Italian-Thai Back on Profit Track and Nam Theun 2 Project to Go Ahead by Phairath Khampha 30 January 2002 New contracts, cut in interest costs the key A sharp reduction in interest costs coupled with steady growth of construction contracts in hand was expected to lift the operating profit of Italian-Thai Development Plc to at least 500 million baht in 2002, after three years of losses, company executives said on January 7, 2002. As such, a number of moribund projects, such as the Nam Theun 2 hydropower project in Laos was to be revived and was included in the developer's repertoire for projects in 2002. However, Thai Prime Minister's Office Minister Chaturon Chaisaeng postponed the scheduled January 17 signing of contracts to buy power from the Nam Theun 2 hydroelectric project in Laos because of 'technical problems'. The profitability of Italian-Thai Development Plc was unlikely to be reduced by the government's postponement of an agreement to buy power from the Nam Theun 2 project. Subsequently, Thailand on January 29 signed a contract with Laos to buy power from the Nam Theun 2 hydroelectric project. Piyasvasti Amranand, secretary-general to the National Energy Policy Office, said the Electricity Generating Authority of Thailand would buy 920 megawatts of power from the Lao project. He said it was part of the 3,000-megawatt power purchase agreement. With the contract signed, the soon-to-be-built Nam Theun project would supply power to Thailand by 2008. At the moment, Laos can supply 350 megawatts of power to Thailand from its Nam Theun-Hin Boun and Huay Hoh projects. The power purchase would help reduce construction costs in Thailand and cope with the rising demand for power, Mr Piyasavasti said. Power consumption increases by 1,200 megawatts annually. NEPO would also ask EGAT to purchase power from small power plants which use paddy husk as fuel. Chavalit Pichalai, director of NEPO's power division, said power would be purchased from neighbouring countries and other privately-run power plants if the Hin Krut and Bo Nok power plants in Prachuap Khiri Khan could not be built. Construction of the two controversial power plants was delayed due to strong opposition from locals. The significant reduction in Italian-Thai's interest rate burden from successful debt restructuring would play a crucial role in returning the company to profitability, said Chatichai Chutima, vice-president for finance. Italian-Thai expected to report a net loss of about two billion baht on total revenues of 13 billion for 2001, compared with a net loss of 3.966 billion baht in 2000 and 1.46 billion baht in 1999. "We're in the process of revising the net profit projection [for 2002], as it has yet to take into account profits available from the contract to build the terminal and concourse of Suvarnabhumi airport," Mr Chatichai said. He estimated an operating profit in excess of 500 million baht in 2002 if revenues from the Suvarnabhumi contract were recognised. "We expect profits this year will stem from two sources: one from operations and another from successful debt restructuring." Italian-Thai was expected to gain between five billion and six billion baht from the debt-restructuring deal. The plan, which was approved during the last week of December 2001 by a majority of shareholders led by Siam Commercial Bank, was sent to the Central Bankruptcy Court for approval on January 24. Italian-Thai owed a total of 20.4 billion baht to its creditors, including four billion to SCB. However, only 12.81 billion baht of the total debts, mostly to unsecured creditors and debenture holders, were covered under the restructuring. The plan included the issuing of 173 million new shares, selling some debts at a discount, repayment extension and debt-for-equity swaps. Italian-Thai expected the value of its construction contracts in hand in 2002 would remain unchanged from the previous year at 54 billion baht. The value of new contracts had been averaging seven billion baht annually over the past few years but would be about 10 billion in 2002, said president Premchai Karnasuta. Major contracts for 2002 include construction on the Nam Theun 2 hydro-electric project valued at US$125 million in Laos, and a five-billion-baht mining development project in Indonesia. The company also intends to bid to construct the runway and related facilities worth 8.5 billion baht at the new Suvarnabhumi airport, and expects to win some additional airport extension projects worth a total of 20 to 30 billion baht. As well, Italian-Thai expected to be awarded work in seven or eight foreign countries including Taiwan, the Philippines, Cambodia and the Maldives, Mr Premchai said. Domestic contracts currently accounted for about 75% of the company's revenues. As a result of the government's limited investment budget, Italian-Thai planned to focus more on overseas projects on which margins range from 10% to 30%, compared with less than 10% from domestic projects, in 2002 and 2003. Meanwhile, PM's Office Minister Chaturon Chaisaeng, who oversees energy affairs in Thailand, postponed the scheduled January 17 signing of contracts to buy power from the Nam Theun 2 hydroelectric project in Laos. EGAT planned to buy 920 megawatts of electricity starting from 2006. He said a postponement was needed to clear technical problems, not because the state was accused of purchasing too much electricity despite low consumption. He said it was not very clear how the developer wanted to proceed with the project. There was also concern from Thailand's prime minister, he said, about the lack of Thai-speaking experts and engineers among the developer's engineering consultants for the project and that these and similar cultural issues needed to be worked out. Ital-Thai to ride out delay - Profits unlikely to be dented The profitability of Italian-Thai Development Plc was unlikely to be reduced by the government's postponement of an agreement to buy power from the Nam Theun 2 project in Laos. The company's construction revenue projection for 2002 had already been expected to exclude the hydro-electric project, said Pongpan Apinyakul, an analyst with Kim Eng Securities Plc. "Italian-Thai is unlikely to factor the construction deal for the Nam Theun 2 project into its revenue projection, because such a project is subject to very high political risk," he said. The value of the project in Laos was estimated at US$125 million or 5.5 billion baht at current exchange rates. Chaturon Chaisaeng, the Prime Minister's Office minister in charge of energy policy, was supposed to sign the power-purchase agreement during a visit to Laos starting on January 17, but the trip was cancelled the previous week. Officials said Mr Chaturon wanted to study the agreement further to ensure that it did not disadvantage the Electricity Generating Authority of Thailand, which would purchase the power. The contract was subsequently signed a week later. Even without the Nam Theun 2 job, Italian-Thai expected an operating profit of at least 500 million baht in 2002, after three years of losses. The company also expected to gain between five billion and six billion baht from a debt-restructuring deal approved in late December by creditors led by Siam Commercial Bank. The company expected the value of new contracts would be about 10 billion in 2002, compared with an annual average of seven billion baht in the previous four years. Among other new projects pending was a five-billion-baht mining development in Indonesia. Italian-Thai also intended in 2002 to bid to construct the runway and related facilities worth 8.5 billion baht at the new Suvarnabhumi airport, and expected to win additional airport extension work worth a total of 20 billion to 30 billion baht. As well, Italian-Thai expected to be awarded work in seven or eight foreign countries including Taiwan, the Philippines, Cambodia and the Maldives, said Premchai Karnasutra, the company's president. Italian-Thai expected the value of all construction contracts in hand in 2002 would remain unchanged from last year at 54 billion baht. Domestic contracts currently accounted for about 75% of the company's revenue. As a result of the government's limited investment budget, Italian-Thai planned to focus more on overseas projects where margins ranged from 10% to 30%, compared with less than 10% from domestic projects, over the next two years. Under the preliminary agreement to buy electricity from Nam Theun 2, EGAT was to purchase 920 megawatts, part of the 3,600 megawatts that it was committed to buying from Laos. Italian-Thai is also the co-developer of the US$1.2-billion Nam Theun 2 project, holding 15% equity. Nam Theun 2 was originally scheduled for completion in 2006, but was now expected to be completed no earlier than December 2007 because of disagreements over the contract terms and the issue over the fact that many of the foreign consultants could not provide Thai-speaking engineering staff. Major Lao hydroelectric development Although the development of the Nam Theun 2 project was going ahead more to provide benefits to Thai businessmen to run factories, with the majority of the power from this project being sold to Thailand, the project is a key component of Laos' economic development plan. The Nam Theun 2 hydropower project would enable Laos to export 3,000 megawatts, the country thus being able to acquire hard-to-get foreign currency. The government of Laos encouraged the project to be developed under a team led by Electricite de France, financed from a large World Bank loan and using Italian-Thai as the project's main developer. The project is located on the Nakai Plateau in central Laos. The reservoir that would result from the impoundment of the Nam Theun River (Nam Theun literally means 'shallow water' in Lao/Thai language) would cover an area of 450 km2. The main feature of the project is the gravity dam, made of roller-compacted concrete, that will be up to 48 m high and 320 m long from one side of the valley to the other. In the centre of the concrete dam there will be five radial gates, 18 m wide by 12 m high, to release water into the spillway, which will be built integrally into the dam. Italian-Thai retained a Canadian engineering firm, Klohn Crippen Consultants, to develop preliminary designs for the project. This company continued to be retained as Italian-Thai's engineer for the project's value engineering reviews. It would also prepare designs for the main dam and saddle dams, the spillway, headrace and tailrace channels, construction camp and access road works. Thailand's prime minister Thaksin Shinawatra visited his Lao counterpart late in 2001 to bring about a resolution to Lao concerns regarding the project, which centred on the payment for the design, construction and development of the transmission and transformer facilities to deliver power to Thailand. Both prime ministers instructed Italian-Thai to urge its international engineers to supply Thai-speaking and/or Lao-speaking engineers on the team to deal with cultural issues that are sure to arise. This, they have said, would greatly assist in more than just the technical success of the project as its development was also creating considerable social issues because these had not been properly addressed previously. They did not want a repeat of the Pak Mun Dam fiasco that has plagued the Thai government and politicians for years. Specific answers needed from EGAT The Nam Theun 2 Hydroelectric project is another case in point wherein the Thai people, do not trus their government officials and those of EGAT. They have demanded whether or not the various power deals, including Nam Theun 2 is going to go haywire as have so many others and that they, as taxpayers, would be left having to pay for the compensation. EGAT would sign an agreement that would commit it to buying power from the project. By allowing EGAT to go ahead, the government is putting Thai taxpayers at risk of shouldering another burden because the project is unlikely to sail smoothly through the World Bank nor stand up to scrutiny from the international community. There is no two ways about it. The World Bank towards the end of january said as much. The plan to sign the so-called initial or technical power purchase agreement between EGAT and the corporate consortium operating the Nam Theun 2 project would entail a number of unresolved questions. Among others, what may count as a force majeure in the contract? If the project is delayed or cannot be built because of the World Bank, who, between EGAT, the Lao government and the private dam development consortium, should be held responsible for compensation? The question is an essential one because the future of the dam very much depends on whether the World Bank provides a political risk guarantee for the project. Such a guarantee is required for international financial institutions to provide loans for the corporate consortium to build the dam. To provide the guarantee, the World Bank demands an environmental impact assessment (EIA) and studies on the project’s economic viability that meet its high standards. The project’s EIA has been turned down by the bank a few times in the past several years. According to the World Bank’s coordinator on Nam Theun 2, no date has yet been fixed for completion of the project’s new EIA. Neither was the economic study completed. The bank has to make sure it contains practical measures to alleviate poverty in Laos. The current plans associated with the social issues basically means destroying the lives of a few thousand Lao rural families. In sum, both studies are overdue with no expected date of completion, but this is why the World Bank and the Lao government are demanding that the international consultants come with Thai and/or Lao-speaking engineers--people who intimately understand the Thai/Lao culture and can deal with the people on the ground as one of them, rather that as a foreign consultant. This is extremely import for the success of the project because the various relationships and conditions are very, very fragile. Another point to ask is whether or not power from the project will enter the power pool – a system designed to make energy producers compete in the retail market – when it is introduced in 2003. If so, will EGAT guarantee the possible loss of revenue for the project developing consortium as it did with those of Hin Krut and Bor Nok? The contracts of Hin Krut and Bor Nok stipulate that EGAT – and therefore Thai taxpayers – must pay an amount of compensation to the project developers equal to the amount of revenue they would lose under the power pool system. How can we call this competitive when some producers are being compensated? These are among the major questions the Thai public wants answered before EGAT signed the agreement with the Nam Theun 2 project developing consortium and the project can go ahead.