Bosnia/China project finance first analysed

Author: | Published: 4 Jul 2012
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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.