Commentary
PROJECT | Contributed Content, Singapore
view(s)
Erik Knive & Eric Ho

Hydropower project development in Myanmar: Risk allocation

BY ERIK KNIVE & ERIC HO

A specific objective mentioned in Myanmar's New Electricity Law 2014 is the intent to "increase foreign… investments in electricity-related work" and provision is made for the issuance and revocation of licenses to foreign investors.

Currently, none of the three credit rating agencies rates Myanmar, however it will soon get its first credit rating. In August 2015, the Government of the Union of Myanmar appointed Citibank and Standard Chartered Bank as its Sovereign Credit Ratings Advisors, who will act as a bridge between the Government and the ratings agencies Standard & Poor's, Fitch Ratings, and Moody's.

A credible credit rating will improve the country's borrowing cost, enhance Myanmar's capital-raising strategies and increase investors' confidence. The energy-rich country with a population of about 60 million is among the poorest in the world and its initial rating is expected to be well below the investment-grade status assigned to developing economies.

In spite of that, what else can Myanmar do to attract foreign investment in the power sector? Myanmar has successfully conducted an international bid and awarded a 225 MW Myingyan gas-fired power project albeit with some delays. The project has a 22-year power purchase agreement (PPA), with the Ministry of Electric Power guaranteeing the offtaker’s obligations under the PPA, and funded through a mix of limited recourse project financing and equity.

The rules in hydropower are different from those of thermal, coal, and gas-fired plants with each presenting its own risks and benefits. Though power generation projects by their nature are more likely to attract private sector investment in the development of new assets, hydropower plants have dams as the generators and yet, large dams entail so many risks that private developers would require a great deal of incentive to invest in them.

Market, volume, and price risks; Public. These risks' allocation is normally done through Power Purchase Agreements (PPAs), which are a form of offtake agreement commonly used in power projects in single buyer developing economies. These PPAs specify a fixed power purchase price or the method of arriving at it through fixed variables. A PPA being an offtake agreement obliges the offtaker who is usually a government utility to purchase all or a predefined quantity of the project output, which would provide international lenders the protection that the borrower will be able to service their debt.

Site selection; Public and private. While the private investor would risk their own funds in conducting feasibility studies, they would also require a high degree of support from the Government to ensure that these several millions of dollars invested are in the interest of the country.

Construction risk; Private. The cost of completion will be fundamental to the financial viability of the project as the financial assumptions and ratios are all dependent on the assumed cost of construction of the project. The construction of a large-scale hydropower project entails a hosts of risks such as contractual, design, raw material, equipment, damage to properties, performance, delay, health and safety risks, amongst others. The private sector, with its international experience in developing hydropower projects should be in a better position to manage this risk.

Operational risk; Private. Similarly, the private operator should assume the risks of the operation and maintenance of the hydropower plant. The private operator shall be able to bring in their vast experience in effective and optimal operations and maintenance best practices, together with knowledge transfer to the country.

Hydrology risk; Public and private. Hydrological risk denotes the ability to produce power depending on the availability of water. With a good record of historical inflow data, the private developer would traditionally accept this risk. However with the uncertainty of climate change as a result of global warming, and increased frequency of drought and insufficient rain, the private sector and international lenders are increasingly reluctant to accept this risk.

Environmental and social (E&S) risk; Private and public. Environmental and social laws and regulations will impose liabilities and constraints on a project. Hydropower projects generally have an important impact on local communities and quality of life. Project impact of society, consumers, and civil society generally can result in resistance from local interest groups that can delay project implementation, increase the cost of implementation, and undermine project viability. E&S risks should be high on the private developer and lenders' due diligence agenda, and the cost of compliance can be significant, and will need to be allocated between the private and public sector.

Foreign currency exchange risk; Public. Project finance debt is often sourced from international lenders, in US Dollars, yet project revenues are generally denominated in local currency. Where the exchange rate between the currency of revenue and the currency of debt diverge, the cost of debt can increase, often dramatically. International lenders will want to see the revenue stream in the debt-denominated currency or adjusted to compensate for any relevant change in exchange rate or devaluation.

Political and regulatory risks; Public. Decision by a government to cancel a project or to change the terms of the contract or not to fulfil its obligations, failing to implement the tariff increases agreed upon in the contract, the risk of expropriation or nationalisation of project assets by a government, all constitutes political or regulatory risks. While some of this will be managed in the project agreements, the government should bear most of these risks as the private sector has limited influence in the political and regulatory development.

Country and economic risks; Public. This risk refers to the political decisions made within the country that might result in an unanticipated loss to the private investors. Economic risk is often referred to as a country's ability to pay back its debts, the willingness to pay debts or maintain a hospitable climate for foreign direct investment. In Myanmar, where the economy is now growing at a rapid pace, the political climate is rather uncertain due to its history.

Guarantees; Public. Developing countries often face the problem of high transmission and distribution losses which results in lower receipts than the cost, and /or highly subsidised retail tariffs for social reasons limiting the government's budget for more urgent infrastructure projects. Thus international lenders often require a government guarantee to ensure payments will be repaid consistently and timely. Providing a government guarantee will not only show the government's commitment to the project but also ensure the international committee the proper management of the government's accounts.

The long term sustainability of a hydropower project requires not only the commercial and technical viability to kickstart the project, but also the environmental and social management in the long term. Experiences of international private sector participating in developing countries worldwide has been mixed – from successful first projects which led to further private sector participation and value creation of the power sector, to projects which cost the improvised governments too much.

While each country differs in their institutional structures and objectives may vary, it is imperative that the risks are appropriately allocated to the party who can best manage them.

The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Power. The author was not remunerated for this article.

Do you know more about this story? Contact us anonymously through this link.

Click here to learn about advertising, content sponsorship, events & rountables, custom media solutions, whitepaper writing, sales leads or eDM opportunities with us.

To get a media kit and information on advertising or sponsoring click here.

Erik Knive & Eric Ho

Erik Knive & Eric Ho

Erik Knive is the Group Chief Operating Officer of SN Power and Eric Ho, the Market Analyst.

Contact Information