The term project financing is used to refer to a wide range of financing structures which have one feature in common: the financing is not primarily dependent on credit support of the sponsors or the value of the physical assets involved (Clifford Chance 1991).
RISK MITIGATION IN PROJECT FINANCING IN VIETNAM: FROM LENDERS’ PERSPECTIVES IN THE PRIVATE SECTOR by Duong Nhu Hung A research study submitted in partial fulfillment of the requirements for the degree of Master of Business Administration Examination Committee : Prof J.P Gupta (Chairman) Dr D.B Khang Dr S Venkatesh Nationality : Vietnamese Previous Degree(s) : Master of Electrical Engineering Technical University of Budapest Hungary Scholarship Donor : The Government of Switzerland Asian Institute of Technology School of Management Bangkok, Thailand April 1999 Acknowledgement During the process of this research study, many persons and institutions whose involvement made this research possible I would like to extend my appreciation and gratitude to all of them I am very grateful to Prof J P Gupta for his guidance, help and encouragement in assisting this research It was he who introduced me to the field of Project Financing and I am very proud to have worked with him I am also grateful to Dr Do Ba Khang and Dr S Venkatesh, for having served as the committee members They provided me with valuable suggestions to enhance the quality of this research Outstanding acknowledgements are due to the government of Switzerland for providing the scholarship that enabled me to achieve the degree of MBA at the School of Management I also wish to acknowledge the Industrial School of Management for providing support during my study Thanks are also due to Mr Ngo Quang Kim, Mr P U Nguyen (HIFU), Mr N H Dung (Energy Center), Mr P H Nam (State Bank of Vietnam), Mr V D H Quan (AIT) and Miss N T M Hue (FPT) This research is dedicated to my parents whose continual encouragement, moral support, and inspirations have molded me into what I am now Abstract The applications of project financing are increasingly wide spreading, particularly in investments that require risk sharing Risk mitigation is one of the most important elements in project financing, but is not well addressed in literature in Vietnam This research attempts to help lenders to mitigate risks in project financing in Vietnam By conducting interviews with bankers, project managers, government authorities and legal experts, we analyze various aspects of risk mitigation at three levels: country, institution and project levels The analysis is focused on the applications and limitations of risk mitigating techniques particularly at the project level An in-depth risk analysis is carried out in a real life project Our research suggests lenders to examine every risk separately and use overlapped protections The predictability of the cash flow and the track records of the sponsors are the most important criteria in project financing Joining syndication with multilateral organizations such as IFC is a wise way to mitigate risk Joint Venture between an experienced foreign company and an influential state owned company is the most recommended form of business in project financing in Vietnam i Table of Contents Chapter Title Page Acknowledgement ii Acknowledgement Abstract ii i Abstract Table of Contents i ii Table of Contents List of Tables ii v List of Tables List of Figures v vi List of Figures vi Chapter 1 Introduction 1.1 Rationale 1.2 Statement of Problem 1.3 Objectives 1.4 Scope 1.5 Organization of the Research 1 2 Chapter Literature Review 2.1 Concept of Project Financing 2.2 Parties Involved in Project Financing 2.3 Project Financing Structures 4 ii 2.4 Risks Involved in Project Financing 2.5 Managing Project Risks 10 Chapter 13 11 Methodology 3.1 Analytical Model 3.2 Data 13 13 15 12 Chapter 16 13 Country Environment 4.1 Political Environment 4.2 Macroeconomic Environment 4.3 Infrastructure 4.4 Market Opportunities 16 16 17 18 18 14 Chapter 20 15 Key Parties in Project Financing in the Context of Vietnam 5.1 Government 5.2 State Owned Enterprises (SOEs) 5.3 Private Businesses 5.4 Foreign Direct Invested (FDI) Companies 5.5 Banks in Vietnam 5.6 International Finance Corporation (IFC) in Vietnam 20 20 20 21 21 22 24 16 Chapter 27 17 Case CSM: Description 6.1 Profile of CSM Project 6.2 Financing Structure 6.3 Special Agreements 27 27 28 30 18 Chapter 32 19 Case CSM: Risk Analysis 7.1 Risk Identifications in CSM Project 7.2 Protection of Project Cash Flow 32 32 37 iii 7.3 Loan Security Package 7.4 Major Difficulties for Lenders in the CSM Project 7.5 Comments on Project Financing in the case of CSM 43 45 47 20 Chapter 49 21 Conclusions and Recommendations 49 8.1 Limitation 49 8.2 Major Findings about Country Environment and Key Parties in the Context of Vietnam 49 8.3 Major Findings Related to the CSM Case 50 8.4 Recommendations 52 8.5 Recommendations for Further Studies 53 Abbreviation 54 22 Abbreviation Reference 54 55 23 Reference Appendix 55 57 24 Appendix 57 iv List of Tables Table Title Page No 4-1 Important Economic indicators of Vietnam 17 4-2 Some indications about the living standards 19 4-3 Summary of Opportunities and Threats of the Country Environment 20 5-1 Investment of the economy during 1996-1997 23 5-2 Summary of Strength and Weakness of Key Partners in Vietnam 27 6-1 Financing details of CSM project 30 6-2 Financing back up of the CSM project 31 7-1 Required insurance in CSM project 45 7-2 Summary of Risk mitigation arrangement in CSM project 50 v List of Figures Figure Title Page No 1-1 Organization chart of the research 2-1 Traditional method of financing a project vs project financing 2-2 An IFC co-financing structure (Clifford Chance, 1991) 2-3 Project risk phases (IFC, 1996) 3-1 Model for Analyzing Project Financing 15 7-1 Security support for CSM project 37 8-1 Simplified financing structure of CSM 53 A6-1 Detailed Summary of Financing Structure of CSM Project 64 vi Chapter 1 Introduction 1.1 Rationale The term project financing is used to refer to a wide range of financing structures which have one feature in common: the financing is not primarily dependent on credit support of the sponsors or the value of the physical assets involved (Clifford Chance 1991) In project financing, lenders have to rely mainly on the performance of the project Therefore, their primary concern is the feasibility of the project and its sensitivity to the impact of potentially adverse factors Since the opening policy, Vietnam has gradually integrated into the world economy With the market of population of 70 millions, the incentives of government and the location in one of the most dynamic region, Vietnam has attracted both private and foreign investment According to the estimation of government, the financing of the planned investments for development over the five years up to the year 2000 are to be in the order of US$41.4 billion The Government hopes to mobilize slightly more than half of the total needed resources (US$20.9 billion) from domestic savings and the remainder (US$20.5 billion) from foreign sources, including US$13 billion of foreign direct investment (FDI) and US$7.5 billion of official development assistance (ODA) (WB, 1999) Clearly, the demand for foreign capital in Vietnam is enormous in coming years On the other hand, the Country environment of Vietnam is still considered as high risk (EIU, 1998) The lack of both capital and assets (used for mortgage) make the traditional method of financing based on the security or enforcing obligations might not appropriate in many circumstances, especially in large project with long repayment time The promising opportunities plus the needs for risk sharing necessitate project financing in Vietnam The government of Vietnam has opened door in many areas to all sectors including local private and foreign investment The limited capacity of government budget, the need for running economy efficiently and the open door policy of government have increased the role of private investment in the economy of Vietnam In project financing, sponsors usually contribute only a small portion of the capital The lenders usually have to provide about 50%-70% of the total investment cost (Clifford Chance, 1991) with limited recourse to the borrowers (sponsors) Meanwhile, they rarely involve directly in management of the project As a result, lenders are exposed to a lot of risks The needs for project financing, the increasing private investment and the risk exposure of the lenders necessitate researches in risk mitigation in project financing in Vietnam, particularly in private sector On the other hand, not much literature is available in these issues Thus, more researches in this field should be done 1.2 Statement of Problem This research attempts to solve the problem “How to mitigate risks in project financing in Vietnam, particularly in private sector?" 1.3 Objectives • To analyze the country environment of Vietnam • To analyze the key partners in project financing in the context of Vietnam with focus on private sector • To analyze the financing structure, risk mitigating techniques and important issues for the lenders through an in-depth study of a typical case in project financing in Vietnam • To make recommendations about risk mitigation for the lenders in project financing in Vietnam 1.4 Scope The research is written from the lenders’ perspectives with focus on risk mitigation in project financing in private sector 1.5 Organization of the Research The first chapter is the introduction including rationale, problems, objectives, scope and the organization of the study The second chapter is literature review, which provide back ground and terminology needed for the analysis The third chapter is methodology that creates the foundation for the analysis The fourth chapter is the country environment analysis including the analysis of political environment, macroeconomic environment, and infrastructure and market opportunities The fifth chapter is the analysis of key partners in project financing in Vietnam including government, state owned enterprises, local private companies, FDI companies, domestic banks and IFC The sixth chapter is the description of CSM project including the project profile, the financing structure, and special agreements The seventh chapter is the analysis of the CSM project including risk identification, risk mitigation to protect cash flow, the loan security package and some major difficulties in CSM project The eighth chapter is conclusions and recommendations including the limitation of the research, the summary of the main findings, the recommendations for the lenders and suggestion for further study 7.5 Comments on Project Financing in the case of CSM The financing structure of CSM project can be summarized as follows: lender (IFC, TEXIM, NIE) VNC Arrow 1: Arrow 2: Arrow 3: GFH Total equity contribution of 122.4 M Total loans of 186.6M Funding Back up, including Project Fund Agreement of 25 M Financial Support Agreement of 42 M Loans Equity CSM (Joint-venture) Owns CSM Project Figure 7-5: Simplified Financing Structure of CSM The figure 7-2 shows that the total loan of USD 186.6 millions has made directly to the CSM joint venture The share holders have to contribute a total equity of USD122.4 millions and an additional total funding back up of USD 76 millions In other words, the lenders not have any direct recourse to the sponsors' revenue or assets other than the maximum amount of USD 76 millions They have to rely on the economics of the project, project assets, and the revenue stream generated by the project According to the definition in the literature review, CSM is really a typical case of project financing We would like to make a small remark here In the above example, we simply consider "the recourse to the sponsors" equal with the total of PFA and FSA, but we have ignored the value of other binding agreements such as off-take agreement Therefore, the actual recourse to the sponsors would be larger than the total of PFA and FSA 47 Table 7-2: Summary of Risk mitigation arrangement in CSM project Risk to lender Risk mitigation arrangement in CSM project Project Performance Choose strong, experienced sponsors: GFH, a world leading producer and VNC, the biggest local producer Significant equity stake: total equity 122.4 millions High cost of service Bidding Sponsors sell out Share Retention Agreement require GFH to keep at least 51% share Project Completion Project Fund Agreement and Financial support agreement until physical and financial completion certified Delays Construction equipment supplies obligations with penalty clauses Cost overruns PFA Site availability Land Use Agreement Technology Use proven technologies + assistance from GFH Non-performance Performance bond/guarantee from equipment suppliers on quantity and quality Fuel/other inputs Materials Careful studies on quality and quantity of deposit of limestone Skilled labor Experts seconded Use expatriate managers Training both technology and language Transportation risk Lease vessels +build its own port Market risk Undertake independent market assessment Off-take contract specifying minimum quantities and prices Conservative financing structure FSA Payment risk Sell output to QCL, a creditworthy buyer Escrow account covering several months’ debt service FSA Country Environment Expropriation Participation of a multilateral organization (IFC) Regulatory interference Government lobby by the strong local sponsor Concession revoked Ownership of VNC, a State owned company Legal framework Contract arbitration in neutral location under rules of international body Environmental risk Independent assessment Agree on guidelines, monitoring, and reporting Financial risk FSA + Offshore escrow account Foreign exchange Agreement with central bank for forex availability Interest rate Interest rate swap Loan security packages Debt services coverage Financial Support Agreement until D-E ratio reduced to safe level Escrow Security accounts with debt service reserve Conditional Assignment of Interest Charge over Escrow acc Assignment On-going compliance of insurance proceeds Staged disbursements Disbursement conditions and loan covenants Accidents/ loss Insurance policies and force majeure provisions As the conclusion, the CSM project is a typical case that provides a lot of useful practical lessons in project financing in the context of Vietnam 48 Chapter 8 Conclusions and Recommendations 8.1 Limitation The analytical model can provide a logical approach in evaluating some important issues related to project financing, particularly the risk mitigation in the context of Vietnam; however, other questions such as why to project financing instead of traditional financing? How to calculate cash flow? How to supervise the project? etc cannot well explained in this model Since every project financing has its own unique features A typical project cannot represent other projects Although CSM meets the selection criteria that the financing structure and risk mitigation should cover most of the common features in project financing, it still has many unique features For instance it is a joint venture between foreign company and a state owned enterprise in the cement industry Project financing in different sector (state sector, or wholly foreign owned project), or different business (for instance, power, water plant) might have different features The primary survey was conducted at a few important banks, government agencies and projects located in Hochiminh city, whereas most of their headquarters are located in Hanoi Therefore, some conclusions might not fully reflect the overall situation in Vietnam 8.2 Major Findings about Country Environment and Key Parties in the Context of Vietnam Vietnam desperately needs the investment of all private sectors in economic development Currently the local private sector and FDI account for more than half of the total investment in the economy Although the investment rate slows down recently due to the regional crisis, the investment of the private sector is expected to increase in the future The investment of the private sector helps share the burden with Government budget Project financing in Vietnam is feasible, but still difficult Although the government has solved a lot of obstacles, and is trying to create a good investment environment, several major problems in project financing still remain including the laws and regulations in mortgage, the ineffective bureaucracy, poor regulatory interference The government budget always runs in deficit Therefore, government limits its investment in only critical projects and infrastructure development Lending to government is least risky, but government projects often require highly concessional loan One of the most important of source for funding government project is the Official Development Aid (ODA) As a result of market oriented reforms, both the number of SOEs and their labor force were sharply reduced, but their productivity has increased Current government policies encourage the participation of state owned companies in large project with foreigners 49 The advantage of most SOEs are the preferable treatment such as obtaining loan without collateral, easier access to foreign currency loan, subsidized interest rate and concessional land use right The disadvantage of most SOEs is the limited liquid capital Their contributions in joint venture are often in the form of properties In Vietnam private sector is very dynamic and market oriented Government has gradually created a more level playing field between SOEs and local private companies The current equitization process will further increase the share of the local private in the economy Although currently there are still many obstacles to the development of the local private investment, they can be a potential partner in project financing in coming years Foreign companies in Vietnam usually have strong financial capacity and experience They can enjoy some investment incentives such as tax incentives, but their operation can be limited in certain areas because of government policy or the access to land use right The most preferable business forms in project financing is the joint venture between a foreign company and a SOE, because it combines the financial strength and experience of foreign partner with the preferable treatments that only SOE can have Domestic banking system has undertaken reforms, but it is still weak The state owned banks still dominate the banking system, monetary policy continues to rely heavily on direct controls, the overdue loan is increasing and local financial market remains rudimentary, the convertibility into foreign currency cannot be ensured Other forms of mobilizing fund for project such as bond issues, private placement etc are difficult Local banks have limited lending capacity and are unfamiliar with project financing They are often reluctant to participate in project financing They cannot take active participation in project financing but they can support local sponsors International Finance Corporation (IFC) plays important role in bridging lenders and sponsors It has been operating in Vietnam only since 1994, but it has soon become the largest project finance arrangers and lenders 10 Under current situation, most foreign lenders prefer to participate in project financing in the syndication with multilateral organizations such as IFC or WB This form of participation can reduce some risks, especially the country risk 8.3 Major Findings Related to the CSM Case CSM is a typical case of project financing not because it is one of the largest industrial ventures being undertaken by private investors in Vietnam, but because its financing structure and risk mitigation cover most of the common features in a project financing The project has been financed on limited recourse basis and without government guarantees There are many types of funding in a project Each type of funding has its own purpose, interest rate and conditions The major types of funding in CSM project include equity, senior loan, subordinated loan and the sponsor support agreements such as Project Fund Agreement (PFA) and Financial Support Agreement (FSA) (Figure 8-1) 50 Offtake Agreement Onshore Account FSA Offshore account PROJECT OWNER CSM Ltd Senior lenders Subordinated lenders GFH VNC 65% 35% PFA Figure 8-6: Simplified financing structure of CSM There are two main protection levels for the lenders In the primary protection level, lenders use risk-mitigating tools mainly for the purpose of protecting the cash flow of the project These tools can be either in the form of money (such as PFA, FSA and charge over offshore escrow account), or in the form of binding agreements (such as off-take agreement, share retention and some financial covenants) In the second protection level, lenders require the loan security package This package include Conditional Assignment of Venture Interest Agreement, charge over the escrow account, assignment of insurance proceeds, share retention agreement and some financial covenants Some risk mitigating tools can be used to protect against several risks such as the escrow account or share retention agreement The summary of risk mitigation is included in the table 7-2 Each risk-mitigating tool can protect the lenders to some limited extent against certain kind of risks For instance, the offshore account is sufficient to cover only several months' debt service, can protect the lenders from the commercial risks, foreign exchange risks, but cannot protect the lender from the project completion risk Therefore, the lenders need a set of protection tools Some risk has direct effect on the lenders (foreign exchange, payment risk); others may be less direct to the lenders (skilled labor, transportation risk) Lenders usually can determine the protection tools against the direct risks, but they usually have only veto power against the indirect risks For instance, they cannot ask the sponsor to choose a specific technology or transportation means The financing is structured according to the risk phase ("high risk, high requirement") The binding requirements are strictest in the early operational phase, when the project faces the highest risks The stronger protections for the lenders usually mean the cost for the sponsors For instance, lenders can avoid payment risk at the cost of the sponsor for bank guarantee The questions of limit of protections largely depend on the negotiation between sponsors and lenders There is a tradeoff between risk – risk Lenders can mitigate one risk by accepting another risk Lenders can accept this trade-off if the total benefit is positive For instance, in case of off-take agreement, lenders can mitigate the market risk by accepting the payment risks because they believe that the payment risk is less serious for them than the market risk Even in the most careful financing structure, lenders can be exposed to certain risks because either the risk mitigating tools are not effective enough (fund agreements cannot solve the technical redesign problem) or it is impossible to devise an effective risk 51 mitigating tool (the lenders could ask the sponsor’s obligation to provide fund for certain problems such as technical redesign, but it is impossible to get back-up guarantee from banks for every obligation) 10 There are the differences in the perspectives between the lenders and the sponsors The sponsors like to see more profit whereas the lenders like to see the stable cash flows 8.4 Recommendations In addition to general recommendations mentioned in the literature reviews, the lenders can consider the following recommendations when they project financing in Vietnam: Analyze every risk separately, but use overlapped protection tools We can better understand the risk if we examine it alone However, we cannot devise separate protection tools for every risk because it would require too many protection tools, or it would be impossible or too costly to so Thus, the lenders have to rely on overlapped protections Each risk should be protected by several tools; and each tool should be able to mitigate several risks The overlapped protections strengthen the lenders' security and reduce the cost Choose the JV between an experienced foreign company and an influential state owned company Setup a strict and clear financing structure right at the beginning But be prepared that nothing is perfect It requires the lenders to cooperate closely with the sponsors Be careful with the difference in perspectives between lenders and sponsor The differences can cause conflicts Lenders should also balance its security versus the benefit of the sponsors Financial covenants are necessary to protect the lenders' benefits, but sometimes they can have negative feedback on the lenders Analyze the sensitivity and effectiveness as well as limitations of risk mitigating techniques and ensure the balance between risk mitigating tools Important risks requires stronger protection tools Share experience with and provide training for local banks in project financing so that they will be more likely to support at least the local sponsors Apply risk phase concept in structure financing Always look first at the cash flow, not the profit before looking at security The securities can provide only the secondary protection for the lenders Use conservative estimation in structuring finance 10 Lenders should joint syndication with multilateral organizations such as IFC 52 8.5 Recommendations for Further Studies There are many issues related to project financing Risk mitigation is one of the most important issues, but other issues such as making decision between project financing and traditional financing, calculation of cash flow, supervision of the project? etc are also important in project financing They need further researches Further surveys should be conducted in Hanoi, where most negotiations and project financing arrangements take place Further studies should be conducted in different sectors (state sector and wholly foreign owned companies), and in different business, particularly in the field of infrastructures 53 Abbreviation Abbreviation ADB AFTA ASEAN Bn BOT CAVIA CEPT D-E DSCR EIU EXIM FDI FSA GDP IFC IMF Incombank Indebank JV M MIGA NGOs NIC NIE NTR ODA OECD OPC OPIC PFA QCL SOEs US Vietcombank W/C WB Full Name Asian Development Bank ASEAN Free Trade Area Association of South East Asian Nation Billion Build Operate Transfer Conditional Assignment of Venture Interest Agreement Common Effective Preferential Tariff Debt per Equity Debt Service Coverage Ratio Economic Intelligence Unit Export Import Bank Foreign Direct Investment Financial Support Agreement Gross Domestic Product International Finance Corporation International Monetary Fund Industrial and Commercial Bank of Vietnam Bank for Investment and Development of Vietnam Joint Venture Million Multilateral Investment Guarantee Agency Non-Government Organizations Nissho Iwai Corporation Nissho Iwai Europe Normal Trade Relation Official Development Aid Organization for Economic Cooperation and Development Ordinary Portland Cement Overseas Private Investment Corporation Project Fund Agreement Queensland Cement Ltd State Owned Enterprises United State Bank for Foreign Trade of Vietnam Working Capital World Bank 54 Reference Books Brealey and Myers, 1996 Principle of Corporate Finance McGraw Hill Inc Clifford Chance, 1991 Project Finance IFR Publishing Ltd Economist Intelligence Unit (EIU), 1998 Country Forecast: Vietnam IFC, 1996 Financing Private Infrastructure IMF, April 1998 Vietnam: Selected Issues and Statistical Annex Ishii, Naoko, 1997 FDI in Vietnam- Leading to a High Cost Economy Development Strategies for Vietnam: Challenge to prosperity Harvard University Niehuss, John M., 199x Project Financing Merrill Lynch White Weld Capital Markets Group UNDP, 1998 From Miracle to Crisis World Bank (WB), 1998 Vietnam: Rising to Challenge 55 Journals Giang, Hoang Tu Cement projects Confront Looming Financial Impasse Vietnam Investment Reviews 16-22 November, 1998 Gupta, Jyoti P and Sravat, Anil K Development and Project Financing of Private Power Projects in Developing Countries: a Case Study of India International Journal of Project Management Vol 16 No P.99-105 1998 Hai, Thanh Foreign Currency Bond Issue to Support Infrastructure Vietnam Investment Reviews 30-6 December, 1998 Hanh, Nguyen Cement industry Calls for Government Intervention Vietnam Investment Reviews 16-22 November, 1998 Hung, Tran Radical reforms Urged to Encourage Aid Vietnam Investment Reviews 30-6 December, 1998 Huong, Thuy Eleven Years of FDI Saigon Economic Times No 50, 1998 Huynh, Nguyen Power Companies in the Dark over Project Licensing Vietnam Investment Reviews 16-22 November, 1998 My, Ha License of Foreign Projects revoked: Why? Vietnam Commerce and Industry May 1998 Quang, Truong Nhat Law Tightened Offshore Loan Security Vietnam Investment Reviews 18-24 January, 1999 Quoc, Tran Bank Chief Maps Out Road to Full recovery Vietnam Investment Reviews 30-6 December 1998 Reynold, Tim and Skinner, Stephen Credit Institutions Examining New Laws Vietnam Investment Reviews 25-31 January, 1999 Skinner, Stephen Pledging Valid Security for Financing Vietnam Investment Reviews 2-8 November, 1998 Skinner, Stephen Financing Infrastructure Vietnam Economic Time November 1998 p.4 Thu, Hoai Lack of Long term Capital Threatens Banks' Viability Vietnam Investment Reviews 21-27 December, 1998 Vietbid Law Firm New Law Maps Route on Foreign Loan Vietnam Investment Reviews 2127 December, 1998 Wattez, Edouard A., 1998 Delivering the Politics on Development Aid Vietnam Investment Reviews 30-6 December, 1998 56 Appendix Appendix for Chapter 4: Country Environment A4-1: Official Development Aid to Vietnam The ODA includes three main sources: bilateral, multilateral and Non-Government Organization (NGOs) The ODA can be offered either as grant (non-repayment) or as concessional loan (low interest with high grace period) The bilateral aid is particularly useful in funding feasibility studies, providing technical assistance or funding infrastructure, but it is frequently tied to procurement from the country providing the funds Another disadvantage of bilateral aid is that it is generally not available in large amount on a continuing basis Major multilateral donors in Vietnam include World Bank (WB), International Monetary Fund (IMF) and Asian Development Bank (ADB) The multilateral aid is often provided to promote macro economic stability, developing infrastructure, alleviating poverty, and investing in human resources (such as WB) or to support international exchange rate stability (such as IMF) Vietnam hopes to mobilize and effectively invest some US$7.5 billion of ODA to help finance its development strategy from 1996 to the year 2000 (WB, 1999) A4-2: The ODA for Vietnam during 1993-1997 (In US$million) Donors 1993 1994 1995 1996 1997 Bilateral 155.68 301.46 349.57 468.99 666.00 Multilateral 107.62 310.84 252.96 507.09 490.33 NGOs 10.48 12.33 9.31 8.90 6.47 Total 273.78 624.63 611.84 984.97 1,162.80 (Source: World Bank, 1998) 57 1993-1997 1,941.70 1,668.84 47.48 3,658.02 Appendix for Chapter 5: Key Partners in Project Financing in Vietnam A5-1: Banking System in Vietnam At the end of 1996, Vietnam’s banking system included four state owned commercial banks, 52 joint-stock banks, 23 branches of foreign banks, four joint-venture banks, 62 representative offices of foreign banks, and 68 credit cooperatives There were also close to 900 people’s credit funds, two finance companies and one government-owned insurance company State-owned commercial banks: • Industrial and Commercial bank of Vietnam (Incombank), whose operations include mobilizing funds, making local and foreign currency loans, trading in foreign exchange, processing local and international payment, trading in gold and silver, consulting, and providing computer services • Bank for Foreign Trade of Vietnam (Vietcombank) dominates trading in foreign exchange and offers the following services: financing trade, letter of credit operations, making bank guarantees, processing international payments, offering credit card facilities, and making loans and accepting deposits • Bank for Investment and Development (Indebank) is responsible for mobilizing funds for development investment projects, providing equity participation in development projects, dealing in foreign exchange, and providing medium and long term lending • Bank for Agriculture and Rural development, whose operations are generally limited to the agriculture sector It also operates the Bank for the Poor, a Government funded lowincome credit scheme Joint stock banks Shareholders of Joint-stock banks are state owned commercial banks, state-owned enterprises, and private entities Foreign bank branches They operate mainly in foreign currencies, especially in the area of trade finance, as they may accept only a limited amount of domestic currency deposits Joint venture banks The four JV banks, which are partnership between a state commercial bank and a foreign bank, are subject to the same restrictions on deposit taking as foreign banks (Source: IMF, April 1998) 58 A5-2: Distribution of Credit, 1994-97 (In billions of dong at end of period) December 1994 1995 Total non-government credit 33,345 42,307 Credit extended by state owned 27,610 33,677 commercial banks to state enterprises 18,604 20,885 to other sectors 9,006 12,792 Credit extended by other banks 5,735 8,630 to state enterprises 2,400 3,224 to other sectors 3,335 5,406 By sector: SOEs 21,004 24,109 Other sectors 12,341 18,198 1996 50,751 38,320 Sept 1997 56,926 43,742 22,030 16,290 12,431 4,780 7,651 23,973 19,769 13,184 4,991 8,193 26,810 23,941 28,964 27,962 (Note: * includes Join-stock banks, JV banks, and branches of foreign banks) (Source: IMF, 1998) A5-3: INTERNATIONAL FINANCE CORPORATION International Finance Corporation (IFC), a member of the World Bank Group, was founded in 1956 Although it shares its Board of Directors with the World Bank and coordinates its activities closely with other affiliates of the World Bank, IFC is legally and financially independent, with its own Articles of Agreement, shareholders, financial structure, management, and staff Its share capital is provided by its 172 members, which collectively determine IFC’s policies and activities IFC is headquartered in Washington, DC, and has offices in 37 countries around the world Global Policies and Priorities IFC’s primary objective is to further economic development by encouraging the growth of productive private enterprise in its member countries, financing such enterprise in partnership with private investors and helping governments create conditions that stimulate both domestic and international private investment It is the largest multilateral source of direct financing for private sector projects in developing countries Type of Assistance and Programming IFC provides long-term loans and makes equity investments in private sector projects In addition to furthering a country’s economic development, these investments must yield commercial rates of return IFC does not provide subsidized financing but rather charges market rates on its loans IFC cannot accept government guarantees IFC makes long-term investments in operating companies and, as IFC’s own financing is limited to a maximum of 25% (or 35% in certain cases) of total project cost, it must play a catalytic role in mobilizing additional funding for projects This funding can come from other equity investors, loan syndication, or underwriting of debt and equity securities IFC also provides advisory services and technical assistance in financial structuring, capital markets development, privatization, corporate restructuring and risk management 59 (Source: IFC, 1999) A5-4: List of Projects Approved by IFC ( Appendix for Chapter 6: CSM: Description A6-1: Debt Service Coverage Ratio (DSCR) Fiscal year No 1994 1995 1995 1996 1996 1996 1996 1996 1996 1996 10 1996 11 1996 12 1996 13 1997 14 1997 15 1997 16 1997 17 1997 18 1998 19 1998 20 1998 21 Project Metropole hotel Baria secrece port Foremost dairy Vinaflour Vina Kyoei steel Morning star cement San Miguel Haiphong glass Bourbon Tay ninh sugar mill Touran hotel Danang Tosac hotel Haiphong Mekong project devt facility Mekong financing line VILC leasing PEAL Hilton hotel(HCMC) KIA-Huyhoang ceramics tiles Vinafood-GCR flour mill Nghison cement Nghe an tate & lyle sugar Vinh phat Baria power Binh an water plant sector Project cost IFC loan IFC equity/quasi equity loan Participant total equity/debt Hotel/tourism 35 3.5 17.5 26 29% Infrastructure 10 32% Agribusiness 29.5 15 42% Agribusiness 26 11 41% Mining/metals 70.8 15 15 29% Constr Mtrls 309 30 66.6 96.6 35% Manufacturing 32 10 4.5 14.5 55% Agribusiness 95 22 20 42 30% Hotel/tourism 23.7 2.3 14.3 28% Hotel/tourism 11.9 3.4 2.8 6.2 49% Project devt 25 4 SME financing 5 capital market 55 0.8 10 15.8 Hotel/tourism 81.5 13 4.5 35.8 53.3 Constr Mtrls 20.6 6.2 1.4 6.2 13.8 30% Agribusiness 41 10.5 13.5 24 Constr Mtrls 372.9 30 26.5 56.5 30% Agribusiness 84.8 20 30 50 31% Textile 0.6 0.3 0.3 Infrastructure 130 28 56.5 88.5 31% Infrastructure 38 12.5 12.5 25 35% 1,497.3 235.9 25.5 320.4 581.8 60 DSCR for a period is calculated as follows DSCR = ( A)Cash _ generation + ( B) Interest _ paid (C ) Debt _ service (A) Cash generation for such period (B) Interest on long term Debt paid during such period (C) Debt service includes the total principle and interest on any Long term Debt becoming due and payable during such period A6-2: Technical & Financial completion in CSM Technical completion The CSM project has to satisfy the following conditions in order to be considered as technical completion • Plant and equipment pass performance tests, permit for normal operating in full force • Environmental measures implemented • Working capital > USD9 millions • Balance of Escrow account >USD 4.9 millions After technical completion, CSM can • Declare dividend • Invest in related cement or building materials activities • FSA=USD 32 millions • Pay principle and interest on subordinated loan and sponsor loan The Financial Completion Criteria: • DSCR>1.4 • Working capital> USD 12 millions • Sales proceeds sufficient to meet minimum balance requirements on Escrow account After financial completion, The CSM can • Reduce minimum balance escrow account • NisshoIwai subordinated loan conversion to senior loan, interest rate reduction by 0.5% • IFC B2 loan (USD 40 millions of NIE) interest rate reduction by 1% 61 ... about risk mitigation for the lenders in project financing in Vietnam 1.4 Scope The research is written from the lenders’ perspectives with focus on risk mitigation in project financing in private. .. features Accordingly, there are many kinds of financing structures Since most of the project financing in private sector in Vietnam involves the participation IFC, we will exam only the financing structures... Project Financing 2.2 Parties Involved in Project Financing 2.3 Project Financing Structures 4 ii 2.4 Risks Involved in Project Financing 2.5 Managing Project Risks 10 Chapter 13 11 Methodology 3.1