Tag Archives: bankability


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.

Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com or any lawyers listed in our office listing if you have any questions or want to know more details on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

Vietnam plays a calculated game of risk with new solar PPA

Vietnam appears to be betting on gung ho enthusiasm to kick start solar power development rather than taking bold steps to deliver a stable backbone to the industry.  It’s a gamble that may pay off in the short term but might also saddle the country with poorly-conceived and under-performing projects in the long term.


To much fanfare, Vietnam’s Ministry of Industry and Trade (MoIT) released Circular 16 in including final template power purchase agreements (PPA) for the solar energy sector. The circular and PPA templates follow a draft issued back in April this year, and are stated to be mandatory templates for utility-scale and rooftop solar projects.


The original draft PPA for utility scale grid projects was met with criticism, and declared non-bankable by most experts and commentators (despite hewing closely to the previously-issued standard PPA for wind projects). Unfortunately, little has changed with the final version of the PPA.  Would-be investors raised serious concerns over the amount and type of risk the PPA sought to shift to investors, and the message delivered was that unless the government was willing to address some of the most glaring problems, few reputable foreign solar players and, just as importantly, few reputable financiers would be likely to sign up.


Having largely ignored recommendations provided, the final text does little to inspire confidence. The final PPA does not improve upon the main critical issues highlighted in April.  Issues include a lack of measures to compensate producers for interruption in the ability to receive power, force majeure conditions, contract suspension, and settlement of disputes.


Tariff trouble


With the FiT rate of US$0.0935/kWh for grid-connected solar power projects confirmed, Circular 16 goes on to outline that the FiT is available for 20 years to projects, or parts of projects, that reach commercial operation before 30 June 2019.


As with the draft from April, the final PPA does not include any indexation of the FiT to the Consumer Price Index (CPI) to address inflation risks. In response to concerns over fluctuating exchange rates, the circular does state that “the FiT for the following year shall be adjusted according to the central exchange rates of the Vietnamese dong against the US dollar announced by the State Bank of Vietnam on the last working day of the preceding year.”  Annual adjustment is better than none but it wouldn’t have been difficult to spread adjustments throughout the year.


As a way to offset the relatively low tariff, and inflation risks, investors may be able to benefit from tax exemptions on raw materials and supplies imported for their projects, corporate income tax relief, and an exemption from land rental fees within the first three years of commencing commercial operation.


A risk too far?


Under Decision 11 (which also set the FiT) and the final version of the PPA appended to Circular 16, Electricity of Vietnam (EVN) is responsible for purchasing the entire power output from grid-connected projects at the stated FiT.


However, the PPA relieves EVN from payment obligations in cases where it is unable to take power due to a breakdown of the transmission or distribution grid. With many solar projects currently focused on few central locations, the capacity of existing facilities to absorb power must be a cause of some concern given the PPA’s transfer of such risk to power producers.


Worryingly, the PPA lacks any mechanism to compensate power producers should interruptions happen outside of their control. Not only does the PPA not provide for extension of time in case of force majeure, but if force majeure were to prevent a power producer from meeting its obligations for a year then EVN could unilaterally terminate the PPA with no compensation payable.  In such circumstances, the power producer is left alone in the dark.


Such arrangements might be acceptable to projects that manage to negotiate clear ‘take or pay’ terms and/or government guarantees, but it is highly questionable whether and to what extent either of these will be possible in the current climate.  As a direct consequence, it is equally questionable to what extent private finance will be prepared to bear the risk, a fact that will prompt capital to seek more favourable conditions in other markets.


Playing by house rules


If the above portends of problems in the relationship with EVN, investors may be further discouraged by the lack of specifics in terms of dispute resolution. The PPA is governed by Vietnamese law and does not itself expressly include the right to agree on international arbitration to resolve disputes, a condition that would typically be considered an important requirement.


As it stands, disputes can be submitted to the Electricity Renewable Energy Department (formerly the General Directorate of Energy) for mediation. If that doesn’t work, there is the option of escalating the issue to the Electricity Regulatory Authority of Vietnam (ERAV) or pursuing litigation in Vietnam’s courts.


The PPA does allow for “another dispute resolution body to be agreed by the parties”, which potentially opens the door for sellers to negotiate with EVN on dispute resolution, including offshore or even domestic arbitration.  But it is not clear if EVN will agree to directly amend PPAs to allow for express prior agreement on offshore arbitration or simply open the door for such a discussion at the time of a dispute.  Clearly in the latter case the deck is firmly stacked in EVN’s favour.


One step forward… wait and see


The MoIT is well aware of the deficiencies in the PPA and knows that, in its current form, it will not attract the kind of investment Vietnam needs if it is to meet both its energy demands and renewable targets. They know that investors were hoping for some of the shortfalls to have been addressed, and as such the agreement remains – for all intents and purposes – largely unbankable.


On the other hand however, the MoIT is also acutely aware of the significant interest in Vietnam’s solar sector. The vast potential of solar power is there for the taking, with abundant land available for the development of solar farms for first movers. With this in mind, the PPA can be considered an attempt to test the waters – asking how much risk investors are willing to bear in return for a piece of the action.


The MoIT is confident that smaller, nimble players will be attracted to Vietnam and make investments, regardless of the bankability of the PPA on paper. The question truly posed by Circular 16 is: exactly how much risk are investors willing to accept?  What better way to test it than in open market conditions?  If risk allocation adjustment need to be made in future, the Prime Minister, MoIT and EVN can make them relatively easily.


Ultimately, although the PPA is “final” on paper, the real trick is for investors to work hard and smart to agree adjustments on a project-to-project basis that re-align specific risks in acceptable ways.  Each project is a sum of many different elements and successful investors in the early days at least will be the ones that focus their energies on key issues for their projects where they can make meaningful progress.  Opportunity vs. risk: Vietnam is playing a calculated game at the dawn of the solar energy sector.  Where the chips fall remains to be seen.


For more information about Vietnam’s energy sector, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.