We invited Philippe Valahu, Acting Director of Operations, and Elena Palei, Senior Underwriter, at the Multilateral Investment Guarantee Agency (MIGA), to discuss the underwriting of investment in the complex Nam Theun 2 hydropower project, in which MIGA has played a major role.

Political risk insurance was a key element in launching the landmark $1.25 billion Nam Theun 2 hydropower project in Lao People’s Democratic Republic (Lao PDR), the largest ever investment in that country. The project’s power plant will export electricity to Thailand, which is expected to yield $1.9 billion of foreign exchange earnings for the country over a 25-year period, and will also serve domestic needs. Political risk guaranties from MIGA and the Asian Development Bank (ADB), and a partial risk guarantee from the World Bank’s International Development Agency (IDA), made possible commercial bank financing for the project at attractive rates.

The Project

Nam Theun 2 (NT2) involves the development, construction and operation of a thousand megawatt hydropower plant on the Nam Theun River, a tributary of the Mekong, in central Laos. The project encompasses a 48-meter high gravity dam, a reservoir, a powerhouse, and two transmission lines: a 130 km double-circuit 500 kV line to deliver the bulk of the electrical output to the Thai power grid, and a 70 km single-circuit 115kV line to carry a small portion of the project’s output which is dedicated to domestic use in Lao PDR.

Structure and Funding

The project is structured as a BOOT (Build-Own-Operate-Transfer) arrangement, to be implemented by the Nam Theun Power Company Limited (NTPC), whose shareholders include Electricite de France International (EDFI), Italian-Thai Development Public Company Limited, Electricity Generating Public Company of Thailand (EGAT) and the Nam Theun 2 Power Investment Company (NTPI). NTPI will invest on behalf of Lao PDR’s state-owned power company.

The project represents not only the largest investment ever made in Laos, but also the largest ever private sector financing of a hydroelectric project. The project is funded by equity (28%) and debt (72%) from multilateral and bilateral agencies, export credit agencies, and a consortium of international private commercial banks. The support of political risk guarantors was critical to securing a significant amount of commercial bank financing.

Risk Mitigation

The participation of commercial dollar lenders hinged on the availability of guarantees against political risks, and for a project of this size recourse to multilateral agencies was the only practical solution. Lender concerns included the traditional political risks of currency transfer restrictions and inconvertibility, expropriation, and war and civil disturbance, but also protection of the rights under the project agreements with the Government of Lao PDR and EGAT. These risks were covered by MIGA, ADB and IDA through a co-insurance agreement. It was also important to lenders to have coverage against political risks in both countries, despite the fact that the investment is located in Lao PDR.

“For MIGA, the main challenge was the cross-border nature of the transaction,” says Elena Palei, the project’s senior underwriter at MIGA. “Although the hydropower plant is being built in Lao, the real risk for the banks was the power purchase agreement between the project and Thailand.”

The breach of contract insurance provided by all parties covers the Lao PDR government’s contractual obligations for payment to both NTPC and the lenders, as well as its obligations under a direct agreement with the lenders recognizing their third-party rights under the concession agreement—including subrogation rights in the event of default. In addition, MIGA’s and ADB’s policies covered commercial lenders’ rights under the power purchase agreement between EGAT and NTPC, as well as the various side agreements between EGAT and the lenders.

“It takes a village to build a project like this,” says Palei. “This project was a great collaboration between public sector lenders, multilaterals, commercial banks, local financial institutions, the government, and the investor. This project simply would not have happened without this type of collaboration.” ■