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MYANMAR CONCLUDES FIVE NEW POWER PURCHASE AGREEMENTS: WHAT ARE THE IMPORTANT TRENDS TO NOTE?

Highlights of this note Myanmar’s five new power purchase

agreements of March 2016 MEPE, unofficially, adopts a model PPA Concluding project documents in separate

stages is, unfortunately, here to stay Getting a Government guarantee is not easy,

but that should not stop you from trying Free equity and free power for the

Government are wild cards There is little standardization in tariff

escalation The approach in terms of curtailment differs

from one PPA to another Little uniformity in the duration of PPAs The system of termination payments is to a

large degree bankable, but lacuna remain in some PPAs

MEPE consent for security to the lenders is generally provided in the PPA

The tax aspects deserve special attention in the PPA

Conclusion: what lies ahead?

March 2016 was a busy month for power in Myanmar! An unprecedented 5 PPAs have been signed just before the change in Government. In this note, we take an inside look at the commercial and legal terms. What are the emerging trends?

Client briefing note | 3 May 2016

Myanmar’s five new power purchase agreements of March 2016

Just before the USDP-led Government transferred power to the newly appointed cabinet of Aung San Su Kyi’s NLD on 31 March 2016, an unprecedented number of at least five Power Purchase Agreements (“PPA”) were executed by the single, state-owned off-taker, the Myanma Electric Power Enterprise (“MEPE”), soon to be reformed into the Electric Power Generation Enterprise (“EPGE”). We will refer to these PPAs here as “the March 2016 PPAs”.

The March 2016 PPA’s were for the most part in preparation for quite some time. They include the internationally tendered Myingyan project, supported by the World Bank (which provided technical assistance for the tender) and by international financial institutions for financing or guarantee. Two other sizable gas-fired projects were inked, as well as two large solar plants.

VDB Loi (www.vdb-loi.com) is a leading legal and advisory firm focusing on helping clients achieve their investment objectives in emerging markets of South East Asia. With our affiliated companies, we have nine partners and over 100 lawyers and advisors in offices in Myanmar, Cambodia, Laos, Vietnam and Indonesia, with representatives in Singapore and Tokyo.

With over 40 lawyers and advisors in Yangon and Nay Pyi Taw we are one of the leading firms in Myanmar and are consistently ranked in the top tier by legal reference guides.

We are widely seen as a leading specialist firm in electric power. We have unique experience on the ground in Myanmar, having assisted the first western-owned IPP from start to finish. We have acted on gas, coal, diesel, hydro, mini-hydro, solar, wind and waste-to-energy projects in Myanmar. Clients typically want us for our ability to navigate the real world obstacles in a commercial and practical way, and for our unique working relationship with the authorities.

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NAME OWNERS MW LOCATIONS GENERATION

Myingyan Sembcorp (Singapore) – 80%MMID Utilities (Myanmar) – 20%

225 Mandalay CCGT

Minbu Green Earth Power (Thailand) 300 Magway Solar

Meiktila ACO 300 Mandalay Solar

Kanbauk Andaman Power & Utility (Thailand) 200 Dawei CCGT

Thaketa UREC Energy (China) 485 Yangon CCGT

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The new PPAs mark an important step in the evolution of Myanmar IPPs. Although there remains important divergence, it is undeniable that there is a higher degree of uniformity in Myanmar PPAs than ever before.

As our firm assisted on 4 of the 5 projects, we thought it useful to discuss some of the emerging trends.

MEPE, unofficially, adopts a model PPA

Negotiations on PPAs which took place during 2011 to 2013, such as the Toyo Thai plant in Ahlone and the gas-fired plants of Navigat, UPP and Zeya & Associates in Thaketa, did not have the benefit of being able to follow an international standard PPA which had already been readily accepted by the MEPE. Sponsors had to draft, propose and negotiate documents on a case-by-case basis. In practice, although some of these PPAs can be considered to be the first bankable PPAs in Myanmar, negotiations were quite time consuming (as we broached some principles such as termination payments and capacity payments for the first time with the authorities) and resulted in an unnecessary lack of uniformity.

Mid-2014, a more comprehensive PPA template was proposed by the World Bank as part of its assistance to the Myingyan tender. Initially, however, much to the dismay of other sponsors

applying to MEPE with unsolicited proposals, the Ministry of Electric Power (“MOEP”) and the MEPE did not take the opportunity to create a published model PPA based on the World Bank text.

In due course, as we can see from the drafts the MEPE has used as its opening position in several of the March 2016 PPAs and in other projects which are still under negotiation, MEPE has created it’s own model text PPA. There are clearly many things in common in the March 2016 PPAs, but there are also some important differences.

There is now more uniformity and arguably better protection for sponsors than ever before. Some of the 2013 Thaketa PPAs also went a long way in achieving that, and this evolution would likely have continued. But, although clearly derived from the same text, in practice many of the March 2016 PPAs ended up differing in some respects.

Concluding project documents in separate stages is, unfortunately, here to stay

One of the less efficient features of IPP deals in Myanmar is the legacy of drafting and concluding the key project documents in separate stages with separate Government counterparts. For national projects, the MOU, feasibility study and the concession or implementation agreement (“Memorandum of Agreement”) are

negotiated with the Department of Electricity Planning or the Department of Hydropower Planning of the MOEP, but the PPA is actually negotiated and concluded with the MEPE.

Although MEPE officials may often attend meetings in the planning stage, this separation is deeply institutionally embedded in the current system.

For certain projects, we were in fact hopeful that we would be able to convince the MOEP to negotiate and conclude all the documents at the same time. For projects, we certainly drafted and submitted all documents at one time to make this possible. Unfortunately, the MOEP insisted on working stage-by-stage, and documents had to be provided with cross-reference CPs to cover the gaps. What is more, in practice there is a tendency by the MOEE to move difficult issues to the last document to be finalized, thus increasing the risk of last-minute surprises. We are hopeful that the current restructuring within the Ministry of Electricity and Energy and the MEPE (into the Electricity Power Generation Enterprise) will ease this largely institutional problem.

Getting a Government guarantee is not easy, but that should not stop you from trying

MEPE, as a state-owned enterprise, is a legal body which is distinct from its owner, the Union of Myanmar. As MEPE sells electricity for less than it purchases,

THERE IS NOW MORE UNIFORMITY AND ARGUABLY BETTER PROTECTION FOR SPONSORS THAN EVER BEFORE. SOME OF THE 2013 THAKETA PPAS ALSO WENT A LONG WAY IN ACHIEVING THAT, AND THIS EVOLUTION WOULD LIKELY HAVE CONTINUED.

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it relies on budget appropriations from the Government. Nevertheless, most IPPs in Myanmar do not have a Government guarantee. Myanmar is reluctant to issue guarantees for power projects for a number of reasons, some of which relate to the public finance system. Their system does not easily facilitate contingent or multi-year outlays (the budget is based on cash only, although this is soon to be reformed), and the practice is that requested amounts in the budget actually get cut in the course of National Assembly approval, making planning very difficult.

Furthermore, the March 2016 PPAs were for the most part negotiated during a change in the legal framework of public finance in Myanmar: the Public Debt Management Law 2016 (“PDML”). Under the PDML, confirming a practice already in place with the annual National Budget Laws, “the Ministry of Finance can provide guarantees or something resembling a guarantee for debt to any person, association of persons or project in accordance with such terms and conditions as may be approved by the Government and the [National Assembly]” (s. 30 PDML). “Government debt” means “all the debt obligations arising from the borrowing or the promise of payment by Central Bodies, Union Ministries and organizations in their charge, the Government or government-guaranteed debt…” (s. 2 PDML).

So, the Ministry of Finance (now the Ministry of National Planning and Finance) can indeed provide guarantees but within yet to be drafted “terms and conditions” which need to be approved by the National Assembly.

At the core of the issue is a deeply held binary view of the economy by many officials, where private and public investment are quite separate, rather than a Public-Private-Partnership model. Why would the public purse have to guarantee the success of a private enterprise? Would such money not be better spent by public sector investment in power infrastructure?

In our practical experience, there are elements which a sponsor can put in place to make it more likely that the Government will indeed agree to some sort of guarantee. The March 2016 PPAs, and the prospect of public finance improvements do indicate that a Government guarantee is at least possible, and therefore sponsors should position themselves as strongly as possible to acquire it.

Free equity and free power for the Government are wild cards

The Government has gone back and forth in its thinking about the need for sponsors to take in the MOEP as a local partner in the project company. In 2012-2013, this was a must for hydro and

coal projects as set out in Notification 1/2013 issued by the Myanmar Investment Commission (“MIC”). But in 2014, this approach was apparently abandoned as a new regulation, 49/2014, dropped this requirement. Since then, in our experience there has indeed been at least one hydropower PPA concluded without any equity for the Government (but this was locally owned).

Nevertheless, the March 2016 PPAs illustrate that providing equity or free power to the Government are still factors to consider in a Myanmar IPP deal. In reality, unsurprisingly, the MOEP seemed to us in discussions more interested in a volume of energy which is free of charge (“the royalty”) than in dividend from the project company.

The way the process is conducted, however, makes it in practice difficult to meet the sometimes unforeseen Government expectations.

Should the MOEE be offered equity, the governance of the project company comes into play. The MOEE stake may come with the expectation of board of director representation, restrictions on share transfers, consultation procedures and reserved matters. With Government shareholding the project company’s legal status also shifts, as it will be primarily governed under the Special Companies Act 1950. This

NEVERTHELESS, THE MARCH 2016 PPAS ILLUSTRATE THAT PROVIDING EQUITY OR FREE POWER TO THE GOVERNMENT ARE STILL FACTORS TO CONSIDER IN A MYANMAR IPP DEAL. IN REALITY, UNSURPRISINGLY, THE MOEP SEEMED TO US IN DISCUSSIONS MORE INTERESTED IN A VOLUME OF ENERGY WHICH IS FREE OF CHARGE (“THE ROYALTY”) THAN IN DIVIDEND FROM THE PROJECT COMPANY.

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means that certain protections of the Myanmar Companies Act 1914 may not necessarily be imported into the corporate framework.

There is little standardization in tariff escalation

Not much progress has been made to render tariff escalation more uniform across all Myanmar PPAs. Some fairly complex formulas, including fixed and variable components have been agreed in just one of the March 2016 PPAs. It seemed to us that MEPE continues to prefer simpler, more straightforward solutions. These more straightforward solutions have been adopted in most March 2016 PPAs.

We are also seeing a trend towards a fixed tariff, without any escalation, for certain types of renewables. We had the impression during negotiations that this was mostly the result of competitive pressure rather than a considered policy from the MOEE, but the end result is much the same. Sponsors may expect this to be the opening position of the MEPE for a number of projects.

The approach in terms of curtailment differs from one PPA to another

In some circumstances, MEPE may not see the need for hard commitments for payment rights during curtailment, which may be particularly troublesome for projects without any form of capacity payment. Some PPAs recognize the concept of “compensable curtailment”, but this is not always the case.

The need for Compensable Curtailment is evident in case the project has a take-or-pay or a guaranteed minimum off-take, but no capacity payments. In case there is no Actually Delivered Energy due to an act or omission of MEPE, the seller needs to be paid for what he would otherwise have generated and delivered.

Little uniformity in the duration of PPAs

Myanmar PPAs have a duration between 20 to 30 year. There is not much uniformity in this respect in the March 2016 PPAs, but most have a duration of 30 years. The same divergence is found with the MOAs. Some MOAs mention the term of the contract, others do not.

The system of termination payments is to a large degree bankable, but lacuna remain in some PPAs

Marking senior debt as an element of compensation in case of termination, an essential ingredient of a bankable project, is fairly new in Myanmar. In the informal and unofficial Myingyan-light model PPA, senior debt is part of the compensation in case of termination by MEPE for default by the seller, in case of default by MEPE or force majeure and in case of force majeure affecting the seller. In all cases, except in case of force majeure affecting the seller and default by the seller, the sponsor also receives some kind of return on equity, calculated in varying ways.

However, there are some points which sponsors would want to improve. Termination due to Governmental force majeure could have been explicitly noted across the board, but it was difficult to get agreement on this. Furthermore, in some situations, the return on equity is capped significantly. More importantly, perhaps, the definitions of “Governmental Force Majeure” and “Change in Law” are not the same in all PPAs. Some PPAs do not have a definition which is as comprehensive as in other PPAs, and this undermines the compensation structure.

MEPE consent for security to the lenders is generally provided in the PPA

Most recent PPAs include specific language to facilitate the creation of secured interests by the sponsor over the project, in one way or another, to its lenders. The contractual arrangement is rather comprehensive for the most part, and it includes a specific reference to all the common forms of security and contractual comforts which are customary internationally for this type of project, such as the rights under the PPA, shares, the land use rights and the plant.

A distinction must be made, however, between projects where (i) MOEP is the land right owner of the site, (ii) another Government agency is the land right holder, and (iii) projects where the land rights are privately held. The project company can mortgage or assign its leased interest in the land, but whoever holds the land right will have to consent to this. Perfecting such assignments and mortgages has been done in Myanmar, but much will depend on the legal status of the land used in the project.

The tax aspects deserve special attention in the PPA

In our experience, the tax aspects of Myanmar IPPs have been subject to change for many years. In 2012 and 2013, at times tax incentives were included in the MOA which turned out not to be applicable. In 2014, when Commercial Tax was expanded to cover all types of supplies, it was long uncertain how the new rules would impact IPPs (it turned out the tariff was deemed to comprise the Commercial Tax impost, severely hitting the bottom line of planned IPPs). In 2015 and to date, lingering questions fester on the withholding tax deductions MEPE can apply, which might affect up to 3.5% of the gross receipts. Also this year, it became clear to everyone (it was our position all along) that a non-resident EPC provider would also need to charge Commercial Tax on its services, potentially adding 5% to the capital expenditure of the project.

In other words, going by the last 5 years, there has been plenty of need for a clear set of rules to manage changes to the tax structure of Myanmar PPAs.

NOT MUCH PROGRESS HAS BEEN MADE TO RENDER TARIFF ESCALATION MORE UNIFORM ACROSS ALL MYANMAR PPAS. SOME FAIRLY COMPLEX FORMULAS, INCLUDING FIXED AND VARIABLE COMPONENTS HAVE BEEN AGREED IN JUST ONE OF THE MARCH 2016 PPAS.

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In practice, the PPAs have adopted very different approaches to changing tax circumstances in various tracks of negotiation. In some of the March 2016 PPAs, at least certain taxes are a pass-through which can lead to immediate adjustments in the tariff. In other PPAs, the issue is addressed solely through the change in law mechanism. In a few PPAs, a separate “Change in Tax” was negotiated, but this clause is not included in all PPAs. In some other PPAs, under intense time pressure, the fate of the Commercial Tax cost ended up being only loosely determined.

Conclusion: what lies ahead?

The new Government, including its Minister of Electricity and Energy, H.E. U Pe Zin Tun (formerly the Permanent Secretary of the Ministry of Energy) has some decisions to make on electricity. None are more fundamental than the increase of the price at which MEPE sells electricity.

The current reorganization of the electricity and energy ministries, together with a restructuring of MEPE itself into the Electric Power Generation Enterprise (lifting its power transmission department out of its responsibilities to a new state-owned enterprise) have the potential of enhancing an integrated energy strategy as well as improving the licensing process.

The haste and time pressure just before the change in Government did lead to some results which should probably not be repeated in future PPAs. Nevertheless, important progress has been made with the March 2016 PPAs and MEPE seems to have created its own PPA as a starting point for future negotiations. Looking ahead, a deep understanding of the March 2016 PPAs, in all their differences, will be crucial for sponsors and their lenders to navigate power deals efficiently in the year ahead.

Edwin Vanderbruggen is one of the most prominent foreign legal advisers in Myanmar, and he is widely recognized for his experience in the Myanmar energy space. Edwin’s experience working with the Myanmar Government is second to none as he advises the Government on privatization transactions and on PPP’s in energy, transport and telecommunications. He advises four of the ‘supermajors’ on oil and gas interests in Myanmar, and has acted on several recent farm-in’s and transfers. He and his team have a uniquely extensive experience in electric power, and was involved with four out of five of the Myanmar gas and renewable projects concluded in March 2016. Edwin worked on the planning, negotiation, documentation and financing for projects of all types of generation, including gas, coal, hydro, solar, wind and w2e in Myanmar. He lives full-time in Yangon.

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