RISK MITIGATION IN PROJECT FINANCING IN VIETNAM: FROM LENDERS’ PERSPECTIVES IN THE PRIVATE SECTOR

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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 1. Acknowledgement ii Abstract i 2. Abstract i Table of Contents ii 3. Table of Contents ii List of Tables v 4. List of Tables v List of Figures vi 5. List of Figures vi 6. Chapter 1 1 7. 1. Introduction 1 1.1 Rationale 1 1.2 Statement of Problem 1 1.3 Objectives 2 1.4 Scope 2 1.5 Organization of the Research 2 8. Chapter 2 4 9. 2. Literature Review 4 2.1 Concept of Project Financing 4 2.2 Parties Involved in Project Financing 5 2.3 Project Financing Structures 6 ii 2.4 Risks Involved in Project Financing 7 2.5 Managing Project Risks 9 10. Chapter 3 13 11. 3. Methodology 13 3.1 Analytical Model 13 3.2 Data 15 12. Chapter 4 16 13. 4. Country Environment 16 4.1 Political Environment 16 4.2 Macroeconomic Environment 17 4.3 Infrastructure 18 4.4 Market Opportunities 18 14. Chapter 5 20 15. 5. Key Parties in Project Financing in the Context of Vietnam 20 5.1 Government 20 5.2 State Owned Enterprises (SOEs) 20 5.3 Private Businesses 21 5.4 Foreign Direct Invested (FDI) Companies 21 5.5 Banks in Vietnam 22 5.6 International Finance Corporation (IFC) in Vietnam 24 16. Chapter 6 27 17. 6. Case CSM: Description 27 6.1 Profile of CSM Project 27 6.2 Financing Structure 28 6.3 Special Agreements 30 18. Chapter 7 32 19. 7. Case CSM: Risk Analysis 32 7.1 Risk Identifications in CSM Project 32 7.2 Protection of Project Cash Flow 37 iii 7.3 Loan Security Package 43 7.4 Major Difficulties for Lenders in the CSM Project 45 7.5 Comments on Project Financing in the case of CSM 47 20. Chapter 8 49 21. 8. 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 54 Reference 55 23. Reference 55 Appendix 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 3 2-1 Traditional method of financing a project vs. project financing 4 2-2 An IFC co-financing structure (Clifford Chance, 1991) 7 2-3 Project risk phases (IFC, 1996) 9 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 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. 2 [...]... 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 IFC 6 IFC often lends to the private sector and seeks no state support Its rate is not concessionaire: indeed margins might be high The high margins and the political risk comfort associated with IFC financing can... structured project financing can give a sponsor the flexibility to increase or decrease its share of a project during the planning and construction period Lenders often find project financing more risky, but they have some reasons to do project financing: • High return for long periods • Increase the visibility in the host country • Support their key clients in overseas business ventures 2.2 Parties Involved... to the special project entity and not tto the project sponsors Figure 2-2: Traditional method of financing a project vs project financing (Source: Niehuss, 1999x) 4 Loans 2.1.2 Reasons of project finance Lenders and sponsors have different reasons to do project financing For the sponsor, project financing is often more expensive than traditional financing, but it has certain advantages: • Risk sharing... for their loan and not the assets and revenues from a single project In a project financing, lenders would not have direct recourse to the sponsors’ assets or revenue but would rely on the economics of the project, project assets, and the revenue stream generated by the project (Figure 2-1) The basic principle underlying project financing is to shift the burden of direct debt liabilities from the sponsors... studies Finally, they chose the site of building cement plant at the deposit of the main material in Honchong (Kien giang province, about 300 km by road from Hochiminh city) and the site of building cement terminal in Catlai, near Hochiminh city, the main market for CSM According to the business plan, the Catlai terminal was built first in 1994 because this required a smaller investment After finishing the. .. opportunities in investment in Vietnam, but the country risk is high (table 4-3) 19 Chapter 5 5 Key Parties in Project Financing in the Context of Vietnam 5.1 Government In the past, government was the sole sponsor of most large projects Today, the government opens the door to all sectors in the economy It limits its investments into some critical projects including national defense areas and important infrastructure... for the loan is • primarily based on the expectation that the revenues generated by the project will be sufficient to service debt incurred for the project; • and/or a mortgage on the assets of project entity The project financing differs from the traditional method of raising funds for projects In the traditional method, the lenders look to the overall credit worthiness of the borrower and all of the. .. Involved in Project Financing 2.2.1 Project sponsors The sponsors contribute equity in the project Frequently, the sponsors or third party interested in the success of the project are also required to provide back up credit support to ensure that debt will be serviced by some credit worthy party if the cash flow from the project revenues is inadequate or interrupted 2.2.2 The project company The Project. .. 5.6.1 Operation of IFC in Vietnam Since the opening policy in 1985, the participation of the private sector in the economy has been increased The opportunity of market development has attracted different sources of funding However, project financing in non-state sector was quite a new concept in Vietnam In 1994, the International Finance Corporation (IFC) (See appendix A-5-3) was the first organization... interest in the security proceeds in any event 2.2.5 Other actors The arranger The bank, which has arranged the financing, and syndication of lending will normally take the lead role in negotiating the terms sheet and the credit and the security documentation The managers Managers and lead managers might be named in the documentation and in any publicity surrounding the launch of the project They will . 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. features. Accordingly, there are many kinds of financing structures. Since most of the project financing in private sector in Vietnam involves the participation
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Xem thêm: RISK MITIGATION IN PROJECT FINANCING IN VIETNAM: FROM LENDERS’ PERSPECTIVES IN THE PRIVATE SECTOR, RISK MITIGATION IN PROJECT FINANCING IN VIETNAM: FROM LENDERS’ PERSPECTIVES IN THE PRIVATE SECTOR, RISK MITIGATION IN PROJECT FINANCING IN VIETNAM: FROM LENDERS’ PERSPECTIVES IN THE PRIVATE SECTOR, Acknowledgement Abstract Table of Contents List of Tables List of Figures 1. Introduction Chapter 2 Literature Review 4 Chapter 3 Methodology 13 Chapter 4 Country Environment 16 Chapter 5 Key Parties in Project Financing in the Context of Vietnam 20 Chapt, Statement of Problem Objectives Scope Organization of the Research, The project company The borrower The banks, Types of risks Risk Phases, Construction and Completion Risk Operational Risk, Market Risk Non-commercial risks, Force Majeure Insurance Arrangements, Political Environment Country Environment, Economic growth Government Budget Current Account and Exchange rate, Infrastructure Market Opportunities Country Environment, Government State Owned Enterprises SOEs, Private Businesses Foreign Direct Invested FDI Companies, Local Banks Banks in Vietnam .1 Overview of local banking system structure and regulation, Role of IFC in project financing in Vietnam, Financing Structure Case CSM: Description, Off-take agreement Off-shore Escrow Account Exchange Agreement Share retention agreement Financial covenants, Project completion risks Technology risks, Fuel and materials risks Skilled labor risks Transportation risks Market risks, Payment risks Country risks Environmental risks, Financial risks Accident, loss and force majeure Development phases of the project, Project performance Protection of Project Cash Flow, Project completion Protection of Project Cash Flow, Technology risks Field, materials, and other Input risks Skilled labor risks, Transportation risks Market risk, Payment risks Country risks Environmental risks, Conditional Assignment of venture interest AgreementCAVIA Charge over Off-shore Escrow Account Assignment of insurance proceeds, Share retention agreement Financial covenants., Governmental policy and regulations, Local banks Sponsors Major Difficulties for Lenders in the CSM Project, Comments on Project Financing in the case of CSM, Limitation Major Findings about Country Environment and Key Parties in the Context of Vietnam, Major Findings Related to the CSM Case, Recommendations Conclusions and Recommendations, Recommendations for Further Studies

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