The financing of
Belgrade-based Energy Financing Team’s (EFT) €550m thermal power plant in
Bosnia and Herzegovina is the country’s first project financing and also the first
to be led by a Chinese bank in Europe.
But
it required key amendments to
the country’s legal regime in order to be implemented, the lead counsel on the
deal have revealed.
The
300MW mine mouth coal-fired power plant in Bosnia and Herzegovina’s Republic of
Srpska was funded via
a €350 million loan provided by China Development Bank (CDB). It is the first project to be incorporated into a
dedicated China sovereign-sponsored fund for infrastructure
projects in central sand aastern Europe.
The
landmark transaction also represents the first large-scale power project to be
constructed by Chinese contractors in Europe, the biggest foreign direct
investment ever in Bosnia and one of the largest independent power projects
to-date in the region.
However,
lawyers on the deal had to work with local regulators to amend three aspects of
Bosnian legislation before the deal could proceed.
Linklaters’
partner James Douglass, who co-led the team advising CDB with fellow partner
Thomas Ng, told IFLR constraints within the Bosnian legal framework had previously
prevented implementation of a project financing structure in the country.
Regulations needed to be amended
to ensure it was possible for security to be granted over receivables in favour
of a foreign lender, and for a direct agreement structure to be put in place to
allow lenders to step into the project if necessary. Theses were changes which needed
to be introduced to enable CDB to lead the financing, he said.
“The ability for a bank to step
in and take over the project to keep it alive, the key feature of a direct
agreement structure, simply wasn’t envisaged by the local legal system,” he
said.
Additionally, changes to
regulations were required to allow for the establishment, of overseas bank accounts
by the borrower.
Linklaters’ managing associate
Jimmy Chua said such features normally came as standard in project finance
deals. In this instance, however, a significant amount of time had to be invested
in order to get a developing local market, and the relevant regulatory bodies,
comfortable with project finance concepts as well as to actually implement the necessary
amendments.
“It took a year and a half of talks
with the government and discussions with local lawyers,” he said. “Bosnian
regulators have been heavily involved throughout the project as the legal
amendments have been key to making the structure of the financing workable.”
Norton Rose partner Nigel Ward,
who led a team advising EFT, said there were issues too with out-of-date
domestic land laws. “We needed precise data to determine who owned land
required for the development of the mine,” he said. “As Bosnian land registries
are not up-to-date, this wasn’t readily available.”
‘This transaction put to the test
a lot of legal factors that might be taken for granted in more developed legal
jurisdictions,” he said. “The domestic regulation regime lacked the modern
techniques needed for a huge project such as this.”
That EFT and CDB had managed to
get the deal signed, Chua said, was testament to their determination. “There
are a lot of well-connected well-funded businesses in the region that have
tried and failed to make similar transactions work in the past,” he said. “EFT and
CDB went knocking on enough of the right doors for long enough to make this
happen.”
Copycat deals will follow
Douglass said the deal reflected
China’s increasing interest in investment opportunities in the region, and in
particular in supporting Chinese power contractors in Europe.
Chua said the transaction would likely
be viewed by Chinese lenders as a template for future deals in the region. Ward
believed the deal would also come to be seen as a test case by Chinese
state-owned companies not only in terms of utilising Chinese financial backing
for European project financing but also for using Chinese equipment in the
region.
Eastern European countries need
more power plants. Douglass said, their location close to European markets also
created opportunities to trade power into the region.
“What’s more most of the region has
signed up to the unified energy laws imposed by the EU,” he said.
The deal therefore sets an
important precedent for similar transactions in the region in the future.
“Deals are already being discussed right now in former Yugoslavia, involving
Chinese lenders and Chinese contractors,” he said.
Ward expected more Chinese
investment in Hungary and Poland as well.
“China is looking to become more
involved in infrastructure projects throughout Europe,” he said.
“The deal gained a lot of
traction in China,” he said. “It
acts as a show piece for China’s technological and civil works capabilities.”
“And as it is located on the
doorstep of Europe, it helps to demonstrate to Europe that Chinese contractors
are capable of building a power plant which is complaint with European
regulations,” he said.
“There was a lot of economic interest
and political motivation from both the Bosnian and Chinese sides for the
project to proceed relatively quickly,” he said.
“Beijing is particularly
interested in countries where there is both public support for projects and
less regulatory hurdles to entry. Non-EU countries such as those in eastern
Europe fit the bill well,” he added.
Douglass said dastern European
parties were also very receptive to Chinese funding because of lack of funding
coming from within Europe. “There are a lot of forces currently at play,
pushing deals like this to happen,” he said.
Ward was hopeful the deal would
encourage renewed interest in coal projects.
“European banks are generally shy
of financing coal,” he said. “But the set back of nuclear power makes it more
possible people might be less opposed for this kind of power project going
forward.”
Chinese developer Dongfang
Electric Corporation will
construct the power plant,
which is scheduled to be operational in 2016 and will rely on lignite from nearby mines run by EFT.