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Client briefing note | 25 April 2017

Myanmar may be on the verge of a completely


new energy landscape offering exciting
opportunities for international investors. In
coming months, a new energy master plan is
expected to be revealed for the Yangon Region
which accounts for almost half of all electricity
produced across the country.

We are a network of leading law and


tax advisory firms with offices in A NEW ENERGY LANDSCAPE IN MYANMAR?
Cambodia, Indonesia, Laos, Myanmar
and Vietnam. Myanmar may be on the verge of a This client briefing note was co-authored with
Our general areas of practice are completely new energy landscape Aled Davies and James Murray of Milbank,
corporate, finance, licensing and offering exciting opportunities, as Tweed, Hadley & McCloy LLP.
disputes. well as challenges, for international
investors. In coming months a new
Our principal specialized areas of Highlights of this note
energy master plan is expected to
practice are energy, infrastructure,
be revealed for the Yangon Region Evolution of the Myanmar PPAs
real estate and construction , telecom
which accounts for almost half of
and taxation. Secured lending framework
all electricity produced across the
There are three things you need to country. Institutional Framework
know about our approach:
1. We deliver the ultimate in It is too early to tell how the sector will
ground connectivity. be re-structured. Myanmar national
press has reported that the master anticipate that investors would urge Myanmar
2. Our quality is trusted by the plan will amend existing laws to allow to walk before they leap in order to maximise
most discerning. local and foreign investors to have a their potential in realising their ambitious
3. We never give up. stake not only in electricity generation plans.
(which is already possible) but also
transmission and distribution in the The anticipated regional changes in the
Yangon Region. There has even been electricity sector come in the wake of what has
PROGRESS REPORT 2016 discussion about direct contracting been a progressive evolution towards a more
MYANMAR by power producers to industrial end- bankable power sector in Myanmar nationally,
users or industrial zones. Yangon and an evolution that has accelerated in recent
alone has 20 industrial zones. years. This note summarises the treatment
of some of the key terms in recent Myanmar
The shift in leadership emphasis from PPAs as well the current status of other key
national to sub-national level, if it is bankability issues such as security, currency
indeed implemented as announced, convertibility and disputes resolution. We
shakes up many elements of an outline the positive points and seek to
unsettled Myanmar electricity identify some of the shortfalls that the new
sector. The proposed reforms would arrangements may seek to address.
represent a significant liberalization
of the regional power sector though Evolution of the Myanmar PPAs
clearly there are challenges in moving
PROGRESS REPORT
directly to such an open approach. On 31 March 2016, power purchase
2016 One of the ideas floated by private agreements were executed for some five
stakeholders is to keep a government gas-fired IPPs. This occurred just before the
Myanmar
entity interposed in the distribution USDP-led Government transferred power to
chain so as to provide access to a the newly appointed cabinet of Aung San Su
government guarantee and insulate Kyis NLD. These March 2016 PPAs included
the IPP from demand and credit risks. the internationally tendered Myingyan PPA,
In our view, this would be critical to which was supported by the World Bank
larger scale power developments. We (which provided technical assistance for the
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tender) as well as other international This simplifies the financial modelling drafting ambiguity.
financial institutions and was awarded exercise for prospective lenders.
to SembCorp Industries (Singapore). More positively, with each new PPA
Force Majeure and deemed in Myanmar the approach appears
The March 2016 PPAs represented a availability to be increasingly sophisticated:
significant improvement in commercial Distinctions have now been drawn
Closely related to the take-or-pay
and legal terms compared to prior between natural force majeure events
commitment (independent of actual
Myanmar precedents. This included (earthquakes, floods, typhoons,
power demand) are further questions
improvements that are key to a bankable etc.), governmental/regulatory force
as to whether the IPP will be paid in two
PPA, including a take-or-pay offtake majeure events (change in law, non-
or three additional situations:
commitment, force majeure provisions, renewal of permits and expropriation)
tariff adjustments and termination and other force majeure events (strikes,
if the power purchaser cannot
payments. However, the March 2016 acts of terrorism and sabotage) and
take power due to force majeure
PPAs also retained some less helpful the consequences thereof. In the most
affecting power purchaser or
legacies from what had preceded them. recent PPAs, governmental/regulatory
infrastructure downstream of the
When the Yangon region energy master force majeure events and other non-
IPP; and
plan is unveiled, and as further PPAs natural force majeure events affecting
(consistent with the customary
are developed nationally, investors the IPP or the power purchaser result
regime in jurisdictions were
and lenders will be keen to assess in PPA payments at least sufficient to
power is sold to state owned
whether remaining bankability issues cover debt service obligations and
power purchasers under a long
have been adequately addressed in operating costs.
term PPA) if certain political force
order for the international standard
majeure events prevent the IPP
of risk allocation to be achievable. We Tariff adjustments
from being available (or prevent
highlight some of the areas that may
the IPP from being commissioned The PPA tariffs have been determined
require monitoring below.
and completed in the construction and paid in US dollars. However, the
period); and experience to date in addressing
Take-or-pay commitment
(in a gas-fired IPP where the modifications to the tariff have been
A clear take-or-pay commitment government or power purchaser is varied.
guaranteeing that the IPP gets paid better able to manage gas supply
provided that it is available (meaning risks) in the event of interruptions The March 2016 PPAs did include
that the power purchaser takes the to the gas supply. mechanisms for adjustments to tariffs
demand or dispatch risk) is the to cover increased costs of project
foundation of project financed IPPs in In conventional international PPAs, specific government actions, as well
all but the most developed electricity the concepts of availability charge, as the wider application of changes in
markets. The approach adopted to date
in Myanmar in seeking to achieve such
an arrangement has been piecemeal
and not helped by ambiguities in
contractual drafting. Rather than a
customary capacity/availability take-or-
pay structure, many recent PPAs have
favoured an approach under which the
power purchaser commits to purchase
a guaranteed minimum output at
an agreed tariff. This commitment
commonly applies on both an annual
basis and in each month (based on
a percentage of the power plants
contracted output), although the
precise payment arrangements still deemed commissioning and deemed laws and government interventions
differ significantly from one PPA to the availability are customarily used (e.g., environmental compliance or
next. For example, some PPAs provide to ensure that in all three of these introduction of a grid code).
for regular payment of invoices based scenarios fixed PPA payments are made
on the guaranteed monthly kilowatt and debt service can be honoured The risk of inflation causing operating
hours only, with an annual balancing (as can any back-to-back take or and maintenance costs to reduce
payment to compensate for any excess pay commitments under gas supply cash available for debt service is
amounts dispatched, while other PPAs contracts). Myanmar PPAs have been conventionally addressed through the
provide for regular payments based less successful in comprehensively use of appropriately targeted (local
on the higher of the guaranteed moving the risks of these scenarios and international) inflation indices in
monthly kilowatt hours and the actual from the IPP to the power purchaser, tariff escalation mechanisms. However,
monthly output. Notwithstanding in part due to the different structural Myanmar has generally resisted tariff
these inconsistencies, the most recent approach of guarantying payment for adjustment structures that could
March 2016 PPAs at least provide for actual output (as opposed to deemed allow significant tariff increases due
a basic regular minimum payment. or actual availability) and in part due to to factors outside Myanmar or outside

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the governments control. While recent this has manifested itself in the form of the security regime may contradict
PPAs have been an improvement government guarantees. elements of Myanmars more recent
from the earlier solution of a periodic commercial law framework. This will
renegotiation, they have also included Termination payments require careful analysis and structuring.
strict limits on the maximum possible
Significant progress was made in
tariff escalation in each contract year; Enforcement of certain security
the March 2016 PPAs providing for
more complex and targeted formulas (namely security over shares in
termination payments to include at
were incorporated into just one of the a Myanmar company) requires
least outstanding debt principal on
March 2016 PPAs. This is already an area governmental consent. To avoid this
a termination in all circumstances,
that will require further development creating an unacceptable restriction
including on termination by the
to reach the international standard. on lenders enforcement options, direct
power purchaser due IPP default
agreements between lenders and the
and termination by either party due
Identity of Power Purchaser and relevant government bodies may need
to extended natural force majeure
Governmental guarantees to be considered (including upfront
affecting the IPP. Upon termination
approval or objective standards for any
The power purchaser under the March in all other circumstances (e.g., power
such sale of shares on enforcement).
2016 PPAs was EPGE, a state-owned purchaser default, government
An alternative would be to establish
enterprise. As EPGE sells electricity for force majeure) some form of equity
an offshore holding company structure
less than it purchases, it relies on budget compensation has typically also been
and ensure no change of control
appropriations from the Myanmar included in termination payments -
provisions would be triggered under
government (and so may not meet though the precise formulation for
the project contracts on enforcement
the credit standing typically required equity compensation is uniquely
and sale of such shares in an offshore
to support long term commitments negotiated per project.
holding company.
under a PPA). Nevertheless, most IPPs
in Myanmar to date do not have a Areas where the termination payments
Scope of available security package
government guarantee and Myanmar could be further developed include:
has been reluctant to issue guarantees clarifying the circumstances where An IPP may provide its lenders with a
for power projects for a number of equity will also be compensated (e.g., mortgage or a fixed charge over a land
reasons, some of which relate to termination on government force lease (including the facilities on the
technicalities of the public finance majeure is an area where this has not land). Full diligence and appropriate
system and some of which reflect an been consistent) and generally in local legal advice must be taken as
institutional mind-set that is unfamiliar tightening up the comprehensiveness there are some restrictions on what
with the public sector guaranteeing of the regime and related definitions category or classification of land can be
private sector investment. Having said (Change in Law; Government Force mortgaged (e.g., for land designated
that, a financial framework introduced Majeure, etc.). as farmland, certain further approvals
in 2016 in principle permits the Ministry are required). Myanmar law also allows
of National Planning and Finance to Secured lending framework a company to provide a fixed charge
provide guarantees within yet to be on its contractual rights (including a
drafted terms and conditions which The security package available to PPA) and book debts (e.g., receivables
need to be approved by the National lenders in Myanmar is in principle under a contract). A floating charge
Assembly. The Myanmar government relatively comprehensive and has may be created on any other property,
provided what effectively amounts many concepts that are familiar to including bank accounts in Myanmar
to a guarantee of the Myingyan the English common law system due (see below for offshore accounts). A
PPA. To ensure bankability of the to the countrys history. From the shareholder in a Myanmar company
project investors typically require the perspective of international lenders, may also provide a guarantee in
power purchaser to be sufficiently however, the legal regime is relatively respect of a loan made to its subsidiary
creditworthy to meet its obligations untested, the level of experience of the or create a hypothecation or a pledge
throughout the term of the PPA and courts in dealing with the enforcement on its shares in a project company.
in most developing energy markets of security is unknown and aspects of Many of these security interests were
expressly recognised in the March 2016
PPAs.

Perfection
Most charges and mortgages must be
registered by the Company Registrar
in accordance with the Myanmar
Companies Act.

Any security against immovable


property must be registered with the
Office of Registration of Deeds (ORD),
with the exception of mortgage by
deposit of title deed, which need not
be registered since all that is required is
deposit of document of title.
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However, note that if a debtor is a anticipated. lines and other infrastructure. Whatever
company incorporated in Myanmar, frameworks they unveil, it is hoped that
then security (against moveable Conclusions that they will build on the progress
and immovable property) must be that has been made in PPAs in the
registered at DICA, in addition to There has been significant evolution country so far. The real opportunity
any applicable ORD registration in Myanmar PPAs towards a bankable here may be for foreign investors with
requirements. model. It is not clear whether the the relevant technical, commercial and
precedents, and in particular the finance expertise to then be proactive
Consents Myingyan PPA, will provide the basis for in making proposals to Myanmar
a model PPA going forward, but they do or Yangon authorities to help them
Mortgages on immovable property at least show what has been achieved develop a bankable solution to their
must have the consent of the Myanmar contracting with EPGE, and with a power and infrastructure needs.
Investment Commission, which is government guarantee, at a national
subject to conditions including the level.
requirement that the mortgagee
be able to carry on any aspect of a Some of the ideas that have been CO-AUTHORS
mortgagors activities. Confirmation floated for the anticipated Yangon
that the conditions have been Region reforms may be overly
considered satisfied and the consents ambitious at least for larger scale
duly given will need to be satisfactorily power developments and project
addressed in the conditions precedent finance. For example, the idea that
to any financing. the IPP might be expected to contract
directly with industrial zones or
Investment Protection industrial users would clearly raise Aled Davies
Under the Myanmar Investment Law issues for an internationally financed Partner, Milbank, Tweed, Hadley & McCloy LLP
of 2016, the national government IPP, or a major power plant investment; +81 3 5410 2851
is specifically prohibited from it would be a requirement (in any such adavies@milbank.com
expropriating investment projects, case) that risks of power pricing and
except where necessary for the demand, offtaker credit or fluctuations
Union. In which case, the investors in the exchange rate of local currency
are compensated according to the given this is a power sector in the earlier
prevailing price of the asset or assets stages of development would need
and the profit due to be earned to be satisfactory addressed. A more
over the investment period. Such realistic approach would appear to be
expropriation would in any case for the Myanmar authorities to explore
constitute government force majeure structures that maintain a contracted
tariff, a customary availability charge James Murray
leading to compensation of debt and
Partner, Milbank, Tweed, Hadley & McCloy LLP
equity under a well-crafted PPA as a (for the power purchaser to assume
+65 6428 2422
contractual remedy. demand/dispatch risk), customary jmurray@milbank.com
concepts of deemed availability and
Further, international arbitration tariff adjustments (to isolate the IPP
awards are enforceable by the Myanmar from certain other risks that are within
courts. In 2016 Myanmar passed the the government control or that state
Arbitration Law. Under the Arbitration offtakers typically assume) and
Law, Myanmar adopted much of some form of government guarantee
the United National Commission on to provide the necessary backing to
International Trade Law (UNCITRAL). support the obligations of the power
purchaser under the PPA. The power
Off-shore accounts purchaser would then be able to on Edwin Vanderbruggen
sell to distributors, which may even be Senior Partner, VDB-Loi
Off-shore accounts for receipt of USD
owned by foreign investors to bring +95 9 421156078
revenue has been permitted under
best practice and efficiency to power edwin@vdb-loi.com
recently executed PPAs. It is expected
distribution. However, attracting
that this will continue to be the case
such investment to distribution can
as this is a likely requirement for the
be expected to require tariff reforms
bankability of the PPAs. Central Bank
and greater visibility on demand and
of Myanmar (CBM) approval is required
prospects for growth.
for the disbursement of revenues
to an off-shore account, however
But Myanmar and Yangon authorities
since this has been agreed upon by
are clearly rethinking how to attract
EPGE and thereafter approved by the
foreign investment and technical know-
Myanmar Investment Commission (as Charles Magdelaine
how to the power sector as a matter of
a majority of the projects obtain an Energy Team Leader, VDB-Loi
urgency in an effort to match supply +959 9445672651
investment licence or MIC permit), no
with a growing demand, as well as to charles.magdelaine@vdb-loi.com
CBM limitation on such remittances is
develop the associated transmission
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