The Taiwan Banker

New offshore wind power opportunities are attracting attention from all corners, but the industry requires support from finance. Effectively estimating and apportioning risks, taking into account profits and risk management, however, is no small challenge. The Financial Supervisory Commission (FSC) has also gradually formulated various supporting measures to promote stable wind energy development.Taiwan is a densely populated island nation, highly dependent on energy imports. In light of this fact, the government has been vigorously promoting green power, particularly offshore wind. According to estimates from the Bureau of Energy, 5.5GW will be set up by 2025, creating an output value of nearly NT$ 1 trillion, making it the next industry poised for explosive growth. Moreover, offshore wind field projects require at least hundreds of billions of Taiwan dollars in financing. For domestic banks, it’s a shining new business opportunity.Selection results have been announced: seven major development teams and ten wind fields. As long as financing comes into place, the offshore industry can enter the formal development stage. It is a capital-intensive industry, though, and domestic banks are inexperienced in financing it. As far as banks are concerned, internal risk management remains the most important issue in the rush to grab new business opportunities. Offshore wind is complex, but careful project evaluation can reduce risksIn general, offshore wind power is funded by public and private power companies, and independent developers. Most of the latter adopt project financing, and Taiwan mostly uses it too.The cost of offshore wind power is higher than that of onshore, because foundation construction, ships used, and turbine installation are inherently costly. Complex factors like climate, wave height, seabed depth, and distance to shore must be considered in installation.Thus, to maintain overall independence between finance and project management, developers set up Special Purpose Companies (SPC) before applying for bank loans, so that failure of the project does not drag down the whole parent company.We can foresee that offshore wind power stakeholders will include not only SPCs and their parent companies, but also power companies and equipment suppliers, maintenance companies, and operators, etc., and insurers and third parties to professionally verify the project must be found separately to reduce risks. Domestic property insurance companies are still learning how to underwrite offshore power, and require considerable foreign reinsurance planning. On the whole, the difficulty for financial players in identifying and managing their risks is clearly much higher than for other types of projects.In the current market, most offshore financing expertise is drawn from abroad, including planning based on key assessment projects in the preparation, construction, and commercial transfer stages, in the hopes that the training can resolve problems in financing. These issues have existed in overseas markets for decades, and the risks of offshore wind project financing can only be reduced through careful assessment.The problem is that domestic banks have insufficient experience in financing large-scale projects. This non-recourse project finance business model is unusual, but many Taiwanese banks seek to undertake related projects, and are now in the exploration stage.In an exclusive interview with this magazine, FSC Chair Wellington Koo (顧立雄) said that in order to smoothen the whole offshore wind project financing process, all parties, from the FSC to banking associations, are committed to loosening improving wind power regulations and improving their effectiveness. In addition to making good use of the proper policy tools, other continuing supporting measures are also necessary.Referring to past successes, and cooperating with foreign banksKoo stressed that “Taiwan’s financial industry is not incapable of understanding project finance, as some outsiders say.” For offshore wind project financing by domestic banks, he emphasized that both production and government should follow the principles of “borrowing from abroad, private companies first, and public corporations later.”Taiwanese banks have a great deal of practical project financing experience. The government has implemented many large-scale BOT projects (transferred to the government after private-sector construction and operation), with prominent results. Koo points out that the most well-known project is the Taipei International Financial Center: Taiwan’s most famous landmark, Taipei 101.Taipei 101 was the Taipei government’s first large-scale project developed in cooperation with the private sector. In July 1997, the Taipei Financial Center Corporation was jointly formed by 14 domestic companies. It acquired air development rights, and started operations after planning and construction. With the cooperation of public and private sectors, not only was the 101 completed on time, to quality standards, but its operations so far have received good marks. Many successful examples of BOT projects exist across Taipei, such as the National Museum of Marine Biology & Aquarium, highly popular with children and adults.Koo however does not deny that the technical problems involved in offshore wind are more complex, and the initial investment in a single field is huge, and the recovery period long. Taiwan’s offshore wind power is still at an early stage. Its challenging environment includes frequent earthquakes and typhoons.Taiwan needs to learn from foreign experience in terms of both financing and technology, which is why Koo repeatedly stressed “borrowing from foreign banks.”Ever since Taiwan decided to promote its offshore wind industry, various foreign banks (especially European ones with relatively rich experience in relevant projects) have expressed their willingness to participate. In order to enhance their credit power, and encourage foreign banks to cooperate with state banks to finance green energy, the FSC has promulgated a number of loosening measures this year.In March, it formally relaxed their credit limits for single clients from NT$ 7 billion to “NT$ 7 billion, or twice its branch net value, whichever is higher.” In mid-April, it further relaxed their ability to issue bonds denominated in Taiwan dollars at Taiwanese branches - all in order to help the green energy industry find more abundant funding sources.Furthermore, according to previous regulations, if any of the five largest foreign banks in Taiwan loan money to clients, that client’s turnover over the last year must be at least NT$ 35 billion, but foreign banks coming to Taiwan to develop offshore power currently mostly use the SPC model. These SPCs are mostly not large, so the banks are mostly unable to reach the NT$ 35 billion threshold. A few days ago, the FSC relaxed the rule. If the foreign branch finances a green energy project approved by the Renewable Energy Development Regulation, it is not subject to NT$ 35 billion rule.Measures to reduce investment riskAlthough bank financing is opening up, according to current regulations, if a foreign developer is not listed on one of the 14 overseas stock exchanges approved by the FSC, it is not able to issue Taiwan dollar bonds. The FSC has also begun to review and discuss whether to relax relevant provisions.Outside doubts about the non-recourse financing model may come from insufficient familiarity with operational details. In fact, the specific recourse model is only one of many links. Other measures, like guarantees from the developer’s parent company, or use of a third-party appraiser, are also effective in reducing risk.Because the scale of financing required for offshore wind projects is huge, bankers must typically jointly fund syndicated loans. Currently, foreign banks have major advantages in experience, manpower, and financial innovation, and can act as loan participants or even arrangers.Koo also mentioned though that based on past experience, when domestic banks have participated in syndicated loans, not acting as the arranger, some details are easy to miss; if any problems emerge with the arranger, the other banks have highly limited working room. Therefore, the FSC has invited banking associations to include within the scope of self-regulation agreements for division of responsibility between arrangers and participants, and information sharing, and independent audits by participants.“In the future, [participants] will not need to think of themselves only as giving face to the arrangers, just participating in the signing ceremony and waiting to receive dividends.” Koo pointed out that since offshore wind project financing, with its complexity, requires a higher degree of professionalism, future arrangers and participants must improve preparation and risk assessment.Fearlessly igniting Taiwan’s green energy industryFinally, Koo encouraged the Taiwanese people. He understands the concerns about not understanding offshore wind power and its financing, but everything has a first step. The initial stage is often the hardest, but Taiwan has launched numerous major projects so far, all of which have undergone great exploration and learning. The experience and competitiveness accumulated along the way will eventually create great results. He recalled a classic case from over 20 years ago of the Taipei Muzha MRT line (now called the Wenhu Line,) which originally cooperated with Matra.Originally, the Taipei Department of Rapid Transit Systems (DORTS) established a system to ensure construction of the Muzha line through the French manufacturer Matra. Later, Matra ended participation in the project and directly withdrew from Taiwan. Because it held the key technologies and components, the only way forward for the Taipei Metro Corporation was to go it alone.Taipei DORTS sought the assistance of the National Chung-Shan Institute of Science and Technology, the Industrial Technology Research Institute, and domestic tech firms to decipher the line’s computer program and control systems. Eventually, the entire system operated smoothly, they figured out how to maintain it, and some of the system’s key components were even jointly developed and successfully manufactured by local manufacturers. Patents were granted for these self-made parts, even shocking Matra. The Muzha MRT line has long been a part of life in Taipei. In the near future, green offshore wind power will also become an indispensable energy pipeline for Taiwan. Society processes one prudent investment at a time.