related to the sponsor) shall guarantee for the debt of the SPV, while a non-recourse deal shall see no involvement of any third party. Our objective is to have SPV lend (in a full recourse arrangement) without the sponsor to be exposed to any recourses (non-recourse). In that case, a non-recourse financing arrangement shall be deemed achieved. There are three possible options to achieve non-recourse/limited recourse financing arrangement:
Option 1: Entering into a BOT (Build-Operate-Transfer) contract with the Government. With this option, as it is agreed that the investors shall build and operate the project for a certain period of time (and receive the profit during such period) and it is the Government who will own the project at the end upon the expiration of the BOT contract, the BOT contract will be more bankable and thus the non-recourse/limited recourse financing arrangement can be achievable. Currently, there is no foreign ownership restriction in energy sector in local laws or Vietnam’s international commitments. The foreign investor may choose among permitted investment forms: 100% foreign invested company, joint venture or public private partnership in the form of BOT contract. For your information, Vietnam ties in first place with Singapore in terms of market access liberalization.
Option 2: To seek guarantee from Multilateral Investment Guarantee Agency (“MIGA”). As the guarantee from the MIGA covers 5 types of non-commercial risks, i.e. (i) currency inconvertibility and transfer restriction; (ii) expropriation; (ii) war, terrorism, and civil disturbance; (iii) breach of contract; non-honoring of financial obligations; separately or together with Option 2, MIGA’s guarantee can help to enhance the bankability of the power purchase agreement.
Option 3: To cooperate with a State-owned commercial bank (“SOCB”) for its guarantee of the project and then, negotiate with lenders to eliminate all recourses that lenders may ask from the sponsors and/or the borrowers. This appears to be the more realistic option but it may come with a higher interest rate and requires extensive negotiation with the SOCB and lenders.
How to make use of the CPTPP and the EU- Vietnam FTA
The recent conclusion of the EU- Vietnam FTA (EVFTA) negotiation and the signing of the CPTPP further opens the market to foreign investors. The investors now can bring their technology and know-how, especially those from countries with high level of development in renewable sectors such as Germany, to Vietnam with less market access barriers and being more secured. In particular, the CPTPP and the EVFTA make it possible that foreign investors could sue Vietnam’s Government for its investment related decisions according to the dispute settlement by arbitration rules. The final arbitral award is binding and enforceable without any question from the local courts regarding its validity. This is an advantage for investors considering the fact that the percentage of annulled foreign arbitral awards in Vietnam remains relatively high for different reasons.