RISK MITIGATION IN PROJECT FINANCING IN VIETNAM: FROM LENDERS’ PERSPECTIVES IN THE PRIVATE SECTOR

RISK MITIGATION IN PROJECT FINANCING IN VIETNAM:
FROM LENDERS’ PERSPECTIVES IN THE PRIVATE SECTOR
by
Duong Nhu Hung
A research study submitted in partial fulfillment of the requirements for the
degree of
Master of Business Administration
Examination Committee : Prof. J.P. Gupta (Chairman)
Dr. D.B. Khang
Dr. S. Venkatesh
Nationality : Vietnamese
Previous Degree(s) : Master of Electrical Engineering
Technical University of Budapest
Hungary
Scholarship Donor : The Government of Switzerland
Asian Institute of Technology
School of Management
Bangkok, Thailand
April 1999
Acknowledgement
During the process of this research study, many persons and institutions whose involvement
made this research possible. I would like to extend my appreciation and gratitude to all of
them.
I am very grateful to Prof. J. P. Gupta for his guidance, help and encouragement in assisting
this research. It was he who introduced me to the field of Project Financing and I am very
proud to have worked with him.
I am also grateful to Dr. Do Ba Khang and Dr. S. Venkatesh, for having served as the
committee members. They provided me with valuable suggestions to enhance the quality of
this research.
Outstanding acknowledgements are due to the government of Switzerland for providing the
scholarship that enabled me to achieve the degree of MBA at the School of Management. I

also wish to acknowledge the Industrial School of Management for providing support during
my study.
Thanks are also due to Mr. Ngo Quang Kim, Mr. P. U. Nguyen (HIFU), Mr. N. H. Dung
(Energy Center), Mr. P. H. Nam (State Bank of Vietnam), Mr. V. D. H. Quan (AIT) and Miss
N. T. M Hue (FPT).
This research is dedicated to my parents whose continual encouragement, moral support,
and inspirations have molded me into what I am now.
Abstract
The applications of project financing are increasingly wide spreading, particularly in
investments that require risk sharing. Risk mitigation is one of the most important elements in
project financing, but is not well addressed in literature in Vietnam. This research attempts to
help lenders to mitigate risks in project financing in Vietnam.
By conducting interviews with bankers, project managers, government authorities and legal
experts, we analyze various aspects of risk mitigation at three levels: country, institution and
project levels. The analysis is focused on the applications and limitations of risk mitigating
techniques particularly at the project level. An in-depth risk analysis is carried out in a real life
project.
Our research suggests lenders to examine every risk separately and use overlapped
protections. The predictability of the cash flow and the track records of the sponsors are the
most important criteria in project financing. Joining syndication with multilateral organizations
such as IFC is a wise way to mitigate risk. Joint Venture between an experienced foreign
company and an influential state owned company is the most recommended form of business
in project financing in Vietnam.
i
Table of Contents
Chapter Title Page
Acknowledgement ii
1. Acknowledgement ii
Abstract i
2. Abstract i

Table of Contents ii
3. Table of Contents ii
List of Tables v
4. List of Tables v
List of Figures vi
5. List of Figures vi
6. Chapter 1 1
7. 1. Introduction 1
1.1 Rationale 1
1.2 Statement of Problem 1
1.3 Objectives 2
1.4 Scope 2
1.5 Organization of the Research 2
8. Chapter 2 4
9. 2. Literature Review 4
2.1 Concept of Project Financing 4
2.2 Parties Involved in Project Financing 5
2.3 Project Financing Structures 6
ii
2.4 Risks Involved in Project Financing 7
2.5 Managing Project Risks 9
10. Chapter 3 13
11. 3. Methodology 13
3.1 Analytical Model 13
3.2 Data 15
12. Chapter 4 16
13. 4. Country Environment 16
4.1 Political Environment 16
4.2 Macroeconomic Environment 17
4.3 Infrastructure 18

4.4 Market Opportunities 18
14. Chapter 5 20
15. 5. Key Parties in Project Financing in the Context of Vietnam 20
5.1 Government 20
5.2 State Owned Enterprises (SOEs) 20
5.3 Private Businesses 21
5.4 Foreign Direct Invested (FDI) Companies 21
5.5 Banks in Vietnam 22
5.6 International Finance Corporation (IFC) in Vietnam 24
16. Chapter 6 27
17. 6. Case CSM: Description 27
6.1 Profile of CSM Project 27
6.2 Financing Structure 28
6.3 Special Agreements 30
18. Chapter 7 32
19. 7. Case CSM: Risk Analysis 32
7.1 Risk Identifications in CSM Project 32
7.2 Protection of Project Cash Flow 37
iii
7.3 Loan Security Package 43
7.4 Major Difficulties for Lenders in the CSM Project 45
7.5 Comments on Project Financing in the case of CSM 47
20. Chapter 8 49
21. 8. Conclusions and Recommendations 49
8.1 Limitation 49
8.2 Major Findings about Country Environment and Key Parties in the Context
of Vietnam 49
8.3 Major Findings Related to the CSM Case 50
8.4 Recommendations 52
8.5 Recommendations for Further Studies 53

Abbreviation 54
22. Abbreviation 54
Reference 55
23. Reference 55
Appendix 57
24. Appendix 57
iv
List of Tables
Table Title Page
No.
4-1 Important Economic indicators of Vietnam 17
4-2 Some indications about the living standards 19
4-3 Summary of Opportunities and Threats of the Country Environment 20
5-1 Investment of the economy during 1996-1997 23
5-2 Summary of Strength and Weakness of Key Partners in Vietnam 27
6-1 Financing details of CSM project 30
6-2 Financing back up of the CSM project 31
7-1 Required insurance in CSM project 45
7-2 Summary of Risk mitigation arrangement in CSM project 50
v
List of Figures
Figure Title Page
No.
1-1 Organization chart of the research 3
2-1 Traditional method of financing a project vs. project financing 4
2-2 An IFC co-financing structure (Clifford Chance, 1991) 7
2-3 Project risk phases (IFC, 1996) 9
3-1 Model for Analyzing Project Financing 15
7-1 Security support for CSM project 37
8-1 Simplified financing structure of CSM 53

A6-1 Detailed Summary of Financing Structure of CSM Project 64
vi
Chapter 1
1. Introduction
1.1 Rationale
The term project financing is used to refer to a wide range of financing structures which have
one feature in common: the financing is not primarily dependent on credit support of the
sponsors or the value of the physical assets involved (Clifford Chance 1991). In project
financing, lenders have to rely mainly on the performance of the project. Therefore, their
primary concern is the feasibility of the project and its sensitivity to the impact of potentially
adverse factors.
Since the opening policy, Vietnam has gradually integrated into the world economy. With the
market of population of 70 millions, the incentives of government and the location in one of
the most dynamic region, Vietnam has attracted both private and foreign investment.
According to the estimation of government, the financing of the planned investments for
development over the five years up to the year 2000 are to be in the order of US$41.4 billion.
The Government hopes to mobilize slightly more than half of the total needed resources
(US$20.9 billion) from domestic savings and the remainder (US$20.5 billion) from foreign
sources, including US$13 billion of foreign direct investment (FDI) and US$7.5 billion of
official development assistance (ODA) (WB, 1999). Clearly, the demand for foreign capital in
Vietnam is enormous in coming years. On the other hand, the Country environment of
Vietnam is still considered as high risk (EIU, 1998). The lack of both capital and assets (used
for mortgage) make the traditional method of financing based on the security or enforcing
obligations might not appropriate in many circumstances, especially in large project with long
repayment time. The promising opportunities plus the needs for risk sharing necessitate
project financing in Vietnam.
The government of Vietnam has opened door in many areas to all sectors including local
private and foreign investment. The limited capacity of government budget, the need for
running economy efficiently and the open door policy of government have increased the role
of private investment in the economy of Vietnam.

In project financing, sponsors usually contribute only a small portion of the capital. The
lenders usually have to provide about 50%-70% of the total investment cost (Clifford Chance,
1991) with limited recourse to the borrowers (sponsors). Meanwhile, they rarely involve
directly in management of the project. As a result, lenders are exposed to a lot of risks.
The needs for project financing, the increasing private investment and the risk exposure of
the lenders necessitate researches in risk mitigation in project financing in Vietnam,
particularly in private sector. On the other hand, not much literature is available in these
issues. Thus, more researches in this field should be done.
1.2 Statement of Problem
This research attempts to solve the problem “How to mitigate risks in project financing in
Vietnam, particularly in private sector?"
1.3 Objectives
• To analyze the country environment of Vietnam.
• To analyze the key partners in project financing in the context of Vietnam with focus on
private sector.
• To analyze the financing structure, risk mitigating techniques and important issues for the
lenders through an in-depth study of a typical case in project financing in Vietnam.
• To make recommendations about risk mitigation for the lenders in project financing in
Vietnam.
1.4 Scope
The research is written from the lenders’ perspectives with focus on risk mitigation in project
financing in private sector.
1.5 Organization of the Research
The first chapter is the introduction including rationale, problems, objectives, scope and the
organization of the study.
The second chapter is literature review, which provide back ground and terminology needed
for the analysis.
The third chapter is methodology that creates the foundation for the analysis.
The fourth chapter is the country environment analysis including the analysis of political
environment, macroeconomic environment, and infrastructure and market opportunities.

The fifth chapter is the analysis of key partners in project financing in Vietnam including
government, state owned enterprises, local private companies, FDI companies, domestic
banks and IFC.
The sixth chapter is the description of CSM project including the project profile, the financing
structure, and special agreements.
The seventh chapter is the analysis of the CSM project including risk identification, risk
mitigation to protect cash flow, the loan security package and some major difficulties in CSM
project.
The eighth chapter is conclusions and recommendations including the limitation of the
research, the summary of the main findings, the recommendations for the lenders and
suggestion for further study.
2
Figure 1-1: Organization chart of the research
3
Literature Review
Methodology
Country
Environment
Analysis
Key Partner
Analysis
Description of
CSM Case
Analysis of CSM Case
Conclusions and
Recommendations
Introduction
Chapter 2
2. Literature Review
2.1 Concept of Project Financing

2.1.1 Definition
Niehuss (199x) defines that project financing is a method of borrowing funds for a project in
which the lender’s security for the loan is
• primarily based on the expectation that the revenues generated by the project will be
sufficient to service debt incurred for the project;
• and/or a mortgage on the assets of project entity.
The project financing differs from the traditional method of raising funds for projects. In the
traditional method, the lenders look to the overall credit worthiness of the borrower and all of
the borrower’s assets as security for their loan and not the assets and revenues from a single
project. In a project financing, lenders would not have direct recourse to the sponsors’ assets
or revenue but would rely on the economics of the project, project assets, and the revenue
stream generated by the project (Figure 2-1).
The basic principle underlying project financing is to shift the burden of direct debt liabilities
from the sponsors of a project to the project itself.
Figure 2-2: Traditional method of financing a project vs. project financing
(Source: Niehuss, 1999x)
4
TRADITIONAL METHOD PROJECT FINANCING
lender lender
loans loans
Project Project Project Project
Sponsor sponsor Sponsor sponsor Loans
Equity & loan Equity
Special project entity Special project entity
(Joint-venture) (Joint-venture)
Owns Owns
Project facilities Project facilities
Note: Loans are made directly to Note: Loans are made to the special
project sponsors but not to the project entity and not tto the
special project entity project sponsors

2.1.2 Reasons of project finance
Lenders and sponsors have different reasons to do project financing. For the sponsor, project
financing is often more expensive than traditional financing, but it has certain advantages:
• Risk sharing. Where debt is wholly or partially non-recourse to the borrowers and
sponsors, all or some of the risks will be borne by the lenders if project fails to produce
sufficient cash flow. This is important where the borrower is smaller to the size of the
project.
• Political risks. A business investing large sums overseas might wish to ensure that certain
political risks are borne by the lenders.
• Ownership flexibility. Large projects have very long lead times. A properly structured
project financing can give a sponsor the flexibility to increase or decrease its share of a
project during the planning and construction period.
Lenders often find project financing more risky, but they have some reasons to do project
financing:
• High return for long periods.
• Increase the visibility in the host country.
• Support their key clients in overseas business ventures.
2.2 Parties Involved in Project Financing
2.2.1 Project sponsors
The sponsors contribute equity in the project. Frequently, the sponsors or third party
interested in the success of the project are also required to provide back up credit support to
ensure that debt will be serviced by some credit worthy party if the cash flow from the project
revenues is inadequate or interrupted.
2.2.2 The project company
The Project Company is an entity that will operate the project. Its identity, domicile and legal
form will be determined by a range of factors. For instance, legal framework of host country
might prescribe the structures for foreign investment; there might be requirement for local
participation.
2.2.3 The borrower
The borrowing entity might or might not be the same as the Project Company. There could be

several borrowers, each raising funds separately to cover its individual participation in the
venture.
5
2.2.4 The banks
The sheer scale of many projects dictates that the financing will be syndicated. A syndication
of banks might be chosen from as wide a range of countries as possible to discourage the
host government from taking action to expropriate or otherwise interfere with the project and
thus jeopardize its economic relations with those countries. Syndication might well include
some banks from host countries, particularly if there are restrictions on foreign banks taking
security over project assets. The total finance package might involve different tiers of lending:
some secured, some unsecured; some short term and trade related, some long term; part of
finance might be subordinated to the right of other lenders.
Commercial banks might also act as guarantors. For example, where concessional rate
financing is available from multilateral organizations or where export credit finance is
involved, some or all of the commercial banks might agree to issue guaranteed or to open
letter of credit in favor of the concessional rate lenders. The benefits to the sponsors of
obtaining the concessional finance on a limited recourse basis could well outweigh the cost of
paying guarantee fees and commissions.
From the perspective of the commercial banks, this arrangement has the advantage that they
do not have to share the project security with the export credit lenders nor suffer their
interference in accelerating the finance or enforcing security. This might justify the additional
risk taken on under the guarantees, particularly if the concessional lenders would have
required a first priority interest in the security proceeds in any event.
2.2.5 Other actors
The arranger. The bank, which has arranged the financing, and syndication of lending will
normally take the lead role in negotiating the terms sheet and the credit and the security
documentation.
The managers. Managers and lead managers might be named in the documentation and in
any publicity surrounding the launch of the project. They will not normally assume any
particular responsibilities to the borrower or to the other lenders.

The agent. The agent bank will be responsible for coordinating draw-downs and dealing with
communication between the parties to the finance documentation, serving notices and
disseminating information, but they will not responsible for the credit decisions of the lenders
in entering into the transaction.
Financial adviser. The adviser will be familiar with the country where the project is located
and can advise on structures and local conditions as well as having the expertise and
contacts to sell the project to the lending banks.
Technical experts. selected by the project sponsors or by the financial adviser, they might be
retained to prepare the feasibility for the project.
2.3 Project Financing Structures
Every project finance has its own special features. Accordingly, there are many kinds of
financing structures. Since most of the project financing in private sector in Vietnam involves
the participation IFC, we will exam only the financing structures IFC.
6
IFC often lends to the private sector and seeks no state support. Its rate is not
concessionaire: indeed margins might be high. The high margins and the political risk comfort
associated with IFC financing can attract commercial lenders into co-financing projects that
otherwise might not get off the ground.
A simplified example of an IFC co-financing is demonstrated as follows:
Off-take agreement
Multinational Pco
Off-take assigned to Investment agreement
security trustee for
A loan and B loan A loan $30m B loan $90m
IFC
Deposit agreement
Bank1 Bank2 Bank3
$30m $30m $30m
Figure 2-2: An IFC co-financing structure
(Source: Clifford Chance, 1991)

• Multinational Company establishes a Joint Venture (PCo) with a local company to
produce cement in a developing country. PCo obtains the government license, enter into
project agreements and an off-take agreement with the multinational company.
• IFC enters into “investment agreement” with PCo, for USD90 m and makes separate
“deposit agreement” with commercial banks for USD60m of the total loan.
• The structure involves no direct contractual relationship between the banks and the
borrower. Under the documentation, IFC retains control of covenant performance,
acceleration and payment; there is no formal agency structure as there would be in a
conventional syndicated loan agreement.
2.4 Risks Involved in Project Financing
2.4.1 Types of risks
Several major groups of risks include
1. Project construction and completion risk, if the project cannot be finished in time, cost
overruns, non-availability of land etc.
2. Operational risk. The main operational risk is that assets do not operate efficiently. This
risk includes
7
• Project performance risk if there are shortfalls in expected capacity, output or
efficiency. For instance: poor management, high cost of service or change in
ownership.
• Technology risk if the project uses new but untested technology, or obsolete
technology
• Fuel, materials risk if the supply of materials, fuel is disrupted, or there are
changes in their cost.
• Human resource risk if there is unavailability or shortage of qualified people, work
force, reliable contractors.
• Transportation risk if the transportation means are not available, changes in
transportation cost.
3. Commercial risk if there are falling demand, oversupply (market size risk), competition of
the import goods, changes in price (price risk) or buyers refuse or delay the payment

(payments risk)
4. Non-commercials risk if lenders have concerns about the stability and consistency of
government's economic and political policies that would affect the prospective investment.
Non-commercial risk include country risk (political and legal risk such as expropriation risk,
regulatory interference, protectionism, tariffs, and changes in local law) environmental risk
(related to all expense when damaging environment) and financial risk (fluctuation in
exchange rate, interest rate, inflation).
2.4.2 Risk Phases
Lenders judge the need for risk management in line with their level of exposure to a project.
Three separate phases of risk are usually identified:
• Construction. The Project Company draws down the majority of the loan to finance
construction activity, equipment purchase, and other pre-operating costs. This phase can
last several years, depending on the size of the project.
• Project start-up. During this phase equipment is tested, raw material inputs are ordered,
project staffing is completed, and marketing starts. Loan exposure may rise slightly
during this phase due to working capital requirements and final payments to contractors
and equipment suppliers. Initial sales from project start-up enable loan payoff to
commence. This phase usually lasts around six months.
• Operation Risk exposure declines as the loan is repaid. The length of this phase and the
rate at which exposure declines depends on the repayment terms of the loan agreement.
The average term of IFC loans to infrastructure projects has been just under eleven
years, made up of an average grace period of three years and a repayment term of eight
years.
8
Figure 2-3: Project risk phases
(Source: IFC, 1996)
2.5 Managing Project Risks
IFC is an expert in project financing. This part is summarized from the experience of IFC
(1996).
Efficient risk allocation and mitigation are central to bringing projects to financial closure and

to providing appropriate incentives during construction and operation. Efficient risk allocation
occurs where risks are assumed by the party best able to manage them. Projects may still be
financeable if some risks are not allocated according to this principle, but costs-and ultimately
tariffs-will be higher. Sponsors and lenders expect higher rewards for assuming higher risks.
Mobilizing debt is particularly sensitive to having adequate risk management mechanisms in
place. With at-risk debt supplying over half of project costs, achieving financial closure can
be stalled if the risk management needs of lenders are not met.
According to IFC (1996), critical areas for lenders include market risk, non-commercial risks,
insurance arrangements, force majeure provisions, and sponsor and government support
arrangements.
2.5.1 Construction and Completion Risk
Private lenders will not generally accept construction or completion risk. Instead they look to
strong, experienced sponsors for support arrangements and contractors to whom the risks
can be laid off. In addition, the Project Company is providing completion support.
Sponsors deal with completion risk by:
• Using fixed-price, date-certain turnkey construction contracts containing provisions tot-
liquidated damages if the contractor fails to perform (and bonuses for better than
expected performance).
• Taking out business start up and other commercial insurance.
• Building contingency amount into the financing plan.
• Building excess capacity to create headroom to meet contracted output levels in the event
of technical difficulties.
9
Engineering
&
constructio
n
Mature
operation
Early

operation
L oa n e x p osu r e $
Time
• Maintaining standby credit facilities.
If a member of the sponsor group is also a supplier to the project there may be a potential
conflict of interest. This will be reduced if the project’s regulatory framework defines tariffs
directly, rather than in relation to a rate of return on investment (in which case there might be
an incentive to increase investment costs). Lenders can also mitigate the risk by:
• Undertaking independent reviews of contracts between the project company and the
supplier to ensure that they are "arms-length" and broadly competitive.
• Requiring the Project Company to sign fixed-price, date-certain construction contracts,
with penalties for non-performance.
• Requiring sponsors to retain their ownership of the Project Company through the
operational stage.
2.5.2 Operational Risk
Concession agreements often link payments to required performance levels, such as
minimum power plant availability, new telephone or water connections, toll road/bridge
capacity or fault repair times. Lenders generally require project companies to cover
operational risk through agreements with equipment and input suppliers, maintenance
agreements, and business interruption insurance (such as for fuel supply agreements to a
power generator). Where the technical skills needed to ensure efficient operation reside with
the lead sponsor, lenders may require a minimum ownership agreement.
Operational risk may arise through delays or failure caused by other parties. Where the party
responsible for the connection is a government agency, the obligations of that agency and
remedial actions in the event of failure to perform may be set out in the concession
agreement.
Because some operational risk is unavoidable, lenders seek to protect their position through
loan covenants designed to ensure that the borrower manages the project in a financially
responsible manner.
2.5.3 Market Risk

Market risk is affected by market structure and buyer creditworthiness. Lenders use several
strategies to reduce their exposure to market risk:
• Independent appraisals.
• Limiting debt exposure by controlling the maximum debt-equity ratios
• Sponsor guarantees. Lenders may request partial sponsor support to service the debt
until the project is certified as physically and financially complete (limited recourse
financing) or full sponsor guarantees (corporate financing).
• Escrow accounts. These enable debt servicing to continue in the face of a temporary fall
in revenues. A nine-month debt reserve account was established for the CSM; this
proved useful after the Dong devaluation reduced the foreign exchange equivalent of the
plant's revenues. A debt reserve accounts are usually offshore and denominated in
foreign exchange.
10
• Standby letters of credit. Issued by the purchaser in favor of the project, these serve the
same purpose as a debt reserve account.
• Government guarantees of contractual performance. Where payment risks is due to a
non-creditworthy state-owned entity, sponsors and lenders may request (Government
guarantee of the entity's payment obligations under contracts sinned with the project.
• Government sometimes bundle an existing asset into concession to give lenders more
confidence.
2.5.4 Non-commercial risks
Many projects are heavily exposed to non-commercial and political risk at both the country
and project level. While some risks such as expropriation or convertibility risk apply to many
projects financed by foreign investors others such as payment risk or regulatory risk, are
more infrastructure-specific.
Project sponsors or lenders cannot remove these risks entirely. But several mechanisms
have been used to mitigate them:
• Contractual provision. Specifying "automatic" formulas in contracts or regulatory regimes
for adjusting tariffs in the face of inflation or devaluation (or defining tariffs in foreign
exchange terms) may help to depoliticize tariff adjustments.

• Focusing on lower risk projects. Projects that generate foreign exchange revenues (for
instance, ports, airports, and international telecom) mitigate convertibility risk. Projects
that supply services for which there are demonstrable excess demand (for example,
power plants where there are blackouts, early cellular projects) are likely to be lower risk.
Projects that sell their services into "wholesale" markets (for example, power plants sell to
distributors, ports to shippers) are less likely to be subject to political interference than
those which supply retail customers.
• Innovative structuring. Several power projects are located on barges that can be towed
away if necessary.
• Partnering with local investors (or the government). Developing a project in partnership
with a local investor may reduce political risks for a foreign investor. Some project
sponsors have taken this further, and deliberately sought to spread local ownership more
widely through partial public offerings.
• Involving official financing institutions. Different types of official financing. Institutions offer
various types of security to project sponsors, as well as some costs, such as bureaucratic
processing procedures. Some institutions (including IFC) offer assurance by their
presence as investors and lenders, their track record of good project performance, and
not having been included by host governments in debt rescheduling. Agencies such as
the Overseas Private Investment Corporation (OPIC) or the Multilateral Investment
Guarantee Agency (MIGA) provide political risk insurance for financiers. The World
Bank's guarantee scheme, which involves a counter-guarantee from the host government,
provides assurance to lenders on specific risks such as the contractual performance of
state-owned enterprises.
• Careful identification of majeure events (and procedures to be followed in their event) and
comprehensive insurance arrangements.
11
2.5.5 Force Majeure
Force majeure provisions define the events that are beyond the control of either party, or their
occurrence gives either party the right to suspend obligations under the contract. Force
majeure events usually fall under two groups:

• Domestic political events, such as war, riot, sabotage, radioactive contamination, general
strikes, lapses of consent, and changes in laws that affect the project.
• Non-political events or "acts of God," such as natural disasters, fire epidemics, or strikes.
Sometimes a third category of political events occurring outside the country is also
considered (for instance, strikes in a supplier country preventing delivery of equipment on
time).
2.5.6 Insurance Arrangements
Lenders have a well-defined set of requirements for insurance arrangements, but some
difficulties have arisen:
• Contractor controlled insurance. Where the contractor arranged the construction
insurance, ensuring that lenders' requirements were met involved lengthy negotiations
with contractors whose primary concern was additional costs.
• Market capacity constraints. For some risks the cost of available capacity is escalating as
the size of projects increases. Insurance capacity for risks such as earthquake, volcanic
eruption, and typhoon depend on project location, it’s existing risk profile, and
underwriters' exposure in the country or region.
• Change in insurance market. For example, take-or-pay obligations are not being insured,
and insurers have argued that principal repayments should be excluded from debt service
cover because they can be rescheduled.
• Technology risks. Where underwriters consider technology to be untested, no insurance
is provided during the crucial testing period. The solution is for the manufacturer to be
contractually bound to cover what would otherwise be uninsurable.
• Local legal requirements. Although most countries expressly prohibit the placing of
insurance directly outside the country, arrangements whereby local insurers effectively
"front" internationally reinsured pro-rams are usually permitted, with the local insurer
retaining a small percentage.
• Costs. Weighting lenders' requirements against sponsors' desire to contain costs is an
ongoing issue. Delay in start-up insurance in particular attracts high premiums, and
sponsors try to contain costs by keeping indemnity periods low and deductibles high.
• Experience has shown that if insurance issues are discussed early with sponsors,

coverage is usually more comprehensive. Sponsors are encouraged to retain the
services of professional brokers or consultants, and lenders usually require certification of
the adequacy of insurance arrangements by an independent insurance adviser.
12
Chapter 3
3. Methodology
3.1 Analytical Model
Based on the literature reviews, the concept of SWOT (Strength, Weakness, Opportunity, and
Threat) and the pilot interviews, we create an analytical model for our research (figure 3-1)
Figure 3-3: Model for Analyzing Project Financing
The Analytical Model is based on the following assumptions:
13
Country Level
Country Environment
Analysis
Opportunity/ threat
Economic/ market
Indications
Qualitative evaluations
(event analysis)
Gov. policy analysis
Forecasting
Institution Level
Key Partners
Analysis
Strength/ Weakness
Financial capacity
Experience
Motivation
Special advantage

Project Level
Project Analysis
Risk Analysis
Cash flow protection
Loan security package
Extent Analysis
Sensitivity Analysis
Effectiveness &
Limitation Analysis
1 2
3
HOW TO MITIGATE RISK
IN PROJECT FINANCING?
• Country (or industry) opportunities and threats can affect the project directly (arrow
3) or indirectly through the key partners (arrow 1- 2)
• The strength and weakness of the key partners can directly affect the project
(arrow2).
• Lenders follow the theory described in literature reviews. They would primarily
focus on the project risk analysis, cash flow protection, and loan security package.
Based on the above assumptions, the lenders should focus on analyzing (i) the opportunities
and threats of the country (or industry) (ii) the strength and weakness of the key partners, and
(iii) the risk analysis, cash flow protection and loan security package of the project.
In this research, we will stand in the position of foreign lenders who are considering lending to
private sector in Vietnam. The key partners include:
• Government, State owned enterprises (SOEs), the private companies and the Foreign
Direct Invested (FDI) companies, because they can be the borrowers of the loan (the
sponsor of the project)
• Domestic banks (include foreign banks’ branches), because they can play important role
in supporting local sponsors.
• International Finance Corporation (IFC), if the lenders consider lending to non-state sector

because IFC is a major lender in project financing in non-state sector in Vietnam.
In order to make consistent analysis, we need the measures for evaluating country, key
partners and project. According to the pilot interviews, we create three groups of measures.
1. Measures for country environment opportunities and threats include:
• some economic indicators such as GDP, foreign exchange rate, debt status of the
country etc.
• qualitative evaluations. For instance, the event that the country has jointed an
international organization can improves the outlook about the country.
• analysis of government policy, and
• Country forecasts, because the lenders would be more concerned with the future
rather than with the past.
2. Measures for the strength and the weakness of the partners include
• financial capacity. For instance, how strong and credit worthy are the sponsors?
• Experience. For instance, how experienced are the sponsors?
• motivation for the investment. For instance, Is the sponsors profit-motivated, or
government target motivated?
• special advantages. For instance, Do the sponsors receive favored treatment from
the government such as concessional land-use right?
3. Measures for evaluating project include
14
• the extent analysis. For instance, How large is the commercial risk? etc.
• the sensitivity analysis. For instance, How does the commercial risk affect the
cash flow?
• the effectiveness and the limitations analysis. For instance, how effective is the
off-take agreement in hedging against the market risk?
We can increase the measures in each group to make the analysis more accurate, but it
would also complicate the model. We have to make the tradeoff between the accuracy and
the complication.
We also have to analyze the linkage between the three levels. For instance, how country
opportunities and threats affect the strength and weakness of the sponsors, and therefore

indirectly affect the project? How do country opportunities and threats directly affect project?
How do the strength and weakness of the sponsors affect the project?
Since it is difficult to conduct a large-scale survey to collect detailed financial data of
companies, we will analyze only a typical case to understand the financing structures and risk
mitigating techniques. Therefore, the financing structure and risk mitigation of the chosen
case must cover as much as possible the common features of project financing. After
scanning some large projects in Vietnam, we chose the CSM as the typical case for our
analysis.
3.2 Data
Data was obtained through the in-depth interviews with selected people such as investment
officers of banks, Government authorities such as Ministry of Planning and Investment (MPI),
experts in economics research Institute (ERI) and managers at some large projects,
particularly the CSM project. Data was also collected from the secondary sources:
Government annual reports, Journal, book, and Internet.
15
Chapter 4
4. Country Environment
4.1 Political Environment
Politically Vietnam is a communist country. The Communist Party has involved extensively at
all level of Government. Vietnam has relative stable political system. There are no politically
motivated attacks against government or business. Violent crime is rare, although in a more
difficult economic circumstance theft of property is increasing.
Both the Party and Government commit to continue the reform, especially in the field of
privatization, improving data transparency and government administration. However, the
implementation of reforms faced several problems. First, it is the weakness of the
bureaucracy. The bureaucracy lacks a public service ethic, and is hampered by vested
interests, which result in a lack of consistency in policy implementation within and between
departments. There is also high level of corruption. The collective decision making process
often acts as constraint on the speed with which decisions are made. Taken together, such
problems make it difficult for the government to steer the country rapidly in any single

direction.
In relationship with foreign countries, Vietnam has improved substantially its position.
Vietnam’s relations with the US have gradually improved since the establishment of
diplomatic relations in 1995. Although full economic normalization – represented by the
signing of a bilateral trade accord and the award of normal trade relations (NTR-formerly
known as most favored nation trading status) has not established, the two US organizations,
the Overseas Private Investment Corporation (OPIC) and export-import Bank (EXIM) are
allowed to offer insurance and trade finance to US firms wishing to do business in Vietnam.
Vietnam also has become a member of ASIAN, which strengthens its political position in the
region.
16
Table 4-1: Important Economic indicators of Vietnam
1993 1994 1995 1996 1997 1998* 1999* 2000* 2001* 2002*
GDP US Bn 12.8 15.5 20.3 23.3 24.7 24.6 25.7 28.5 30.5 32.1
GDP growth % GDP 8.1 8.8 9.5 9.3 8.8 5.2 5 6.1 7.1 6.9
Gross fix investment
%GDP
52.6 11.3 16.7 12.3 16.5 6.5 8.6 10.5 12 10
Inflation 8.4 9.3 16.8 5.6 3.1 7.4 10 8 7 6
Gov. revenue %GDP 22.3 24.7 23.9 23.6 21.8 19.8 18.8 18.9 19 19.1
Gov. expenditure
%GDP
27.1 26.5 25.2 24.2 23.6 22 21.3 21.4 21.8 22
Budget balance %GDP -4.8 -1.8 -1.3 -0.6 -1.8 -2.2 -2.5 -2.5 -2.8 -2.9
Current account %GDP -10.9 -7.7 -9.2 -10.4 -6.8 -7.5 -7.3 -7.6 -8.4 -8.9
Foreign debt %GDP 42.8 39.7 37.4 42.2 40.1 42.4 43.2 44.6 48.2 51.7
Exchange rate 10,64
0
10,95
5

10,97
0
11,10
0
11,74
5
13,30
0
14,70
0
15,19
0
16,30
0
17,64
0
Prime rate %/year 28.3 28.3 28.3 16.8 19 23 20 18 16 15
Population Mn 71 72.5 74 75.4 76.7 78.1 79.5 80.9 82.3 83.7
Labor force Mn 32.7 33.7 34.6 35.8 36.8 37.9 39.1 40.3 41.5 42.8
(Source: EIU, 1998. 1998-2002*: Forecasted by EIU)
4.2 Macroeconomic Environment
The following analysis is based on data in table 4-1.
4.2.1 Economic growth
GDP grew strongly at 8-9 percents annually during the period between 1993-97. The growth
slowed down in 1998-99 because of the affects of the regional crisis. However, the GDP is
expected to increase in the year 2000 when the regional economy is recovered.
The gross fix investment, which come from government budget, state owned companies,
private sector and foreign direct investment, was above 10 percent of GDP during the
economic boom 1993-97. The gross fix investment fall sharply in 1998 but is expected to
increase again when the foreign investors return to the region.

The inflation rate was high during the economic boom but it decreased in 1997. The inflation
increases a little in 1998 again because the Government devaluates DONG. In the next few
years, inflation is expected to be under ten percent.
4.2.2 Government Budget
Although the government revenue has increased in absolute term but it has decreased as the
percentage of GDP because tax receipt, which account for 80 percents of government
revenue has increased slowly. Historically, tax collection has been heavily based on revenue
from SOEs. But as their growth slows, eroding profits, SOEs will contribute a shrinking share
to government revenue. On the other hand, tax on trade will grow more slowly in next few
years as Vietnam lowers its import tariffs to meet the requirement under the ASEAN Free
Trade Area (AFTA) Common Effective Preferential Tariff (CEPT) program.
17