Project financing is a well-established method of financing
large projects in Thailand, in both the private and public
sectors. Some recent examples of significant project financings
are given in Table 1.
Recent significant project financings in
||THB13.5 billion ($425
million) financing of new truck, SUV and diesel projects
||$2.76 billion financing
of 1,876 MW lignite fired power plant in Lao PDR
refinancing of two waste gas VSPPs (April 2011)
||THB8 billion project
financing wood chip SPP (June 2011)
||THB5 billion project
financing gas-fired SPP (signed March 2011)
||THB3.3 billion project
financing solar VSPPs (June 2011)
financings of solar VSPPs (2011-2012)
|KFW and KR2
||Two THB4 billion+
project financing of wind farms (August and December
||Project financing of
1,285 MW hydro power project in Lao PDR (April 2012)
In Thailand, no special government approvals are required
for project financings, other than the usual approvals
associated with unsecured loan transactions, security by way of
mortgage and licensing required under Thai laws. The
liberalisation of exchange controls in the early 1990s largely
eliminated concerns about exchange controls in project
financings, although Bank of Thailand approval is required for
the opening of offshore bank accounts by Thai borrowers. Since
2005, the Bank has declined to approve requests to open
offshore reserve accounts, with limited exceptions.
No Thai government guarantees have been available in recent
years, even for projects involving state enterprises as
Assuming more than one lender group is to be involved (for
example, foreign commercial bank lenders, Thai commercial bank
lenders, export credit agencies, and international financial
institutions), there will usually be a need for a separate
security or inter-creditor agreement between lenders, security
agents and borrower, setting forth the details of security,
timing of establishing security interests, coordination and
voting procedures, procedures for enforcement of security, and
sharing of proceeds from enforcement of security and
There are a number of differences between US law market
practice, English law market practice and Thai law market
practice, which need to be addressed.
The governing law issue is frequently resolved in practice
in favour of foreign law to govern the common terms agreement
and foreign credit agreements. Foreign law will also govern
certain security, such as charges over foreign bank accounts,
guarantees of foreign persons and assignments of project
documents governed by foreign law. Thai law will be the
governing law under Baht credit agreements and
security documents with respect to property and rights in
Dispute resolution provisions generally prescribe submission
to courts, foreign or Thai. Foreign court judgments are not
enforceable in Thailand. There are several recent precedents
for dispute resolution by international arbitration.
Arbitration awards are enforceable in Thai courts, subject to
exceptions along lines of those in the NY Convention.
Before 1998, the Thai Bankruptcy Act did not include
provisions similar to Chapter 11 under US bankruptcy law or
equivalent provisions to facilitate a work-out in case the
borrower became insolvent. In practice, this gave rise in
project financings to a requirement for assignments of rights
under project documents in favour of a substitute entity to be
nominated by the lenders. However, because most licences and
permits associated with a large project cannot be transferred,
the enforcement of security by way of assignment will leave
certain licensing and tax issues to be addressed.
In 1998, the Thai Bankruptcy Act was amended to provide for
reorganisation proceedings. Further amendments in 1999 were
enacted to resolve issues which had not been adequately
addressed in 1998. On June 18 1999 the new Bankruptcy Court
opened. Work-outs are now usually conducted under
reorganisation proceedings instead of exercise of rights under
assignments of rights to substitute entities.
Promotion of renewable energy projects
On December 26 2006, the National Energy Policy Committee
(NEPC) approved the Electricity Generating Authority of
Thailand (Egat) purchasing power from generators using
renewable energy, and instructed Egat to revise its regulations
for purchase of power from small power producers using
renewable energy. On July 20 2010, the Thai Cabinet approved
resolutions of the NEPC adopted on June 28 2010, including the
NEPC's guidelines for coordination and follow-up of promotion
of renewable power production in compliance with the policy,
and establishment of a committee comprising representatives
from such related agencies of Ministry of Education and
National Economic and Social Development Board, and to approve
a feed-in tariff system.
On January 28 2009, the Cabinet approved a 15-year
alternative energy plan, and on March 9 of the same year, the
NEPC approved additional tariff adders for certain categories
of alternative energy. The announced goal was for renewable
energy to constitute up to 20% of total energy consumption by
2022. Both Egat and the Provincial Electricity Authority
published adder tariffs for renewable energy producers. On
November 30 2011, the NEPC approved a 10-year 25% renewable and
alternative energy development plan (2012–2021) to
replace the 15-year plan. The Department of Alternative Energy
Development and Efficiency is responsible for implementation of
the alternative energy plan.
There is a growing market for carbon market finance in
Thailand. The country established a Designated National
Authority to manage CDM projects, currently the Thailand
Greenhouse Gas Management Organisation. One hundred and
ninety-one letters of approval for CDM projects have been
issued, and there are 72 registered Thai CDM projects (as of
June 29 2012).
Forms of security
Thai law provides traditional forms of security: mortgages
of land and buildings, pledges, mortgages of registered
machinery, and sales with right of redemption. There is no
equivalent of a floating charge on inventories or
work-in-progress, or charge on a bank account. Certain classes
of creditors have preferential rights under the Civil and
A draft secured lending bill was drafted by the Ministry of
Justice in the late 1990s and was given priority status by the
Ministry of Finance and Bank of Thailand. This bill provided
for non-possessory security interests over a range of property.
On July 9 2009 the Cabinet approval the bill in principle, but
it is still under review at the Council of State. The bill has
not been introduced in Parliament.
Security in Thai project financings has a number of unique
features. There are only limited forms of security: mortgage,
pledge, right of retention, or creditor possessing preferential
rights in nature of a pledgee. In addition, there are no
floating charges (no security over moveable property, with some
exceptions), no title insurance, no trustees, no mortgages of
leaseholds or reclaimed land, no assignment of obligations, no
concept of pledge substitution, and no specific security
interest in bank accounts
There are also some differences in mortgage registration
processes (land versus machinery).
In addition, the mortgage amount is fixed in
There have been interpretations under Foreign Business
Operations Act with respect to inter-company loans, guarantees,
leases, and so on. Finally, there are approximately 30
bi-lateral investment treaties in force) and the Asean
Investment Promotion Treaty should also be borne in mind
(although it is not in force).
A security package in a large industrial project in Thailand
may include some of the following elements.
Mortgage of land and buildings: In the case of projects
constructed on leased land, a conditional assignment of the
land lease may be feasible. Approval from the Ministry of
Finance was previously required for foreign banks to be
mortgagees under a land mortgage, but this rule was cancelled
on August 3 2008.
Mortgage of registered machinery: The mortgage may only be
registered after import and installation of the machinery, and
after registration of ownership of the machinery under the
Machinery Registration Act.
Interim security on imported goods by way of pledges: This
form of security is required to cover the gap in time between
import of machinery and construction materials, and
registration and mortgage of the machinery or mortgage of a
Thai counsel are divided as to whether this form of security
is effective. A pledge poses practical problems in having to
trace specific imported goods for the entire period until the
time of mortgage of machinery. There is the need to maintain
possession in a third party (a construction contractor, for
example) on behalf of the pledgees. Issues of liabilities and
indemnities often arise to frustrate these arrangements. To the
extent that lenders are interested primarily in post-completion
security, this element is not important.
Guarantees and/or cost overrun agreements by shareholders,
and completion guarantees by contractors or sponsors can be
included. Take or pay agreements or other off-take agreements
with customers Are other options.
Assignments of rights under contracts: It is Thai practice
for banks to require immediate or conditional transfers of
rights and obligations of all big contracts, to hopefully
facilitate a workout using a substitute project vehicle. Under
Thai law only rights (not obligations) may be assigned, with
consent of or notice to the debtor. A novation is required in
the case of an assignment of obligations.
Thai counsel have reservations about the practicability of
enforcing such assignments of rights which involve activating a
new project vehicle, because few of the licences and permits
which will be obtained by a project owner are transferable. A
BOI promotion certificate is not transferable. Customs duty and
business tax may be payable on goods imported duty free, if
they are transferred within five years.
Thai counsel also have reservations about the enforceability
of immediate transfers of rights in cases in which the borrower
retains any significant rights over the assigned property.
Insurance, on terms and conditions approved by lenders, with
"loss payee" clauses under insurance policies and/or
assignments of insurance: Lenders normally require owner's
insurance versus contractor's insurance cover. In some cases
banks seek an interest in reinsurance by way of cut through
clauses or assignments. The rights of beneficiaries under loss
payee clauses are reinforced by the rights of third party
beneficiaries under the Civil and Commercial Code. In case of
cover by local insurance companies, reinsurance (95%) is
normally required in the international market.
Pledges of stocks and other movables: Establishing a pledge
requires satisfaction of elements of a pledge as prescribed in
the Civil and Commercial Code, including pledge of specific
goods, and possession of the goods in the pledgee or third
party. There is no pledge substitution concept under Thai
In large project financings in Thailand, the use of pledges
on inventories has been explored in depth, but is usually
rejected for practical considerations. In smaller projects
informal pledges of inventories are established, using
segregated areas of factories with signage and nominal
third-party supervision. Thai counsel have reservations about
the validity of the pledge of inventories or machinery because
the substantial degree of control which the pledgor retains
over the pledged property.
Assignments or pledges of bank accounts and cash control
arrangements, such as joint signature requirements, pledge of
commercial paper, and so on: There are mixed views on the
validity of assignments and pledges of bank accounts, compared
to rights of set off.
Custody of important documents, such as insurance policies,
title documents, and so on, is another possibility.
Assignment of receivables: As for the assignment of rights
under contracts, the consent of or notice to the debtor is
required to perfect an assignment.
Derivative instruments and swaps for hedging are also
There is some use of paying agents/trustees/escrow agents,
although there are legal and tax uncertainties. Offshore
reserve accounts in foreign exchange were common, and required
approval by the Bank of Thailand on a case-by-case basis; the
Bank of Thailand adopted a policy not to approve offshore
reserve accounts in 2005.
There are three-month and one-year preference periods under
the Bankruptcy Act, which create legal uncertainties in the
case of transfer of rights and certain other of the above forms
of security. However, these forms of security may have value,
such as blocking attachments by third parties, outside the
Taking pledges of the shares of borrowers in large projects
Large projects in Thailand are usually promoted by the Board
of Investment (BOI) under the Investment Promotion Act, B.E.
2520. Conditions of promotion include a requirement for BOI
consent to mortgage of machinery which has been imported exempt
from customs duty, and mortgage of land which has been acquired
with BOI approval. A statutory exchange assurance is available
to foreign lenders under the Act, subject to a routine approval
of the BOI.
Legal opinions issued in connection with project financings
in Thailand contain a number of qualifications, some of which
are common to those found in English law or New York law legal
opinions in similar transactions. There are, however, a number
of qualifications which are unique to Thai projects. The first
is that an assignment does not fall within the definition of
"security" under the Bankruptcy Act. The effect of an
assignment is similar to that of a transfer of ownership, and
is subject to revocation under the preference provisions of the
Thai law is silent on the admissibility in evidence and
enforceability of a document signed in counterparts. The
validity of obligations to reimburse legal fees in the event of
a court case in Thailand is uncertain.
Conditions of admissibility of documents into evidence is
that stamp duty has been properly affixed and that Thai
translations be provided for documents in a foreign language.
The purchase of foreign exchange is subject to approvals of
authorised agents of the Bank of Thailand.
Generally, the charging of interest on interest is
prohibited except where the lender and borrower have agreed
that interest due for not less than one year will be added to
the capital and the whole will bear interest.
Certain documents must be executed in the Thai language,
such as mortgages. The consent of the BOI is required to
mortgage machinery which was imported under duty exemption or
reduction, and land which has been acquired by a majority
foreign-owned promoted company with BOI consent.
The assets of state enterprises are immune from execution in
Thailand. Thai law is silent on the legal effect of a
submission to the non-exclusive jurisdiction of foreign courts,
waivers of objections to venue, and judgement currency
The appointment of an agent may be revoked. The ceiling on
interest on foreign loans is 20% per year.
A choice of foreign law will be recognised, but only to the
extent to which the law chosen is proved to the satisfaction of
the court, and is not contrary to the public order or good
morals of the people of Thailand. A judgment of a foreign court
is not enforceable in Thailand, but is admissible in evidence
in legal proceedings in Thailand. A foreign arbitration award
is enforceable, subject to defences in under the Arbitration
A money debt expressed in a foreign currency may be paid in
Baht. The enforceability of pledges of bank accounts,
and judgment currency indemnities, are uncertain.
Thai courts have power to award legal fees and costs in
their discretion, subject to ceilings in the Civil Procedure
Code. The enforceability of covenants to reimburse legal fees
is uncertain. The Act on Unfair Contract Terms give Thai courts
broad authority to invalidate unreasonable contractual
provisions under certain circumstances.
Finally, the use of arbitration in contracts including
finance documents with state companies must be approved by the
The security available under Thai law and documentation
associated with project financing have become well-understood
by large foreign lenders to Thai projects. Nevertheless, it is
strongly recommended that term sheets for proposed project
financings spell out the elements of the security package in
detail, in order to avoid misunderstanding at later stages,
particularly in financings which include foreign lenders who
have not had any past experience in Thai project
Thong-ek Law Offices
Albert Chandler is the founder of Chandler & Thong-ek
Law Offices, which was established in 1974. He has been
practicing business law in Bangkok, Thailand since 1969,
specialising in business law, energy law, international
transactions, project financing and investment projects.
Chandler's energy sector experience includes advice to
eight gas-fired power projects in Thailand, six Lao PDR
hydroelectric power project financings, and five
coal-fired power projects in Thailand. He represented PTT
and its subsidiaries on the Trans Thailand-Malaysia
He also acted as mineral law and policy adviser to the
Government of Nepal under the World Bank (1982-2007),
under UNDP to the Philippines on mining legislation
(1988-1990), and to Vietnam on petroleum legislation
(1989-1990). He has been a special lecturer at the
Faculty of Law, Chulalongkorn University, since 1987. In
2010 Chandler introduced the first Chula LLM oil &
gas law training courses attended by government and
private sector representatives.
In 1995, he co-founded the law practice Myanmar Legal
Services. He holds a BS degree in mining engineering from
University of California at Berkeley, and LLB from
Harvard Law School.