THE attractiveness of project financing for the Waigaoqiao II power project in Pudong hinges on the Chinese Government's approval for the provision of credit support to the project by Chinese banks, sources say. The project is a pilot for a competitively bid Build, Operate, Transfer project which will lay the foundation for future infrastructure projects. The sources said the use of Chinese banks to provide external credit support to the project, on a commercial basis, would assure international banks of the certainty of income received by the project company from the utility. This would mean the Chinese banks would have to provide up to a certain amount of credit to cover any shortfall should the utility run short of capital in paying for the electricity supplied from the project company. It is not Chinese policy for banks to give credit support because it is not profitable. Price Waterhouse has been commissioned to prepare the bidding document which will outline the process for competitive bidding and the allocation of risks among the involved parties. Asked about the implications of the absence of credit support from Chinese banks, Nigel Ayton, head of electricity services (China) of Price Waterhouse, said: 'It would make this project very difficult. I am not going to say it's impossible.' The external credit support was essential as it was impossible for the Chinese Government to give guarantees to all infrastructure projects, Mr Ayton said. In an interim report on the project submitted to Chinese authorities in September, Price Waterhouse suggested the bidding focus on the price of electricity instead of the rate of return, which has been a sticking point stalling many power projects. But electricity pricing is difficult. Unlike other countries, China not only regulates the tariff the utility charges the end-user but also the tariff at which the utility buys from the project company. Any change in tariffs must be approved by the pricing bureau each year, which may make international banks uncertain about the income due to the project company. Another suggestion to make the project more appealing to bidders is to write into the contract a formula for calculating tariff. That could prove difficult as it meant the pricing bureau would have to relinquish its right to control tariffs for the length of the concession, which might be 15-25 years, sources said. To reduce the risks of the international banks in the project, a new method for calculating the payment for electricity was recommended. It was suggested that the payment made by the utility to the project company be based on the amount of the power available instead of the units of electricity used. This would avoid any fluctuation in the amount of electricity delivered due to seasonal or other factors. The bidding document is scheduled to be completed by next month. There has not been any official response to the recommendations made in the interim report. The project is expected to be approved by the State Planning Commission early next year. It is hoped the price of the 1800mW plant will be less than US$2 billion.