Crossborder Investment Projects in Asia: Review of Selected Case Studies

We cite here a few examples among several of ongoing and/or completed CBIPs in Asia and critically evaluate their performance in the context of crossborder infrastructure development and regional cooperation.¹⁴

4.1 Theun Hinboun Hydropower, Lao PDR

The Theun Hinboun project (originally known as Nam Theun 1-2) was the first BOOT Hydropower project implemented in Lao PDR. Construction started in 1994 and the plant was made operational in 1998. The 210 MW (2x105 MW) project is located about 100 km upstream of the confluence of the Mekong river. A 230 kV transmission line (86 km long) was also constructed to transport electricity from the station to the Thailand border.

The main objective of the project was to support economic growth in Lao PDR by enhancing foreign exchange earnings through the export of electric power to Thailand. This was the first project implemented under the 1993 memorandum of understanding between Lao PDR and Thailand for developing 1,500 MW of power in Lao PDR by the year 2000 for export to Thailand. It was the first major investment under the new foreign investment policy of Lao PDR. In addition to technical assistance for structuring legal agreements for implementation of the project, the Asian Development Bank (ADB) also extended loan assistance for the project.

The final project cost, including foreign and local currencies was US$240.3 million. The project was completed on time, without delays, and with substantial savings from the original estimated cost.

4.1.1 Implementation Arrangement

In 1994, the Government of Lao PDR formed a PPP, named Theun-Hinboun Power Company Ltd. (THPC), to plan, design, finance, construct, own, operate, and maintain the project, and sell electricity under a long-term contract to the Electricity Generating Authority of Thailand (EGAT).

The Government of Lao PDR was represented by Electricité du Laos (EdL), the state-owned power utility, while the private sector was represented by the foreign sponsors MDX Lao Public Company Ltd. (MDX) and Nordic Hydropower AB (NH). The MDX is 90%-owned by GMS Power Public Company Limited; the remaining 10% is owned by the Crown Property Bureau, Thailand. The NH is equally owned by Statkraft A.S. of Norway and Vattenfall AB of Sweden.

From the beginning, since the legal framework in Lao PDR was inadequate for the project to be implemented under a commercial format, the Government of Lao PDR and THPC entered into a License Agreement (LA) that authorized THPC to implement the project on a BOOT basis for 30 years (from the start of commercial operation). The LA contained provisions on exclusive rights and tax and royalty obligations of THPC. THPC was also protected under the LA against any water diversions detrimental to it, except for the implementation of the NT2 Project. In return, THPC was required to pay a royalty of 5% of gross revenue to the Government. THPC was granted a tax holiday of five years commencing with the start of commercial operations up to the end of 2002, after which THPC was expected to pay 15% tax on its taxable income. The Lao PDR Government took responsibility for environmental and social mitigation; funding for such mitigation measures and compensation, however, was to be provided by THPC (limited to US$2.6 million).

The Power Purchase Agreement (PPA) was executed between EdL and EGAT in June 1996 with a validation period of 25 years from the start of commercial operations. The PPA provided for an option to renegotiate the tariff after 10 years and was based on the take-or-pay principle under which EGAT undertakes to purchase 95% of the project's available energy output. The tariff itself was denominated in dollars, of which 50% was to be payable in dollars and 50% in Thai baht at the exchange rate on the execution date of the PPA. In the first year of operation, the tariff was negotiated at US$0.0484 per kWh and would increase thereafter at a fixed rate of 1% per annum.

4.1.2 Financing Arrangement

Equity funding of US$110 million was raised by the Government of Lao PDR, through EdL (US$66 million), MDX (US$22 million) and NH (US$22 million). On the other hand, debt funding worth US$130.3 million was provided by the Government of Lao PDR (US$6.9 million), commercial banks (US$64.8 million) and through export credit (US$58.6 million).

Funding towards the Government of Lao PDR's contribution for the project was channelized through grant assistance from Norwegian Agency for Development Cooperation (US$7.1 million) and UNDP (US$0.4 million); and loan assistance from ADB (US$57.7 million) and Nordic Development Fund (US$7.3 million).

The ADB loan was extended to the Government of Lao PDR at a 1% interest rate, with 40 years maturity and a 10-year grace period. The ADB funds were further on-lent by the Government of Lao PDR to EdL (US$5.5 million, at 6.21% interest, with 25 years maturity and 5 years grace period) and THPC (US$8.5 million, at 10% interest, with 16 years maturity and 4 years grace period).

4.1.3 Financial Returns

According to ADB (2000), THPC's financial performance was found to be exceptional. The project was rated as highly profitable with substantial accumulated net profits during operating years. The analysis showed that during the period 1998–2009, total revenues and net income from the project would reach US$736.6 million and US$407.6 million, respectively. After paying dividends to shareholders, THPC would still retain US$13.8 million in unappropriated earnings. On the other hand, the shareholders are projected to recover their investment through dividend payments. By 2009, virtually all debt will have been paid and profitability will depend on tariff negotiations with EGAT and whether EGAT moves to a pooling system. Financial analysis shows that THPC's recalculated financial international rate of return (FIRR) was 19.5% (project life of 25 years). Further, it was found that over the period 1998–2000, EdL would earn about US$46.4 million and the income was projected to reach about US$28.6 million per annum till the year 2022.

A recent ADB publication (ADB 2007) has mentioned that THPC's sales revenues increased from US$42 million in 1998 to US$57 million in 2005, and are expected to reach about US$55 million in the future. THPC is making a healthy profit and maintains a comfortable debt-servicing capacity. The project generated net income of US$88 million from 2003 to 2005. THPC's dividend payments over 2003–2005 amounted to US$78 million, of which US$47 million went to EdL. In addition THPC paid about US$2.8 million in royalties to the government in 2005. The profit tax payment for 2004 was about US$3.4 million and about US$2.9 million for 2005.

4.1.4 Mitigation of Project Risks

The project risks were mitigated to a large extent through a number of initiatives from the project sponsors (UNCTAD 2005). The Government of Lao PDR committed to meet its obligations under the 30-year BOOT license, while the ADB waived its usual negative pledge covenant. The shareholders gave a completion guarantee to the lenders.

As shown in Figure 7 [ PDF 19.9KB | 1 page ], an offshore escrow account, managed by a French bank, was set up and pledged to the lenders. Funds were distributed, first to meet the O&M costs of THPC, then to service the debt to the lenders, followed by royalties to the government, and later, dividends to shareholders. O&M costs are managed via a contract awarded every three years. In addition, Lao PDR agreed to join the World Bank Group's Multilateral Investment Guarantee Agency (MIGA), which allowed the lenders to take out sovereign risk insurance with MIGA.

4.1.5 Project Benefits

THPC was expected to contribute about US$21.2 million revenue in the year 2000; that would increase to US$40.9 million by the year 2022. In the real sense, the project was found to have favorable impact on Lao PDR's economy through export of electricity to Thailand and rural electrification in the surrounding areas. Substantial employment was generated during the construction period and in plant operation. The project also resulted in capacity building of several workers associated with the project. Further, availability of modern education and medical services has resulted in improved living conditions in the area. With substantial funds earned from the project, the EdL is in a position to subsidize electricity tariffs for the poor population in the country and support its various power projects.

On the negative side, project-related environment and social impacts were found to be a serious issue when flows were diverted to the Nam Hai–Nam Hinboun system. However, the risks were largely mitigated with support from ADB in the form of review missions and technical assistance.

Overall, the project was found to be remarkably successful with respect to financing arrangements, project implementation, and coordination between all parties concerned.

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