This content is from: Local Insights

China

The contract for Laibin B, China's first 100% wholly foreign-owned build-operate-transfer (BOT) power plant, was formally agreed in Beijing on November 11 1996. Under the HK$4.57 billion (US$600 million) contract, GEC Alsthom, an Anglo-French engineering group, and Electricite de France (EDF) will jointly control the company undertaking the contract. EDF will hold a 60% stake and GEC, 40%. The project is scheduled to be completed sometime after 1999, whereupon EDF and GEC will operate the power plant to recoup their investment before the power plant reverts to the Guanxi government at the end of the term.

Laibin B is the first project to adopt the investment structure outlined in the Draft BOT Regulations of August 21 1995 by the State Planning Commission. The Regulations permit wholly foreign-owned enterprises (WFOEs) to be established in the development of thermal power plants with a generating capacity of 2x 300Mw or larger and hydropower stations with a generating capacity of less than 250Mw. WFOEs differ from joint ventures in that no Chinese partner is needed, and the foreign investor has a 100% equity stake in the project. Until recently, the government did not approve of WFOEs in the power industry because of concerns that it would be controlled by foreigners.

This new BOT structure is also distinct from past joint venture power projects in the following ways:

  • international power providers competitively bid for new BOT projects, whereas previous joint venture power projects were usually formed by private negotiations. In the Laibin B project, the Chinese authorities first compiled a short-list of bidders that included New World Infrastructure (Hong Kong) and International Generating Company (US), before selecting the GEC-EDF team;
  • most or all of the finances are generated from overseas;
  • the availability of foreign exchange is guaranteed for the payment of loans and dividends;
  • debt guarantees (ie loan repayment guarantees) by the Chinese government are not offered, and finance contracts are limited or non-recourse against the international power provider. Previously, the Chinese government offered debt guarantees to lenders, effectively wiping out the bulk of the lending risk associated with infrastructure projects. However, in so doing, the Chinese banks and other institutions who made these guarantees incurred heavy liabilities on the balance sheets.

By implementing this new wholly foreign-owned BOT structure, China is moving more towards the international model of project financing.

Florence Li and Connie Zhong

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