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|Vit Vatanayothin, partner at Baker McKenzie’s Bangkok office|
Thai investors in the renewable energy industry have found their usual domestic markets and investment prospects rapidly drying up. This was partly due to a saturated market and excess capacities already being generated by the private sector and failure to implement the projects awarded by the Electricity Generating Authority of Thailand, Provincial Electricity Authority, and Metropolitan Electricity Authority.
In response to these impediments, the Thai Ministry of Energy has been slow to implement new power purchase agreement (PPA) bidding rounds under various schemes with a view to cleaning up the market by terminating the backlog of previously awarded PPAs, whose project owners failed to achieve commercial operation by their respective schedules.
With the dearth of attractive and available investment opportunities at home, Thai investors that are keen to grow and accomplish the targeted installed capacities have been looking to its neighbours in the ASEAN region to seek out new golden fields.
In recent years, Vietnam has become a hotbed of foreign direct investment activity across many sectors. Viable opportunities to either directly develop (whether solely or jointly with other foreign or local investors), or acquire conventional as well as renewable power projects (particularly solar and wind) with attractive internal rate of return (IRR) owing to high feed-in tariffs awarded by Electricity of Vietnam (EVN) have proved irresistible.
Major Thai power producers, being sophisticated investors themselves, typically do come on the scene prepared to overcome certain legal hurdles in Vietnam. In many cases, Thai sponsors have been keen to secure participation in projects based solely on high-level technical, financial, and legal due diligence findings, knowing fully that some fundamental issues found in due diligence exercises may not be resolved, and that these hurdles will cause difficulties in finding project financing on a limited-recourse basis in both international and Thai financial markets.
With a very attractive IRR in place, major Thai power producers have been very ambitious to implement the projects with the hope that these legal missteps can later be fixed one way or another without significantly hurting their IRR.
|illustration photo, Shutterstock|
One of the noteworthy legal issues includes non-bankable renewable PPAs. Solar and wind PPAs awarded by EVN for some small power producer projects have historically been non-bankable, unlike some Vietnamese independent power producer PPAs. This has deterred traditional project financing by foreign lenders during pre-construction and construction phases.
Construction risks are therefore often borne by or allocated solely to project owners. Risks arising from the non-bankable PPAs are usually mitigated by full sponsor support during the operational phase.
Vietnamese law does not permit foreigners, including foreign financial institutions, to take security over immovable property in Vietnam. However, the term “immoveable property” is not broad enough and the interpretations of such term by Vietnamese authorities are inconsistent, as to which parts of project assets are classified as immovable property and which parts are not classified.
Another issue is that the rigorous Vietnamese exchange control regulation is not investor friendly and rigid conditions are imposed. For instance, the use of medium- to long-term offshore loans to refinance foreign debts is permitted only if such offshore refinancing does not increase the borrowing costs from those of the original foreign debts.
The State Bank of Vietnam’s (SBV) approval and registration requirements are also posing challenges to Thai investors. Mid- to long-term foreign loans are required to be registered with the SBV prior to disbursement, which is typically very time-consuming. The opening of bank accounts outside of Vietnam by a Vietnamese entity also requires prior SBV approval, which will only be granted on a discretionary and case-by-case basis.
Due to the lack of clear guidelines in the SBV’s operations and their conservative administration of financial regulations, delays in the SBV registration process have been largely responsible for holding up financial closes where the investment is being project financed (or refinanced).
Last but not least, it is the requirement to settle payment for onshore goods and services locally and in local currency – Vietnamese exchange control regulations require payment for onshore services provided domestically (such as onshore engineering, procurement, and construction work) to be settled in VND and in Vietnam.
To avoid these legal pitfalls, foreign investors would do well to approach strategic opportunities in Vietnam with a caveat emptor mindset and seek in-depth legal, tax, and financial advice to properly structure their initial investment before offloading any capital in Vietnam.
Despite the myriad of legal snags and snares, there has been an influx of offshore renewable energy project financings in Vietnam of late. The prospect of reaping favourable returns from Vietnamese power projects, especially renewables and liquefied natural gas-to-power projects, have increased risk appetites of Thai investors and foreign lenders alike.
In following their Thai investors to Vietnam, multilateral development banks such as the Asian Development Bank and major Thai commercial banks have been granting more takeout loans (both directly and via sub-participation arrangements) on a project financing basis to refinance initial funding of projects here.
With sufficient risk allocation measures (such as project sponsors undertaking substantial financial/credit support and/or guarantee obligations), project financing on limited recourse basis is likely to continue gaining ground in Vietnam.