Power Project Finance

8/8/2019 Power Project Finance

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RMC Discussion Paper Series, Number 119

Power Project FinanceExperiencein DevelopingCountries

Suman BabbarJohn Schuster

Project Finance and Guarantees DepartmentResource Mobilization and Cofinancing Vice PresidencyJanuary 1998

1a31 The World Bank


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CFS/RMC DISCUSSION PAPERS101 - Privatization n Tunisia, amal Saghir, 1993.102 - Export Credits:Review and Prospects,Waman S. Tambe, Ning S. Zhu, 1993.103 - ArgentinasPrivatizationProgram,Myrna Alexander,Carlos Corti, 1993.104 - EasternEuropeanExperience ith Small-Scale rivatization: Collaborativetudy with the CentralEuropeanUniversityPrivatizationProject,1994.105 - Japan'sMain Bank Systemand the Roleof the Banking System n TSEs,Satoshi Sunumura, 1994.106 - Selling State Companies o Strategic nvestors: radeSale Privatizations n Poland, Hungary, he CzechRepublic,andthe Slovak Republic,Volumes and 2, Susan L. Rutledge, 1995.107 -JapaneseNational RailwaysPrivatizationStudy II: InstitutionalizingMajor PolicyChangeand ExaminingEconomicImplications,Koichiro Fukui, Kiyoshi Nakamura, Tsutomu Ozaki, Hiroshi Sakmaki, Fumitoshi Mizutani, 1994.108 - Management Contracts: Review of InternationalExperience,Hafeez Shaikh, Maziar Minovi, 1995.109 - CommercialReal EstateMarket Development n Russia,April L. Harding, 1995.110 - ExploitingNew Market Opportunities n Telecommunications:essonsor DevelopingCountries,Veronique Bishop,Ashoka Mody, Mark Schankerman, 1995.111 - Best Methodsof RailwayRestructuring nd Privatization,Ron Kopicki, Louis S. Thompson, 1995.112 - Employee tock OwnershipPlans (ESOPs),Objectives,DesignOptionsand InternationalExperience,effreyR. Gates,Jamal Saghir, 1995.113 - Advanced nfrastructurefor imeManagement, The CompetitiveEdge n EastAsia,Ashoka Mody, William Reinfeld,1995.114 - Small ScalePrivatization n Kazakhstan,Aldo Baietti, 1995.115 - Airport Infrastructure: heEmergingRole of the PrivateSector,RecentExperiences asedon TenCaseStudies,EllisJ.Juan, 1995.116 - Methods of Loan GuaranteeValuationandAccounting,Ashoka Mody, Dilip Patro, 1995.117 - PrivateFinancingof TollRoads,Gregory Fishbein, Suman Babbar, 1996.118 - FinancingPakistan'sHub PowerProject:A Review ofExperienceor Future Projects,Michael Gerrard, 1997.

JOINT DISCUSSION PAPERSPrivatization n the Republics f the FormerSoviet Union:Frameworkand Initial Results,SooJ. Im, Robert Jalali, JamalSaghir; PSD Group, Legal Department and PSD and Privatization Group, CFS - Joint Staff Discussion Paper, 1993.MobilizingPrivateCapitalfor hePowerSector: xperiencen Asia andLatin America,David Baughman, Matthew Buresch;Joint World Bank-USAID Discussion Paper, 1994.

OTHER CFS PUBLICATIONSJapaneseNational RailwaysPrivatizationStudy,World Bank Discussion Paper, Number 172, 1992.Nippon Telephone nd Telegraph rivatizationStudy,World Bank Discussion Paper, Number 179, 1993.BeyondSyndicatedLoans,World Bank Technical Paper,Number 163, 1992.CFS Link, Quarterly Newsletter.

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The findings,interpretations, nd conclusionsexpressed ereinare entirely thoseof the authors and shouldnot beattributed in any manner to CFS, the World Bank, or to members of the Board of ExecutiveDirectors or the countriesthey represent.The World Bank does not guarantee he accuracyof the data included in this publication, and accepts noresponsibilitywhatsoever or any consequence of their use. The paper and any part thereof may not be cited or quotedwithout the author's expressedwritten consent.


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RMCDISCUSSION APER 19

Power Project Finance:Experience inDeveloping CountriesSuman BabbarJohnSchuster


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Contents

Foreword viAbstract viiAcknowledgments viiiAbbreviations nd Acronyms ix1 Background 1

Focus 1PowerSectorNeeds 1Key ssues 2Notes 4

2 MarketTrends 239 Projects) 5Capital Contributions 5Market Participationand Competition 5ProjectFinance 7Fuel Choice 8RegionalTrends 8

3 IndependentPowerProjectFinance (72 Projects) 9PowerProjectFinance Characteristics 9Market and Project Structure 11FinanceTrends 12DevelopmentLead Times 14Notes 14

4 Case StudyProjectProfiles(10 Projects) 15ProjectCharacteristics 15ProjectDevelopmentTimes 15ProjectSponsors 16Projectand FinancialStructure 18Notes 19

5 Risk Allocation 10 Projects) 20ProjectRiskManagement 20Case StudyOverview 20PredominantRiskAssumption y Sponsors,Lenders,and Contractors 21SharedRisk:Fuel 23Host GovernmentRiskAssumption 25Relationship f ProjectRiskEnvironmentand GovernmentRiskAssumption 32Notes 33

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6 Conclusions 34Encouraging Factors 34Challenges Ahead 35Meeting Future Challenges 37Sumnmary 38Notes 38

AppendixesA Background Tables 39B Note on Source Material 42C Glossary of Terms Used in the Study 43

FiguresFigure 1 Study overview 3Figure 2 Project closures in developing countries, 1992-96 5Figure 3 Market equity participation, 1994-96 6Figure 4 Financial closures of competitivelybid projects as share of total private power dosures

in developing countries, by capacity 7Figure 5 Project finance 7Figure 6 Regional and fuel mix of the power project finance market, 1994-96 9Figure 7 Largest power project finance markets, 1994-96 10Figure 8 Effect of project and market structure on average power purchase agreement length 11Figure 9 Power project finance debt sources, 1994-96 12Figure 10 Uses of risk debt capital 13Figure 11 Case study project development time 17Figure 12 Equity participation in case study projects 17Figure 13 Sources of debt in case study projects 18Figure 14 Fuel supply alternatives 23Figure 15 Government risk assumption and utility performance 27Figure 16 Relationship between country risk environment and government risk assumption 33

TablesTable 1 Private power equity participants, selected years 5Table 2 Fuel type, 1994-96 8Table 3 Regional trends, 1994-96 8Table 4 Debt terms 14Table 5 Factors influencing time to financial closure 14Table 6 Project profiles 16Table 7 Project and financial structure 18Table 8 Risk management mechanisms used by sponsors and govemment entities 21Table 9 Equity interests by project participants 22Table 10 Government risk assumption case study projects 25Table 11 Govemment power purchase agreement termination guarantees 28Table 12 Comparison of Aguaytia and Ave Fenix power projects 30Table 13 Summary of govemment risk assumption for case study projects 32Table 14 Participant roles in promoting private power in developing countries 38Table A.1 Case study project sponsors 39

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TableA.2 Sourcesof debt for casestudy projects 40TableA.3 Governrnent oreignexchange iskassumptionn case studyprojects 40TableA.4 Economic nd political iskenvironmentn casestudycountries 41TableA.5 Independedntpowerproducerregulatoryrameworkn casestudycountries 41TableA.6 Overallriskenvironmentncasestudy countries 41TableA.7 Largestpowerprojectfinancemarkets,1994-96 41

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Foreword

T his study examines he experienceof privategreenfieldpowerproject inance n developing ountries n1994-96.During this period, private power made a significant contribution toward meeting the power needs of develop-ing nations. Private power projects financed during this period will provide an increasing proportion of the gen-

erating capacity that developing countries will need for the rest of the decade. The recent involvement of the privatesector represents a significant departure from years of public sector dominance in the finance, ownership, and operationof generating capacity in developing countries.

This study was motivated by the need to reevaluate power project finance trends and issues discussed in the 1994 study"Mobilizing Capital for the Power Sector" (sponsored jointly by the World Bank and the U.S. Agency for InternationalDevelopment). That study evaluated project structure, risk allocation, and other issues based on information available in1994 for eight projects in Asia and Latin America. The 1994 study was somewhat constrained by the limited amount ofprivate power experience prior to 1994. This study benefits from a substantially greater base of activity to systematicallyevaluate power project finance sources, project and financial structures, and other factors for the entire market.

The objectives of this study were to evaluate trends in private greenfield pcwer project finance and to examine therisk-sharing arrangements between private investors and host governments that enable private power projects to obtainlimited recourse finance. This study willhelp policymakers n developing countries structure and finance new private powerprojects. This study focuses on Asia, Latin America, and the Middle East, where most private power finance has occurred.Because the basic issues faced by the private sector and governments are common, the insights provided by this studywill be of help to most of the countries in the developing world in enhancing the role of private power.

This study evaluates the private power market in developing countries, exaniining trends in power projects financedand the number and types of market participants. A key objective was to assess financing structures, sources of funds,and regulatory trends for a subset of the private power market involving limited. recourse finance of power projects thatsell power to utility off-takers but that are not majority-owned by the off-takers. For this subset of the market, referredto as "power project finance (PPF)," this study analyzes trends in private power regulation, project structure, debt sourcesand terms, and development times.

The study reviews risk management trends by analyzing private power projects in 10 countries: China, Colombia,Honduras, India, Indonesia, Mexico, Pakistan, Peru, Philippines, and Turkey The projects examined reflect the trend inthe power project finance market in terms of fuel type, size, and other characteristics. The risk allocation among partici-pants in these case study projects reflects many important trends in risk managerment n the market as a whole.

Hiroo Fukui Nina ShapiroVice President DirectorResourceMobilization and Cofinancing Project Financeand GuaranteesDepartmentThe WorldBank The WorldBank

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Abstract

P ivate power is beginning o makelargecontributions o powersectors in developing ountries.The nearly50gigawatts GW)of privategreenfieldgenerating apacity inancedbetween 1994and 1996 s three times greaterthan all the privatepowercapacity inancedbefore 1994. The annualrate of private powerprojectinvestment

during he 1994-96period s approximately0 percent of the total projectedannualinvestmentneedsfor newgenera-tion in developing ountries.Privatepower is introducingnew sourcesoffinancingo developing ountrypowersectors,providingnew services,andcreatingcompetitive owermarkets.This study analyzes he 1994-96 privatepowermarketto assess rends in market competition, inancingstructuresandsources,and riskallocation.This analysiswillprovide nsights o helpgovernments ndinvestorsmaintainorexpandthe roleof privatepower n developing ountries.Nearly wo-thirdsof all he capital aised ornew privatepowerprojectsbetween1994and 1996was providedunderprojectfinancestructures, n which projectcash flowsand assets, ather than sponsors'balancesheets, providesecurityto lenders.Thisstudy focuseson one part of the project-financemarket-power project inance PPF)-where privatelycontrolledprojectssellpower o off-takers or distributionn public grids.Thisstudyexaminesrends n regulation, roject tructure,debtsources, nd developmentimes.Froma regulatoryer-spective, strongcommitment o privatepower s a key determinantof PPF activityn a country. tructurally,owerpro-ject finance as nvolvedargely uild-own-operateBOO)projectstructures nd ong-term ontracts.Merchant owerplantsare rare.The vastmajority f debt has involved irectfinanceor creditenhancementromexportcreditagencies ndmul-tilateraldevelopmentanks.Developmentimes averagewoto three years,and is less n countrieswith PPF experience.

Amajoremphasis f this study s to evaluate rends n risk managementy examining 0case studies,PPF deals n Asia,LatinAmerica, nd the MiddleEast. Theprojects argelyeflecta rational llocation f risksamongpublic and privatepar-ticipantsbasedon the parties'relative isk management bilities.Privatesponsorsandlenders generally ssume isks forcompletion nd performance hat are within heir control. Governmentsassumesubstantial isks n nearly all projects,mostly n areas n which hey havecontrol, uchasutility erformance, urrency onvertibility,uelcosts, nflation,uninsur-able orcemajeure,and political vents.The levelof riskgovernmentsssumes largely ommensurate ith theprojectenvi-ronment.Theyassumegreater esponsibilitiesn high-risk nvironmentsndless isk in more secureenvironments.The private ectorusesa variety f mechanismsor managingisks. n halfof the projects xamined,t reliedon central ov-ernmentguarantees.n the rest, t reliedon alternativemechanismsuch asgovernmentoans,public nsurance,ocalgovern-mentsupport,andstrong ommitments yutilityoff-takers. s marketsopen and becomecommercial,entralgovernmentsare likelyo assumeewer isks. nstead, he private ectorwill elymoreheavily n alternativeourcesof projectsecurity.Privatepower finance or greenfieldgenerating apacity hould continue o make substantial apitalcontributions opowersectors n developingountries.The 1994-96marketexperiencehowshat governments nd investors avemutualinterests n a strongprivatepower ndustry.A competitivemarket,fair project isk allocation, nd reasonabledebttermswillhelp provideprivatepower at low prices.The substantialamountof capitalprovided o developing ountrypowersectors s evidenceof growing nvestorconfidence.Privatepowercontinues o facemanychallengesn developing ountries.Protractedcontract enegotiations nd a lackof adequategovemmentrisk assumptionmay erode investorconfidenceand restrain private investments.Continuedgrowthmay requiregreaterprivatedebt capital isk taking.Governments,developers,nstitutional anks,private enders,andfinanciersallhave a role in helping o meet future challenges.

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Acknowledgments

T his studywascommissioned y the WorldBank's ProjectFinanceand GuaranteesDepartment.The analysis ndwriting was performed by John Schuster of Hagler BaillyConsulting,Inc. under the direction and advice ofSuman Babbar of the Project Finance and GuaranteesDepartment of the WorldBank and the analytical nd

technical assistanceof SonaliShah of HaglerBaillyConsulting, nc. John Sachs and SusanFinch Moore of Latham &Watkinsprovided egaladvice nd commentary.DavidBaughmanof the Project]Finance nd GuaranteesDepartmentofthe WorldBank initiated he study.Severalothers made contributions o the study, ncludingScott Sinclair,AlejandroMirkow, nd FaridaMazharof the WorldBank;AndrewBartleyand SuryaSethiof the InternationalFinanceCorporation;Maria Elena G. Barrientosof the Inter-AmericanDevelopmentBank; Diane M. Rudo, an independent project financespecialist nd formnerice presidentof project inance at the U.S. Export-ImportBank; and AlainStreicher,AmitDalai,SteveWlliaams, eather Vierbicher, arahMilius,and Mark Symonds f Hagler BaillyConsulting, nc. This study reliedheavilyon Hagler BaillyConsulting, nc.'s International ndependentPowerKnowledgeBase and the informationpro-vided by developers, enders, and others associatedwith case study projects.

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Abbreviations nd Acronyms

ABB Asea Brown Boveri Ltd.ADB Asian Development BankAIF Asian Infrastructure FundAPSEB Andhra Pradesh State Electricity BoardBLT Build, lease, transferBOO Build, own, operateBOT Build, own, transferBPCL Bharat Petroleum Corporation, Ltd.CDC Commonwealth Development Corporation (U.K. development agency)CEPA Consolidated Electric Power AsiaCFE Comision Federal de Electricidad (Mexico)ClTlC China International Trust and Investment CorporationCONITE National Committee on Foreign Investment and TechnologyECA Export Credit AgencyELCOSA Electricidad de Cortes S.R.L. de C.VENEE Empresa Nacional de Energia ElectricaEPC Engineering, Procurement, and ConstructionEPSA Empresa de Energia del Pacifico, S.A. (Colombia)FEN Financiera Energetica Nacional (Colombia)GAIL Gas Authority of India, LimitedGW GigawattsHECO Honduras Electric CorporationIDB Inter-American Development BankIFC International Finance CorporationIIP International Independent PowerIP Independent PowerIPP Independent Power ProducerJEXIM Japan Export-Import BankLIBOR London interbank offered rateLOI Letter of IntentLOS Letter of SupportMDB Multilateral Development BankMIGA Multilateral Investment and Guarantee AgencyMOU Memorandum of UnderstandingMW MegawattsNCPG North China Power GroupNPC National Power Corporation (Philippines)O&M Operation and maintenance

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OECD Organisation for Economic Co-operation and DevelopmentOGDC Oil and Gas Development Corporation (Pakistan)OPIC Overseas Private Investment Corporation (U.S.)PEC Pangasinan Electric Corporation (Philippines)PICC Peoples' Insurance Company of ChinaPLN Perusahann Listrik NegaraPPA Power Purchase AgreementPPF Power Project FinanceTCW Trust Company of the West (U.S.)TEAS Turkiye Electrik Uretim EletimUSEXIM U.S. Export-Import BankWAPDA Water and Power Development Authority (Pakistan)

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SECTIONBackground

T he finance fprivate ower rojectsn developing Focuscountries as emergeds a large,dynamicndus-try.A totalof 47 gigawattsGW)of newprivate An mportant ocusof thisstudy sproject inance ealspower apacitywasinancedndevelopingountriesetween (private owerprojects hat are financedon a limited1994 nd1996, namount earlyhree imesgreaterhan recourse asis),n which enders'primary r evenexclu-thecumulativeapacityfprivate rojectsinancedndevel- sive ources fsecurityre he cash lows ndassets f heoping ountries efore1994.Thisnewly stablished ar- project.Creditors onotreceive dditionalecurityn theket ishelping ountriesn Asia,LatinAmerica, nd the formofunlimited ccesso the assets f theproject pon-MiddleEast o meet heirgrowinglectricityeeds. t is sors. n contrast,underbalancesheet finance, endersalso ntroducingewcompanieso developingountries, have ecourseo boththe borrower's ssets ndthe pro-whichs creating moredynamicndcompetitivearket. ject'scash lows. nbothproject ndbalanceheet inanceAs private poweractivity n developing ountrieshas deals,enders anbenefit rommany ifferentources fincreased,nvestors nd host countries ave established security rovided yhostcountry overnments, ultilat-practicesorallocatingrojectisks mong rivate ndpub- eralandbilateralnstitutions,ndcommercialroviders.licsector articipantsn theseprojects.This studyanalyzeshenewly stablishedmarket or PowerSector Needsgreenfield rivate ower rojectsn developingountries.It describesrends nmarketcompetition,iskallocation, This tudy ssesseshecontributionsf he private owerand financingtructuresnd sources,roviding detailed industryo meetinghenewgeneratingapacity eedsofpicture f today'smarketand the market hat is likelyo developingountries.emergen thenear future. Capital nvestmentornewgenerationapacitys oneThis tudy lso onsidershe relationshipetweenmar- of the fundamentaleedsof developingountries' owerket, finance, nd riskmanagementrendsand thediffer- sectors.AccordingtothentemationalnergyAgency,evel-entprojectisk nvironmentsoundn hedevelopingorld. oping ountries reprojectedo invest early 60billionEachregion nd countrys realizinghepotential f pri- year n newgenerationapacity:40billionn Asiaalone,vatepowerat its ownpace,and each sfinding ts own $7 billion n LatinAmerica,nd more han$5 billion napproachesorattractingnvestment ndcompletingri- Africa nd the MiddleEast.With he exception f a fewvatepowerransactions.or xample, hilemost ountries countriesn EastAsia, evelopingountriesack ufficienthave encouragedhe developmentf build-own-operate domesticapitalosupport his evel f nvestmentn heir(BOO)structures, omehave eliedon build-own-trans- own.fer (BOT) tructures.Mostprojects ave ong-termon- Not addressedn thisstudyareotherenergy eedsoftracts.However, few LatinAmerican ountrieshave developingountrieshatcannotbemetbyprivate reen-merchantower lants,hatforgoong-termontractsnd fieldgeneratingrojects.Nuclear nd many ydroelectriccompeteormarketsnstead.Whilemost ountrieselyon power rojectswill ikelyemainhe domain f hepublicfinancingndcredit nhancementrom xport redit gen- sectorecausehey ffectmportantublicnterestsnsafetycies ECAs)ndmultilateralevelopmentanks MDBs), and irrigation.Nuclear rojects,n particular,re usuallya fewprojectsnAsiahavebeenable o obtain rivate isk consideredoo riskyorprivate evelopment. evelopingcapitalwithout hem, elyingnsteadon ocal inance. countries lsoneedcapital or transmissionnd distribu-

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tion systems.Finally,hey requirecapital or privatization throughout hisstudyas powerproject finance.These areto improvehe efficiency f existingpower sectorassets. private owerprojects hatare inanced n a limnitedecoursebasis, hat will ell at leasta portion oftheir powerto pub-Key Issues licutilitycompanies nd power grids,and that are not con-trolledby utilityoff-takers.This segmenthas three majorThis study evaluates he issues for three segments of the elementswhichrequirefurther definition.privatepowermarket in developing ountries: First, his study ocusesonlyon project inance.Balance* Overallrendsfor the privatepowermarket n devel- sheet deals are excludedbecause their sourcesof debt,

opingcountries,withan emphasis n project inanced terms,and projectstructuresdo not reflect he countryanddeals (section2). project risk environment s accuratelyas projectfinance* Financeand projectstructure trendsfor a subsetof deals. n making oans to balancesheet projects, endersproject-financed eals(section3). maybe less concernedabout countryand project risks* Projectrisk allocation or 10 project-financed ase because they have access to the sponsors' assets if thestudy projects(sections and 5). project defaults. In a balance sheet project, discerning

Section6 laysout someprojections asedon analysis f whether he sourceof finance, he lengthof finance erms,these issues.Figure 1 providesan overviewof the analysis the levelofdebt, the interestrate, or the allocation f pro-performedfor each portionof the market. ject risk resultedfrom the individualproject'scharacter-

istics or from the creditworthiness f the projectsponsorPrivateowermarket rends is virtually mpossible.Under projectfinance,where theonlysourceof recourse o lenders s the project tself, hereThe startingpoint for his study s an evaluationof market is no such ambiguity.Excludingbalance sheet projectstrends with respect o allprivate powerprojects n devel- leaves a projectfinancemarket of 87 projects witha gen-opingcountriesbetween 994and 1996.Duringthisperiod erating capacityof 27 GW during the 1994-96 period239 projectswere inanced, otaling47 GWof capacity see (see figure 1).figure1). Section2 of this studyevaluateshe following ri- Second, he study examines inancing rends for pro-vatepowermarketissues o assess he aggregate ontribu- jectswith sales or distributionwithinanelectricutility ys-tions of privatepowerto developing ountries. tem,and screens utwithin-the-fenceealsn order o focus

* Totalprojectolume.Howmuchprivatepower apac- upon developingcountries' commercialpower sectors.ityhas been financed n developing ountries?What Within-the-fenceealsunderwhichpower s generated ndportion of developing ountries'generation apacity usedon-sitedo not necessarilyeflectprevailing owersec-needs did privatepower capacitymeet? tor conditionswithin country.Excludingwithin-the-fence

* Participantsnd ompetition.owmanyandwhat ypes projectsfurther limits he private power finance ocus ofof private ompaniesre participatingn privatepower this study o 77 projects otaling26 GW (see figure1).markets? s competition ncreasing?To what extent Third,projects hat are ownedby the off-takers re alsoare formalbidding systems eadingto greater com- excludedbecause hey donot reflectprivatepower inancepetitionamongdevelopers nd financiers? conditions, ut rather privatenvestmentn publicly wned

* Typesof privatepowercapacity.How much of the projects.Furthermore,ecause heseprojects re self-dealt,totalprojectvolumewas imited ecourse inanceand (the same entity sells and purchases he power), he riskhow much was balancesheet finance?What were allocations verydifferent romthat on arms-length rans-the fuel types and sizesof these projects? In what actions.Excludingff-taker-ownedrojects eaves remain-regionswere most of the balancesheet and project- ingmarketof 72projectsand 21 GWfinancedealsdeveloped?' Section3 also evaluates he followingypesof finance

trends:Finance rends Marketandprojectstructure.hattypeofproject truc-

turesprevail n today'smarket? How muchof PPFSection3 evaluatesrends n financing tructures,sources, salesare tied to long-termcontracts,and what por-and terms for a portionof the market that is referred o tion are sold on a merchantbasis?What s the length2


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FIGUREStudy overviewTotal greenfield eneration Project Power project inanceprivatepower In developing finance xcluding (financeexcluding Case studycountnes,1994-96 Project inance within-the-fence off-takerowned projects) projects

. .. ... . ~~~~~~~~~~~~~~.'...........

Study l l Illfocus Market rends Power project finance rends Case studyrisk analysis

Source: aglerBaillynternationalndependentower WlP)nowledgease.of power purchase agreements? How is the length project development? What approaches are projectaffected by project and market structure? sponsors using to manage construction, fuel supply,

3 Finance ources.What types of debt to equity ratios and other risks? To what extent are these approachesprevail n today's market?What debt sourcesare being becoming standard in the industry?used for PPF? What is the importance of private risk * Government iskassumption.What level of governmentdebt capital and finance relative to ECA and MDB support and guarantees on specific risks is requiredfinance?Towhat extent are private borrowers in devel- for project finance in particularcountries?What mech-oping countries able to raise debt for power projects anisms do developing countries use to mitigate risk?from domestic sources of capital? - Ability to replicate iskmanagement pproacbes.owhat

* Debt terms.What are typical maturities and interest extent are the case study projects typicalof the overallrates for debt in developing countries? How do debt private power market in developing countries betweenterms offered by ECAS, MDBs, commercial banks, 1994 and 1996 in terms of fuel sources, project sizes,and capital markets differ? Are these terms affected finance sources, development lead times, and otherby local conditions? characteristics?To what extent are these projects typi-

* Development lead times. How long does it take to cal of the projects that will be concluded in the nextdevelop a project from inception to financial closure? few years? Is the level of governrment isk assumptionDoes it take less time to finance smaller projects? in future projects ikely o be higher orlower? How doesDoes it take more timneo close a developing coun- the levelof risk-sharingcompare with hat in new mar-try's first time deal than subsequent deals?What other kets that are likely o emerge in the next few years?'factors influence the time required to close a deal?2

Conclusionsnd uture rendsCasestudies: isk allocation ndmitigation

Conclusionsabout the prospects of the private power indus-From the 72 PPF deals, 10 projects were selected for analy- try in developing countries are based on findings from sec-sis of the allocation of risks among public and private sections 2 through 5.tor project participants. These 10projects are representative * Market volume. Will private power finance in devel-of the overall market. Sections 4 and 5 focus on the fol- oping countries remain at its current levelor increase?lowing issues: WIll nvestorsmaintain a high evel of interest in devel-

* Participant oles.To what extent are fuel and equip- oping greenfield private power projects?ment suppliers, construction and O&M contractors, * Rolesoffinanciers.Will oansand credit enhancementsand other project participants taking equity stake in from ECAs and MDBs continue to be responsiblethe project? How does this risk assumnptionaffect for a high portion of debt needed for private power

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in developing countries? How can the role of private which provided information on the capacity, cost, timing, andrisk debt capital be expanded? fuel type of privatepowerprojects. t alsoprovided nformationGovernmentchallenges.owcandevelopingcountries on the number and types of developers active in developingmaintain a high level of investor interest? Can viable countriesduring he 1994-96 eriod.alternatives to sovereign guarantees be found? 2. Analysis f finance rendswas based on HaglerBailly's IP

Knowledge Base, plus additional research on project debt sources,Notes debt finance terms, power purchase lengths, development lead

times, insurance coverage, and other factors.1. The analysisof market trends was performed using Hagler 3. Risk analysisof case study projects was based on the sources

Baily's International Independent Power (IIP) Knowledge Base, listed in the "Note on Source Material" in appendix B.

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SECTIONMarket Trends (239 Projects)

P rivatepower made a significantcontribution to previous years.Prior to 1994, 107 projects totaling 17developing ountries'powersectorsbetween1994 GWof capacity ad received inancingn developing oun-and 1996. t provided a significant hareof countries. By 1996 an additional239 projectswith 47 GW oftries' capital investmentneeds and brought new private capacityhad been financed (figure2). The annualvolumeinvestors o the market. Moreover, he entrance of new of financial losuresalso ncreased steadily, rom 45 pro-investors s increasingmarket competition,which should jects and 8 GW in 1994 to 97 projects and 23 GW inhelp providedeveloping ountrieswith reasonably riced 1996.sourcesof power. The 47 GW of private power financedbetween 1994Projectfinanceaccounts or most privatepowerdebt in and 1996 epresents ignificant rivate nvestmentn devel-developing ountries,n part because project inance acil- opingcountries'power sectors.This capacityhas an esti-itates he financingof largerprojects.Most projects,both matedconstructioncost of more than $50 billion-nearlybalancesheet and project-financed,ave been oil, gas,or $17 billiona year.This average evelof investment epre-coal-fired,withEastAsiaaccounting ormore than half of sents approximately0 percentof the annual investmentstotal privatepower finance. thatdeveloping ountries re projectedo make n newgen-erationcapacitybetween 1995 and 2005.Capital Contributions Market Participationand CompetitionPrivatepower inance n developing ountriesemergedas

a majorbusinessbetween 1994and 1996.The volumeof Another ontribution f he privatepower ndustry as beenprojects inancedduring his periodwasnearly hreetimes to introducenew investorso the market. n 1991only13greater than the total volume ofprojects financed in all independentpowerproducers(IPPs)owned equity n pri-vate power projects n developing ountries table 1). By

FIGURE 1993,51 IPPshad acquiredequity in developing ountryProjectclosuresn developingountries, 992-96 projects. n 1996 he number increased o 217. An addi-(gigawatts) tional 112entities for whichprivatepower is not a lineof50 business suchaslocal ndustrialirms)alsoacquired quity

in privatepowerprojects.40 Increased quityparticipationhas brought n new ypesofprivate nvestorshat werenot previously ctive n devel-30 opingcountrypowersectors.Asof 1991globalutilityaffil-iatesand developerswerevirtuallyheonlyprivate nvestors20 with equity nterests n developing ountryprivate powerTABLE

I10 | | iil [ |Private powerequityparticipants,elected ears0 Participants 1991 1993 1996

Cumulative 1994 1995 1996 1994-96 Independentowerproducers 13 5 1 217prior o 1994 Total articipants 31 97 329Source: agler aillyIPKnowledgease. Source:agler aillyIPKncwledgease.

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FIGURE Competitively id projectspromiseo be an importantFinanciallosuresf competitivelyid projects s sourceof power hroughout he developingworld.Overall,shareof total privatepowerclosuresn developing 68pending olicitationsor 45 GWofcapacitywereeleasedcountries, y capacity(percent) in 1996and thus far in 1997. n Mexico, he bids received25 by ComisionFederal de Electricidad(CFE) were so lowthat the country s now considering eveloping dditional20 BOO projectsunder competitive olicitationsather thani5 | ll proceedingwith additionalBLTprojects. n Thailand he15IL electricutilityEGAT concluded ts firstand second com-10 petitivebidding phases,and is nownegotiating erms andconditionswith 11biddingconsortia or more than 4,1005 MW During he third phaseof its program,which startedin mid-1997, EGAT plans to issue solicitations otaling

1992 1993 1994 995 1996 4,000 MW of power projects. In India more than half ofSource:HaglerBaillyIPKnowledge ase. all power projects now in an advanced stage of develop-ment have been competitively id. In China,a new policyaccounted or nearly hree-quartersof the region'sprivate now requires all major IPP projects to be competitivelypower finance.Competitivelyid projectshave nowbeen bid. LaibinB was the firstproject solicitedunder this newfinanced n virtually very egionof the developingworld. policy.

In countries hat havedevelopedIPP programs,com-petitivebiddingcan greatly xpedite he development nd Project Financefinanceprocess by establishing ontract conditionsand arational rameworkwithinwhichdevelopment an occur. Limited recourseproject inancehas been responsible orIn Thailand, or example, 700 MWcombined-cycleower the majority f IPP marketgrowth n developing ountriesplant sponsoredby Thai Oil, Unocal,and Westinghouse since 1993 and has alloweddevelopers o finance largerreceived orporate inancialommitmentsn 1996 thesame projects.Although ewer han 40 percentof the 239 finan-year that the project was bid) and sought project finance cial closures hat occurredbetween 1994 and 1996werein 1997. n the Philippines he Sualproject reachedagree- project inanced therest werebalance heetclosures), ro-ment on a power purchaseagreementonly a few months ject financehas accounted orabout 58percent of otal clo-after he bid wasawardedand reached inancial losure ess sures in terms of MW capacity figure5). This is becausethan eighteenmonths later. the average size of a project finance deal (300 MW) isFIGUREProjectinance

Number f closuresI1994-96) CapacityI 994-96) TransactionalueI1994-96)239 47GW $50billion36% of projects 58% of closures y capacitymegawatts) 62% of transaction alue

~~~~u(A iCC -~~~~~~~~~~~~~~~~~~~~~~~P(ti CI PI0-' Of"rce

V ~~~Balanceheet \Balance heet '\ Balance heet

Source:HaglerBaillyIPKnowledgeBase.

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more than wice he sizeof a typicalbalance heet deal (130 relatively arge. The average size of a project financedMW). The relatively arge size of project financed deals coal-fired power plant was greater than 600 MW Oilreflectsa clearpreferenceby sponsorsnot to assumebal- and gasprojects averagedmore than 250 MW per project.ance sheet risks for largeprojects. More than 10 percent of private powercapacity wasProjectfinance ccounts or aneven greaterportion 62 financed on a contingent basis (currently financed onpercent) of the total dollar amount of private power clo- the sponsors' balance sheets but in the process of seek-sures because project finance deals tend to have higher ingproject finance).Approximatelywo-thirds f the con-capital costs per kilowatt. Though large deals would be tingent capacity was coal-fired. The rest was oil- orexpected o achieve conomiesof scale nd thereforedrive gas-fired.costs down, project financing is often used to pay forcoal-firedplantsand integratedpowerplants that tend to Regional Trendshave higher capital costs. For example, n Peru, the lim-ited recourse inancedAguaytia roject nvolved 155MW More hanhalfof allprivatepower inanceoccurred n Eastpowerplant, gas ielddevelopment, natural gaspipeline, Asia,where here is a largeneed for power table3). Nearlypetroleum refining facilitiesand a 400 km, 220kv trans- half of this capacitywas in China, and virtuallyall of themission ine. In addition, project financedeals are usually other privatepower inance n the regionoccurred n fourfully oaded with overhead ransactioncosts and interest countries: Indonesia, Malaysia, the Philippines, andduring construction.Under a balance sheet arrangement, Thailand.Of the remaining apacity inancedsince 1993,development, inance, and other costs are often consid- almost 20 percent is 'located n India and Pakistan,whileered corporate xpenditures nd therefore re not included LatinAmericaaccounts or about 23 percent.as part of a project's total reported capital costs. In this East Asia is particularlydominant in project finance,regard, project inancemore accurately eflectsa project's accounting or 60 percent of the total during he period.true cost. Asiaas a whole epresented80percentof allproject inance

activity.By contrast, in LatinAmericamost privatepowerFuelChoice capacitywasbalancesheet financed,mainly ecausemanyof the projectshavebeen relatively mall less han 130MWOil- and gas-fired rojectshave accounted or 53 percent on average).The lack of project inance n LatinAmericaof allprivatepowercapacity inanced n developing oun- also eflects he fact hat Argentina, istoricallyhe region's

tries since 1993with over two-thirdsof this capacitybal- largestprivatepower market, has a competitive or mer-ance sheet financed.Coal-fired ower projectsaccounted chant)marketwith lititle r no relianceon long-termagree-for 36percentofallprivatepower apacity ince1993,while ments. In such a setting, he price and quantityof powerhydrocapacity ccounted or only7 percent (table2). is determined y he market ather han by ong-term owerAmongproject finance deals, the mix of coal and oil purchase agreements PPAs).Creditors have been reluc-and gas projects s relatively ven: 44percent of all capac- tant to lend to merchantpowerdealsbecauseof uncertaintyity was coal-fired,while 48 percent was oil or gas fired. about project revenues.Both oil and gas and coal-firedproject financedealswere

TABLE 3TABLE 2 Regional rends, 1994-96Fuel ype,1994-96 (percentfGW)(percentfGW) Project BalanceFuel Project Balance Region finance Contingentsheet Totaltype finance Contingent sheet Total Latinmerica IS 14 43 23Coal 44 61 10 36 EastAsia 60 86 29 54Oil/Gas 48 35 68 53 South sia 20 0 22 19Hydro 5 4 13 7 Afrca/Middleast 5 0 5 4Other 3 0 9 4 Central/Eastemurope 0 0 1 0.2Total 100 100 100 100 Total i00 i00 100 100Total(GWM 27.3 5.4 14.0 46.7 Total(GWV) 27.3 5.4 14.0 46.7Source:agler aillyIPKnowledgease, Source:agler aillyIPKnowledgease.8


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SECTIONIndependent Power Project Finance (72 Projects)

T hePowerProjectFinance PPF)market,as defined Largestmarketsin section 1, represents an important segment ofthe total power market in developing countries. PPF has been heavilyconcentrated in a few countries, theAs construction is completed over the next several years, 10 largest PPF markets accounting for all but 1.6 GW of

the 72 deals that were concluded between 1994 and 1996 the total capacity financedbetween 1994and 1996 (figurewill provide21 GW of power o countries'commercialpower 7). Five countries had nearly 70 percent of the capacitysectors. financed: Pakistan (the largest market), China, Indonesia,

Examinationof the PPF market shows the following eg- Malaysia,and the Philippines.ulatory and financial trends:

* A strong commitment by the host government to FIGUREprivate power is a key determinant of activity in a Regionaland fuelmix of the power project financcountry. market, 1994-96* Most projectshaveBOO structuresand long-termcon- (percentagef otalmarket)tracts. Other structuresand merchant pricingare rare. Total apacity-21GW

* Most debt is provided through finance and credit Fuel ypeenhancement from ECAs and MDBs.

* There is relativelylittle private risk debt capital. Oil/Gas* Countries with strong domestic capital markets pro- 60.4%

vide a largeportion of their own debt requirements.* Project development time is considerably shorter in

countrieswith privatepower experiencethan in coun- 3O.8%hetries without it.

Power ProjectFinanceCharacteristics 5.6%30.2%The 1994-96 PPF market included 72 greenfield genera-tionprojects with 21 GW of capacity,accounting for about Regionthree-quarters of all project financed private power capac- - -ity. The characteristics of PPF capacity closely resemble EastAsiathose of the total project finance market in terms of fuel 52.9%sources, regional distribution, and size, with only a fewexceptions.East Asiaaccounts oronly53 percentof PPF MiddleEast/Africacapacity (figure 6) and 60 percent of total project finance. 6.4%Coal capacity represents 30 percent of PPF capacity and44 percent of total project financed capacity.These differ-ences arise argelybecause5 GW of coal-firedcapacitys Latinmerica SouthAsiaexcluded from the PPF market, as it is majority-ownedbyentitiesof the ChineseMinistryof Power. Source:agleraillyIP nowledgease.

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FIGURELargestpower project financemarkets, 199496 IBRD29360

Rr,,ge. W ,N-be,f YoTwaCout-s MW- n2,00 MW 5 14,759Thismopwos produced y the Mop Desi'g Unit of TheWorldBook. 00 1999MW 5 4.630The oundories. olors'denorninotionsnd onyother nformation 10399 MW 1 1.609shown on hismop do not imply on he port of TheWorld BorkGroup, ony udgmenton the egol tolus of any teritory, or anyendorsement racceptcncefsuch boundories

S.uroe:HaglerBaily IPKnowledgeae. FEBRUARY998Features fmajor markets The experience of these 10 countries demonstrates that

sophisticated regulatory and market structures that shieldThe 10 major PPF markets share three regulatory and private power developers from the dominance of large,market features that together represent a commitment to state-owned utility companies are not prerequisites forprivate power participation. These three features are poten- PPF. As long as countries enable private project sponsorstial prerequisites for other countries to emulate as they to sell power under long-term PPAs, countries do notembark upon private power programs. have to make additional regulatoryand market reforms to

* Rulesfor private greenfieldcapacitydevelopment. All reduce the dominance of state-owned companies. Of theof the countries have established rules for greenfield 10 major PPF markets, only Colombia has made signifi-capacity development. With a few possible excep- cant reforms in establishing an independent regulatorytions, most of the countries provide clear guidelines commission, privatizing state-owned utility assets, andand lawsthat facilitate private power development.' ensuring that no one state company owns a preponderance

* Private power track record. With the exception of of the country's generating assets. Only a few of the 10Mexico, private power projects were financed in all countries have achieved progress in any one of these three10 countries prior to 1994. While onlya few of these areas.pre-1994 projects involved PPF as defined in this In spite of thisfinding, there are manyreasonswhycoun-study, this experience with private power ownership tries should reduce the dominance of state-owned utili-allowed them to test private laws and to demon- ties. Privatepower investorsconsistentlyassert hat reducingstrate to investors a commitment to private power. government dominance over the power sector improvesthe

* Establishmentof an organized olicitationprocess.All environment for private power investments.2 By reducing10 countries have begun using formal power project regulatory risks, developing countries can encourage pri-solicitation processes, many of which involve inter- vate investors to accept other risks such as utility perfor-national competitive bidding. mance or foreign exchange.

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Market and Project Structure years ess than the term of the PPA. Afterrepaymentof aproject'soriginaldebt, power pricesnegotiatedunder theThe overwhelming ajority fPPF between1994and1996 PPAsoften decrease.

involved rojectswithBOOstructures nd ong-term ower There appears o be littlerelationbetween he lengthofsalescontracts,with the lengthof power purchaseagree- PPAsand a country's onsiderationf market estructuring.mentsdepending argelyupon a project'sstructure. One mightexpect shorter lengthagreements n countriesthat are consideringestructuring.Once marketsare sepa-Projecttructure rated into generation, ransmission, nddistribution om-ponents, power prices are likely o be determinedby a

Of the 72 PPFdeals,59 involved OOstructures, or agree- competitivemarket ather han by ong-term ontracts.Thements hat were similaro BOOs such as build-own-oper- existence f long-term ontractsmay mpedea transition oate-maintain), 2 nvolvedBOT structures, nd Samalayuca competitivemarketsbycreatingportionsof the market hatin Mexicowasthe only BLT. arenoncompetitive r byrequiring owerpurchaserso buyThis relativeabundanceof BOO projects,as opposed out these contracts. n countries hat are consideringmar-to BOT and BLT structures, reflects an increasing ket restructuring such as Colombia, ndonesia,Pakistan,commitmenton the part of developing ountries o trans- and Thailand), owever, PAswithBOO projectsare actu-fer long-termcontrol of the power ndustry rom the pub- ally onger han PPAs n countries hat are not actively on-licsector o the privatesector.Even n countries hat began sideringmarket estructuring Chinaand India; figure8).performingprojectson a BOT basis (the Philippines nd There s someevidence o support he contention hatChina),many ecent projectshavebeen BOO. market restructuringconsiderations horten the length ofBOTPPAs. n countries hat are consideringestructuringMarketstructure (for example, he Philippines) he length of BOT agree-ments sshorter than n countries hat are not actively ur-TheoverwhelmingmajorityoftheseBOOprojectshavepoweruing restructuring(for example,Turkey; see figure 8).purchase greementshat stipulate uantity, ricing,nd other However, he total number of BOT projects (12) is tooconditions or the long-term aleof power rom he project small o derive any strongconclusions n this issue.to the off-taker.n LatinAmerica herewere iveBOO pro- Regionally,owerpurchaseagreements veraged boutjects without long-termPPAs that sold power to national 25 years in Asia, generally rangingfrom 20 to 30 years,powergrids.Noneof heseprojects, owever,eliedonpowergrid sales or 100percent of their revenues.For example, FIGUREtwo projects n Argentinaobtained omeof their revenues Effectof projectand marketstructure on averagefromsalesof steamunder long-term ontractswith on-site powerpurchasegreementengthindustrial acilities, nd theAguaytia roject n Peruwill ely (years BOO BOTonpetroleumalesornearly ne-third f ts evenue. 25 (59projects) (12projects)PPAength 20Amongprojectswith PAs, he lengthof agreementsanged I5from 15 o 30 years,with an averageof about 21 yearsfor I0BOO projects nd anaverageof 15years or BOTprojects.Forboth typesof projects, he lengthof the agreements 5largely eterminedby the need to amortizedebt. Projectsponsors ypically ry to negotiatedebt terms that are as 0 Actively Not Actively Notlong as possible,but lenders, as a rule, willnot extend consideringonsidering considering onsideringloans for periods hat are longer han the term of the pur- restructuringestructurng restructuringestructurngchaseagreements. oallow or unexpected roblems, enders Note: No BOT projects n restructuredmarkets. 00 PPAength n restructuredmarketsszero.usuallyprovide debt terms that are at least one to two Source: aglerBailly IPKnowledgeBase.

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and about 17 years in Latin America, ranging from 15 to Export credit agencies were responsible for nearly half21 years (excluding merchant power projects). The longer of all PPF debt between 1994 and 1996, providing thelength of PPAs in Asia reflects the larger size and com- largest volume of finance in all regions. This money repre-plexity of projects as well as their longer expected useful sents funds provided directly to power projects or guaran-lives. Many of the shorter-term projects in Latin America tees on money lent by commercial banks. ECAs providedwere smaller-scaleoil and gas or diesel projects with shorter a smaller share of total debt to projects in Asia (42 percent),useful lives. where project risks were moderate, and a higher percent-age of total debt in emerging private power markets in theFinanceTrends MiddleEast and Africa (70 percent).

Multilateral development banks provided $2 billion inDebt has supplied about three-quarters of all the money project finance debt, and bilateral development institutionsneeded for PPF in developing countries. The overwhelm- provided $800 million. This debt involved either directing majority of this debt has involved ECA or MDB direct finance (IFC and :[DB A loans) or loan syndication (IFCfinance orprivate debtwith credit enhancement fromECAs and IDB B loans), in which debt is provided by a privateor MDBs. Largely as a result of this credit enhancement, lender, usually a commercial bank. Typically,multilateraldeveloping countries with relativelyhigh-risk environments debt finance to a single project involves both direct financehave been able to obtain financing at terms similar o those and syndication. The bank serves as the lender of recordin developingcountries with lessriskyproject environments. for direct and syndi.cated oans, both of which benefit fromthe preferred creditor status and other advantages associ-Debt to equity ratios ated with this type of lending.

T'hese loan syndications involve some political risk toThe average debt to equity ratio in PPF was 74/26, which private lenders, but are generally considered more secureis comparable to ratios in recently concluded power deals than uncovered private debt. While the MDB does not gen-in the U.S. market. There is little variation in average debt erally provide loan guarantees for syndicated debt, its par-among regions. Average ratios range from 70/30 in Latin ticipation in a project as a lender provides an importantAmerica to 75/25 in Asia and 80/20 in Africa and the Middle source of security. Still, defaults on syndicated loans nearlyEast. During 1994-96 there was no appreciable time trend alwaysaffect direct loans provided by the MDBs, which aretoward higher or lower debt to equity ratios. typically paid pari passu with syndicated loans or are even

Power projects with some or all of their revenue affected subordinated to syndicated oans. Especiafly n poorer coun-bymerchant powerprices have exhibited muchlowerratios tries, where MDBs provide a large amount of a country'sthan those with purchase agreements. Among the 72 pro-jects in this group, the only one with a debt to equity ratio FIGUREof less than 50/50 is Argentina's San Miguel power project. Power project financedebt sources,1994-96

Trotalebt-$18 billionSources f debt inancing Commercial, Bilateraluninsured 4%59/6A very smallportion of foreignPPF debt financing omes Capitalmarkets Exportfrom private lenders without any guarantees or credit credit agenciesenhancement from ECAs or MDBs. Most debt (90 per- Co.mmercial, 48%insuredcent) was provided either by host country sources or by 9%one or more of the following types of finance and creditenhancement rom MDBs and ECAs (figure9).3 Multilateral* Direct funding ll/o

* Guarantees (for example, World Bank guarantees)* MDB loan syndication, such as International Finance Local

Corporation (IFC) B loans 1796* Political risk insurance. Source:HaglerBailly IIP KnowledgeBase.12


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total debt, government-owned oweroff-takersare con- antees,or anyothermultilateral r bilateral upport.Nearlysidered o be less likely o default ondebt from an MDB allof thisriskdebt capitalwasprovided o onlya fewcoun-than on privatedebt. tries, mostly n East Asia,which had a better investmentLocalcapitalprovidednearly$3.1billionof debt financ- climate than other developing egionsand was thereforeingfor PPF projects.Allbut about $400millionof this was able to attractprivatedebt risk capital (figure10).raisedbybanks n Malaysia,ndonesia, ndThailand,where About$970 million n capital markets endingwith no

capital markets grewduring 1994-96. In Malaysiaand directguarantees,political iskinsurance,or other cover-Thailand ocal financing ourceshaveprovidednearlyall age accounts orhalf of this at-riskfinancing.Nearlyall ofof the debt financingneededfor PPF. The $1.9billionof thismoneywas rovidedoIndonesia,he Philippines, hina,locally aised debt in Malaysia upplied all but $200 mil- Chile,and Colombia, ountrieswith nvestmentgrade or-lionof the debt financing eededfor three argepowerpro- eigndebt ratings.Whilecapitalmarketsprovided nly boutjects, including he 1,303 MW Lumut Perak natural gas 6 percentof PPF debt finance n 1994-96,theyprovidedproject. In Thailand $300 million in local funding pro- an increasingmountofdebt eachyear n 1994-96.Severalvidedthree-quartersof the necessarydebt. importantdeals ecentlyclosed n East Asiamean hat cap-Only $2 billion,or slightlymorethan 10percentof the italmarketswillprovidea largeamountof debt finance ndebt financing sedfor PPF during 1994-96,maybe con- 1997.Furthermore, apitalmarketshave provideda largersideredprivate iskdebt capital n that itdid nothave MDB proportionof debt for within-the-fencend off-taker on-or ECAdebt coverage,political isk insurance, oan guar- trolledprojectsnot includedas part of the PPF market.The remaining alf ofthe at-riskfundsoriginated romFIGURE 0 $950 millionof commercialbank lending. More than 90

percent of this moneywas lent to two countries)China,Commercialank ebt-$950 illion wheresomeECAsdo not operate andwhere he economic5% riskenvironment sconsidered elativelyow, ndMalaysia,Indonesia a country hat has a high percapita incomeand does not

receiveWorldBank loans.China ~Debt terms

24% 62% Thelength ofdebt termsand the interest ate havesignif-icant implicationsor the cost of privatepowerin devel-oping ountries.Debt is themost mportant ourceofcapitalfor PPF, accounting or 74 percent.Thus a project's debtterms can influence the cost of power by more thanCapitalmarkets-$970million $0.01/kWh. 4

Colombiastan Amonghe projects nalyzedn the PPF market, ebtCooba2%83 /C _ terms anged rom6 to 17yearsand averaged 3years.ThereChina 1 1 _ is relativelyittledifference n the lengthof loansofferedby

ffi % f _ 55Qno ECAs,MDBs,and commercialenders (table4). Not sur-prisinglyhen, helength lsodid notvary ubstantiallymongPhilippines regionsor even amongcountrieswith favorable reditrat-ings or among hosewith unfavorable reditratings).Interest ate marginsanged from1.5percentto 4.0 per-

Chile cent over LIBOR,with an averageof about 2.7 percent.17% Ratesdo not vary substantially mongdebt sources, noramong low-risk and high-risk project environments.

Note: This debt is inancedithno guarantee,oliticalisk nsurance, Developing countries with low-risk project environmentsor othercoverage.Source: agler zillyIPKnowledgease. tend to pay a 2.0-2.5 percent premium over LIBOR.13


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TABLE TABLESDebt terms Factors nfluencing ime to financialclosureInterestate percentage Lead imeTerm ength pointsoverLIBOR' Factor (years)

Finance ource Range Average Range Average Averageime 2.5DirectECA 12-16 13 1.5-3.0 2.8 SizeDirect MDB 10-15 13 2.0-4.0 3.0 Large >600 M\W) 2.7Commercial-covered 6-16 12 I.5-3.0 2.8 Small < ISO M 2.0Commercial-uncovered -15 13 1.5-3.0 2.5Foreignapitalmarkets 12-19 14 2.0-3.0 2.5 Country xperienceLocal 9-17 14 - Firsttime 3.6Overall 6-19 13 1.5-4.0 2.7 Second eals 1.9- Not available. Typea. Including ommitment ndexposure ees. Fossiluel 2.4Source: aglerBailly IPKnowledge ase. Hydropower 3.7Countries with riskierproject environments pay a premium Source:electedransactionsn HaglerBailly1 Knowledge ase.of slightly more than 3 percentage points.

The relatively small amount of variation among debt size on development lead times is slight. Small projects ofterms and interest rates evidenced during the 1994-96 150 MW or less have reached closure in about two years,period means that PPF debt is being provided at relatively only slightly quicker than average, while large projects ofreasonable terms in allcountries. The major factor account- 600 MW or more have reached closure in 2.7 years, slightlying for these reasonable terms is the significant amount of slower than average.lending and credit enhancement by ECAs and MDBs to Fossil fuel projects have reached closure in about 2.4the market. These institutions are willing o lend to projects years. There is a small difference in the times needed toin risky environments without charging a significant pre- close coal projects and oil or gas projects, but these aremium relative to that paid in less risky environments. explainable by project size. Hydropower projects have

reached closure in an average of 3.7 years, much longerDevelopment Lead Times than is typical in the market. However, this longer leadtime should be expected, given the complexities of sur-

The average development time for PPF deals was 2.5 years. veying physical conditions at the plant site and of decid-The largest single factor influencing the speed with which ing resettlement issues and water rights. There is nota project proceeds to financial closure s the experiencebase enough evidence to support any strong conclusionsaboutof the country in which the transaction is being completed the development times of other renewable energy(table 5). First time deals tend to take about twice as long projects.as subsequent transactions.The only exceptions to this weredeals arranged when the host country governmentwas expe- Notesriencinga severepower shortage.For example, the ELCOSAproject in Honduras reached financial closure quickly, in 1. In Turkey OT awswerechallengedn the courts. n Mexicopart because it was developed during that country's power privatepower awshavebeen recentlyevised.The legalenforce-crisis in 1994. abilityofcontracts n China s uncertain.

The fact that project experience typically eads to faster 2.USAID1996,Privatization ptions for he Power ndustry,closures should mean that closures should occur more concludes that an independent regulatory commission is thequickly in the future. So far, however, there is no evidence most important egulatory actor or private nvestors.that lead times in the market as a whole are being reduced. 3. Most host country sources are publiclyowned or raisedMany of the projects that achieved financialclosure in 1996 through ocalcapitalmarkets.were first time deals in countries such as Mexico and Turkey 4. Basedonthe differencebetweendebt financedwith a six-and had been under development for some time. yeartermand a1 percerlt premium over LIBOR and debt financed

There is some evidence that small projects can be devel- with a 17-year erm anda 3 percent premium over LIBOR.Assumesoped faster than large ones. However, the effect of project a $1,000/kW aseloadplant.

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SECTIONCase Study ProjectProfiles (10 Projects)

T en case study projectswere selected for detailed from its statusas a merchantplant n Peru, whereelectricityexamination of their risk allocation (section5). Four pricesare expected to decline(from their current levelof 5-6are located in Latin America, five in Asia, and one cents/kWh o about 4 cents/kWh) as the spot market matures

inthe Middle East. The purpose of this chapter is o describe and new, ow-cost projects come on-line.the general characteristics of these case study projects and ELCOSA has the highest tariff at 8.5 cents/kWh. Thisto assess the degree to which these projects reflect the over- high ariff can be attributed to several factors, ncluding theall 1994-96 PPF market. use of imported heavy fuel oil, a 35 percent import tax on

Overall, these projects were found to reflect the regional this fuel, a lowdebt to equity ratio (66/34), a high-riskenvi-market trend with regard to structure, fuel type, size, debt ronment, and a desperate need for power in Honduras at theterms, and types of sponsors. The case study projects are time ELCOSA was negotiated. While this project was notatypical of the market, however, in at least one respect. solicited through a formal competitive bidding system, theMore than half of the projects represent the host coun- tariff of 8.5 cents/kWh was based on the lowest tariff bid oftries' initial experience in PPF. Therefore they required a two other independent power producers (IPPs) that werelonger than average time to finance and relied on MDBs competitivelybid at the same time that ELCOSA was nego-and ECAs for a greater portion of debt than was typical of tiated. The urgent need for power and the high-risk envi-the 1994-96 market. The significant amount of debt and ronment gave developers the leverage to demand relativelycredit enhancement provided by these organizations reflects high rates of return. ELCOSA sponsors were asked to buildthe high level of risk of first time deals and of some of the the plant quickly and to take full construction risk in ordercountries involved. to do so. They also accepted the regulatory risks associated

with a system that had little or no private power laws andProject Characteristics regulations. While the cost of this project to Honduras ishigh, it is arguably ower than the economic cost that would

The size and fuel type of the case study projects are largely have resulted from the continued power shortage.typical of the 1994-96 PPF market (table 6). The projects In general, power prices are contractually guaranteed inin Latin Americaand South Asia use oil and gas, whilethose the power purchase agreements(PPAs).However, n China'sin East Asia use coal. Similar to the overall market, case Tangshanproject, the project's off-taker, North China Powerstudy projects in Latin America are smaller than those in Grid, does not have the authority to establish power prices.Asia,with two exceptions: Samalayuca,a 580 MW project The authority o set pricesrests with the TangshanMunicipalin Mexico, and Tangshan, a 100 MW project in China. Commodities Pricing Bureau, which is not a party to the

Installed costs vary widely among the case study pro- deal. The tariff of 5.5 cents/kWh is based on an estimatejects. Aguaytia, at $450/kW, has the lowest capital cost, of the capacity and energy price that would provide anwhile Birecik, at $2,370/kW, has the highest cost. The cost adequate rate of return under the PPA as well as a long-per kW is fairly typical of coal and oil and gas projects in term forecast of coal prices (table 6).the overall market. While capital costs for hydro projectsare site-specific, they tend to be higher than those of fos- Project Development Timessil fuel projects.

With the exception of Aguaytia and ELCOSA, the tariffs Project development times range from less than two yearsrange from 4.5 to 6.5cents/kWh.Aguaytia's ow ariffresulted to seven years (figure 11). As described in section 3, coun-

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TABLEProject profilesTotalprojectcost Installed ApproximateariffCountry, roject MW/fuel (millions f dollars) cost ($/kW) (cents/kWh),

China,Tangshan 100/Coal 183 1.827 5.5Colombia, ermovalle 240/Gasb 148 617 4.5Honduras,LCOSA 80/ mported eavyuel ilc 90 1,168 8.5India,egunrpadu 216/Gas,Naphtha 228 1.055 s.5Indonesia,T awa 1,220/Coal 1,705 1,398 6.5Mexico, amalayuca 700/Gasd 647 924Pakistan,ch 586/LowBtu as 653 1,1 4 5.5Peru,Aguaytia 155/Gas 705e 450 4.0Philippines,ual ,200Amportedoal 1,352 1,127 5.0Turkey, irecik 672/Hydro 1,593 2,370 5.5

- Not pplicable.a.NocostkWhorSamalayucaomputeds thiss lease; guaybastimatedasedn potmar-ketrice rojection.b. Capacity s ISOconditions.Capacityssite s 199MW Grid off-take s 160 MW,project also has 1 and 20year power purchase agreements with ndustrialustomers.c.Grid off-take s55MWd. Capacitys SO onditions.apacityt sites580MW ue o altitude.e. This igure ncludesonly the costs for the power portion of he integratedproject.Source:asetudy rojectponsorsnd enders.

try experience is the main factor affecting the time from was so great that the gove:rnmentasked the ELCOSA spon-project inception to financial closure. For the case study sors to build a temporary plant. Initially generating 24 MWprojects, the average development time was 3.2 years. This it began operating six months prior to final financialclosurewas higher than the market average of 2.5 years mainly and was later expanded to 60 MW and then to 80 MWbecause many of these projects were the countries' first- Projects that were able to benefit from experience tooktime private power projects. Birecik, Samalayuca,Aguaytia, less ime to develop. Indonesia's PT. Jawa was able to reachJegurupadu, ELCOSA, and Uch allbegan negotiationsprior financial closure quicklybecause of precedents establishedto the establishment of standard documents orto any finan- by PT Paiton. Many of the Paiton documents, includingcial closings of other projects in their respective nations. the comfort letter, were used for PT. Jawa. In the case of

Jegurupadu and Birecik had the longest development the Philippines' Sual, five private power projects had alreadytimes. AlthoughJegurupadu was promised a sovereignguar- achieved financialclosure before Sual's development began.antee, the project took more than five years to reach finan- This experience, in addition to the government's commit-cial closure. The PPA was redrafted several times, and the ment to private power and its willingness to guarantee allcentral government guarantee required lengthy negotia- of National Power Corporation's (NPC) commitments,tions.2 The fact that the project began operation prior to helped to expedite negotiations.financial closing is attributable to the strong commitmentof the sponsors and the contractor, Asea Brown Boveri Project Sponsors(ABB). The Birecik hydropower project in Turkey tookalmost eight years to reach financial closure. As is often Information on the case study project sponsors and theirthe case in a nation's first IPP, at the time negotiations began, equity participation at the time of financial closure is pro-the legal framework was insufficient. Clarifications and vided in figure 12 and table A. 1. Five observations can bedevelopment of the legal framework required additional made from this data. First, projects involve a wide varietytime, which extended the development period. In addition, of sponsors, including host government public sector enti-because of their technical complexity, hydropower pro- ties, regional IPP players, global utility affiliates, globaljects are generally more difficult to negotiate. developers, fuel companies, equipment suppliers and EPC

Although ELCOSA was Honduras's first IPP, it had the contractors, infrastructulre funds, multilateral and bilateralshortest development time of all the case study projects development agencies, and other organizations.(1.5 years). This short development time can be attributed Second, the sponsors are not typical of the private powerto many of the same factors that were responsible for the market in developing countries. EPC contractors and equip-project's relativelyhigh ariff. The country's need for power ment suppliers have the largest equity share of the case16


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FIGURE ICasestudyprojectdevelopmentime(years)Projectl tart date

China, angshan El $ , ElPPA/contractsignedMay 1994,Joint VentureAgreement s Constructionbegins$ Finalinancial losureColombia.Termovalle $l Commercializationif before 7/97)August1995,BidAward

Honduras,ELCOSA A A $July 1993.Bid AwardIndia, egurupadu X $February1992.GOAP Selection

Indonesia.T.Jawa E $Apinl 1994,GOl MandateMexico,Samalayuca Els$December 1992, BidAward

Pakistan, ch E7$July 1993,MOU SignedPeru, Aguaytiab_$_March 1994,Project DevelopmentPhilippines.ual E1 $ sApril 1994,Bid AwardTurkey,Birecik | E7 $April 1989, MNER Mandate

0 1 2 3 4 5 6 7Years

a. Bridge inancingwas obtainedprioro construction.b. No PPA.Source:Casestudy projectsponsorsand enders.

study projects (27 percent), yet these companies control the highest equity stake in ELCOSA (30.6 percent), butless than 10 percent of the equity in the private power Wartsilawas the lead developer. TEAShas the highest equitymarket as a whole. Global developers have only 7 percent stake in Birecik (30 percent), yet Holzmann was the leadof the case study project equity, but 14 percent of the totalprivate power market. Although there is only one regional Equityparticipationin casestudy projectsplayer in the 10 case study projects (CEPA), it controls 20 Globaldevelopers Global utilitypercent of the equity because it owns92 percent of the 6.6% affiliatessecond largest case study project, Sual. Local ndustry

Third, in more than half the projects, one of the lead 8.6%developers is a major supplier (table A. 1). In five projects Publicector. _(Samalayuca, ELCOSA, PT. Jawa, Birecik, and Uch) an 6.9%Other ~equipment supplier is one of the main developers. In one 3.3%(Aguaytia), he fuel supplier is the main developer.The pro-ject company owns the gas and Maple Gas is the operationsand maintenance contractor for gas production and trans- Regional lEntrsppir/players 27.2%pierportation. 20.4% l2 e

Fourth, the lead developer is usuallythe party with the Global uellargest equity stake. There are some exceptions, however. Infrastructureunds companiesScudder Latin American Trustfor Independent Power has Source:asestudy rojectsponsorsnd enders.

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developer. Also PanEnergy International Corporation and power in spot market. The capacity payments to EPSA willEl Paso Energy International Company have the highest be sufficient o cover the clebtservice, fixed costs, and returnstakes in Aguaytia 24.3 percent each), while the lead devel- on equity even in the event that the plant is not dispatched.oper, Maple Gas, has only 12 percent. The average debt ternm s 13 years. Debt terms are gen-

Fifth, the lead developer rarely retains more than 50 per- erally related to a lender's country limits and willingness tocent of the project equity. This small share reflects a need accept risks, and they are also limited by the PPA termto diversify isks, especially n first time projects where risks length. PT.Jawa, Uch, and Sual, he projects with he longesttend to be greater, though an exception is CEPA, which PPAs, have the longest debt terms. ELCOSA and Birecikholds 92 percent of the equity in Sual. have the shortest PPAs. ELCOSA has the shortest debt

term of allof the case study projects (10 years),whileBirecik'sProject and Financial Structure (14 years) is one year longer than the case study average.

The case study projects reflect a greater amount of creditSeven of the 10 projects use a BOO structure (table 7). enhancement than is found in the market as a whole. MoreBOO sponsors permanently own the project and usually than 80 percent of all debt raised for the 10 case study pro-sell power to off-takers under long-term PPAs. Two projects is either financed or guaranteed by an ECA, a MDB,jects (Sual and Birecik) have BOT structures, in which own- or a bilateral institution (figure 13). Samalayuca, Sual, andership of the project is transferred to the off-taker at the Birecik received the majorityof this debt from ECAs, whileend of the PPA term. Samalayuca uses a BLT structure in ELCOSA and TermovalleMDBs provided or syndicatedunder which the sponsors lease the plant to the off-taker most of the financing. All. our of the case study projects in(CFE). The sponsors retain possession of the plant until Latin America rely, to some degree, on funding from thethe end of the lease, when ownership is ransferred to CFE. IDB. Only Tangshan has no debt from an ECA or multi-

In nine of the 10 case studies, revenue is secured through lateral.long-term PPAs or lease agreements (see table 7). The aver- This significant amouint of credit enhancement reflectsage PPA length for the case study projects is 21 years, the high level of risk among the case study projects, manyranging from 15 years (Birecik and ELCOSA) to 30 years of which are first time projects. ECAs, multilaterals, and(PT. Jawa). On average, projects in Latin America have bilaterals lend credibility to a project and are often instru-shorter purchase agreement terms than those in Asia. mental in bringing it to financial closure. The SamalayucaTermovalle sells most of its capacity to EPSA through a project in Mexico provides a good example of the impor-long-term agreement, but it also has shorter contracts with tance of these lending nstitutions in emergingmarkets. U.S.industrial customers. In the future it may sell some of its Export Import Bank (U.S. EXIM) provided more that 80

percent of the debt financing for this project. The sponsorsTABLE planned to raise debt from capital markets, but were unableProject and financialstructure FIGURE3

Power purchae Sourcesof debt in casestudy projectsagreement Ttl$. ilolengths Debt/equityDebt erm Total-$5.4 billionProject Structure (years) ratio (years) Foreign apitalmarketsMexico.Samalayuca BLT 20 80/20 14 B[ateralHonduras, LCOSA BOO IS 66/34 10 6.4% ExportcreditColombia, ermovalle BOO 21a 72/25 13 agenciesPeru,Aguaytia BOO - 62/38k 12 . ! l . -. 60.6%India,egurupadu BOO 18 70/30 12 Mul4ateralPakistan,ch BOO 23 80/20 15 5..4. tIndonesia,T awa BOO 30 80/20 IS .iPhilippines,ual BOT 25 75/25 15China, angshan BOO 20 70/30 10 ForeignTurkey, irecik BOT 15 85/15 14 commercialAverage 21 74/26 13 bank 10%- Not applicable-merchant ower plant. Locala. Length f EPSA PA nly 2.5%b. After undingof second ranche f IDB debt.Source:ase tudy roject ponsorsnd enders. Source:ase tudy roject ponsorlsnd enders.18


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to do so when he 1994peso crisiseroded investorconfi- a small role in the case studies is that none of the casedence in the Mexican market. The IDB steppedin and study projects are located n Malaysia r Thailand,whereprovided he debt that couldnot be raised n the capitalmar- domesticsourcesof fundinghave been the most active.kets. Multilaterals re also becoming nstrumental n pro-ject development. orexample, he IFC played n mportant Notesrole in renegotiatinghe PPA n the Jegurupaduproject.Only 10 percent of the total project debt came from 1.Theproject nception ate s basedon the bidaward atecommercial ankswithout anycoverage romECAs,bilat- if the projectwascompetitivelyid. If the projectwasnotbid,erals,ormultilaterals.n maturemarkets, ommercial anks then he nception ate s the date hat the MOU,LOS,or LOIare willingo provideuncovereddebt to IPPs, but in places was igned. hedate hat the feasibilitytudywascompletedswhere here s still considerable mountofrisk,manycom- notusedas he project nception ate.mercialbanks continue o insist on some sort of political 2. Central overnmentuaranteesor he fast rackprojectsor commercial isk coverage.The reason ocaldebt played arenotuniform.

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SECTIONRisk Allocation (10 Projects)

R isk management s critical o the financingof pri- exchange o specificprojects.Governmentscan also con-vate power projects. Lenders' primary or, in some trol the activities and influence the financial condition ofcases, only source of security s a project's cash flow, public sector power off-takers. Sovereign guarantees can

which is subject to considerable technical, economic, polit- provide a way to ensure the performance of off-takers toical, and foreign exchange risks. Improper management of the satisfaction of lenders.these risks placesa project's cash flow n jeopardy and makes Sponsors, governments, and power off-takers can man-lenders unwilling to provide project finance. age fuel supply and price risks, depending on the circum-

This section explains the principles of risk management stances of a project's fuel supply. Sponsors can import fueland describes how the 10 case study projects allocate risk from established international suppliers under long-termbetween government and private parties. contracts or obtain access to alternative sources.The assessment is based on an analysisof documentable Governments generally control national fuel sources andrisk allocation and does not address intangible factors, such fuel import licenses.Power off-takers are best able to absorbas developer judgment, that may influence how project risks fuel pricerisk bypassing cost increases on to their customers.are allocated under actual circumstances. Case StudyOverviewProject RiskManagement

To a large extent, the 10 cases examined for this study fol-Effective risk management depends on a fundamental prin- lowed the risk allocation rnodel outlined above (see tableciple: risks should be allocated to those most able to man- 8). Sponsors, lenders, and contractors (collectively eferredage them. The parties accepting risks must have both the to as the project) assume(d nearly all completion, perfor-capability to manage risks and the means to enforce risk mance, and financing risks,whilehost governments assumedmanagement roles legally.Amodel of howrisks maybe allo- most inflation, foreign exchange, utility performance, andcated to governments and sponsors under this principle is political risks. Fuel risks were shared among private andprovided in table 8. public sector participants. Six projects follow this model

Project sponsors are best able to manage the risks that closely:Tangshan (China), Sual (the Philippines), PT. Jawaprojects will be completed within budget and on schedule (Indonesia), Jegurupadu (India), Uch (Pakistan), andand that theywill perform as technically specified. Sponsors ELCOSA (Honduras).can retain capable contractors whose performance can be Typically,he overall level of government risk assump-contractually enforced, and can use hedging mechanisms tion is commensurate with a country's project risk envi-to manage financing risks. Sponsors can also manage some ronment. In uncertain environments, governments assumeforeign exchange and political risks by purchasing political more risk; in more secure environments, they assume less.risk insurance. However,they have little control over polit- The nature of project finance, however, precludes exclu-ical instability, oreign exchange rate fluctuations, and other sive reliance on standard approaches. Projects deviate fromeconomic and political developments. Therefore, they have the model because of varying risk environments and otherlittle ability to assume these risks (see table 8). project-specific circumstances. For example, the govern-

Host governments can better manage economic and ment of Mexico assumed substantial performance riskspolitical risks. Foreign exchange and inflation risks can be for Samalayuca,while the Turkishgovernment took respon-addressed by fiscal policy and the allocation of foreign sibility for completion risk on the Birecik hydropower pro-

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TABLEEquity nterests y projectparticipantsConstruction Major equipment O&M FuelProject Off-taker contractor supplier contractor supplier

China, angshanColombia, ermovalleHonduras, LCOSA 0 *India, egurupadu * *Indonesia, TJawaMexico,SamalayucaPakistan, ch *Peru,AguaytiaPhilippines, ualTurkey, irecik *

Source: aglerBailly IPKnowledge ase.

specify no penalties for the off-taker's failure to provide although major defects remain the responsibility of the EPCsuch support. contractor or equipment manufacturer. The operator oftenGovernments assumed a reasonable amount of com- agrees to a specified heat rate and output schedule over

pletion risk in three case study projects. First, in the Birecik the life of the project, putting fees and bonuses at risk ifproject, the Turkish government is arranging the necessary the guarantees are not met. As with completion, O&M dam-land acquisition and resettlement of people. In addition, ages are typically limited to a specified annual amount.'the government will provide subordinated loans to the Therefore, sponsors and Icnders assume considerable risksproject to cover cost overruns. This assumption of risk was to the extent that damages exceed this limit.considered necessary under the physical and economic Termovalle sponsors and lenders assumed even greateruncertainties associated with construction of the large-scale risks. In this project the O&dMcontractor receives an annualhydropower project. Second, in Mexico's Samalayuca pro- budget. Any additional expenses require approval by theject, CFE takes completion risk, having agreed to provide sponsors, who generally consent in order to keep the plantadditional funds if inflation, domestic labor problems, or operating. Sponsors' only means of ensuring adequate O&Mother factors increase construction costs. Third, in Colombia, performance is to threaten to discharge the operator beforeFEN assumes the same completion risk as do other lenders. the end of the contract.

Governments assumed technical performance risk inTechnicalerformance only wo projects. In the Samalayuca project, the Mexicanutility CFE is the plant operator and is obligated to make

Sponsorsmitigatemajortechnicalperformanceriskbyrely- lease payments regardless of plant performance. FENing on outside contractors. All equipment is tested for heat assumes some technical performance risk for the Termovallerate and output during the testing phase, which immedi- project in Colombia by virtue of its loan to the project.ately precedes commercialization. If the heat rate and out- In addition to sharing responsibility for completion andput are insufficient, the EPC contractor must pay damages. technical performance, sponsors can reduce their risks byAfter commercialization, the EPC contractor provides a including contractors and equipment suppliers as equitywarranty on the equipment, which generally covers the pro- participants. Eight of the 10 case studies involve equity par-ject's first year or two of operation. Unique or specially ticipation by reputable construction contractors, equipmentdesigned equipment may have much longer warranty suppliers, or O&M operators with a great deal of experi-periods. ence (table 9).

After the warranty period, the O&M operator takes Equity investments by project participants serve the inter-responsibility for the project's technical performance, ests of both the participants and the project. Equity can guar-22


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antee contractors nd suppliers market or theirgoodsor ments regardlessof fuel availabilityHowever,Termovalleservices,while he project an benefit roma contractor'sor does take riskson sales o non-EPSA ustomers,whicharesupplier'sestednterest n exceptionalechnical erformance not coveredby hisguarantee.The Uch projectwill eceive(completing projecton time,ensuring hat equipment er- capacitypaymentsonly if the fuel is not supplieddue toformswell,providingow-cost, eliable ourcesof fuel).Of force majeure events.the four projects hat beganconstruction rior to financial With he exception f Sual, he government artyassum-closure Jegurupadu, Uch, Termovalle, nd ELCOSA)all ing he fuelsupply isk obtains uelfrom domestic ources.involved quityparticipation y an EPC contractor. These sourcesare often government-controlled,acilitat-

ing governmentmanagement of these risks. In Uch forShared Risk: Fuel example, he government f Pakistanguarantees he oblig-ations of the state-owned Oil and Gas DevelopmentThe major fuel risks nvolve: Corporation OGDC). In the Philippines, he government

* Supply:Failure o deliver a specifiedquantity and utility NPC imports coal at international market pricesqualityof fuel according o a schedule. and suppliesSual under an energyconversionagreement.* Price: Higher than expectedprices for fuel. The government s well positioned o obtain coal at a fair

Sponsorsand governments hared supply isks n the case price, as it may participate n international ales negotia-study projects.Governments ssumed most pricerisks. tionswithcoalsuppliers ndother EastAsiangovernments.Fuel supply risks Third-partyalesagreement.he second option nvolves

an agreementbetween he project and a fuelsupplier hatSponsorsand governments ssumedvarying evelsof fuel is not a party to the PPA.The suppliermay be a govern-supply isks using hree differentalternatives figure 14). ment entity, but the state does not giveany guarantees.Compared o off-takerguaranteed uel supply,hird-party

Government r off-taker ssumedisk.In the Uch, Sual, sales agreements nvolvea higher level of risk. Projectsand Termovalleprojects, a governmententity or power forfeit capacitypayments and incentivepayments f fueloff-takerassumed fuel supply isk. supply nterruptionsprevent the generation and deliveryThis option represents he lowest evel of risk forpro- of power.This ype of agreement ntailsvarying egreesof

ject sponsors. f fuel is not delivered, he projectcontinues risk, depending on the reliabilityof the third-party con-to receive ts capacitypayments. n Colombia he off-taker tractor, he availability f alternative uel supplies, nd theprovidesfuel to Termovalle,which receivescapacitypay- terms of fuel supplycontracts.FIGURE 4Fuelsupply lternatives

Method f uelsupply Tangshancoal)Fuel upplier Aguaytiagas)equity articipant

ELCOSA fuel oil)aThird-party greement P.T. awacoal)

Jegurupadunaptha, as)--------------------------------------------------------------- _Sualcoal)Govemment/off-taker enmovallegas)riskassumption Uch lowbtu gas)

Low HighProjectiska.Fuelmport pton.Source:asetudy rojectponsorsndenders.

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The Jegurupadu project in India employs this method ply,projects can lose capacity payments if fuelinterruptionsof fuel supply n acquiring both naphtha and gas for its three do not allow plants to perform as contractually obligated.turbines. One turbine is intended to operate on naphtha, However, equity participation can also reduce risks, asthe other two on gas. The gas supply agreement with Gas long as fuel suppliers effectively manage their obligations.Authority of India, Ltd. (GAIL) is only a best efforts con- Moreover,as equity participants, uel suppliershave a vestedtract without penalties for failure to deliver gas. The spon- interest in ensuring that the project receives the requiredsors are contractually obligated to make some payments to quantity and quality of fuel.GAIL even if gas is not supplied to the project. The Tangshan project in China faces a relatively high

In contrast, the naphtha agreement with Bharat Petroleum level of risk, most of which is borne by Tangshan Power byCorporation, Ltd. (BPCL) provides greater security. f BPCL virtue of its relationship to Tangshan West, the project's fuelis unable to deliver naphtha, the project may recover the supplier. If Tangshan West is unable to meet its obliga-cost of delivering replacement fuel. The contract also allows tions, Tangshan Power must indemnify the project. Whilethe project to obtain enough fuel to operate all three tur- this arrangement entails significant exposu

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