Laibin fires foreign hopes
How can anyone afford to invest in the Laibin B power plant? How can anyone afford not to? That is the dilemma facing foreign power developers as they mull over whether to submit a bid in May for China's first Build-Operate-Transfer (BOT) power project to be built without central government guarantees.
With 1996 shaping up as the make-or-break year for foreign-financed power projects in China, 12 foreign companies and consortiums are pinning their hopes on this medium-sized plant in Guangxi Zhuang Autonomous Region.
The 700-megawatt coal-fired plant, to be built in Liuzhou at a cost of about US$600 million, has been chosen by the State Planning Commission (SPC) to experiment with the BOT model.
Submissions are due on May 7, with bidding to open on May 8. Bids will be reviewed by the Bridge of Trust, a commercial consultancy set up by the SPC, which is expected to hand down a decision by July or August.
SBC Warburg, an adviser to the Bridge of Trust, and French law firm Gide Loyrette Nouel are helping with drafting the legal requirements for bidding documents.
The problem is that winning the right to build the remote power plant could be as painful as losing it.
Guangxi is a relatively poor, inland province to the west of Guangdong with doubtful creditworthiness and unproven ability to provide sufficient amounts of foreign exchange. In 1993 - the most recent year for which comparative figures are available - its GDP per capita of 2,031 yuan (about HK$1,868) ranked it 21st among China's 30 provinces and municipalities.
Nevertheless, with a dozen players remaining on a shortlist that some developers say should only have included five, highly competitive bidding on the price of electricity is expected to drive the rate of return below 16 per cent.
More importantly, developers say an unrealistic time-frame for completing the plant allows little room for delay in setting up financing after the concessionary agreement is signed.
'This is the first attempt by the Chinese to try to establish a template to be used in the future to build lots of BOT projects. It would be nice to be part of the process to establish what those parameters would be,' a project developer for one of the companies taking part in the bidding said.
'The State Planning Commission considers this to be [its] first-born. There would be a great loss of face if it fails.' The impetus to bid on this project is the prestige of building China's first BOT project with limited-recourse financing and the hope that a demonstration of commitment will lead to more projects for the lucky developer.
The Guangxi government has said it will guarantee the power purchase agreement and the fuel supply contract for the 18-year wholly foreign-owned concession.
The pricing formula for the electricity will be based on yuan and US dollars to hedge against foreign exchange risk, but the documents are not as transparent as developers would like.
'I think the project can be successful, but not in the time-frame that China has set. There will be a large temptation for the foreign developer to . . . take risks you wouldn't normally take, just to get it done,' one project developer said.
He said the tight schedule and lower returns favoured Asian companies with strong China ties such as New World Infrastructure, China Light & Power and Tomen, which could have strategic reasons for accepting a low rate of return on this project.
'These rates of return are not competitive with what you can get elsewhere in Asia,' one foreign bidder said.
According to the current framework, the developer has just 28 months from the signing of the concessionary agreement to raise overseas financing and build the two 350 MW units. Some bankers say it could take up to a year just to close the financing.
Hardly anyone believes that the project can be done without assistance from export credit agencies, whose low-cost loans for imported equipment can reduce costs.
Foreign power companies, bankers and lawyers also agree that the backing of the Guangxi government alone will not be enough to get foreign banks to commit to the project, but no one is sure just how much China is willing to compromise.
The State Administration of Exchange Control has already sweetened the deal by submitting a letter throwing its weight behind the Guangxi government's pledge to ensure an adequate supply of foreign exchange.
Developers are waiting for the Ministry of Electric Power to write a letter of support, although there is no chance that it would guarantee payment if the local power bureau defaulted.
John Mitchell, a corporate finance adviser at Price Waterhouse who is working on the Laibin B project, said bankers were also looking to the central government or one of its banks to submit a letter of support.
China is requiring foreign bidders to submit full details of project proposals, including an estimate of capital costs and a projected rate of return on their investment. 'They are paranoid that someone is going to take advantage of them,' a prospective bidder said.
Clive Ransome, a lawyer with Linklaters and Paines who specialises in project finance, said China's refusal to permit foreign banks to run a power plant if the foreign developer cannot meet its loans added greatly to lending risk.
Another risk comes from China's legal structure, which is not transparent enough to allow banks to evaluate projects on their own and does not allow international arbitration.
China is drafting a BOT law which will be tested on the Laibin B power project, but it has yet to be published.
Foreign developers and project financiers say they would have been happier to invest had China decided to put its first unguaranteed BOT plant in Beijing or a major coastal city.
But they acknowledge that from Beijing's point of view, testing the viability of a BOT plant in Guangxi makes more sense because it would set down the conditions necessary for similar projects across the country - not just in the wealthy provinces.
'By putting the project in Guangxi, not Shanghai or Xinjiang, China is taking the middle way. We shouldn't be surprised that investors are not immediately comfortable with it,' Nigel Ayton, director of electricity services at Price Waterhouse, said.
The only foreign developer to complete BOT power projects in China so far has been Hong Kong entrepreneur Gordon Wu Ying-sheung, albeit with guarantees. He built Shajiao B and Shajiao C in Guangdong, but has since turned his attention to other power projects in the region.
Frustrated financiers and developers are looking for a breakthrough this year. China has plans to allow 35,000 MW of independent power projects by 2000.
'People have been working on project finance a long time. Either things start to work this year or people will start packing their bags,' a financier advising one of the bidders said.