Demand for power in the emerging markets of the Asia-Pacific region is rising so fast that authorities often struggle to secure the private international finance needed to keep pace with rising energy needs.
In some cases, it is falling to lawyers to tempt international investors to stump up funds for power projects in some of the region’s least well-known economies by developing new deal structures. These aim to reassure investors that are wary of the unfamiliar risks of countries such as Myanmar, the Philippines and Indonesia.
“Some emerging markets still do not have deep or developed enough bank and capital markets to finance big projects without international capital,” says Stefan Robertsson, an energy sector expert at The Lantau Group, a Hong Kong-based electricity and gas consultancy. “In the power sector these are typically the countries where the biggest investments in the electricity sector are needed,” he says. “So we end up in a paradox where the countries with the greatest need for investments are the countries most relying on international financing.”
One of the most striking examples is Myanmar, where the authorities expect electricity demand to double by 2018. In a bid to bolster supply, Allen & Overy was charged with helping to find a cost-efficient way to secure some of its energy needs. “Until now different power deals had been done with a company turning up to the government and saying I’d like to do X, and this is what it’s going to cost you,” says Stephen Jaggs, managing partner of Allen & Overy’s Bangkok office. “The government had no real benchmark of what the cost should be.”
The countries with the greatest need for investments are the countries most relying on international financing
The firm advised on a competitive tender to select a bidder that would build a power plant and sell energy to the government for an agreed price. But carving out a structure that bidders could work with was easier said than done. “Myanmar is more of a frontier market and there are particular challenges that relate to that,” Mr Jaggs says. Allen & Overy created a deal that met the standards of international banks and institutions using a pioneering government guarantee for the credit risk of the project, which Mr Jaggs says could be used by Myanmar again. The programme was backed by several developers and international commercial lenders, and Myanmar achieved its most competitive tariff rate to date.
In Indonesia, Shearman & Sterling used a new kind of guarantee concept for the $4.3bn financing of a new coal-fired power station in Central Java. The plant was critical to the long-term supply of energy to the Java-Bali region and new technology means the plant will have less environmental impact than traditional coal.
“Some of the basic principles [of the deal] can be replicated on other projects and in other countries — in particular, the key risk allocation between public and private sector,” says Bill McCormack, a Singapore-based partner. “Banks lending in Asia will often look to recent projects in the region . . . and so these projects will set the benchmark in Asia.
“Every project is unique and so the challenge is where to draw that line,” he adds. “But even where you have a very bespoke arrangement, like Central Java . . . one can draw upon the precedent and extract principles to be applied on the next project.”
In the Philippines, Freshfields made Southeast Asia’s first use of European-style credit enhancements — reassurances to the lender that the chance of default is lower. The aim was to cushion the private sector’s risk in a $225m project bonds deal for a geothermal power plant. The use of credit enhancements marked a milestone because the region’s economies and financial regulation are less developed than in Europe, where such tools were first conceived.
There was an additional layer of complexity because the project — one of the world’s largest geothermal power plants — involved taking on the technical risks involved in harnessing steam from underground.
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Still, the firm managed to structure financing that included the following: the first climate bond from an emerging market certified by the Climate Bonds Initiative; the first local-currency project bond in the Philippines power sector; the first credit-enhanced project bond in Asia since the 1997 Asian financial crisis; and the first green bond issued in the Philippines.
In West Papua, Indonesia, Latham & Watkins navigated World Bank rules that ban lenders from seizing a project’s assets and revenues if a loan defaults and local regulations that require export payments to be made onshore. The result was that international banks were willing to pump $8bn into a natural gas project.
Although lawyers have been innovative in helping to pull off challenging financing deals, it is also true that investors are looking more closely at projects they would formerly have shied away from. Cristina Chang, Citi’s Hong Kong-based head of global structured finance for Asia-Pacific, says institutional investors are becoming “an alternative source of funding for these critical projects”, because they want long-term investments where the value does not change in sync with credit cycles.
The scale of investors’ appetite for development finance is clear from the $27bn raised last year for a tricky Franco-Chinese-Russian liquid national gas project. Linklaters managed to navigate complex US and EU sanctions affecting Russia’s participation, reassure investors on logistical issues and prevailing low oil prices, and do it all under the added scrutiny reserved for a key project in China’s One Belt One Road strategy to build hundreds of billions of dollars of Asian infrastructure.