The SPC’s letter of support, issued in March 1997, was short but critically important. The
main points in the letter were that:
- even though there was no BOT law in China, the contract documentation for Laibin B
was legal; - the project sponsors’ contracts with the Guangxi provincial government were acceptable
to the SPC in Beijing; and - the central government assumed responsibility for the Laibin B project.
The SAEC had issued a letter in January 1996, stating that it would guarantee any investor’s
ability to convert renminbi to foreign exchange, and the MOEP issued a similar letter guar-
anteeing the investor’s ability to convert the project company’s dividends and remit them
abroad. There was still some doubt as to investors’ ability to convert and repatriate amounts
beyond those required to service the project’s debt.^14 However, the Guangxi provincial gov-
ernment, in the Concession Agreement, also promised to assist the sponsors with conversion
and remittance of renminbi-denominated funds to cover debt service, payment of dividends
and repatriation of capital. It also assured the sponsors that they would be permitted to open
US-dollar-denominated accounts in China and to transfer dollars from those accounts to other
accounts outside China.
Risk analysis
In an article in the Journal of Project Finance(Winter 1999), Robert L.K. Tiong, Sjou Qing
Wang, S.K. Ting and D. Ashley describe two risks – tariff adjustment and counterparty cred-
it – as critical, alongside other normal risks to be expected for a project of this nature.
Tariff adjustment
The requirement that tariff increases be approved annually by the pricing bureau creates an
element of uncertainty with regard to tariff adjustment and project economics. That risk was
addressed in several ways in the Concession Agreement, the Power Purchase Agreement
(PPA) and the SPC’s support letter. The PPA and its tariff structure were approved by the
SPC. The SPC controls the central pricing bureau and the Guangxi government controls the
provincial pricing bureau. The SPC, in its support letter, affirms that it and the Guangxi gov-
ernment have approved the principles of the tariff structure, the payment mechanism and the
tariff adjustment scheme. The Concession Agreement states that the central pricing bureau
will simply verify the correct application of the pricing formula specified in the PPA and also
defines the GPIB’s obligation to pay the tariff as a commercial obligation.
Counterparty credit
The offtaker and the sole source of revenue for the project is the power bureau of one of the
poorest provinces in China. This counterparty credit risk is mitigated by the Guangxi gov-
ernment’s commitment for the project to succeed. The project is a key to alleviating a signif-
icant power shortage, which has been an impediment to economic growth. The Guangxi
government’s commitment has the support of both the SPC and the MOP. The SPC’s support
LAIBIN B, CHINA