43711 NAM THEUN 2 BRIEF WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY Hydropower in Asia: The Nam Theun 2 Project MIGA is supporting a landmark $1.25 bil- and basic infrastructure for the benefit of the of the country, about 250 kilometers east of lion hydropower project in Lao People's poor. MIGA's guarantee was very important Vientiane. Its main features are a 48-meter Democratic Republic, the largest ever invest- to lowering the project's risk profile, which in high gravity dam on the Nam Theun river, a ment in the country. The project involves the turn enabled the government and developers 450 sq km reservoir on the Nakai plateau, a development, construction, and operation of to attract commercial financing and gave the powerhouse, and a 30 km long double-cir- a trans-basin power plant that is expected to investors the assurance needed to go ahead cuit 500 kV transmission line to deliver the generate $1.9 billion in foreign exchange earn- with the deal. electricity produced to the Thai power grid. ings over a 25-year period through the export A 70 km long single-circuit 5 kV transmis- of electricity to Thailand. These earnings willIn June 2005, MIGA provided $9 million sion line will also be included to carry the enable the country to increase the amount in political risk insurance for a hydropower small portion of total electrical output that of money it can invest in health, education, project in Lao People's Democratic Republic will be dedicated to domestic uses. (PDR). The bulk of the guarantee, $86 mil- lion, is covering a nonshareholder loan by The base project cost is funded 28 percent Fortis Bank NV of Belgium (representing by equity and 72 percent by debt, with the itself and acting as agent for a number of additional $200 million of contingent costs commercial banks) against the risks of financed 50-50 by equity and debt, on a pari expropriation, breach of contract, war and passu basis. The $,000 million debt financ- civil disturbance, and transfer restriction ing for the project (including contingencies) MIGA, a member of the World and inconvertibility in both Lao PDR and is provided by a number of multilateral and Bank Group, mitigates noncom- Thailand. The rest of the coverage is protect- bilateral agencies, export credit agencies, mercial risks by insuring invest- ingElectricitédeFranceInternational(EDFI), and a consortium of 4 international private ments against the risks of: one of the project's sponsors, against commercial banks ­ nine international dollar the risk of transfer restriction in Lao PDR. lenders and seven Thai lenders. Multilateral r Currency inconvertibility and MIGA's policy complements a $50 million guarantees against political risks were a transfer restrictions partial risk guarantee issued by the World pre-requisite to secure the support of the r Expropriation Bank, as well as a $20 million grant from dollar lenders. Therefore debt guarantees r War and civil disturbance the International Development Association from IDA, the Asian Development Bank and r Breach of contract of the World Bank Group (IDA). MIGA covering about $86 million of the debt financing played an important role in MIGA provides mediation services making the project go forward. for guaranteed investments to pre- THE PROJECT vent disputes from escalating. With a total estimated base project cost of MIGA also provides technical assis- $.25 billion, Nam Theun 2 (NT2) is the larg- tance to help countries attract and est investment ever made in Lao PDR and is retain foreign direct investment, also the world's largest private sector hydro- as well as providing free online electric project financing. NT2 involves the information on investment oppor- development, construction, and operation 1 The dollar denominated debt was arranged by the fol- lowing lenders: Australia and New Zealand Banking tunities. of a thousand megawatt trans-basin diver- Group Limited; BNP Paribas; The Bank of Tokyo- sion power plant on the Nam Theun river, a Mitsubishi, Ltd.; Fortis Bank N.V./S.A.; Crédit Agricole Indosuez; ING Bank N.V.; KBC Bank N.V.; Société tributary of the Mekong, in the central region Générale Asia Limited; Standard Chartered Bank. JUNE 2006 page /4 NAM THEUN 2 BRIEF WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY CONTRACTUAL STRUCTURE of directors. Some of the key contractual to by NTPC following its incorporation agreements are: in September 2002. The project is structured as a BOOT (Build- r The concession agreement signed in r The EGAT power purchase agreement Own-Operate-Transfer) arrangement and it 2002 between NTPC and the govern- signed by NTPC and EGAT in 2003 and will be implemented by Nam Theun 2 Power ment of Laos, in which the government valid for a period of 25 years from the Company Limited (NTPC), a limited liability granted NTPC the rights to develop, commercialoperationsdate.Underthis company established in 2002 under Lao own, finance, construct, and operate key contract, NTPC shall make available PDRlaw.NTPC'sshareholdersincludeEDFI, the hydroelectric plant and related facil- to EGAT generating capacity of up to Italian-Thai Development Public Company ities, and to transfer them at the end 995 MW and electrical energy of 5,636 Limited (ITD), Electricity Generating Public of the concession period. The agree- GWH per year to be purchased at an Company of Thailand (EGCO), and the ment is for a period of 25 years from agreed tariff on a take-or-pay basis. Nam Theun 2 Power Investment Company the Commercial Operations Date under r Theheadconstructioncontractbetween (NTPI). NTPI (a newly created special pur- thepowerpurchaseagreementbetween NTPC and EDF (the head contractor), pose and public company) will invest into NTPC and the Electricity Generating a turnkey, price-capped engineering, NTPC on behalf of Electricité du Lao (EDL), Authority of Thailand (EGAT). procurement and construction con- the country's state-owned power company, r The shareholder agreement signed in tract. and represent it on the company's board 200 among the sponsors and acceded NT2 Contractual Structure Sponsors' Agreement NTP1 EDF1 EGGO ITD ADB MIGA World Bank Shareholder Agreement & Equity PRG/PRI Thai Baht US Dollar Banks Banks EGGO's Technical Services and Coverage Subsidiary Management Services Agreements Loans Bilateral Export Credit Agencies Agencies Électricité de France European Investment Bank Nam Theun 2 Power Company Head Construction Contract Concession Agreement Agence Française de Développement Construction EDL EGAT Sub-Contracts PPA PPA Government of Lao Construction Undertaking Sub-Contractors EDL EGAT Government of Lao JUNE 2006page 2/4 NAM THEUN 2 BRIEF WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY RISK MITIGATION Lao PDR and Thailand, through a stand- the Form of Acknowledgement and Consent alone coverage. and the subordination agreement. Guarantees against political risks were essential to provide the international dollar Under its breach of contract coverage, MIGA MIGA will pay compensation to the lenders lenders with the level of comfort that they covered selected contractual obligations should the following events occur: needed to support the NT2 project. For a of the government of Lao contained in the r There is a default on covered loans as project of this size, the recourse to multi- concession agreement between NTPC and a direct result of a breach by the gov- lateral agencies offered the only practical the government with respect to its payment ernment of Lao or EGAT of the selected solution. Besides being concerned about the obligations to both NTPC and the lenders as contractual obligations under the proj- traditional political risks of currency transfer a result of the termination of the agreement, ect agreements; restriction and inconvertibility, expropriation, as well as obligations under the direct agree- r A final and binding arbitration award is and war and civil disturbance, the lenders ment with commercial lenders, with respect rendered to the lenders for a breach by were also interested in protecting their rights to the government's recognition of the lend- the government of Lao or by EGAT of under the numerous project agreements ers' third party rights under the concession their contractual obligations under the with the government of Lao PDR and EGAT. agreement, including subrogation rights in project agreements; and With the support of the government of Lao, the event of default. In addition, MIGA's r Lendersareunabletoenforcetheaward the World Bank and MIGA mitigated specific policy covered commercial lenders' rights against the relevant government within political risks under the project agreements in case of termination of the power pur- a specified waiting period. in the country. In addition, MIGA also cov- chase agreement (PPA) between EGAT and ered other political risks in both countries, NTPC as well as EGAT's obligations under DEVELOPMENT IMPACT Lao PDR has an average income level of less than a dollar a day, with levels considerably lower in rural areas and few options for generating income. The project is expected to generate an estimated $.9 billion in foreign exchange earnings over a 25-year period through the export of electricity to Thailand. The project will also produce 75 MW of power for domestic consumption. It is expected that NT2 revenues will account for between 3 and 5 percent of total revenues to Lao PDR from 2005 to 2020, equivalent to about 60 percent of domestically financed expenditures on education and health. The government and IDA have also agreed on detailed revenue management arrangements to ensure the revenues generated by NT2 will be allocated to priority expenditure programs for poverty reduction and environ- mental conservation. "The income generated by this In addition, the IDA loan supports the management of the project's environmen- project will provide key funding for tal and social impacts on the natural habitats affected directly or indirectly by the Lao's National Growth and Poverty dam, namely the Nakai Plateau, the NT2 watershed, and the downstream areas of Eradication Strategy, enabling the the Nam Theun and Xe Bang Fai rivers and their tributaries. In substance, besides country to increase the amount of generating income in dividends, taxes and royalties for country, the project also money it can invest in health, educa- provides for increased environmental protection in Lao PDR, with a biodiversity tion, and basic infrastructure for the area being set aside and conserved; improved housing and higher incomes for the benefit of the poor." 6,200 villagers who are re-settling from the reservoir area; a robust and proactive mitigation and compensation program to help communities downstream prepare Yukiko Omura, for changes to their livelihoods; special measures to ensure that revenues from Executive Vice President, MIGA the project are used effectively to reduce poverty; and a continued commitment by the World Bank to monitor the project and ensure that it is fully and properly implemented. JUNE 2006 page 3/4 NAM THEUN 2 BRIEF WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY What is MIGA's Added Value for r Ensuring prompt claims payment. Clients? In the event that a dispute cannot be mediated, MIGA ensures that valid As a member of the World Bank Group, claims are paid promptly, based on a MIGA is able to provide a unique umbrella strong balance sheet and stable stream of deterrence against political risks related of operating income. to government actions that may have a neg- ative impact on projects. Improving Financial Terms and Conditions for Investors/Lenders r Accessing funding. MIGA guarantees Contact help investors obtain project finance from banks. r Lowering borrowing costs. MIGA- guaranteed loans may help reduce risk- For general information capital ratings of projects. r Increasing tenors. MIGA can provide World Bank Group insurance coverage for up to 5 years Multilateral Investment (in some cases 20), thereby increasing Guarantee Agency the tenor of loans available to inves- 88 H Street, NW tors. Washington, DC 20433 t. .202.458.4798 Country, Social and Environmental f. .202.522.036 Expertise migainquiry@worldbank.org www.miga.org r Providing extensive country knowl- edge. MIGA applies decades of experi- ence, global reach, and knowledge of For information on developing countries to each transac- power projects Investment Protection and tion. Prompt Claims Payment r Providing environmental and social Philippe Valahu expertise. MIGA helps investors and t. 202.473.3506 r Deterring harmful actions. MIGA's lenders ensure that projects comply pvalahu@worldbank.org relationship with shareholder govern- with what are considered to be the ments provides additional leverage in world's best social and environmental Elena Palei protecting investments. safeguards. t. 202.473.5022 r Mediating disputes. As an honest epalei@worldbank.org broker, MIGA intervenes at the first Justin Kouakou sign of trouble to resolve poten- t. 202.458.7398 tial investment disputes before they jkouakou@worldbank.org reach claim status, helping to main- tain investments and keep revenues Jason Zhengrong Lu flowing. t. 202.458.0544 zlu@worldbank.org Wenhe Zhang t. 202.473.7523 wzhang@worldbank.org JUNE 2006 page 4/4