RMC Discussion Paper Series, Number 119

Power Project Finance

Experiencein Developing Countries

Suman Babbar
John Schuster

Project Finance and Guarantees Department

Resource Mobilization and Cofinancing Vice Presidency
January 1998

1a31 The World Bank

 CFS/RMC DISCUSSION PAPERS

101 - Privatizationin Tunisia,Jamal Saghir, 1993.

102 - Export Credits:Reviewand Prospects,Waman S. Tambe, Ning S. Zhu, 1993.
103 - ArgentinasPrivatizationProgram,Myrna Alexander,Carlos Corti, 1993.
104 - EasternEuropeanExperiencewith Small-ScalePrivatization:A Collaborative Study with the CentralEuropeanUniversity
PrivatizationProject,1994.
105 - Japan'sMain Bank Systemand the Role of the Banking Systemin TSEs,Satoshi Sunumura, 1994.
106 - SellingState Companiesto StrategicInvestors:TradeSale Privatizationsin Poland, Hungary,the CzechRepublic,and
the Slovak Republic,Volumes1 and 2, Susan L. Rutledge, 1995.
107 -JapaneseNational RailwaysPrivatizationStudy II: InstitutionalizingMajor PolicyChangeand ExaminingEconomic
Implications,Koichiro Fukui, Kiyoshi Nakamura, Tsutomu Ozaki, Hiroshi Sakmaki, Fumitoshi Mizutani, 1994.
108 - Management Contracts:A Reviewof InternationalExperience,Hafeez Shaikh, Maziar Minovi, 1995.
109 - CommercialReal EstateMarket Developmentin Russia,April L. Harding, 1995.
110 - ExploitingNew Market Opportunitiesin Telecommunications: Lessonsfor DevelopingCountries,Veronique Bishop,
Ashoka Mody, Mark Schankerman, 1995.
111 - Best Methodsof RailwayRestructuringand Privatization,Ron Kopicki,Louis S. Thompson, 1995.
112 - EmployeeStock OwnershipPlans(ESOPs),Objectives,DesignOptionsand InternationalExperience,JeffreyR. Gates,
Jamal Saghir, 1995.
113 - AdvancedInfrastructureforTimeManagement,The CompetitiveEdgein EastAsia,Ashoka Mody, William Reinfeld,
1995.
114 - Small ScalePrivatizationin Kazakhstan,Aldo Baietti, 1995.
115 - Airport Infrastructure:TheEmergingRole of the PrivateSector,RecentExperiencesBasedon 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 ReviewofExperiencefor Future Projects,Michael Gerrard, 1997.

JOINT DISCUSSION PAPERS

Privatizationin the Republicsof the FormerSoviet Union:Frameworkand Initial Results,Soo J. Im, Robert Jalali, Jamal
Saghir; PSD Group, Legal Department and PSD and Privatization Group, CFS - Joint Staff DiscussionPaper, 1993.
MobilizingPrivateCapitalforthePowerSector:ExperienceinAsia and Latin America,David Baughman,Matthew Buresch;
Joint World Bank-USAID Discussion Paper, 1994.

OTHER CFS PUBLICATIONS

JapaneseNational RailwaysPrivatizationStudy,World Bank Discussion Paper, Number 172, 1992.

Nippon Telephoneand Telegraph
PrivatizationStudy, World Bank DiscussionPaper, Number 179, 1993.
BeyondSyndicatedLoans,World Bank Technical Paper,Number 163, 1992.
CFS Link, Quarterly Newsletter.

RMC Information Center, phone: 202-473-7594, fax: 202-477-3045

Copyright (©1998
The World Bank
1818 H Street, NW.
Washington, D.C. 20433, U.S.A.

All rights reserved

Manufactured and printed in the United Statesof America

The findings, interpretations,and conclusionsexpressedhereinare entirely thoseof the authors and should not be
attributed in any manner to CFS, the World Bank, or to members of the Board of ExecutiveDirectors or the countries
they represent.The World Bank does not guaranteethe accuracyof the data included in this publication, and accepts no
responsibilitywhatsoeverfor any consequence of their use. The paper and any part thereof may not be cited or quoted
without the author's expressedwritten consent.
RMCDISCUSSIONPAPERI 19

Power Project Finance:

Experience in
Developing Countries

SumanBabbar
JohnSchuster
Contents

Foreword vi
Abstract vii
Acknowledgments viii
AbbreviationsandAcronyms ix
1 Background 1
Focus 1
PowerSectorNeeds 1
KeyIssues 2
Notes 4
2 MarketTrends(239 Projects) 5
CapitalContributions 5
MarketParticipationand Competition 5
ProjectFinance 7
Fuel Choice 8
RegionalTrends 8
3 IndependentPowerProjectFinance (72 Projects) 9
PowerProjectFinanceCharacteristics 9
Marketand Project Structure 11
FinanceTrends 12
DevelopmentLead Times 14
Notes 14
4 Case StudyProjectProfiles(10 Projects) 15
ProjectCharacteristics 15
ProjectDevelopmentTimes 15
ProjectSponsors 16
Projectand FinancialStructure 18
Notes 19
5 Risk Allocation(10 Projects) 20
ProjectRiskManagement 20
Case StudyOverview 20
PredominantRiskAssumptionby Sponsors,Lenders,and Contractors 21
SharedRisk:Fuel 23
Host GovernmentRiskAssumption 25
Relationshipof ProjectRiskEnvironmentand GovernmentRiskAssumption 32
Notes 33

iii
6 Conclusions 34
Encouraging Factors 34
Challenges Ahead 35
Meeting Future Challenges 37
Sumnmary 38
Notes 38
Appendixes
A Background Tables 39
B Note on Source Material 42
C Glossary of Terms Used in the Study 43

Figures
Figure 1 Study overview 3
Figure 2 Project closures in developing countries, 1992-96 5
Figure 3 Market equity participation, 1994-96 6
Figure 4 Financial closuresof competitivelybid projects as share of total private power dosures
in developing countries, by capacity 7
Figure 5 Project finance 7
Figure 6 Regional and fuel mix of the power project finance market, 1994-96 9
Figure 7 Largest power project finance markets, 1994-96 10
Figure 8 Effect of project and market structure on average power purchase agreement length 11
Figure 9 Power project finance debt sources, 1994-96 12
Figure 10 Uses of risk debt capital 13
Figure 11 Case study project development time 17
Figure 12 Equity participation in case study projects 17
Figure 13 Sources of debt in case study projects 18
Figure 14 Fuel supply alternatives 23
Figure 15 Government risk assumption and utility performance 27
Figure 16 Relationship between country risk environment and government risk assumption 33

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

iv
TableA.2 Sourcesof debt for casestudyprojects 40
TableA.3 Governrnentforeignexchangerisk assumptionin case studyprojects 40
TableA.4 Economicand politicalrisk environmentin case studycountries 41
TableA.5 Independedntpowerproducerregulatoryframeworkin casestudycountries 41
TableA.6 Overallrisk environmentin case studycountries 41
TableA.7 Largestpowerproject financemarkets, 1994-96 41

v
Foreword

T hisstudyexaminesthe experienceof privategreenfieldpowerprojectfinancein developingcountriesin 1994-96.

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 private
sector represents a significant departure from years of public sector dominance in the finance, ownership, and operation
of 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 International
Development). That study evaluated project structure, risk allocation, and other issues based on information available in
1994 for eight projects in Asia and Latin America. The 1994 study was somewhat constrained by the limited amount of
private power experience prior to 1994. This study benefits from a substantially greater base of activity to systematically
evaluate 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 the
risk-sharing arrangements between private investors and host governments that enable private power projects to obtain
limited recourse finance. This study willhelp policymakersin developing countries structure and finance new private power
projects. 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 study
will 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 financed
and 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 that
sell power to utility off-takers but that are not majority-owned by the off-takers. For this subset of the market, referred
to as "power project finance (PPF)," this study analyzes trends in private power regulation, project structure, debt sources
and 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 in
the 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 managermentin the market as a whole.

Hiroo Fukui Nina Shapiro

VicePresident Director
ResourceMobilization and Cofinancing Project Financeand GuaranteesDepartment
The WorldBank The WorldBank

vi
Abstract

P rivate power is beginningto make large contributionsto power sectors in developingcountries.The nearly50
gigawatts(GW)of privategreenfieldgeneratingcapacityfinancedbetween 1994and 1996is three timesgreater
than all the privatepower capacityfinancedbefore 1994.The annual rate of private power project investment
duringthe 1994-96 periodis approximately30 percent of the total projectedannual investmentneeds for new genera-
tion in developingcountries.Privatepower is introducingnew sourcesof financingto developingcountrypower sectors,
providingnew services,and creatingcompetitivepowermarkets.
This study analyzesthe 1994-96 private powermarket to assesstrends in market competition,financingstructures
and sources,and risk allocation.This analysiswillprovideinsightsto help governmentsand investorsmaintainor expand
the role of privatepowerin developingcountries.
Nearlytwo-thirdsof allthe capitalraisedfor new privatepowerprojectsbetween 1994and 1996was providedunder
project finance structures,in whichproject cash flowsand assets,rather than sponsors'balance sheets, providesecurity
to lenders.This studyfocuseson one part of the project-financemarket-power projectfinance(PPF)-where privately
controlledprojectssellpowerto off-takersfor distributionin public grids.
Thisstudyexaminestrendsin regulation,projectstructure,debt sources,anddevelopmenttimes.Froma regulatoryper-
spective,a strongcommitmentto privatepoweris a keydeterminantof PPF activityin a country.Structurally,powerpro-
jectfinancehasinvolvedlargelybuild-own-operate (BOO)projectstructuresandlong-termcontracts.Merchantpowerplants
are rare.The vastmajorityof debt has involveddirect financeor creditenhancementfromexportcredit agenciesand mul-
tilateraldevelopmentbanks.Developmenttimesaveragetwo to three years,and is lessin countrieswith PPF experience.
A majoremphasisof thisstudyis to evaluatetrendsin risk managementby examining10casestudies,PPF dealsin Asia,
LatinAmerica,and the MiddleEast.The projectslargelyreflecta rationalallocationof risksamongpublic and privatepar-
ticipantsbased on the parties' relativerisk managementabilities.Privatesponsorsand lendersgenerallyassumerisksfor
completionand performancethat are withintheir control.Governmentsassumesubstantialrisksin nearly all projects,
mostlyin areasin whichtheyhavecontrol,suchas utilityperformance,currencyconvertibility, fuelcosts,inflation,uninsur-
ableforce majeure, and events.
political The levelof riskgovernments assume is largelycommensurate with the projectenvi-
ronment.Theyassumegreaterresponsibilities in high-riskenvironmentsand lessrisk in more secureenvironments.
The privatesectorusesa varietyof mechanisms for managingrisks.In halfof the projectsexamined,it reliedon centralgov-
ernmentguarantees.In the rest, it reliedon alternativemechanismssuch asgovernmentloans,publicinsurance,localgovern-
ment support,and strongcommitmentsbyutilityoff-takers.As marketsopen and becomecommercial,centralgovernments
are likelyto assumefewerrisks.Instead,the privatesectorwillrelymoreheavilyon alternativesourcesof projectsecurity.
Privatepower financefor greenfieldgeneratingcapacityshould continueto make substantialcapitalcontributionsto
powersectorsin developingcountries.The 1994-96marketexperienceshowsthat governmentsand investorshavemutual
interestsin a strongprivatepowerindustry.A competitivemarket, fair projectrisk allocation,and reasonabledebt terms
willhelp provideprivate power at low prices.The substantialamount of capitalprovidedto developingcountrypower
sectorsis evidenceof growinginvestorconfidence.
Privatepowercontinuesto face manychallengesin developingcountries.Protractedcontractrenegotiationsand a lack
of adequate govemmentrisk assumptionmay erode investor confidenceand restrainprivate investments.Continued
growthmayrequiregreaterprivatedebt capitalrisk taking.Governments,developers,institutionalbanks,privatelenders,
and financiersallhave a role in helpingto meet future challenges.

vfi
Acknowledgments

T his studywascommissionedby the WorldBank's ProjectFinanceand GuaranteesDepartment.The analysisand

writingwas performedby John Schusterof Hagler BaillyConsulting,Inc. under the direction and adviceof
Suman Babbar of the Project Finance and GuaranteesDepartment of the WorldBank and the analyticaland
technicalassistanceof SonaliShah of HaglerBaillyConsulting,Inc. John Sachs and SusanFinch Moore of Latham &
Watkinsprovidedlegaladviceand commentary.DavidBaughmanof the Project]Financeand GuaranteesDepartmentof
the WorldBank initiatedthe study.Severalothers made contributionsto the study,includingScott Sinclair,Alejandro
Mirkow,andFaridaMazharof the WorldBank;AndrewBartleyandSuryaSethiof the InternationalFinanceCorporation;
Maria Elena G. Barrientosof the Inter-AmericanDevelopmentBank; Diane M. Rudo, an independentproject finance
specialistand formner
vice presidentof projectfinance at the U.S. Export-ImportBank; and AlainStreicher,AmitDalai,
SteveWlliaams,Heather Vierbicher,SarahMilius,and Mark Symondsof HaglerBaillyConsulting,Inc. This studyrelied
heavilyon HaglerBaillyConsulting,Inc.'s InternationalIndependentPowerKnowledgeBase and the informationpro-
vided by developers,lenders, and othersassociatedwith casestudyprojects.

viii
Abbreviationsand Acronyms

ABB Asea Brown Boveri Ltd.

ADB Asian Development Bank
AIF Asian Infrastructure Fund
APSEB Andhra Pradesh State Electricity Board
BLT Build, lease, transfer
BOO Build, own, operate
BOT Build, own, transfer
BPCL Bharat Petroleum Corporation, Ltd.
CDC Commonwealth Development Corporation (U.K. development agency)
CEPA Consolidated Electric Power Asia
CFE Comision Federal de Electricidad (Mexico)
ClTlC China International Trust and Investment Corporation
CONITE National Committee on Foreign Investment and Technology
ECA Export Credit Agency
ELCOSA Electricidad de Cortes S.R.L. de C.V
ENEE Empresa Nacional de Energia Electrica
EPC Engineering, Procurement, and Construction
EPSA Empresa de Energia del Pacifico, S.A. (Colombia)
FEN Financiera Energetica Nacional (Colombia)
GAIL Gas Authority of India, Limited
GW Gigawatts
HECO Honduras Electric Corporation
IDB Inter-American Development Bank
IFC International Finance Corporation
IIP International Independent Power
IP Independent Power
IPP Independent Power Producer
JEXIM Japan Export-Import Bank
LIBOR London interbank offered rate
LOI Letter of Intent
LOS Letter of Support
MDB Multilateral Development Bank
MIGA Multilateral Investment and Guarantee Agency
MOU Memorandum of Understanding
MW Megawatts
NCPG North China Power Group
NPC National Power Corporation (Philippines)
O&M Operation and maintenance

lx
 OECD Organisation for Economic Co-operation and Development
OGDC Oil and Gas Development Corporation (Pakistan)
OPIC Overseas Private Investment Corporation (U.S.)
PEC Pangasinan Electric Corporation (Philippines)
PICC Peoples' Insurance Company of China
PLN Perusahann Listrik Negara
PPA Power Purchase Agreement
PPF Power Project Finance
TCW Trust Company of the West (U.S.)
TEAS Turkiye Electrik Uretim Eletim
USEXIM U.S. Export-Import Bank
WAPDA Water and Power Development Authority (Pakistan)

x
SECTION
1
Background
T he financeofprivatepowerprojectsin developing Focus
countrieshas emergedas a large,dynamicindus-
try.A total of 47 gigawatts(GW)of newprivate
powercapacitywas financed indeveloping countriesbetween
1994and 1996,an amountnearlythreetimesgreaterthan
thecumulative capacity ofprivateprojectsfinancedindevel-
opingcountriesbefore1994.Thisnewlyestablished mar-
ket is helpingcountriesin Asia,LatinAmerica,and the
MiddleEastto meettheirgrowingelectricityneeds.It is
alsointroducingnewcompanies to developing countries,
whichis creatinga moredynamicandcompetitive market.
As private poweractivityin developingcountrieshas
increased,investorsand host countrieshaveestablished
practicesforallocating projectrisksamongprivateandpub-
licsectorparticipants in theseprojects.
This studyanalyzesthe newlyestablishedmarketfor
greenfieldprivatepowerprojectsin developing countries.
It describestrendsin marketcompetition, riskallocation,
and financing structuresand sources,providinga detailed
pictureof today'smarketand themarketthat is likelyto
emergein thenearfuture.
Thisstudyalsoconsiderstherelationship betweenmar-
ket,finance,and riskmanagement trendsand the differ-
entprojectriskenvironments foundinthedeveloping world.
Eachregionand countryis realizingthe potentialof pri-
vatepowerat its ownpace,and eachis findingits own
approachesfor attractinginvestmentandcompleting pri-
vatepowertransactions. Forexample,whilemostcountries
haveencouragedthe developmentof build-own-operate
(BOO)structures,somehavereliedon build-own-trans-
fer (BOT)structures.Mostprojectshavelong-termcon-
tracts.However,a fewLatinAmericancountrieshave
merchantpowerplants,thatforgolong-termcontractsand
competeformarketsinstead.Whilemostcountriesrelyon
financing andcreditenhancement fromexportcreditagen-
cies(ECAs)andmultilateral development banks(MDBs),
a fewprojectsinAsiahavebeenableto obtainprivaterisk
capitalwithoutthem,relyinginsteadonlocalfinance.
1
Animportantfocusof this studyis projectfinancedeals
(privatepowerprojectsthat are financedon a limited
recoursebasis),in whichlenders'primaryor evenexclu-
sivesourcesofsecurityarethecashflowsand assetsofthe
project.Creditorsdonot receiveadditionalsecurityin the
formofunlimitedaccessto the assetsof theprojectspon-
sors.In contrast,under balancesheetfinance,lenders
haverecourseto both the borrower'sassetsand the pro-
ject'scashflows.In bothprojectandbalancesheetfinance
deals,lenderscanbenefitfrommanydifferentsourcesof
securityprovidedbyhost countrygovernments, multilat-
eralandbilateralinstitutions,andcommercialproviders.
Power Sector Needs
Thisstudyassessesthecontributions oftheprivatepower
industryto meetingthe newgeneratingcapacityneedsof
developing countries.
Capitalinvestmentfor newgenerationcapacityis one
of the fundamentalneedsof developing countries'power
sectors.Accordingtothe IntemationalEnergyAgency, devel-
opingcountriesareprojectedto investnearly$60billiona
yearin newgenerationcapacity:$40billionin Asiaalone,
$7 billionin LatinAmerica,and morethan $5 billionin
Africaand the MiddleEast.Withthe exceptionof a few
countriesin EastAsia,developing countrieslacksufficient
domesticcapitalto supportthislevelofinvestment ontheir
own.
Not addressedin this studyareotherenergyneedsof
developing countriesthatcannotbe metbyprivategreen-
fieldgeneratingprojects.Nuclearand manyhydroelectric
powerprojectswilllikelyremainthe domainofthepublic
sectorbecausetheyaffectimportantpublicinterestsinsafety
and irrigation.Nuclearprojects,in particular,are usually
consideredtoo riskyforprivatedevelopment. Developing
countriesalsoneedcapitalfor transmission and distribu-
tion systems.Finally,they require capitalfor privatization throughoutthisstudy as powerproject finance.These are
to improvethe efficiencyof existingpower sectorassets. privatepowerprojectsthat arefinancedon a limnited recourse
basis,that willsell at least a portionof their power to pub-
Key Issues licutilitycompaniesandpower grids,and that are not con-
trolledby utilityoff-takers.This segmenthas three major
This studyevaluatesthe issues for three segmentsof the elementswhichrequirefurther definition.
private powermarket in developingcountries: First,thisstudyfocusesonlyon projectfinance.Balance
* Overalltrendsfor the privatepowermarketin devel- sheet deals are excludedbecause their sources of debt,
opingcountries,withan emphasison projectfinanced terms,and projectstructuresdo not reflectthe countryand
deals (section2). project risk environmentas accuratelyas project finance
* Financeand project structure trends for a subset of deals.In makingloans to balance sheet projects,lenders
project-financeddeals (section3). maybe less concerned about country and project risks
* Project risk allocationfor 10 project-financedcase because they have access to the sponsors' assets if the
studyprojects(sections4 and 5). project defaults. In a balance sheet project, discerning
Section6 laysout someprojectionsbased on analysisof whetherthe sourceof finance,the lengthof financeterms,
these issues.Figure 1 providesan overviewof the analysis the levelof debt, the interest rate, or the allocationof pro-
performedfor each portionof the market. ject risk resulted from the individualproject's character-
istics or from the creditworthinessof the project sponsor
Private powermarkettrends is virtuallyimpossible.Under project finance, where the
onlysourceof recourseto lendersis the projectitself,there
The startingpoint forthis studyis an evaluationof market is no such ambiguity.Excluding balance sheet projects
trends with respectto all private power projectsin devel- leaves a project financemarket of 87 projectswith a gen-
opingcountriesbetween1994and 1996.Duringthisperiod erating capacity of 27 GW during the 1994-96 period
239 projectswerefinanced,totaling47 GWof capacity(see (see figure 1).
figure1).Section2 of thisstudyevaluatesthe followingpri- Second,the studyexaminesfinancingtrends for pro-
vate powermarket issuesto assessthe aggregatecontribu- jectswith salesfor distributionwithinan electricutilitysys-
tions of privatepower to developingcountries. tem,and screensoutwithin-the-fence dealsin orderto focus
* Totalproject volume.How muchprivatepowercapac- upon developing countries' commercialpower sectors.
ity has beenfinancedin developingcountries?What Within-the-fencedealsunderwhichpoweris generatedand
portionof developingcountries'generationcapacity usedon-sitedo not necessarilyreflectprevailingpowersec-
needs did privatepower capacitymeet? tor conditionswithina country.Excludingwithin-the-fence
* Participantsandcompetition.Howmanyandwhattypes projectsfurther limitsthe private power financefocus of
of privatecompaniesare participatingin privatepower this studyto 77 projectstotaling26 GW (see figure1).
markets?Is competitionincreasing?To what extent Third,projectsthat are ownedby the off-takersare also
are formalbidding systemsleading to greater com- excludedbecausetheydo not reflectprivatepowerfinance
petition amongdevelopersand financiers? conditions,but rather privateinvestmentin publiclyowned
* Typesof privatepower capacity.How much of the projects.Furthermore,becausetheseprojectsare self-dealt,
totalprojectvolumewaslimitedrecoursefinanceand (the same entity sells and purchasesthe power),the risk
how much was balance sheet finance?What were allocationis verydifferentfrom that on arms-lengthtrans-
the fuel types and sizes of these projects?In what actions.Excludingoff-taker-owned projectsleavesaremain-
regionswere most of the balancesheet and project- ing marketof 72 projectsand 21 GW
financedealsdeveloped?' Section3 alsoevaluatesthe followingtypesof finance
trends:
Financetrends Marketandprojectstructure. Whattypeofprojectstruc-
tures prevailin today'smarket? How much of PPF
Section3 evaluatestrendsin financingstructures,sources, salesare tied to long-termcontracts,and what por-
and terms for a portion of the market that is referredto tion are sold on a merchantbasis?Whatis the length

2
FIGURE
I
Study overview
Total greenfieldgeneration
privatepower In developing
countnes, 1994-96 Projectfinance
. .. ... . ~~~~~~~~~~~~~~.'...........
Study l
focus Markettrends
Source:
HaglerBaillyInternational
Independent
Power(WlP)
Knowledge
Base.
of power purchase agreements? How is the length
affected by project and market structure?
3 Financesources.What types of debt to equity ratios
prevailin today's market?What debt sourcesare being
used for PPF? What is the importance of private risk
debt capital and finance relative to ECA and MDB
finance?Towhat extent are privateborrowers in devel-
oping countries able to raise debt for power projects
from domestic sources of capital?
* Debt terms.What are typical maturities and interest
rates for debt in developing countries? How do debt
terms offered by ECAS, MDBs, commercial banks,
and capital markets differ? Are these terms affected
by local conditions?
* Development lead times. How long does it take to
develop a project from inception to financial closure?
Does it take less time to finance smaller projects?
Does it take more timneto close a developing coun-
try's first time deal than subsequent deals?What other
factors influence the time required to close a deal?2
Case studies:risk allocationandmitigation
From the 72 PPF deals, 10 projects were selected for analy-
sis of the allocation of risks among public and private sec-
tor project participants. These 10projects are representative
of the overall market. Sections 4 and 5 focus on the fol-
lowing issues:
* Participantroles. To what extent are fuel and equip-
ment suppliers, construction and O&M contractors,
and other project participants taking equity stake in
the project? How does this risk assumnptionaffect
Project Power projectfinance
financeexcluding (financeexcluding Case study
within-the-fence off-takerowned projects) projects
l Ill
Power project financetrends Case study
risk analysis
project development? What approaches are project
sponsors using to manage construction, fuel supply,
and other risks? To what extent are these approaches
becoming standard in the industry?
* Governmentriskassumption.What level of government
support and guarantees on specific risks is required
for project finance in particularcountries?What mech-
anisms do developing countries use to mitigate risk?
- Ability to replicateriskmanagementapproacbes. Towhat
extent are the case study projects typicalof the overall
private power market in developing countries between
1994 and 1996 in terms of fuel sources, project sizes,
finance sources, development lead times, and other
characteristics?To what extent are these projects typi-
cal of the projects that will be concluded in the next
few years? Is the level of governrmentrisk assumption
infuture projectslikelyto be higher orlower? How does
the level of risk-sharingcompare withthat in new mar-
kets that are likelyto emerge in the next few years?'
Conclusions
andfuturetrends
Conclusions about the prospects of the private power indus-
try in developing countries are based on findings from sec-
tions 2 through 5.
* Market volume. Will private power finance in devel-
oping countries remain at its current levelor increase?
WIllinvestorsmaintain a highlevel of interest in devel-
oping greenfield private power projects?
* Rolesoffinanciers.Willloans and credit enhancements
from ECAs and MDBs continue to be responsible
for a high portion of debt needed for private power
3
 in developing countries? How can the role of private
risk debt capital be expanded?
Governmentchallenges. Howcandevelopingcountries
maintain a high level of investor interest? Can viable
alternatives to sovereign guarantees be found?
Notes
1. The analysisof market trends was performed using Hagler
Baily's International Independent Power (IIP) Knowledge Base,
4
which provided information on the capacity, cost, timing, and
fuel type of privatepowerprojects.It alsoprovidedinformation
on the number and types of developers active in developing
countriesduringthe 1994-96period.
2. Analysisof financetrendswas basedon HaglerBailly'sIIP
Knowledge Base, plus additional research on project debt sources,
debt finance terms, power purchase lengths, development lead
times, insurance coverage, and other factors.
3. Risk analysisof case study projects was based on the sources
listed in the "Note on Source Material" in appendix B.
SECTION2
Market Trends (239 Projects)

P rivate power made a significantcontribution to

developingcountries'powersectorsbetween 1994
previous years. Prior to 1994, 107 projects totaling 17
GWof capacityhad receivedfinancingin developingcoun-
and 1996.It provided a significantshare of coun- tries. By 1996 an additional239 projectswith 47 GW of
tries' capital investment needs and brought new private capacityhad been financed(figure2). The annualvolume
investorsto the market. Moreover,the entrance of new of financialclosuresalsoincreased steadily,from 45 pro-
investorsis increasingmarket competition,whichshould jects and 8 GW in 1994 to 97 projects and 23 GW in
help providedevelopingcountrieswith reasonablypriced 1996.
sourcesof power. The 47 GW of private power financedbetween 1994
Projectfinanceaccountsfor most privatepowerdebt in and 1996representssignificantprivateinvestmentin devel-
developingcountries,in part becauseprojectfinancefacil- oping countries'power sectors. This capacityhas an esti-
itatesthe financingof largerprojects.Most projects,both mated constructioncost of more than $50 billion-nearly
balance sheet and project-financed,havebeen oil, gas, or $17 billiona year.This averagelevelof investmentrepre-
coal-fired,withEast Asiaaccountingfor more than half of sents approximately30 percent of the annual investments
total privatepower finance. that developingcountriesare projectedto makein newgen-
eration capacitybetween 1995 and 2005.
Capital Contributions
Market Participationand Competition
Privatepowerfinancein developingcountriesemergedas
a major businessbetween 1994and 1996.The volumeof Anothercontributionofthe privatepowerindustryhas been
projectsfinancedduringthis periodwasnearlythree times to introducenew investorsto the market.In 1991only 13
greater than the total volume of projects financed in all independentpowerproducers (IPPs)owned equityin pri-
vate power projectsin developingcountries(table 1). By
FIGURE
2 1993,51 IPPs had acquiredequity in developingcountry
Projectclosures
in developing
countries,1992-96 projects.In 1996the number increasedto 217. An addi-
(gigawatts) tional 112entitiesforwhichprivatepower is not a line of
50 business(suchas localindustrialfirms)alsoacquiredequity
in privatepowerprojects.
40 Increasedequityparticipationhas broughtin newtypes
ofprivateinvestorsthat werenot previouslyactivein devel-
30 opingcountrypowersectors.Asof 1991globalutilityaffil-
iatesand developerswerevirtuallythe onlyprivateinvestors
20 with equityinterests in developingcountryprivate power
TABLEI
I10 | | iil [ |Private powerequityparticipants,
selectedyears
0 Participants 1991 1993 1996
Cumulative 1994 1995 1996 1994-96 Independent powerproducers 13 51 217
priorto 1994 Totalparticipants 31 97 329
HaglerBaillyIIPKnowledge
Source: Base. Source:
HaglerBailly
IIPKncwledge
Base.

5
projects. By 1996 global developers and utility affiliates
were still strong market players. However, equity partici-
pation as of 1996 reflected significantly greater diversity,
as existing firms began new ventures and new companies
emerged (figure 3).
Perhaps the most significantdevelopment in market par-
ticipation has been the emergence of firms dedicated to
developingprivatepoweronaregionalbasis.Therearenow
51 regional developers, which control 13 GW of capacity,
or about 20 percent of the total project equity in develop-
ing countries. East Asia accounts for more than half of all
regional developer activity,in terms of both the number of
participants (26) and the amount of capacity controlled (7.2
GW). While most of these firms are locally controlled,
such as Tenaga Nasional Bhd. in Malaysia, some of these
companies are likely to emerge as truly global developers,
through both growth and industry restructuring. For exam-
ple, Consolidated Electric Power Asia (CEPA), a strong
regional developer in East Asia, will be consolidated into
the global power development organization of Southern
Electric International (SEI), a major U.S. electric utility
affiliate that recently acquired CEPA.
Another significant development has been the decision
by fuel companies, equipment suppliers, and engineering
and construction firms to launch new IPP ventures. As of
1991 none of these companies owned any equity in a devel-
oping country project. By 1996, 27 fuel companies had 4
GW of project equity, 23 equipment suppliers had 3.7 GW
and 10 engineering and contractor firms had 1.4 GEW
FIGURE
3
Market equity participation, 1994-96
TotalIPP players-67%
Globalfiuel
companies
Regional
Global
developes
Equipmnt
equipment
suppliers . .when
9% S t w.
Publicsector
12% sl NSN
.21YOlll | vate power market in 1996 when 4.5 GW of competitively
Localindustry hr
7% 14%
5 wrre-HaolerRailfvIIP Knr)wlerls RPi.
6
Competition
The strong response by private investors to the growingIPP
industry in developing countries has two powerful impli-
cations for market competition. First, growing market par-
ticipation has prevented any one company from achieving
dominance in the power sector of any country or region.
Second, the increased number of market players has
made it difficult for companies to expand their power port-
folios. In 1993 the average IPP controlled 153 megawatts
(MW) of capacity, yet the average interest of each partici-
pant grew by only 7 percent a year through 1996, to 189
MWEPrivate companies would prefer greater growth poten-
tial, but to be successful, companies need to enhance their
competitiveness by reducing prices, offering new services,
or raising finance at more attractive terms. While this sit-
uation is difficult for investors, it is favorable for develop-
ing countries, which are increasinglyable to seek and obtain
better deals.
Competitivebidding
Competitive solicitations for private power first emerged
in most parts of the world in 1992. However, competitive
bidding was slow to make a mark on the private power
industry, and many initial solicitations encountered diffi-
culties. In Mexico the Merida solicitation had to be re-bid
several times before finallybeing awarded in early 1997. In
the Philippines, an initial award to the Batangas Project had
:tobe re-bid because of the involvement of an equipment
supplier that was temporarily barred from doing business
in the country. In Incliacompetitive bidding had to contend
with a large number of projects already awarded under nego-
tiated agreements, many of which were rescinded so that
players projects could be re-bid. In Turkey two competitively
2l% awarded projects were delayed because of legal uncertain-
ties surrounding the country's BOT law.
Infrastructure Because of these problems, competitively bid projects
f.unds......d.id1
Ilb%tl
m
not result in any significantfinancial closuresuntil 1994,
1.5 GW of competitively bid projects achieved clo-
Global utiftey sure. In that year,competitivelybid projectsrepresented
.~i~1affiliates
16% about 15 percent of all financial closures (figure 4).
Competitive bidding became a sizable part of the pri-
bid projects achieved financial closure. Most of this growth
occurred in East Asia as the result of four closures totaling
3.3 GW In the MiddleEast, however,competitivebidding
FIGURE4 Competitivelybid projectspromiseto be an important
Financial bid projectsas
closuresof competitively sourceof powerthroughoutthe developingworld.Overall,
shareof total privatepowerclosuresindeveloping for45 GWof capacitywerereleased
68 pendingsolicitations
countries,bycapacity
(percent) in 1996and thus far in 1997.In Mexico,the bids received
25 by ComisionFederal de Electricidad(CFE) were so low
that the countryis nowconsideringdevelopingadditional
20 BOO projectsunder competitivesolicitationsrather than
i5 | ll proceedingwith additionalBLTprojects.In Thailandthe
15IL
| electricutilityEGAT concludedits firstand second com-
10 petitivebidding phases,and is nownegotiatingterms and
conditionswith 11biddingconsortiafor more than 4,100
5 MW Duringthe third phaseof its program,whichstarted
in mid-1997, EGAT plans to issue solicitationstotaling
1992 1993 1994 995 1996 4,000 MW of power projects. In India more than half of
Source:HaglerBaillyIIP KnowledgeBase. all power projects now in an advanced stage of develop-
ment havebeen competitivelybid. In China,a new policy
accountedfornearlythree-quartersof the region'sprivate now requires all major IPP projects to be competitively
power finance.Competitivelybid projectshave nowbeen bid. LaibinB was the firstproject solicitedunder this new
financedin virtuallyeveryregionof the developingworld. policy.
In countriesthat have developedIPP programs,com-
petitivebiddingcan greatlyexpeditethe developmentand Project Finance
financeprocessby establishingcontract conditionsand a
rationalframeworkwithinwhichdevelopmentcan occur. Limitedrecourseprojectfinancehas been responsiblefor
In Thailand,for example,a 700 MWcombined-cycle power the majorityof IPP market growthin developingcountries
plant sponsoredby Thai Oil, Unocal, and Westinghouse since 1993 and has alloweddevelopersto finance larger
receivedcorporatefinancialcommitmentsin 1996(thesame projects.Althoughfewerthan 40 percent of the 239 finan-
year that the project was bid) and sought project finance cial closuresthat occurredbetween 1994 and 1996were
in 1997.In the Philippinesthe Sualproject reachedagree- projectfinanced(therestwerebalancesheetclosures),pro-
ment on a power purchaseagreementonly a few months jectfinancehas accountedfor about 58percent oftotal clo-
afterthe bid wasawardedandreachedfinancialclosureless sures in terms of MW capacity(figure5). This is because
than eighteenmonths later. the average size of a project finance deal (300 MW) is
FIGURE5
Projectfinance
(I1994-96)
Numberof closures (I 994-96)
Capacity value(I1994-96)
Transaction
239 47 GW $50billion

36% of projects 58% of closuresby capacity(megawatts) 62% of transactionvalue

~~~~u
((A iCC
I PI0-' Of"rce
((
cti C
-~~~~~~~~~~~~~~~~~~~~~~~P

V ~~~Balance
sheet \
Balancesheet '\ Balancesheet

Source:HaglerBaillyIIP KnowledgeBase.

7
more thantwicethe sizeof a typicalbalancesheet deal (130 relativelylarge. The average size of a project financed
MW). The relativelylarge size of project financeddeals coal-fired power plant was greater than 600 MW Oil
reflectsa clearpreferenceby sponsorsnot to assumebal- and gasprojectsaveragedmore than 250 MW per project.
ance sheet risksfor largeprojects. More than 10 percent of private power capacity was
Projectfinanceaccountsforaneven greaterportion(62 financed on a contingent basis (currently financed on
percent) 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).Approximatelytwo-thirdsof the con-
capital costs per kilowatt.Though large deals would be tingent capacity was coal-fired. The rest was oil- or
expectedto achieveeconomiesof scaleand thereforedrive gas-fired.
costs down, project financing is often used to pay for
coal-firedplantsand integratedpowerplants that tend to Regional Trends
have higher capital costs. For example,in Peru, the lim-
ited recoursefinancedAguaytiaprojectinvolveda 155MW Morethanhalfof allprivatepowerfinanceoccurredin East
powerplant, gasfielddevelopment,a natural gaspipeline, Asia,wherethere is a largeneedfor power(table3). Nearly
petroleum refiningfacilitiesand a 400 km, 220kv trans- half of this capacitywas in China, and virtuallyall of the
missionline. In addition,project financedeals are usually other privatepowerfinancein the regionoccurredin four
fullyloaded with overheadtransactioncosts and interest countries: Indonesia, Malaysia, the Philippines, and
during construction.Under a balance sheet arrangement, Thailand.Of the remainingcapacityfinancedsince 1993,
development,finance, and other costs are often consid- almost 20 percent is 'locatedin India and Pakistan,while
ered corporateexpendituresand thereforeare not included LatinAmericaaccountsfor about 23 percent.
as part of a project's total reported capital costs. In this East Asia is particularlydominant in project finance,
regard,projectfinancemore accuratelyreflectsa project's accountingfor 60 percent of the total duringthe period.
true cost. Asiaas awholerepresented80percentof allprojectfinance
activity.Bycontrast, in LatinAmericamost privatepower
Fuel Choice capacitywasbalancesheet financed,mainlybecausemany
of the projectshavebeenrelativelysmall(lessthan 130MW
Oil-and gas-firedprojectshave accountedfor 53 percent on average).The lack of projectfinancein LatinAmerica
of allprivatepowercapacityfinancedin developingcoun- alsoreflectsthe factthat Argentina,historicallythe region's
tries since 1993with over two-thirdsof this capacitybal- largestprivatepower market, has a competitive(or mer-
ance sheet financed.Coal-firedpower projectsaccounted chant)marketwith lititleor no relianceon long-termagree-
for36percentofallprivatepowercapacitysince1993,while ments. In such a setting,the price and quantityof power
hydrocapacityaccountedfor only7 percent (table2). is determinedbythe marketrather thanbylong-termpower
Amongproject finance deals, the mix of coal and oil purchase agreements(PPAs).Creditorshave been reluc-
and gas projectsis relativelyeven: 44percent of all capac- tant to lend to merchantpowerdealsbecauseof uncertainty
ity was coal-fired,while 48 percent was oil or gas fired. about project revenues.
Both oil and gas and coal-firedproject financedealswere
TABLE 3
TABLE 2 Regionaltrends, 1994-96
Fueltype, 1994-96 (percent
ofGW)
(percent
ofGW) Project Balance
Fuel Project Balance Region finance Contingentsheet Total
type finance Contingent sheet Total Latin
America IS 14 43 23
Coal 44 61 10 36 EastAsia 60 86 29 54
Oil/Gas 48 35 68 53 SouthAsia 20 0 22 19
Hydro 5 4 13 7 Afrca/Middle
East 5 0 5 4
Other 3 0 9 4 Central/Eastem
Europe 0 0 1 0.2
Total 100 100 100 100 Total i00 i00 100 100
Total(GWM 27.3 5.4 14.0 46.7 Total(GWV) 27.3 5.4 14.0 46.7
HaglerBailly
Source: Base,
IIPKnowledge HaglerBailly
Source: Base.
IIPKnowledge

8
 3
SECTION
Independent Power Project Finance (72 Projects)

T he PowerProjectFinance(PPF)market,as defined
in section 1, represents an important segment of
Largestmarkets

the total power market in developing countries. PPF has been heavily concentrated in a few countries, the
As 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 financed between 1994 and 1996 (figure
will provide 21 GW of powerto countries'commercial power 7). Five countries had nearly 70 percent of the capacity
sectors. financed: Pakistan (the largest market), China, Indonesia,
Examination of the PPF market shows the followingreg- Malaysia, and the Philippines.
ulatory and financial trends:
* A strong commitment by the host government to FIGURE6
private power is a key determinant of activity in a Regionaland fuel mix of the power project financ
country. market, 1994-96
* Most projects haveBOO structuresand long-termcon- (percentage
oftotalmarket)
tracts. Other structures and merchant pricing are rare. Totalcapacity-21GW
* Most debt is provided through finance and credit Fueltype
enhancement from ECAs and MDBs.
* There is relatively little private risk debt capital. Oil/Gas
* Countries with strong domestic capital markets pro- 60.4%
vide a large portion of their own debt requirements.
* Project development time is considerably shorter in
countries with private power experience than in coun- 3O.8%
the
tries without it.

Power Project FinanceCharacteristics 5.6%

30.2%
The 1994-96 PPF market included 72 greenfield genera-
tion projects with 21 GW of capacity,accounting for about Region
three-quarters of all project financed private power capac- - -
ity. The characteristics of PPF capacity closely resemble EastAsia
those of the total project finance market in terms of fuel 52.9%
sources, regional distribution, and size, with only a few
exceptions.East Asiaaccountsfor only53 percent of PPF MiddleEast/Africa.
capacity (figure 6) and 60 percent of total project finance. 6.4%
Coal capacity represents 30 percent of PPF capacity and
44 percent of total project financed capacity.These differ-
ences ariselargelybecause5 GW of coal-firedcapacityis Latin
America SouthAsia
excluded from the PPF market, as it is majority-owned by
entitiesof the ChineseMinistryof Power. Source:
Hagler IIPKnowledge
Bailly Base.

9
FIGURE
7
Largestpower project financemarkets, 199496
Thismop wos producedby the Mop Desi'g Unit of TheWorld Book.
Theboundories.colors'denorninotionsand onyotherinformation
shown on thismop do not imply on the port of TheWorld Bork
Group, onyiudgment on the legolstolus of any teritory, or any
endorsementor acceptcnce ofsuch boundories
S.uroe:HaglerBailyIIPKnowledge
Bae.
Featuresof major markets
The 10 major PPF markets share three regulatory and
market features that together represent a commitment to
private power participation. These three features are poten-
tial prerequisites for other countries to emulate as they
embark upon private power programs.
* Rules for private greenfield capacitydevelopment. All
of the countries have established rules for greenfield
capacity development. With a few possible excep-
tions, most of the countries provide clear guidelines
and laws that facilitate private power development.'
* Private power track record. With the exception of
Mexico, private power projects were financed in all
10 countries prior to 1994. While onlya few of these
pre-1994 projects involved PPF as defined in this
study, this experience with private power ownership
allowed them to test private laws and to demon-
strate to investors a commitment to private power.
* Establishment of an organizedsolicitationprocess.All
10 countries have begun using formal power project
solicitation processes, many of which involve inter-
national competitive bidding.
10
IBRD29360
Rr,,ge.
MW ,N-be,
of YoTwa
Cout-s MW
- n2,00 MW 5 14,759
00 1999MW 5 4.630
10
-399 MW 13 1.609
1998
FEBRUARY
The experience of these 10 countries demonstrates that
sophisticated regulatory and market structures that shield
private power developers from the dominance of large,
state-owned utility companies are not prerequisites for
PPF. As long as countries enable private project sponsors
to sell power under long-term PPAs, countries do not
have to make additional regulatory and market reforms to
reduce the dominance of state-owned companies. Of the
10 major PPF markets, only Colombia has made signifi-
cant reforms in establishing an independent regulatory
commission, privatizing state-owned utility assets, and
ensuring that no one state company owns a preponderance
of the country's generating assets. Only a few of the 10
countries have achieved progress in any one of these three
areas.
In spite of thisfinding, there are manyreasonswhycoun-
tries should reduce the dominance of state-owned utili-
ties. Private power investorsconsistentlyassertthat reducing
government dominance over the power sector improves the
environment for private power investments.2 By reducing
regulatory risks, developing countries can encourage pri-
vate investors to accept other risks such as utility perfor-
mance or foreign exchange.
Market and Project Structure yearsless than the term of the PPA.After repaymentof a
project'soriginaldebt, power pricesnegotiatedunder the
The overwhelming majorityofPPF between1994and 1996 PPAsoften decrease.
involvedprojectswithBOO structuresandlong-termpower There appearsto be littlerelationbetweenthe lengthof
salescontracts,with the length of power purchaseagree- PPAsand a country'sconsiderationof marketrestructuring.
mentsdependinglargelyupon a project'sstructure. One mightexpect shorter length agreementsin countries
that are consideringrestructuring.Once marketsare sepa-
Project structure rated into generation,transmission,and distributioncom-
ponents, power prices are likelyto be determined by a
Of the 72 PPF deals,59 involvedBOO structures,(oragree- competitivemarketrather than bylong-termcontracts.The
mentsthat were similarto BOOs such as build-own-oper- existenceof long-termcontractsmayimpedea transitionto
ate-maintain),12involvedBOT structures,andSamalayuca competitivemarketsbycreatingportionsof the marketthat
in Mexicowas the only BLT. arenoncompetitiveor byrequiringpowerpurchasersto buy
This relativeabundanceof BOO projects,as opposed out these contracts.In countriesthat are consideringmar-
to BOT and BLT structures, reflects an increasing ket restructuring(suchas Colombia,Indonesia,Pakistan,
commitmenton the part of developingcountriesto trans- andThailand),however,PPAswith BOO projectsare actu-
fer long-termcontrol of the powerindustryfrom the pub- allylongerthan PPAsin countriesthat are not activelycon-
licsectorto the privatesector.Evenin countriesthat began sideringmarketrestructuring(Chinaand India; figure8).
performingprojectson a BOT basis (the Philippinesand There is someevidenceto supportthe contentionthat
China),manyrecent projectshavebeen BOO. market restructuringconsiderationsshorten the length of
BOT PPAs.In countriesthat are consideringrestructuring
Marketstructure (for example,the Philippines)the length of BOT agree-
mentsis shorter thanin countriesthat are not activelypur-
TheoverwhelmingmajorityoftheseBOOprojectshavepower suing restructuring (for example,Turkey;see figure 8).
purchaseagreementsthat stipulatequantity,pricing,andother However,the total number of BOT projects (12) is too
conditionsfor the long-termsaleof powerfromthe project smallto derive anystrong conclusionson this issue.
to the off-taker.In LatinAmericatherewerefiveBOO pro- Regionally,powerpurchaseagreementsaveragedabout
jects without long-termPPAs that sold power to national 25 years in Asia,generallyranging from 20 to 30 years,
powergrids.Noneoftheseprojects,however,reliedonpower
grid salesfor 100 percent of their revenues.For example, FIGURE8
two projectsin Argentinaobtainedsome of their revenues Effectof project and marketstructure on average
from salesof steam under long-termcontractswith on-site powerpurchase agreementlength
industrialfacilities,and the Aguaytiaprojectin Peruwillrely (years BOO BOT
onpetroleumsalesfornearlyone-thirdofitsrevenue. 25 (59projects) (12projects)

PPAlength 20

AmongprojectswithPPAs,the lengthof agreementsranged I5

from 15to 30 years,with an averageof about 21 yearsfor I0
BOO projectsand an averageof 15yearsforBOTprojects.
For both typesof projects,the length of the agreementis 5
largelydetermined by the need to amortizedebt. Project
sponsorstypicallytry to negotiatedebt terms that are as 0
Actively Not Actively Not
long as possible, but lenders, as a rule, will not extend consideringconsidering consideringconsidering
loans for periodsthat are longerthan the term of the pur- restructuring
restructurng restructuring
restructurng
chaseagreements. Toallowforunexpectedproblems,lenders Note: No BOT projectsin restructuredmarkets. 00 PPAlengthin restructured
marketsiszero.
usuallyprovide debt terms that are at least one to two Source:HaglerBaillylIPKnowledgeBase.

11
and about 17 years in Latin America, ranging from 15 to
21 years (excluding merchant power projects). The longer
length of PPAs in Asia reflects the larger size and com-
plexity of projects as well as their longer expected useful
lives. Many of the shorter-term projects in Latin America
were smaller-scaleoil and gas or diesel projects with shorter
useful lives.
FinanceTrends
Debt has supplied about three-quarters of all the money
needed for PPF in developing countries. The overwhelm-
ing majority of this debt has involved ECA or MDB direct
finance orprivate debtwith credit enhancement fromECAs
or MDBs. Largely as a result of this credit enhancement,
developing countries with relativelyhigh-risk environments
have been able to obtain financing at terms similarto those
in developingcountries with lessriskyproject environments.
Debt to equity ratios
The average debt to equity ratio in PPF was 74/26, which
is comparable to ratios in recently concluded power deals
in the U.S. market. There is little variation in average debt
among regions. Average ratios range from 70/30 in Latin
America to 75/25 in Asia and 80/20 in Africa and the Middle
East. During 1994-96 there was no appreciable time trend
toward higher or lower debt to equity ratios.
Power projects with some or all of their revenue affected
bymerchant powerprices have exhibited muchlowerratios
than those with purchase agreements. Among the 72 pro-
jects in this group, the only one with a debt to equity ratio
of less than 50/50 is Argentina's San Miguel power project.
Sourcesof debt financing
A very smallportionof foreignPPF debt financingcomes
from private lenders without any guarantees or credit
enhancement from ECAs or MDBs. Most debt (90 per-
cent) was provided either by host country sources or by
one or more of the following types of finance and credit
enhancementfrom MDBs and ECAs (figure9).3
* Direct funding
* Guarantees (for example, World Bank guarantees)
* MDB loan syndication, such as International Finance
Corporation (IFC) B loans
* Political risk insurance.
12
Export credit agencies were responsible for nearly half
of all PPF debt between 1994 and 1996, providing the
largest volume of finance in all regions. This money repre-
sents funds provided directly to power projects or guaran-
tees on money lent by commercial banks. ECAs provided
a smaller share of total debt to projects in Asia (42 percent),
where project risks were moderate, and a higher percent-
age of total debt in emerging private power markets in the
MiddleEast and Africa (70 percent).
Multilateral development banks provided $2 billion in
project finance debt, and bilateral development institutions
provided $800 million. This debt involved either direct
finance (IFC and :[DB A loans) or loan syndication (IFC
and IDB B loans), in which debt is provided by a private
lender, usually a commercial bank. Typically,multilateral
debt finance to a single project involvesboth direct finance
and syndication. The bank serves as the lender of record
for direct and syndi.catedloans, both of which benefit from
the preferred creditor status and other advantages associ-
ated with this type of lending.
T'hese loan syndications involve some political risk to
private lenders, but are generally considered more secure
than uncovered private debt. While the MDB does not gen-
erallyprovide loan guarantees for syndicated debt, its par-
ticipation in a project as a lender provides an important
source of security. Still, defaults on syndicated loans nearly
alwaysaffect direct loans provided by the MDBs, which are
typically paid pari passu with syndicated loans or are even
subordinated to syndicatedloans. Especiaflyin poorer coun-
tries, where MDBs provide a large amount of a country's
FIGURE9
Power project financedebt sources,1994-96
Trotal
debt-$18 billion
Commercial, Bilateral
uninsured 4%
59/6
Capitalmarkets Export
credit agencies
Co.mmercial, 48%
insured
9%
Multilateral
ll/o
Local
1796
Source:Hagler Bailly IIP KnowledgeBase.
total debt, government-ownedpower off-takersare con-
sideredto be less likelyto default on debt from an MDB
than on privatedebt.
Localcapitalprovidednearly$3.1billionof debtfinanc-
ingfor PPF projects.Allbut about $400millionof thiswas
raisedbybanksin Malaysia,Indonesia,andThailand,where
capital markets grew during 1994-96. In Malaysiaand
Thailandlocal financingsourceshave providednearlyall
of the debt financingneeded for PPF. The $1.9 billionof
locallyraised debt in Malaysiasupplied all but $200 mil-
lionof the debt financingneededfor threelargepowerpro-
jects, includingthe 1,303MW Lumut Perak natural gas
project. In Thailand $300 million in local funding pro-
vided three-quartersof the necessarydebt.
Only $2 billion,or slightlymore than 10percent of the
debt financingused for PPF during 1994-96,maybe con-
sideredprivateriskdebt capitalin that it did nothaveMDB
or ECAdebt coverage,politicalrisk insurance,loan guar-
FIGURE10
Commercial
bank debt-$950
million
5%
Indonesia
antees,or anyother multilateralor bilateralsupport.Nearly
allof thisriskdebt capitalwasprovidedto onlya fewcoun-
tries, mostlyin East Asia,whichhad a better investment
climate than other developingregionsand was therefore
able to attract privatedebt risk capital (figure10).
About $970 millionin capital marketslendingwith no
directguarantees,politicalrisk insurance,or other cover-
age accountsfor half of this at-riskfinancing.Nearlyall of
thismoneywasprovidedto Indonesia,the Philippines,China,
Chile,and Colombia,countrieswithinvestmentgradefor-
eigndebtratings.Whilecapitalmarketsprovidedonlyabout
6 percentof PPF debt financein 1994-96, theyprovided
an increasingamountof debt eachyearin 1994-96.Several
importantdealsrecentlyclosedin EastAsiameanthat cap-
italmarketswillprovidea largeamountof debt financein
1997.Furthermore,capitalmarketshaveprovideda larger
proportionof debt for within-the-fenceand off-takercon-
trolledprojectsnot includedas part of the PPF market.
The remaininghalf of the at-riskfundsoriginatedfrom
$950 millionof commercialbank lending.More than 90
percent of this moneywas lent to two countries)China,
wheresomeECAsdo not operate andwherethe economic
riskenvironmentis consideredrelativelylow,andMalaysia,
a countrythat has a high per capita incomeand does not
receiveWorldBank loans.

China ~Debt terms

24% 62%
The length of debt terms and the interestrate have signif-
icant implicationsfor the cost of private power in devel-
opingcountries.Debt is the mostimportantsourceof capital
for PPF, accountingfor 74 percent.Thus a project's debt
terms can influence the cost of power by more than
Capitalmarkets-$970million $0.01/kWh. 4
Colombiakstan
Cooba2%
Amongthe projectsanalyzedin the PPF market,debt
83
O/C _ termsrangedfrom6 to 17yearsandaveraged13years.There
China 1 1 _ is relativelylittledifferencein the lengthof loansofferedby
ffi %f _ 55Qno ECAs,MDBs,and commerciallenders(table 4). Not sur-
prisinglythen,the lengthalsodid notvarysubstantially among
Philippines regionsor even amongcountrieswith favorablecreditrat-
ings(or amongthosewith unfavorablecreditratings).
Interestrate marginsrangedfrom1.5percent to 4.0 per-
Chile cent over LIBOR,with an averageof about 2.7 percent.
17% Rates do not vary substantiallyamongdebt sources,nor
among low-risk and high-risk project environments.
Note: This debt is financed
withno guarantee,
politicalriskinsurance, Developing countries with low-risk project environments
or othercoverage.
Source:HaglerBzillyIIPKnowledge
Base. tend to pay a 2.0-2.5 percent premium over LIBOR.

13
TABLE4 TABLES
Debt terms Factorsinfluencingtime to financialclosure
Interestrate percentage Leadtime
Termlength pointsover LIBOR' Factor (years)
Financesource Range Average Range Average Averagetime 2.5
DirectECA 12-16 13 1.5-3.0 2.8 Size
Direct MDB 10-15 13 2.0-4.0 3.0 Large(>600 M\W) 2.7
Commercial-covered 6-16 12 I.5-3.0 2.8 Small(< ISO
MM 2.0
Commercial-uncovered8-15 13 1.5-3.0 2.5
Foreigncapitalmarkets 12-19 14 2.0-3.0 2.5 Countryexperience
Local 9-17 14 - Firsttime 3.6
Overall 6-19 13 1.5-4.0 2.7 Seconddeals 1.9
- Not available. Type
a. Includingcommitmentandexposurefees. Fossilfuel 2.4
Source:HaglerBaillyIIPKnowledgeBase. Hydropower 3.7

Countries with riskier project environments pay a premium Selected

of slightly more than 3 percentage points.
The relatively small amount of variation among debt
terms and interest rates evidenced during the 1994-96
period means that PPF debt is being provided at relatively
reasonable terms in allcountries. The major factor account-
ing for these reasonable terms is the significant amount of
lending and credit enhancement by ECAs and MDBs to
the market. These institutions are willingto lend to projects
in risky environments without charging a significant pre-
mium relative to that paid in less risky environments.
Development Lead Times
The average development time for PPF deals was 2.5 years.
The largest single factor influencing the speed with which
a project proceeds to financial closureis the experience base
of the country in which the transaction is being completed
(table 5). First time deals tend to take about twice as long
as subsequent transactions. The onlyexceptions to this were
deals arranged when the host country governmentwas expe-
riencinga severepower shortage.For example, the ELCOSA
project in Honduras reached financial closure quickly, in
part because it was developed during that country's power
crisis in 1994.
The fact that project experience typicallyleads to faster
closures should mean that closures should occur more
quickly in the future. So far, however, there is no evidence
that lead times in the market as a whole are being reduced.
Many of the projects that achieved financialclosure in 1996
were first time deals in countries such as Mexico and Turkey
and had been under development for some time.
There is some evidence that small projects can be devel-
oped faster than large ones. However, the effect of project
Source: in HaglerBaillyI1
transactions PKnowledgeBase.
size on development lead times is slight. Small projects of
150 MW or less have reached closure in about two years,
only slightly quicker than average, while large projects of
600 MW or more have reached closure in 2.7 years, slightly
slower than average.
Fossil fuel projects have reached closure in about 2.4
years. There is a small difference in the times needed to
close coal projects and oil or gas projects, but these are
explainable by project size. Hydropower projects have
reached closure in an average of 3.7 years, much longer
than is typical in the market. However, this longer lead
time should be expected, given the complexities of sur-
veying physical conditions at the plant site and of decid-
ing resettlement issues and water rights. There is not
enough evidence to support any strong conclusions about
the development times of other renewable energy
projects.
Notes
1. In TurkeyBOTlawswerechallengedin the courts.In Mexico
privatepowerlawshavebeen recentlyrevised.The legalenforce-
abilityof contractsin Chinais uncertain.
2.USAID1996,PrivatizationOptions for the PowerIndustry,
concludes that an independent regulatory commission is the
most importantregulatoryfactorfor privateinvestors.
3. Most host country sources are publiclyowned or raised
throughlocalcapitalmarkets.
4. Basedon the differencebetweendebt financedwitha six-
yeartermand a 1 percerlt premium over LIBOR and debt financed
with a 17-yearterm anda 3 percent premium over LIBOR. Assumes
a $1,000/kWbaseloadplant.

14
SECTION
4
Case Study ProjectProfiles (10 Projects)
T en case study projectswere selected for detailed
examination of their risk allocation (section 5). Four
are located in Latin America, five in Asia, and one
inthe Middle East. The purpose of this chapter is to describe
the general characteristics of these case study projects and
to assess the degree to which these projects reflect the over-
all 1994-96 PPF market.
Overall, these projects were found to reflect the regional
market trend with regard to structure, fuel type, size, debt
terms, and types of sponsors. The case study projects are
atypical of the market, however, in at least one respect.
More than half of the projects represent the host coun-
tries' initial experience in PPF. Therefore they required a
longer than average time to finance and relied on MDBs
and ECAs for a greater portion of debt than was typical of
the 1994-96 market. The significant amount of debt and
credit enhancement provided by these organizationsreflects
the high level of risk of first time deals and of some of the
countries involved.
Project Characteristics
The size and fuel type of the case study projects are largely
typical of the 1994-96 PPF market (table 6). The projects
in Latin America and South Asia use oil and gas,while those
in East Asia use coal. Similar to the overall market, case
study projects in Latin America are smaller than those in
Asia, with two exceptions: Samalayuca, a 580 MW project
in Mexico, and Tangshan, a 100 MW project in China.
Installed costs vary widely among the case study pro-
jects. Aguaytia, at $450/kW, has the lowest capital cost,
while Birecik, at $2,370/kW, has the highest cost. The cost
per kW is fairly typical of coal and oil and gas projects in
the overall market. While capital costs for hydro projects
are site-specific, they tend to be higher than those of fos-
sil fuel projects.
With the exception of Aguaytia and ELCOSA, the tariffs
range from 4.5 to 6.5 cents/kWh.Aguaytia'slowtariffresulted
15
from its statusas a merchantplantin Peru,whereelectricity
prices are expected to decline (from their current level of 5-6
cents/kWhto about 4 cents/kWh) as the spot market matures
and new,low-cost projects come on-line.
ELCOSA has the highest tariff at 8.5 cents/kWh. This
hightariff can be attributed to several factors,including the
use of imported heavy fuel oil, a 35 percent import tax on
this fuel, a lowdebt to equity ratio (66/34), a high-riskenvi-
ronment, and a desperate need for power in Honduras at the
time ELCOSA was negotiated. While this project was not
solicited through a formal competitive bidding system, the
tariff of 8.5 cents/kWh was based on the lowest tariff bid of
two other independent power producers (IPPs) that were
competitivelybid at the same time that ELCOSA was nego-
tiated. The urgent need for power and the high-risk envi-
ronment gave developers the leverage to demand relatively
highrates of return. ELCOSA sponsors were asked to build
the plant quickly and to take full construction risk in order
to do so. They also accepted the regulatory risks associated
with a system that had little or no private power laws and
regulations. While the cost of this project to Honduras is
high, it is arguablylower than the economic cost that would
have resulted from the continued power shortage.
In general, power prices are contractually guaranteed in
the power purchase agreements (PPAs).However,in China's
Tangshanproject, the project's off-taker, North China Power
Grid, does not have the authority to establish power prices.
The authorityto set pricesrests with the TangshanMunicipal
Commodities Pricing Bureau, which is not a party to the
deal. The tariff of 5.5 cents/kWh is based on an estimate
of the capacity and energy price that would provide an
adequate rate of return under the PPA as well as a long-
term forecast of coal prices (table 6).
Project Development Times
Project development times range from less than two years
to seven years (figure 11).l As described in section 3, coun-
TABLE6
Project profiles
Totalprojectcost Installed Approximatetariff
Country,project MW/fuel (millionsof dollars) cost ($/kW) (cents/kWh),
China,Tangshan 100/Coal 183 1.827 5.5
Colombia,Termovalle 240/Gasb 148 617 4.5
Honduras, ELCOSA 80/Importedheavyfueloilc 90 1,168 8.5
India,
jegunrpadu 216/Gas,Naphtha 228 1.055 s.5
Indonesia,PTjawa 1,220/Coal 1,705 1,398 6.5
Mexico,Samalayuca 700/Gasd 647 924
Uch
Pakistan, 586/LowBtugas 653 1,114 5.5
Peru,Aguaytia 155/Gas 705e 450 4.0
Philippines,
Sual ,200AmportedCoal 1,352 1,127 5.0
Turkey,Birecik 672/Hydro 1,593 2,370 5.5
- Notapplicable.
a.NocostkWh forSamalayuca as thisisa lease;Aguayba
computed based
estimated onspotmar-ket
priceprojection.
b. Capacityis ISOconditions.Capacityassiteis 199MW Grid off-takeis 160 MW, project also has 10 and 20 year power purchase agreements with ndustrialcustomers.
c. Grid off-takeis 55MW
d.Capacity
isISOconditions. at siteis580MWdueto altitude.
Capacity
e. Thisfigure includesonly the costs for the power portion ofthe integratedproject.
Case
Source: studyproject
sponsors
andlenders.

try experience is the main factor affecting the time from
project inception to financial closure. For the case study
projects, the average development time was 3.2 years. This
was higher than the market average of 2.5 years mainly
because many of these projects were the countries' first-
time private power projects. Birecik,Samalayuca,Aguaytia,
Jegurupadu, ELCOSA, and Uch allbegan negotiationsprior
to the establishment of standard documents orto any finan-
cial closings of other projects in their respective nations.
Jegurupadu and Birecik had the longest development
times. AlthoughJegurupadu was promised a sovereignguar-
antee, the project took more than five years to reach finan-
cial closure. The PPA was redrafted several times, and the
central government guarantee required lengthy negotia-
tions.2 The fact that the project began operation prior to
financial closing is attributable to the strong commitment
of the sponsors and the contractor, Asea Brown Boveri
(ABB). The Birecik hydropower project in Turkey took
almost eight years to reach financial closure. As is often
the case in a nation's first IPP,at the time negotiationsbegan,
the legal framework was insufficient. Clarifications and
development of the legal framework required additional
time, which extended the development period. In addition,
because of their technical complexity, hydropower pro-
jects are generally more difficult to negotiate.
Although ELCOSA was Honduras's first IPP, it had the
shortest development time of all the case study projects
(1.5 years). This short development time can be attributed
to many of the same factors that were responsible for the
project's relativelyhightariff. The country's need for power
was so great that the gove:rnmentasked the ELCOSA spon-
sors to build a temporary plant. Initially generating 24 MW
it began operating six months prior to final financialclosure
and was later expanded to 60 MW and then to 80 MW
Projects that were able to benefit from experience took
lesstime to develop. Indonesia's PT. Jawa was able to reach
financial closure quicklybecause of precedents established
by PT Paiton. Many of the Paiton documents, including
the comfort letter, were used for PT. Jawa. In the case of
the Philippines' Sual, five private power projects had already
achieved financialclosurebefore Sual's development began.
This experience, in addition to the government's commit-
ment to private power and its willingness to guarantee all
of National Power Corporation's (NPC) commitments,
helped to expedite negotiations.
Project Sponsors
Information on the case study project sponsors and their
equity participation at the time of financial closure is pro-
vided in figure 12 and table A.1. Five observations can be
made from this data. First, projects involve a wide variety
of sponsors, including host government public sector enti-
ties, regional IPP players, global utility affiliates, global
developers, fuel companies, equipment suppliers and EPC
contractors, infrastructulre funds, multilateral and bilateral
development agencies, and other organizations.
Second, the sponsors are not typical of the private power
market in developing countries. EPC contractors and equip-
ment suppliers have the largest equity share of the case

16
FIGUREII
Casestudyprojectdevelopment
time
(years)
Projectlstart date
China,Tangshan El $ , ElPPA/contracts
signed
May 1994,JointVentureAgreement s Constructionbegins
$ Finalfinancialclosure
Colombia.Termovallea Al $ Commercialization(if before 7/97)
August 1995,Bid Award

Honduras,ELCOSA A A $
July 1993.Bid Award

India,Jegurupadu| X $
February1992.GOAP Selection

Indonesia.
PT.Jawa E $
Apinl 1994,GOl Mandate

Mexico, Samalayuca Els$

December 1992, BidAward

Pakistan,Uch E7$
July 1993,MOU Signed

Peru, Aguaytiab_$_
March 1994,ProjectDevelopment

Philippines.Sual E1 $ s
April 1994,Bid Award

Turkey,Birecik | E7 $
April 1989, MNER Mandate
0 1 2 3 4 5 6 7
Years
a. Bridgefinancingwas obtained prior
to construction.
b. No PPA.
Source:Casestudy projectsponsorsand lenders.

study projects (27 percent), yet these companies control the highest equity stake in ELCOSA (30.6 percent), but
less than 10 percent of the equity in the private power Wartsilawas the lead developer. TEAShas the highest equity
market as a whole. Global developers have only 7 percent stake in Birecik (30 percent), yet Holzmann was the lead
of the case study project equity, but 14 percent of the total
private power market. Although there is only one regional Equity participation in casestudy projects
player in the 10 case study projects (CEPA), it controls 20 Globaldevelopers Global utility
percent of the equity because it owns 92 percent of the 6.6% affiliates
second largest case study project, Sual. Local industry
Third, in more than half the projects, one of the lead 8.6%
developers is a major supplier (table A.1). In five projects Publicsector. _
(Samalayuca, ELCOSA, PT. Jawa, Birecik, and Uch) an 6.9%
Other ~
equipment supplier is one of the main developers. In one 3.3%
(Aguaytia),the fuel supplier is the main developer.The pro-
ject company owns the gas and Maple Gas is the operations
and maintenance contractor for gas production and trans- Regional lEntrsppir/
players 27.2%pier
portation. 20.4% l2 e
Fourth, the lead developer is usually the party with the Globalfuel
largest equity stake. There are some exceptions, however. Infrastructurefunds companies
Scudder Latin American Trust for Independent Power has Source:
Case studyproject sponsors
and lenders.

17
developer. Also PanEnergy International Corporation and power in spot market. The capacity payments to EPSA will
El Paso Energy International Company have the highest be sufficientto cover the clebtservice,fixed costs, and return
stakes 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 ternmis 13 years. Debt terms are gen-
Fifth, the lead developer rarely retains more than 50 per- erallyrelated to a lender's country limits and willingness to
cent of the project equity. This small share reflects a need accept risks, and they are also limited by the PPA term
to diversifyrisks, especiallyin first time projects where risks length. PT.Jawa, Uch, and Sual,the projects withthe longest
tend to be greater, though an exception is CEPA, which PPAs, have the longest debt terms. ELCOSA and Birecik
holds 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's
Project and Financial Structure (14 years) is one year longer than the case study average.
The case study projects reflect a greater amount of credit
Seven of the 10 projects use a BOO structure (table 7). enhancement than is found in the market as a whole. More
BOO 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 pro- jects 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, and
ership of the project is transferred to the off-taker at the Birecik received the majorityof this debt from ECAs, while
end of the PPA term. Samalayuca uses a BLT structure in ELCOSA and TermovalleMDBs provided or syndicated
under which the sponsors lease the plant to the off-taker most of the financing. All.four of the case study projects in
(CFE). The sponsors retain possession of the plant until Latin America rely, to some degree, on funding from the
the end of the lease, when ownership is transferred 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 amouintof credit enhancement reflects
age PPA length for the case study projects is 21 years, the high level of risk among the case study projects, many
ranging 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 Samalayuca
Termovalle 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 lendinginstitutions 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 sponsors
TABLE7 planned to raise debt from capital markets, but were unable
Projectand financialstructure
FIGURE
13
Power purchae Sourcesof debt in casestudy projects
agreement Ttl$. ilo
lengths Debt/equity Debtterm Total-$5.4 billion
Project Structure (years) ratio (years) Foreigncapitalmarkets
Mexico.Samalayuca BLT 20 80/20 14 B[ateral
4
Honduras,ELCOSA BOO IS 66/34 10 6.4% Exportcredit
Colombia,Termovalle BOO 21a 72/25 13 agencies
Peru,Aguaytia BOO - 62/38k 12 . ! l . -. 60.6%
India,jegurupadu BOO 18 70/30 12 Mul4lateral
Pakistan,Uch BOO 23 80/20 15 5..4. t
Indonesia,PTJawa BOO 30 80/20 IS .i
Philippines,
Sual BOT 25 75/25 15
China,Tangshan BOO 20 70/30 10 Foreign
Turkey,Birecik BOT 15 85/15 14 commercial
Average 21 74/26 13 bank 10%
- Not applicable-merchantpower plant. Local
a. Lengthof EPSAPPAonly 2.5%
b. Afterfundingofsecondtrancheof IDB debt.
Source:
Casestudyprojectsponsors
andlenders. Source:
Casestudyprojectsponsorls
andlenders.

18
to do so whenthe 1994peso crisiseroded investorconfi-
dence in the Mexican market. The IDB stepped in and
providedthe debt that couldnot be raisedin the capitalmar-
kets. Multilateralsare alsobecominginstrumentalin pro-
jectdevelopment.Forexample,the IFC playedanimportant
role in renegotiatingthe PPAin the Jegurupaduproject.
Only 10 percent of the total project debt came from
commercialbankswithout anycoveragefromECAs,bilat-
erals,ormultilaterals.In maturemarkets,commercialbanks
are willingto provideuncovereddebt to IPPs,but in places
wherethereis stilla considerableamountofrisk,manycom-
mercialbanks continueto insist on some sort of political
or commercialrisk coverage.The reasonlocaldebt played
a smallrole in the case studies is that none of the case
studyprojectsare locatedin Malaysiaor Thailand,where
domesticsourcesof fundinghavebeen the most active.
Notes
1.Theprojectinceptiondateis basedon the bidawarddate
if the projectwascompetitively
bid.If the projectwasnotbid,
thentheinceptiondateis the datethat the MOU,LOS,or LOI
wassigned.Thedatethat the feasibilitystudywascompletedis
notusedasthe projectinceptiondate.
2. Centralgovernmentguaranteesforthe fasttrackprojects
arenotuniform.
19
SECTION5
Risk Allocation (10 Projects)
R isk managementis criticalto the financingof pri-
vate power projects. Lenders' primary or, in some
cases, onlysource of security is a project's cash flow,
which is subject to considerable technical, economic, polit-
ical, and foreign exchange risks. Improper management of
these risks placesa project's cash flowin jeopardy and makes
lenders unwilling to provide project finance.
This section explains the principles of risk management
and describes how the 10 case study projects allocate risk
between government and private parties.
The assessment is based on an analysisof documentable
risk allocation and does not address intangible factors, such
as developer judgment, that may influence how project risks
are allocated under actual circumstances.
Project RiskManagement
Effective risk management depends on a fundamental prin-
ciple: risks should be allocated to those most able to man-
age them. The parties accepting risks must have both the
capability to manage risks and the means to enforce risk
management roles legally.Amodel of howrisks maybe allo-
cated to governments and sponsors under this principle is
provided in table 8.
Project sponsors are best able to manage the risks that
projects will be completed within budget and on schedule
and that theywillperform as technicallyspecified. Sponsors
can retain capable contractors whose performance can be
contractually enforced, and can use hedging mechanisms
to manage financing risks. Sponsors can also manage some
foreign exchange and political risks by purchasing political
risk insurance. However, they have little control over polit-
ical instability,foreign exchange rate fluctuations, and other
economic and politicaldevelopments. Therefore, they have
little ability to assume these risks (see table 8).
Host governments can better manage economic and
political risks. Foreign exchange and inflation risks can be
addressed by fiscal policy and the allocation of foreign
20
exchangeto specificprojects.Governmentscan alsocon-
trol the activities and influence the financial condition of
public sector power off-takers. Sovereign guarantees can
provide a way to ensure the performance of off-takers to
the satisfaction of lenders.
Sponsors, governments, and power off-takers can man-
age fuel supply and price risks, depending on the circum-
stances of a project's fuel supply. Sponsors can import fuel
from established international suppliers under long-term
contracts or obtain access to alternative sources.
Governments generally control national fuel sources and
fuel import licenses.Power off-takersare best able to absorb
fuel pricerisk bypassing cost increases on to their customers.
Case Study Overview
To a large extent, the 10 cases examined for this study fol-
lowed the risk allocation rnodel outlined above (see table
8). Sponsors, lenders, and contractors (collectivelyreferred
to as the project) assume(dnearly all completion, perfor-
mance, and financingrisks,whilehost governments assumed
most inflation, foreign exchange, utility performance, and
political risks. Fuel risks were shared among private and
public sector participants. Six projects follow this model
closely:Tangshan (China), Sual (the Philippines), PT. Jawa
(Indonesia), Jegurupadu (India), Uch (Pakistan), and
ELCOSA (Honduras).
Typically,the overall level of government risk assump-
tion is commensurate with a country's project risk envi-
ronment. In uncertain environments, governments assume
more risk; in more secure environments, they assume less.
The nature of project finance, however, precludes exclu-
sive reliance on standard approaches. Projects deviate from
the model because of varying risk environments and other
project-specific circumstances. For example, the govern-
ment of Mexico assumed substantial performance risks
for Samalayuca,while the Turkishgovernment took respon-
sibilityfor completion risk on the Birecik hydropower pro-
TABLE8
Riskmanagement mechanisms used by sponsors and government entities
Risk Sponsors/lenders/contractors Governmententities
Predominont
riskassumption
byprojectsponsors/lienders/controctors
Complebon Projectownership/control Grantingof permits/consents
Turmkey EPCcontracts
Developmentexpertise/resources
Technical
performance Projectownership/control None exceptfor BLT
TurnkeyO&M contracts
Financing Interestratehedges Off-takerabilityto pass-through
financecosts

Shoredrisks
Fuelavailabilityandprices Controlfuel supplyfor the project Controlof localfuelresources,importlicenses.
Storage/altemative
sources Off-takerabilityto absorbpriceincreases

Predominant
riskossumption
by hostgovemments
Foreignexchange Hedgeforeignexchange
rates Fiscalpolicy
reserves
Foreignexchange
Inflation Indexedcontracts Off-takerabilityto passthroughprice increases
Utilityperformance None Controlover off-taker
Abilityto coverutility'spayments
Political/change
in law Politicalriskinsurance Domesticpolicy

ject. Sponsors of the Aguaytia merchant plant in Peru
assumed substantial economic and exchange rate risks.
Through a loan to the Termovalle project by Financiera
Energetica Nacional (FEN, a financial institution owned
by the Colombian government), the government of
Colombia assumed greater technical risks and fewer eco-
nomic and political risks than the model would suggest.
While the case studies largelyreflect a rational model of
risk allocation among public and private participants, they
also reflect many unique approaches. Governments and
sponsors assume different degrees of risk and use differ-
ent mechanisms for allocating it (table 9). Most important,
only half the projects rely on central government guaran-
tees as the primary source of government risk assumption.
The other half rely on nontraditional sources.
Predominant Risk Assumption by
Sponsors, Lenders, and Contractors
Project sponsors, lenders, and contractors in the case study
projects generally mitigate the risks associated with project
completion, technical performance, and operations through
the retention of capable EPC and O&M contractors.
Projects are increasinglystandardizing the management of
these risks through the use of standard EPC and O&M
practices, which allowsponsors to manage risks of cost over-
runs, construction delays,and poor operating performance.
In addition, all projects purchase insurance to cover nat-
ural force majeure risks during plant construction and
operation.
Projectcompletion
All case study projects relied on EPC contractors to com-
plete projects through fixed price and date certain contracts
with delay damages. If the delay is not caused by a force
majeure event or by a change order from the sponsor, the
contractor must pay damages for completion delays.
Damages are usuallyequivalent to the amount that the spon-
sor would pay to the off-taker for delays under the PPA,
plus interest. In all projects, however, contractors' poten-
tial damages are limited to a specified amount, ranging from
15 percent to 35 percent of the EPC contractvalueafter
certain minimumsare met. Sponsors and lenders bear
risks to the extent that project completion damages exceed
this limit.
While projects generallybear a great portion of the com-
pletion risk, host governments may assume a small amount
of risk through national utility off-taker agreements to
help the developersobtain the consents and permits required
to build the plant. This level of government risk assump-
tion is minimal, however, because these agreements often

21
TABLE
9
Equityinterestsbyprojectparticipants
Construction Major equipment O&M Fuel
Project Off-taker contractor supplier contractor supplier
China,Tangshan
Colombia,Termovalle
Honduras,ELCOSA 0 *
India,Jegurupadu * *
Indonesia,PTJawa
Mexico,Samalayuca
Pakistan,
Uch *
Peru,Aguaytia
Philippines,
Sual
Turkey,Birecik *

Source:HaglerBaillyIIPKnowledgeBase.

specify no penalties for the off-taker's failure to provide
such support.
Governments assumed a reasonable amount of com-
pletion risk in three case study projects. First, in the Birecik
project, the Turkish government is arranging the necessary
land acquisition and resettlement of people. In addition,
the government will provide subordinated loans to the
project to cover cost overruns. This assumption of risk was
considered necessary under the physical and economic
uncertainties associated with construction of the large-scale
hydropower project. Second, in Mexico's Samalayuca pro-
ject, CFE takes completion risk, having agreed to provide
additional funds if inflation, domestic labor problems, or
other factors increase construction costs. Third, in Colombia,
FEN assumes the same completion risk as do other lenders.
Technical
performance
Sponsorsmitigatemajortechnicalperformanceriskbyrely-
ing on outside contractors. All equipment is tested for heat
rate and output during the testing phase, which immedi-
ately precedes commercialization. If the heat rate and out-
put are insufficient, the EPC contractor must pay damages.
After commercialization, the EPC contractor provides a
warranty on the equipment, which generally covers the pro-
ject's first year or two of operation. Unique or specially
designed equipment may have much longer warranty
periods.
After the warranty period, the O&M operator takes
responsibility for the project's technical performance,
although major defects remain the responsibility of the EPC
contractor or equipment manufacturer. The operator often
agrees to a specified heat rate and output schedule over
the life of the project, putting fees and bonuses at risk if
the guarantees are not met. As with completion, O&M dam-
ages are typically limited to a specified annual amount.'
Therefore, sponsors and Icnders assume considerable risks
to the extent that damages exceed this limit.
Termovalle sponsors and lenders assumed even greater
risks. In this project the O&dMcontractor receives an annual
budget. Any additional expenses require approval by the
sponsors, who generally consent in order to keep the plant
operating. Sponsors' only means of ensuring adequate O&M
performance is to threaten to discharge the operator before
the end of the contract.
Governments assumed technical performance risk in
onlytwo projects. In the Samalayuca project, the Mexican
utility CFE is the plant operator and is obligated to make
lease payments regardless of plant performance. FEN
assumes some technical performance risk for the Termovalle
project in Colombia by virtue of its loan to the project.
In addition to sharing responsibility for completion and
technical performance, sponsors can reduce their risks by
including contractors and equipment suppliers as equity
participants. Eight of the 10 case studies involve equity par-
ticipation by reputable construction contractors, equipment
suppliers, or O&M operators with a great deal of experi-
ence (table 9).
Equity investments by project participants serve the inter-
ests of both the participants and the project. Equity can guar-

22
antee contractorsand suppliersa marketfor their goodsor
services,whilethe projectcan benefitfroma contractor'sor
supplier'svestedinterestin exceptional
technicalperformance
(completinga projecton time,ensuringthat equipmentper-
formswell,providinglow-cost,reliablesourcesof fuel).Of
the four projectsthat beganconstructionprior to financial
closure Jegurupadu, Uch, Termovalle,and ELCOSA)all
involvedequityparticipationby an EPC contractor.2
Shared Risk: Fuel
The major fuel risksinvolve:
* Supply:Failureto deliver a specifiedquantity and
qualityof fuel accordingto a schedule.
* Price: Higher than expectedprices for fuel.
Sponsorsand governmentssharedsupplyrisksin the case
studyprojects.Governmentsassumedmost pricerisks.
ments regardlessof fuel availabilityHowever,Termovalle
does take riskson salesto non-EPSAcustomers,whichare
not coveredbythisguarantee.The Uch projectwillreceive
capacitypaymentsonly if the fuel is not supplieddue to
force majeure events.
Withthe exceptionof Sual,the governmentpartyassum-
ingthe fuelsupplyrisk obtainsfuelfrom domesticsources.
These sourcesare often government-controlled, facilitat-
ing governmentmanagement of these risks. In Uch for
example,the governmentof Pakistanguaranteesthe oblig-
ations of the state-owned Oil and Gas Development
Corporation(OGDC). In the Philippines,the government
utility NPC imports coal at international market prices
and suppliesSual under an energyconversionagreement.
The governmentis wellpositionedto obtain coal at a fair
price, as it may participatein internationalsales negotia-
tionswithcoalsuppliersand other EastAsiangovernments.

Fuel supplyrisks Third-partysalesagreement.The second optioninvolves

Sponsorsand governmentsassumedvaryinglevelsof fuel
supplyrisksusingthree differentalternatives(figure14).
Governmentor off-takerassumedrisk. In the Uch, Sual,
and Termovalleprojects, a government entity or power
off-takerassumedfuel supplyrisk.3
This option representsthe lowestlevel of risk for pro-
ject sponsors.If fuel is not delivered,the projectcontinues
to receiveits capacitypayments.In Colombiathe off-taker
providesfuel to Termovalle,whichreceivescapacitypay-
an agreementbetweenthe project and a fuelsupplierthat
is not a party to the PPA.The suppliermay be a govern-
ment entity,but the state does not give any guarantees.
Comparedto off-takerguaranteedfuel supply,third-party
sales agreementsinvolvea higher level of risk. Projects
forfeit capacitypayments and incentivepaymentsif fuel
supplyinterruptionsprevent the generation and delivery
of power.Thistypeof agreemententailsvaryingdegreesof
risk, dependingon the reliabilityof the third-party con-
tractor,the availabilityof alternativefuel supplies,and the
terms of fuel supplycontracts.

FIGURE14
Fuelsupplyalternatives
Methodof fuelsupply
Tangshan
(coal)
Fuelsupplier Aguaytia
(gas)
equityparticipant

ELCOSA(fuel oil)a
Third-party
agreement P.T.Jawa(coal)
Jegurupadu
(naptha,gas)
--------------------------------------------------------------- _

Sual(coal)
Govemment/off-taker
Tenmovalle (gas)
riskassumption
Uch(lowbtu gas)

Low High
Projectrisk
a. Fuelimportopton.
Source: Case
studyproject
sponsors
andlenders.

23
 The Jegurupadu project in India employs this method
of fuel supply in acquiringboth naphtha and gas for its three
turbines. One turbine is intended to operate on naphtha,
the other two on gas. The gas supply agreement with Gas
Authority of India, Ltd. (GAIL) is only a best efforts con-
tract without penalties for failure to deliver gas. The spon-
sors are contractually obligated to make some payments to
GAIL even if gas is not supplied to the project.
In contrast, the naphtha agreement withBharat Petroleum
Corporation,Ltd. (BPCL) provides greater security.If BPCL
is unable to deliver naphtha, the project may recover the
cost of delivering replacement fuel. The contract also allows
the project to obtain enough fuel to operate all three tur-
bines on naphtha if gas is unavailable. The plant can store
enough naphtha to operate all three turbines for 50-60 days
at the minimum level required under the PPA.
The naphtha contract compensates for many of the weak-
nesses inJegurupadu's gas supply agreement. However, the
gas supply agreement is still a source of project risk, because
incentive payments under the PPA depend on the type of
fuel used. IfJegurupadu operates onlyone turbine on naphta,
the project may receive incentive payments by maintaining
a higher than promised level of availability,even if the plant
is not dispatched. If more than one turbine is operated on
naphtha, the project may only be eligible for incentive pay-
ments if it is dispatched. This risk is considered important,
because the project expects to maintain a high level of avail-
ability and therefore to be eligiblefor incentive payments.
ELCOSA involves a substantially lower level of project
risk. It has a long-term contract for fuel oil with Texaco, a
strong, internationally recognized fuel supplier. If Texaco
is unable to provide fuel oil, the project may purchase fuel
from other international suppliers.
PT. Jawa faces a moderate level of risk. Coal will be sup-
plied by PT. Berau and PT Kideco Jaya Agung from mines
located 850 kilometers from the plant. Lenders did raise
concerns about the complex logisticalarrangementsrequired
for coal delivery and about the economic viabilityof one of
the mine operators. Eventually,the lenders agreed to assume
the risks, in part because the project has the option of obtain-
ing coal from other foreign and domestic sources.4
Fuelsupplierasequityparticipant.Underthethirdoption,
the fuel supplier is an equity participant. Project sponsors
face a high degree of risk exposure in this option, because
they are exposed to possible lossesfrom both their fuel sup-
ply and power project roles. As with third-party fuel sup-
24
ply,projects can lose capacity payments if fuel interruptions
do not allow plants to perform as contractually obligated.
However, equity participation can also reduce risks, as
long as fuel suppliers effectively manage their obligations.
Moreover,as equity participants,fuel suppliershave a vested
interest in ensuring that the project receives the required
quantity and quality of fuel.
The Tangshan project in China faces a relatively high
level of risk, most of which is borne by Tangshan Power by
virtue of its relationship to TangshanWest, the project's fuel
supplier. If Tangshan West is unable to meet its obliga-
tions, Tangshan Power must indemnify the project. While
this arrangement entails significant exposure, it does not
preclude the local government from assuming fuel risks, as
Tangshan West and Tangshan Power are owned by the
Tangshan municipal government.
The Aguaytiaproject also faces significant risk exposure.
In this integrated gas and power project, the sponsors are
responsible for developing a gas field, building pipelines,
constructing a power.plant, and installingtransmission lines.
The lenders agreed to bear these risks for three reasons.
First, there are opportunities as well as risks. About 30
percent of the project's revenues are expected to come from
the sale of natural gas and natural gas liquids. Second, the
sponsors have signii'icant experience in gas field develop-
ment. Third, the sponsors' equity interests provide a strong
incentive to fulfill their role as fuel suppliers.
Fuel price risk
Government power off-takers generally assumed fuel price
risksby passing on cost increases under the PPA. Assuming
that plants produce power at an agreed-on efficiencylevel,
sponsors recover all fuel costs. In only three case study
projects, did sponsors accept price risk. The Aguaytia mer-
chant plant in Peru receives payments based upon market
prices for power, which do not necessarily reflect the pro-
ject's gas costs. However, the cost of power may reflect gas
prices in general.
Tangshan's fuel costs are to be passed along to the pro-
ject's off-taker, No:rth China Power Grid (NCPG), but
NCPC has provided no price guarantees. Therefore,
Tangshan Power has provided a guarantee that prices will
allowthe project to earn an acceptable rate of return. Under
a termination agreement, failureto implement a tariff adjust-
ment for more than 90 consecutivedays represents a default,
in which case Tangshan Power may have to make termina-
tion payments.Thesepaymentsare,in turn, guaranteedby
the People'sInsuranceCompanyof China (PICC).
P.T.Jawa accepts a minor amountof price risk. In this
projectfuelpricesare renegotiatedannually. Whilethe gov-
ernmentpoweroff-taker,PLN, has no specificobligations
with respect to the price of fuel, it has agreedto establish
prices that allowthe project to earn an acceptablerate of
return.PLN has alsoagreedto absorbanyadditionalcosts
to pay for imported coal should the governmentsupplier
fail to provide enoughfuel.
Host Government RiskAssumption
Host governmentsassumeda substantialamountof risk in
allbut onecasestudyproject,the Aguaytiamerchantpower
plant in Peru. The major role of host governmentsis to
assumerisk for lendersin the areas of foreignexchange,
inflation,utilityperformance,and politicalstability(table
10).Govermnentsgenerallyassumeclly minorprojectcom-
pletionand technicalperformancerisks,plussomefuelsup-
plyrisks,as discussedabove.
Economic
andfinancialrisks
Foreignexchange.Powerprojects face three types of for-
eignexchangerisks:exchangerate,convertibility, and repa-
triation. With the exception of Termovalle, host
governmentsassume one or allof these risksin all of the
casestudies.The Colombiangovernmentassumesno for-
eign exchange risk in Termovalle,because the off-taker,
EPSA,wasscheduledforprivatizationat the timeof finan-
cial closure.At privatizationin May 1997,exchangerate
risks assumedby EPSA shifted from the governmentto
the new owners.5
Some assumption of risk appears warranted based
on governments' ability to manage foreign exchange
issues. Governmentsoften directlyestablish a local cur-
rency's value. In other cases, they indirectly determine
its valuethrough fiscaland monetary policiesthat affect
foreign currency flows into the exchange reserves.
Governments also decide how foreign exchangeis allo-
cated and how much of a company'sprofits must remain
in the country.

TABLEIO
Governmentriskassumption
casestudyprojects
Technical Economic
andfinancial
Project Political
Project technical Fuelsupply Foreign Inflation Utility changes
Country,project completion performance andprice exchange interestrate performance in law
China, Tangshan 0 0 4 4 4 4 4

Colombia, Termovallea 4 4 4 4 4 4 4

Honduras, ELCOSA 0 0 Q 4 4 * 0

India, jegurupadu 0 0 4 4 4 4 O

Indonesia, P.T.Jawa 0 Q 4 4 4 4 O

Mexico, Samalayuca 4 4 0 0 0 0 4
Pakistan,Uch 4 0 0 0 4) 0

Peru, Aguaytia 0 0 0 4 0 0 4

Philippines,Sual 0 0 * * 4 *

Turkey,Birecikb 4 0 n.a. * 0

* Substantial
government
riskassumption
C Partial
government
assumption
0 Littlegovernment
riskassumption
n.a. Not applicable.
a The governmentassumespartialriskin allcategories,
exceptfor foreignexchange,asa resultof FEN'sloanto the project.No othergovemmententityassumes
riskin the
Termovalle project.
b. Governmentriskassumptionin the Birecikprojectisnot strictlycomparable
to that of other projectsbecauseof the natureof hydroelectricplants.
Source:Casestudyprojectsponsorsandlenders.

25
 With respect to the host governmnents'assumption of
foreign exchange and convertibility risks, the case study
projects may be organized into three groups:
Government Assumption of Exchange Rate and
Convertibility Risks. In seven of the 10 projects, the
host government assumed risks for both foreign
exchangerates and convertibility:Uch, PT.Jawa, Sual,
Tangshan, Birecik, Samalayuca,and ELCOSA (table
A.2). In these projects the governments either indexed
payments to, or made payments in, foreign currency.
In four projects (Uch, Sual, Birecik, and ELCOSA)
the risk assumption is supported by a guarantee from
the central government.
In two of these projects (ELCOSA and Tangshan)
governmentsassumeonlypartialforeignexchangerisks.
In the ELCOSA project, governmententities took full
risk for foreign exchangerates but only partial risk for
currency convertibilityand repatriation. Payrnents are
indexed to the dollar but are paid in lempiras. The
Honduran government is committed to providingfor-
eign currencyfor relevant fuel payments.6 However, it
gives no assurances of foreign currency convertibility
for the project's fixed payments. Furthermore, foreign
exchange must usually be put in a Honduran bank
before it can be transferred out of the country.
These risks are mitigated by an agreement with
the project's industrial off-takers and local partners,
which makes foreign currency available to the pro-
ject if the government is unable or unwilling to do
so. The sponsors and some of the lenders have fur-
ther purchased convertibility insurance from the
Multilateral Investment Guarantee Agency (MIGA).
In Tangshan,government entities provide onlypar-
tial guarantees for both the rate and the convertibility
of foreignexchange.The project's tariffis adjusted only
if foreign exchangerate fluctuations exceed 5 percent
in any year.Convertibilityand repatriation risks to the
sponsors and lenders are mitigatedbut not eliminated
by an "undertaking" by China International Trust and
Investment Corporation(CMTIC).In spiteof this under-
taking (whichdoes not constitute a formal guarantee),
China maylimit sponsors'and lenders' abilityto obtain
and transfer foreign exchange.This undertaking does,
however,show the government's high level of support
and commnitmentto the project. Furtherrnore, under a
specialrisk insurance policy,PICC has agreed to make
any termination payments in dollars.
26
* Governmentassumptionofexchangeraterisksonly. The
Indian government assumed no currency convert-
ibilityrisks and only a portion of the foreign exchange
rate risks in theJegurupadu project. In this project,
only a portion cf the tariff is linked to the U.S. dCl-
lar. The termination payment is calculated in dollars,
but along with PPA payments, it is paid in rupees.
Thus the project bears a risk between the time that
payments are received and the time when they can
be converted. Lenders and sponsors were willing to
take this risk because they believe that India has sat-
isfactory foreign exchange reserves and that the goV-
ernment's manaigement of them has been sound.
Government assumption of foreign excbangeconvert-
ibility only. Aguaytia is the only case where foreign
exchange rate risk is not passed on to the off-taker
under a PPA. As a merchant plant, Aguaytia has no
such contract. The sponsors believe that the power
market prices in Peru that determine the project's
payments will mitigate foreign exchange risks. Tnese
prices are influenced byinternational oil and gasprices,
which are denorninated in dollars.
The central bank, however, does guarantee
Aguaytia's conversion of local currency into foreign
currency,and the project has the right to freely trans-
fer funds abroad. In addition, all of the debt and a
portion of the equity are covered by currency incon-
vertibilityinsuranceissuedbythe U.S.Overseas Private
Investment Corporation (OPIC). This coverage comr-
pensates investors if new restrictions prevent the con-
version and repatriation of remittances from insured
investments. OPIC coverage does not protect against
foreign exchange rate fluctuations or devaluations.
* Foreignexchangerepatriation.Thisstudy does not focus
extensivelyon foreign exchange repatriation. In most
cases, the guarantee of earnings repatriation is cov-
ered by each cotntry's foreign business laws rather
than by specific project guarantees. For exarnple,
the governments of India and Pakistan allow spon-
sors to repatriate all profits. India provides no addi-
tional guarantees to any specific projects. Similarly,
the government of Mexico gives no specific guaran-
tees of repatriation to the Samalayuca project.
* Inflation and interestrates. In general, governments
assume inflation rate risk and sponsors assume inter-
est rate risk. In eight projects (all but Aguaytia and
Termovalle), government off-takers allow cost
 increasescausedbyinflationto be passedalongunder
PPAsor leaseagreements.In the Birecikproject,the
Turkishgovernmentwillbearadditionalinflationrisks
by providingsubordinateddebt if the projectexpe-
riences cost overruns.While this arrangementwas
not established specificallyto guard against infla-
tion, it does covercost overrunsthat maybe caused
by inflation.
In these same eightprojects, sponsorsassumerisk for
floatinginterestrate loans.However,sponsorstypicallymit-
igatethisriskbypurchasingswapsthat convertfloatingrate
loans into fixed interestrate loans.
In the Samalayucaproject,the government-owned util-
ity CFE assumesboth interestrate and inflationrisk.As in
the Birecikproject, if Samalayucaexperiencescost over-
runs, CFE willprovide additional funds, in the form of
either direct contributions toward completionor higher
leasepayments.CFE alsoassumesinterest rate riskin this
leasebecauselease paymentsare not fixed until the time
of leaseconversion.Higher interestrateswillmeanhigher
leasepaymentsfromCFE to the project.InAguaytia,spon-
sors assume risks for both inflation and interest rates.
Becausethe projectisa merchantplantandso has nopower
purchaseagreement,thereisno vehicleforpassingincreased
costs along to the customer.Still, the sponsors' inflation
and interest rate risksmaybe mitigatedto the extent that
higherinflationand interest rateswillalsotend to increase
market power prices in Peru. In the Termovalleproject,
the privatizedEPSAbears inflationand interest rate risk,
whileFEN assumesthe same risk as anyother lender.
Off-takerperformance
The off-taker'sabilityto performas contractuallyobligated
maybe the singlemost importantriskfacingprivatepower
projects.Allprojectsrequire off-takersto makepayments
accordingto an agreed-onarrangement.For nonmerchant
projects,the primaryor evensolesourceof valueisthe PPA.
It governsthe quantityandpriceof power,and allowsprices
to adjustfor inflationand exchangerate fluctuations.PPAs
alsogovern politicaland force majeure risksand contain
provisions for contract termination and assignment.
Merchantpowerprojectsdo not havethis security.Rather,
they must depend on expectationsof power market sup-
ply,demand, and prices.
For projects with PPAs to be financed on a limited-
recourse basis, lenders require securityfrom the utility
responsibleformeetingthoseobligations. In industrialcoun-
tries,wherelendersrecognizemostutilitiesas commercially
viableentities,the utility's balance sheet and a favorable
andpredictableregulatoryenvironmentcanprovidean ade-
quate sourceof securityin most projectfinance.In devel-
opingcountries,whereutilitiesare eitherunknownentities
or unacceptablecredit risks,lenderstypicallyseek to have
utilities'obligationssecured by governmententities with
good credit.Weak governmentcredits in Pakistan's Uch
projectwere strengthenedby a WorldBank guarantee.
Lenders' traditional source of securityfor utility per-
formancehas been centralgovernmentsovereignguaran-
tees. This form of securityis in fact comrmonin the case
studies(figure15). Sixof them havesomeform of central

FIGURE15
Government
riskassumption
andutilityperformance

Centralgovernmet Other governmentriskassumption

Primaryform Sovereign Partial Comfort Strong Weaker Little/no
of government guarantees guarantees letter government govermnent government
support entities entities riskassumption

Government/
off-takerrisk High D> Medium D Low
assumptiona

Casestudy Birecik Jegurupadu PTJawa Termovalle Aguaytia

projects ELCOSA Samalayuca
Uch{{Ta
Sual
1
a
Tangshan

a.Govemment riskassumption
ofutilityperformance
determined
bythedegree
to whichgovernment
enates,
otherthanthepoweroff-taker,
guarantee
utlityperformance.
Source:Casestudyprojectsponsors
andlenders.

27
government assurances. Of the projects with central gov-
ermnent assurances, one has only partial guarantees and
one received only a pledge of government support rather
than a specific guarantee. Of the four projects without
central assurances, two rely on security from government
entities other than the central government. Two projects
have no performance guarantees from any entity other than
the power purchaser.
Traditional centralgovernment risk assumption. Central
government assurances are the traditional mechanism by
which governments secure utility performance. They are
the major source of utility performance security in six of
the case studies: PT. Jawa, Sual, Jegurupadu, Uch, Birecik,
and ELCOSA.
There is, however, significantvariation in the scope and
strength of guarantees provided by governments. The PT.
Jawa project in Indonesia has no guarantee but has a letter
of support(acomfortletter)from the governmentofIndonesia.
This comfort letter, like that provided to PT Paiton, con-
firms the government's support for the project. It represents
a strongcommitment by the governmentto ensure that PLN
willhonor its financialand contractual obligations.However,
the comfort letter is not a binding guarantee of PLN's oblig-
ations. Therefore, it may lack legal enforceability.
While the other five projects with central government
assurances received specific assurances, there is great vari-
ation in the scope of the guarantees. The strongest is a com-
prehensive guarantee of off-taker obligations that includes
a waiver of sovereign irmmunity(figure 15). The central gov-
ernments of Honduras, Pakistan, the Philippines,and Turkey
provided guarantees of utility performance under the Pr-A.
These governments also guaranteed repayment of debt and
some equity upon terrnination.
The Jegurupadu project in India received only a partial
guarantee. The central government does not guarantee
payments from the Andhra Pradesh State Electricity Board
(APSEB) to the project, but only guarantees foreign debt
upon the project's termination. This guarantee is consider-
ably less comprehensive than that provided to the Dabhol
project, which did guarantee utility performance under the
PPA as well as a termination guarantee. To compensate for
this deficit, Jegurupadu also received state guarantees from
the government of Anclhra Pradesh for APSEB's payments
and for all debt and equity upon termination (table 11).
Alternative sourcesof governmentrisk assumption.In the
Tangshan and Termovalleprojects, utility performance risk
was assumed by government entities other than the central
government. Assurances for Tangshan were provided by a
combination of local and central government entities, sim-
ilarto those in India'sJegurupadu project. Through Tangshan
Power, the municipality of Tangshan guarantees the quan-
tity of power sold to NCPG. It further guarantees that the
price paid by NCPG will give the project an adequate rate
of return. Though comprehensive, the Tangshan munici-

TABLEII
Governmentpower purchaseagreement termination guarantees
Power Terminationguarantees
Country,project payments Debt Equity
India,Jegurupadu
Governmentof India C
APSEB Is
Pakistan,
Uch c*
Philippines,
Sual c*
China,Tangshan
PICC
Tangshan
Municipal
Turkey,Birecik * 0
Honduras.ELCOSA * cc1

C Partial
* Fullguarantee guarantee

a Foreign
debtonly.
b. Senior
debtonly.
c Fixed
payment guarantee
onlyimplicitly
covers
debtandequity.
Source:
Casestudyproject
sponsors
andlenders.

28
pal guarantee was not considered financeable because
lendersbelievedthat the municipalitylacked
sufficientfinan- to mitigateutilityperformancerisk. IDB is a major lender
cial strength.Therefore,the project purchased insurance
from the central governmentinsurancecompany,PICC,
to cover outstanding debt payments in the event that
TangshanPowershouldbe unable to performas specified
in the PPA.
In ColombiaFEN assumesthe same off-takerperfor-
mancerisks as other lendersthrough its $15 million,12-
year, limited recourse loan to Termovalle. FEN's
participationreassuredlendersand sponsorsthat the com-
pany acquiring EPSA under its scheduled privatization
would be able to meet EPSAs obligations.The project,
however,has no specificguaranteesfrom anygovernment
entity for EPSA'spower payments. Termovallewas the
first IPP in Colombiathat did not receivea government
guarantee of power payments and the first to receive a
loan from FEN.
Littleornosupportofutilityperformance.
Governmentspro- willingto acceptthese risksin the Aguaytiaprojectthan in
vided littleor no supportof utilityperformancein two pro- AveFenix (table 12).
jects,Samalayuca in MexicoandAguaytiain Peru.Giventhe
irnportanceof aPPAinsecuringprojectfinance,andthe expe-
rience of the eight other projectsin which strong govern-
ment supportwasessentialto financialclosure,the factthat
these twoprojectswerefinancedon a limited-recoursebasis
seemsunusual.However,both of theseprojectshaveexcep-
tionalcharacteristicsthat explainwhyfinancingwaspossible
withoutgovernmentsupportof utilityperformance.These
factorsindicatethat the absenceof governmentsupportis
likelyto be the exceptionrather than the rule.
Developersand lendersto Samalayucaagreedto accept
risk for CFE's performancefor three reasons.First, CFE
is a largeand powerfulinstitutionin Mexicoand wascon-
sideredby somelendersto be a better creditrisk than the
government.That the lease paymentsto Samalayucawill
constituteonly about 3 percent of CFE's total capitaland
operatingcostsis indicativeof CFE's size.
Second,utilityperformancepresented the only major
risk. Under the project'sBLTstructure,CFE assumesall
operatingrisksother than major mechanicaldefects.Even
ifCFE has difficultyobtainingfuelsuppliesor experiences
operatingproblems,it is still obligedto make lease pay-
mentsto the sponsors.In BOO andBOTprojectsthe spon-
sors assume many of these risks in addition to utility
performancerisk.CFE alsoacceptedthe risksfor inflation,
interestrates, and foreignexchange.
Third,the presenceof the IDB and U.S. EXIMhelped
to Mexico,and the United States is an importanttrading
partner. The participationof these financialinstitutions
reducesthe likelihoodthat CFEwilldefaulton itspayments.
Sponsorsand lenders assumedeven greater risks for
power paymentsin the Aguaytiaproject.Paymentswillbe
made to Aguaytiafromgeneratorsthat are membersof the
Committeefor EconomicOperationof the System,which
is responsiblefordispatchinggeneratingunits in Peru,but
no governmententitysupportsthesepayrnents.In addition
to these risks, Aguaytia'ssponsorsand lenders accepted
risks for price fluctuationsin Peru's competitivepower
market.
Lenders'acceptanceof these risksis exceptionalin that
fewmerchantpower projectshave been project financed.
Other merchant projects such as Ave Fenix,a 160 MW
gas-firedplant project in Argentina,were balance sheet
financed. 7 There are six reasons
why lenderswere more
Non-powerrevenues.Aguaytiaexpectsto earn30 per-
cent of its revenuesfrom the saleof natural gas and
natural gas liquids,whichhavevaluein Peru and in
internationalmarkets.This anticipatedrevenuewas
importantto Aguaytia'sproject finance.In contrast,
AveFenixreliedentirelyon merchantpowerrevenues.
C
Competitive capacitycosts.Aguaytiawas able to con-
structits powerfacilitiesfor a costof about $450/kW
AveFenixhad capacitycoststhatwerehigherby about
$150/kW.
* StrongMDBsupport.The presenceof the IDB, a sig-
nificantlender to Peru, reassuresboth the sponsors
and other lendersabout importantpoliticalrisks.
Highpowerpices. Powerpricesin Peru are currently
about 5-6/kWh, whichis very high relativeto the
project'sexpectedcostsandin comparisonwithcosts
in other merchant markets. Given the country's
reliance on expensiveoil-fired generation, power
pricesareunlikelyto fallbelow3.5¢/kWhforthe fore-
seeablefuture.
* Favorable powerpricingrules.UnderPeruviandispatch
rules,merchantpowerprojectscan receivecapacity
paymentsregardlessof whetherpoweris dispatched. 8
These rules provide a sourceof revenuethat is not
affectedby spot power prices.These rules alsopro-
videno incentiveforprojectsto underbidtheirenergy
29
TABLE12
Comparison
of AguaytiaandAve Fenixpowerprojects
Aguaytia,Peru Ave Fenix,Argentina
Characteristics 155 MW gas-firedturbine 160MW gas-firedturbine
Revenues Hydrocarbons:
29% Merchantpower: 100%
Capacitypayments:I 1%
Merchantpower: 60%
Capacitycost $450AW $600/KW
Lenders Capitalmarkets Commerciallenders
IDB
Powerprices 5-6¢A/kW 20/kWh
Pricingrules Two-priceformula One pnceformula:capacitypayments
madebasedon dispatch
Projectstucture/paymentpriority Integrated Conventional
I. Gasandpoweroperatingcosts I. Gasand otheroperatngcosts,
2. Debtpayments (including
debt andequityon gas)
3. Gasand powerequity 2. Powerplantdebt
3. Powerplantequity
Note:Approximatedestimatedpricesasof firstquarter 1997.Powerpncesin Peruexpectedto declineto about3-4¢/Wh.
Source:
Casestudyproject
sponsors
andlenders.

prices, as Argentinian rules have sometimes done
under the country's "one price" rule. During the time
that Ave Fenix was being financed in 1996, some
power plant operators in Argentinawere sellingenergy
at prices below their variable costs in order to obtain
dispatch priority and thereby receive capacity pay-
ments.9 At that time, the pricing rules were a major
factor in explaininglowerpower pricesin the Argentine
market. Today,other factors, such as increased effi-
ciency,new plants, and lowgas prices availableto gen-
erators have kept prices low.
* Integratedprojectstructure.In contrast to most power
plant finance, Aguaytia's integrated project struc-
ture provides preferential treatment for lenders. In
conventional finance of nonintegrated projects, debt
and equity for fuel supply is paid before power pro-
ject debt. In Aguaytia debt to finance both gas and
power-related assets must be repaid before any equity
is paid. Because of this preferential treatment, lenders
estimate that debt can be fullyrepaid even with power
prices that are less than half their current levels.
Political risk and changesin law
Governments generally assumed the risk for both political
events and changes in tax and environmental law that could
increase costs or interfere with the project operation. This
finding is consistent with expectations, given the relative
ability of sponsors and governments to manage these risks.
Within their borders, governments are responsible for main-
taining political order and making changes in the law.
Sponsors' onlyrecourse for mitigatingpoliticalrisk is through
politicalrisk insurance. They have fewmechanisms for man-
aging changes in the law other than relying on host coun-
try governments. Foreign sponsors often fear that they are
easy targets for discriminatory changes in law.
Political.Political risks include expropriation, insurrec-
tion, political violence, and changes in law that adversely
affect a project. Althoughgovernments provided assurances
for many or all of these risks in the case study projects, many
projectsponsors stillchoseto purchase coveragefrom MDBs
or ECAs against expropriation, insurrection, and political
violence.
Central governments assumed sizeable political risks in
fiveof the case study projects: Uch,Jegurupadu, Samalayuca,
Sual, and Birecik. In these projects the utility is obligated
to make capacity payments if force majeure or other polit-
ical events prevent the project from generating power or
the off-taker from receiving it. There are limitations, how-
ever, on the types of political events for which govern-
ments will assume risk. For example, the government of
Pakistan will pay Uch its full capacity payment only if cer-
tain political force ma;jeureevents occur inside Pakistan or
directly involve the country (war, insurrection, loss of gov-
ernment authorizations, nationwide strikes, changes in law).
In some cases this payment will also include an amount
sufficient to repair any damage to the power plant.

30
 In two of the study projects, governmentslimit their
assumptionof politicalrisk to eventsthat preventoff-tak-
ers from receivingpower.In IndonesiaPLN is requiredto
makecapacitypaymentsto PT.Jawaifpoliticalforcemajeure
prevents PLN from acceptingdeliveryof power.It must
alsopay if a changein environmentallaw,a government
denialof a consent,or naturaleventspreventPT. Jawafrom
deliveringpower.PLN doesnot, however,haveto provide
capacitypaymentsfor acts of war, publicdisorder,strikes,
or natural events that prevent PT. Jawa from supplying
powerbut do not affectPLN's abilityto acceptdelivery.
Similarly,in the ELCOSAproject, Empresa Nacional
de EnergiaElectrica(ENEE) is obligatedto make capac-
ity paymentsevenif it cannot acceptpower,but not if the
projectcannot generatepowerbecauseof a politicalforce
majeureevent.
In severalprojectsgovernmententitiesare obligatedto
buy out the project and make a terminationpayment in
the event of expropriationor extendedpoliticalviolence.
Terminationpaymentsin these projectscover most or all
project debt and in somecasesinclude equityas well.For
example,in the Tangshanproject,the Chineseoff-takeris
not obligatedto make anypaymentsunder force majeure
events.If, however,a force majeure event lasts for more
than 90 days, the sponsorscan exercisean option to ter-
ninate the project.TangshanPowermust then repay out-
standingdebt but no equity.This obligationis supported
by a specialrisk insurancepolicyfrom PICC.
In Pakistaneither the project companyor the govern-
mentcanterminatethe Uch projectif politicalforcemajeure
eventsinsidePakistan,or directlyinvolvingPakistan(war,
insurrection,lossof governmentauthorizations),continue
for more than 180 days.In such a casePakistanmust pay
Uch an amountsufficientto repay the debt. In most cir-
cumstances,terminationpaymentsalsocoverequityinvest-
ments. For force majeureevents that do not incur inside
Pakistanor directlyinvolveit, the governrnentis not oblig-
ated to makecapacityor terminationpayments.
Changesin law. Changesin tax and environmentallaws
can greatlyincreaseprojectcosts.In most of the casestud-
iesthe powerpurchaseagreementspecifiesthat costincreases
resultingfromchangesin these lawsmaybe passedthrough
to the utiiityunder the powertariff.In some casesproject
sponsorscanexerciseoptionsto terminatethe project,trig-
geringthe obligationby the utilityor host governmentto
buy out the project.For example,in the Philippines,NPC
maybe obligatedto repaySual'soutstandingdebtandequity
investmentsifthe sponsor'sinvestmentis materially
reduced
by newor modifiedlawsor regulations.The Philippinegov-
emient supportsNPC obligationsunderits guarantee.
Change in lawtermination provisionsnegotiated for
Termovallestate that the privatizedEPSAcan exercisean
option to terminatethe project if changesin environmen-
tal law increasethe project'scapacitycosts by more than
10 percent.EPSAmust then make a terminationpayment
that is sufficientto cover outstanding debt balancesand
equityreturns.
The only form of governmentrisk assumptionin the
Aguaytiaprojectis a governmentguaranteeof tax stability
for30 yearson hydrocarbonrevenuesand 10yearsonpower
revenues.
govemmentrisk assumption
Summary:
The level of governmentexposurein the case studypro-
jects suggeststhree importantcondusions aboutboth tra-
ditional and alternative forms of government risk
assumption.
First, traditional,central governmentguaranteescon-
stitutethe strongestform of governmentrisk assumption.
In the five projectswith central governmentguarantees,
governmentsassumethe greatest levelof risk (table 13).
This is a logicalfindinggiventhe fact that adequateassur-
anceto a project dependsnot onlyon the comprehensive-
ness,but alsoon the strengthof the entitiesassumingrisks
and the enforceabilityof guarantees.
Second,for someprojects,nontraditionalformsof gov-
ernmentrisk assumptioncanprovideadequatesecurityfor
project finance. Marketparticipantsseem to be exploring
newmethodsfor allocatingrisk amongvariousgovernment
entities.In fiveprojects,the primaryor even solesourceof
governmentrisk assumptionwas providedbycreditworthy
entities other than the centralgovernment.These bodies
included localgovernments(Tangshanand Jegurupadu),
developmentbanks(Termovalle), and insurancecompanies
(Tangshan).In twoprojects(PT.Jawaand Samalayuca)the
governmententityprimarilyresponsibleforgovernmentrisk
assumptionwas the off-takeritself.Only in Aguaytiadid
governmententitiesassumeverylittlerisk.
Third,the trend in governmentriskassumptionis to pro-
videsubsequentprojectswith eitherthe same levelof gov-
emient risk assumptionor an evenlowerlevel.To a large
extent,this trend reflectsa decisionto extend fewercom-
31
TABLE13
Summary of government risk assumptionfor case study projects
Overall Governmentrisk
Central Other government government assumptiontrend
Country, project government entity risk assumption or future projects
China,Tangshan 0 C
Colombia,Termovalle C c
Honduras, ELCOSA c C LI.
India,Jegurupadu C * LI
Indonesia, PT.jawa 0 C C
Mexico,Samalayuca - * O

Pakistan,Uch 0 C C
Peru, Aguaytia 0 0 0 r
Philippines,
Sual * 0 *
Turkey,Birecika C 0*.

governmentriskassumptionC Partialgovernmentriskassumption0
Substantial Littlegovernmentriskassumption

3 Decreasing
governmentriskassumption,E: No change.
- No governmentriskassumption.
a. Governmentriskassumptionin the Birecikprojectisnot strictycomparable
to thatof other projectsbecauseofthe natre of hydropowerplants.
Source:
Casestudy projectsponsorsand lenders.

prehensive centralgovernment guaranteesto future projects.
Five countries that offered such guarantees (Philippines,
Pakistan,India,Turkey,and Honduras) are consideringreduc-
ing or eliminatingthem in the future (table 13). There is also
a trend toward less government risk assumption in coun-
tries that do not offer central government guarantees. Many
future projects in Mexico will have BOO rather than BLT
structures. In BOO structures, governments assume fewer
operation and technical risks. In Colombia future projects
willlikelyoperate in merchant power markets without PPAs.
Relationship of Project Risk Environment
and Government Risk Assumption
Government risk assumption in each of the case study pro-
jects is largelycommensurate with the country's risk envi-
ronment. More support is given in high-risk environments
than in low-riskenvironments. A country's project risk envi-
ronment depends on both regulatory risks and on political
and economic risks. (Euromoney's Political and Economic
Scoresand Standard and Poor's Long-TermForeignCurrency
Ratings are some of the better indicators of these risks; see
table A.4). The regulatory risks for IPPs depend on favor-
able policiesand laws,independent regulatoryarrangements,
transparent competitive bidding frameworks, and a lack of
dominance by state-owned utilities (table A.5).
The project risk environment varies widely among the
countries examined (table A.6). In the Philippines and
Indonesia a combination of favorable regulations and low
economic and political risk translates into a low project risk
environment.Conversely Honduras has highperceived eco-
nomic and political risks and an uncertain regulatory envi-
ronment, and therefore has a high project risk environrnent.
In Turkey a high level of project risk and the particular
construction and technical risksassociatedwith hydropower
projects led to greater government risk assumption for the
Birecik project (figure 16). So too in Honduras and Pakistan
do relativelyhigh-riskenvironmentslead to fairlysignifi-
cant governmentrisk assumption.In Indonesiaa lowper-
ceived level of project risk was matched by the relatively
slight government risk assumption for PT. Jawa.
In only a few case study projects is the level of govern-
ment risk assumption not commensurate with the project
risk environment. These exceptions do not indicate a mis-
calculation. Rather, they reflect legitimate project-specific
considerationsby governments and sponsors.The Philippine
governmentprovided comprehensive guarantees to the Sual
project despite a low-riskenvironment in order to expedite
the project during a period of acute power shortages. Sual's
development time of 1.5 yearswas exceptionallyfast. In con-
trast, the government of Peru assumed little risk for the
Aguaytia project in a medium-risk environment. The pro-

32
FIGURE16 2. Termovalledid, however,receivelimited recoursebridge
Relationshipbetween country risk environment financingto beginconstruction.
and governmentrisk assumption 3. Hydroelectric resources to the Birecik project are not
Govemment considered fuel for the purposes of this discussion. In this
riskassumption
project, the Turkishgovernment guaranteed water levels for
High Birecik Birecikand the sponsorsreceivecapacitypaymentsregardless
* Sual 'Uch * ELCOSA of hydrologicalconditions,exceptin the case of a force majeure
*Jegurupadu
event.
Medium *Samalyuca
MediumSm*Tangshan 4. The project'sharboris sufficientlydeep toaccomodatelarge
P.T.Jawa
'P.T.Jawa Targshan
ITermovalle vesselsthat can economicallytransport coal from a varietyof
sources.

Low *Aguaytia 5. EPSAs paymentsto the Termovafleplant are indexed to

Low Medium High
Countryriskenvironment
Note: The assessment of the risk environment and government risk
assumption in the Birecik project, to some extent, reflects the
specific nature of hydroelectrc project risks.
Source: Assessment of risk environment (tables A.4, A.5, and A.6) and governmer
riskassumption (table 3).
ject sponsors and lenders bore allthe risksexcept for changes
in tax law and foreign exchange convertibility and repatri-
ation. Lenders felt comfortable assumingthese risksbecause
of the project's strengths, which were described earlier.
Notes
1. Damagescausedby O&Mfailurescould exceedthe value
of the O&Mcontract.O&Mcontractorsare unwillingto assume
this risk and thus their penaltiesare limited.
dollars.Sponsorsand senior lendersmitigatedforeignexchange
risksthrough politicalrisk insurance and arrangementswith a
Colombian trustee.
6. Honduras gives fuel importers favored access to foreign
exchange.As the country's largestfuel importers,the ELCOSA
sponsors have first rights to foreign exchange.
7. Lenders did offer project finance terms to Ave Fenix.
However,the sponsorschose to obtainbetter loan terms avail-
able for balancesheet finance.
8. Capacitypricesin Peru are basedon the cost of a peaking
plantand areadjustedtoreflectthe supply-demandbalance.Plants
receivelowercapacitypaymentsunderexcesscapacityand higher
paymentsduringsupplyshortages.
9. Argentia's one price system was recently amended,
however, to eliminate these incentives to under bid energy
prices.

33
SECTION
6
Conclusions
P rivatepower in developingcountriesis experienc-
ing an unprecedented boom as countries' need for
power has expanded more rapidly than their abil-
ity to finance it using public funds. Private power finance
realized some $50 billion in investment during 1994-96,
nearly two-thirds of it was project-financed. The number
of equity participants more than quadrupled.
This boom in financingis attributable to several factors:
the development of mechanisms allowing projects to be
solicitedand negotiated fairly(internationalcompetitivebid-
ding), the willingnessof governmentsto provide projects with
levels of security, and the provision of credit enhancement
by ECAs and MDBs. The 1994-96 project finance experi-
ence provides a favorable base on which the market can
develop furither.While the private power growth is slowing
in many countries, large new markets are opening in others.
The future also holds many challenges, including the
specter of contract renegotiation, a decrease in sovereign
guarantees, the emergence of alternative investment oppor-
tunities in the power sector, and the threat of fewer investors
willing to participate in the market.
In addition, the new market may offer increased scope
for merchant powerwith project paymentsdetermined by the
market rather than by long-term power purchase contracts.
Because of the unreliabilityof the revenue stream, lenders
have been reluctant to provide project finance for merchant
powerprojects,whichcould substantiallyinhibit their growth.
Sustainingthe spectaculargrowth in privatepowerfinance
in developing countries will require contributions from all
major private power stakeholders. Governments, lenders,
and developers need to find new ways to give projects the
security they need under rapidly changing conditions.
EncouragingFactors
Several encouraging factors indicate that project-financed
power plants will continue to provide a substantial amount
of developing countries' power needs.
34
A solidbaseof experience
The amount of capital invested in private power projects
grew from $6 billion in 1993 to $23 billion in 1996. A total
of 329 equity participants financed more than 239 projects,
generating 47 GW in 48 countries. Awide varietyof sources
have provided the debt for this newly established market,
including traditional lenders such as ECAs, MDBs, and
commercial banks and new ones such as international cap-
ital markets and local financiers. Many projects iniclude
complex arrangements, relying on the integrated finance of
power and non-power assets.
Private and public sectors in developing countries will
be able to build on this solid base of experience. This study
shows that as countries gain private power experience,
they are likely to seciare financing for new private power
projects more quickly
Largenumberof projects under development
There are currently more than 1,400 projects under devel-
opment with a capacity of 550 GW Experience suggests
that about one in five of these projects will succeed. If this
success rate continues, the projects now under develop-
ment will make a sigrificant contribution toward meeting
the power demands of developing countries for the next
several years.
That private power finance has already given some co,n-
tries (Pakistan, Malaysia, Indonesia, the Philippines) the
capacity they will need over the next few years does not
diminish growth prospects. Many more countries still need
power,includingseverallarge countries such as Brazil,China,
India, and Mexico.
Increasingnumber of equity participants
The number of participants in the market has kept pace
with the growth in capacity that has been financed. New
players,includingequipment and fuel suppliersas well as
engineeringand constructionfirms,haveentered the mar-
ket, offeringgreatercompetitionand newservicesthat can
help developprojectscreatively
Increasedcompetitivebidding
International competitivebidding has become an estab-
lishedpart of IPP policyin manydevelopingcountries.It
accountedfornearlyone-fourthof allprivatepowercapac-
ity financedin 1996 and is likelyto becomemore impor-
tant in the future. Private investors have shown their
willingnessto participatein competitivesolicitations,and
manycountrieswith significantgrowthprospects (China,
India, Mexico,and Turkey)have implementedcompeti-
tive solicitations.
The trend towardcompetitivebiddingis by itselfa pos-
itive development,as it sustainsmarket growthin devel-
opingcountries,offersutilitiesthe opportunityto rationalize
the project selectionprocess,and expeditesproject devel-
opment. Competitivelybid projects can also increasethe
transparencyand fairnessof the decisionmakingprocess,
helpingto eliminateperceptionsof unfairnessthat might
lead subsequent governmentsto question project selec-
tion or renegotiateprojectcontracts.
Continuingneedfor projectfinance
Developershavesoughtprojectfnance formostdealsrather
than riskingtheir balance sheets. In many casessponsors
cannotcarrydebt forsuchlargeprojects,sorelianceonpro-
jectfinancingis likelyto continue.In addition,manydevel-
oping countriescontinue to experiencepower shortages.
With favorableeconomiesof scale and commercialeffi-
ciencies,large projectscan deliverpower at competitive
rates.
Catalyticrole of creditenhancement
ECAs, MDBs, and bilateral development agencies are
responsiblefor more than two-thirdsof all privatepower
debt finance.Credit enhancementhas been instrumental
in providingaccessto capitalunder reasonableterms.
Moreover,nearlyall privatelyfinancedprojectsinvolve
some form of multilateralor bilateralpoliticalrisk insur-
ance.Privatepowerdevelopersand lendersnowhaveexpe-
rienceworkingwithcreditenhancementprovidersand have
developedproceduresforallocatingpoliticalandcommercial
risksto those most able to assumethem. As governments
seekto reducetheirriskassumptionin privatepowerfinance,
commerciallenderswilllikelyneed greater support from
ECAs and MDBs.
Suitablegovernmentriskassumption
Evidencefrom the projectsexaminedin this studyreveals
that governmentsin developingcountries are becoming
increasinglyadept at allocating risk. They are assuming
levelsof risk proportionalto the risk environmentand are
no longerrelyingexclusivelyon centralgovernmentguar-
anteesfor projectsecurity.Other governmententities,such
as nationalbanks,governmentinsuranceagents,localgov-
ernments,fuel suppliers,and electricutilityoff-takersare
assumingmajor project risks. In addition,other forms of
financialsecurity,such as escrowaccounts and letters of
credit are alsobeing used for short-termcredit support.
Asgovernmentsincreasingly cometo acceptsuitablelev-
els of projectrisk, they are more likelyto embraceprivate
power as an equitable way of meeting long-term needs.
Whilesponsorsand lenderswouldprefertraditionalforms
of security,they largelyseem to accept these alternative
measuresin manycountries.
Increased
standardization
of risk allocation
IPP developershaveachieveda high degree of standard-
ization,especiallyin the general approachto risk alloca-
tionin turnkeyconstructionand O&Mcontracts.Theresult
is that investorsand governmentscan betterfocuson issues
that are specificto the projectand the country,such as the
levelof governmentsupportforpowerpayments,fuelsup-
ply,and foreignexchange.
ChallengesAhead
In additionto theseencouragingfactors,however,there are
severalthreats to the continued growth of private power
finance.
Threatof contractrenegotiation
The specter of contract renegotiationthreatensto under-
minethe confidenceof privateinvestors. The decisionby
the governmentof Maharashtrain India to firstrepudiate
35
and then to renegotiateEnron's Dabhol project was the
singlemost visibleevent in private power financeduring
1994-96. Other countries,includingPakistan,the largest
PPF market between 1994 and 1996, are consideringa
reviewof someessentialarrangementsfor ongoingprojects.
In manycountriesthereis alwaysthe threat that publicmis-
trust of foreigninvestmentwilllead politiciansto question
the privatepower decisionsof politicalrivals.
Competingsources
of investorinterest
Whilethe number of equityholdersin developingcountry
powerprojectshas grownwiththe market,competinginter-
ests are emergingthat mayreducethe number of investors
and divert attentionfrom greenfieldpower investments.
* Increased prvatizationactivity.The privatizationthat
has occurred thus far in the power sector is only a
fractionof the potential that maybe realizedin the
next few years.Countriesthat are just beginningto
privatizewillgreatlyexpandthismarket.
* Secondarymarketactivity. The experiencewith pri-
vate power in industrial countries suggests that
investorswillbegin sellinginterestsin the projectsto
earn quickprofits. Asa short-termstrategyto obtain
a marketpresence,newequityparticipantsmayfocus
on buyingthese assets rather than investingin new
powerprojects.
* Deregulation in industrialcountries.
As the power sec-
tors in the United States and Europe continue to
deregulate,investorsare devoting increased atten-
tion to mergers,asset acquisition,and restructuring
withinthese markets.
Limitson alternativesto centralgovernment
guarantees
The casestudyprojectsshowthat developingcountriesare
finding alternativesto centralgovernmentguaranteesin
order to provide the securityprojects needed to obtain
financing.However,the experiencein two of these coun-
tries demonstratessomeof the limitsof these alternatives.
In China, privatelyowned projectshave had difficulty
obtaininglimitedrecoursefinancebecauseoff-takershave
providedno firmprice commitmentsand strong govern-
mententitieshavemadefewor no guarantees.TheTangshan
project sponsorsdid succeedin findinga creativesolution
to finance their project without sovereignguarantees.
36
However,this solutionrequired significantcommitments
from the project's Chinese sponsor and the purchase of
costlyinsurance.The Tangshanmodel willbe difficultto
replicate,especiallyforlargeprojects,as it requiredthat the
project'sU.S.sponsorsacceptno compensationin the event
of termination.
In India the capacitythat has been financedrepresents
only a smallfractionof the projects under development.
Perhapsthe chief obstacleto a greater amount of project
financeis the unwillingnessof the Indian governmentto
provideevenpartialguarantees,suchas those givento the
Jegurupaduproject.The alternativesto sovereignguaran-
tees identifiedby the Indian governmentwillhelp finance
onlya smallpart of the capacitythat India willneed.'
Limited roleof private risk debt capital
Commercialbanks and the capitalmarketshaveshownlit-
tle willingnessto take extensivepoliticalrisksin develop-
ing country private power finance. They have provided
uncoveredfinancein onlya few,mostlylow-riskcountries
and only 10 percent of the total debt needed between
1994and 1996.So far,other sources,suchasECAs,MDBs,
and developingcountriesthemselveshave shoulderedthe
debt burden. However,as the need for privateinvestment
in both greenfieldprojectsand privatizationcontinuesto
grow,the abilityof these financingsourcesto continuetak-
ingrisksmaysoonbecornelimnited. Tosustainmarketgrowth,
privaterisk debt capitalneeds to assumea largerrole.
Merchantpowerplant risk
Asof the end of 1996no merchantplantprojecthadreceived
limitedrecoursefinancepurelyon the basisof revenuesfrom
power sales.PPAshavetraditionallybeen the main source
of securityfor limitedrecourseloans.The absenceof PPAs
in merchantsystemshas meantthe absenceof assuranceof
futuretariffs.ProjectssuchasAguaytiain Peruhavereceived
financingbeauseof specificcircumstances,the most impor-
tant being the abilityto generatenon-powerrevenue.
In light of this fact, developingcountriesthat are con-
sideringmerchant power systemsface a dilemna.If they
establishmerchantpowermarkets,theywillinevitably reduce
access to limited recourse finance. In a country like
Argentina,where balance sheet financehas provided suf-
ficientcapital,adopting a competitivepower systemmay
be logical.
 There are,however,limitationsto suchan approach.For
many borrowers,balance sheet finance maybe available
only at high interest rates and short debt terms. Reliance
on balance sheet financeis alsolikelyto inhibitthe ability
to finance large projects. Smallplants may be an accept-
ablewayto meetpowerneedsin countriessuchasArgentina,
whichhas sufficientcapacityto meet near-termdemand.
Countries facing severe shortages, however,may prefer
larger projects.Moreover,developershavebeen willingto
riskbalancesheetsinArgentinabecauseof its low-riskenvi-
ronment. Sponsorsmaybe unwillingto take such chances
in higher-riskenvironments,evenfor smallprojects.
Meeting Future Challenges
Developers,lenders, multilateralinstitutions,ECAs, and
developingcountrygovernmentsall have roles in helping
the market meet these challenges.
Avoiding
contractrenegotiation
Sponsors,privateinvestors,andinstitutionallendersallbear
responsibilityfor avoidingpower contract renegotiation.
Sponsors need to foster professionalbusiness relation-
ships that are in the long-terminterests of both develop-
ingcountriesandprivateinvestors.Governmentswillthen
be morewillingto supportthe long-termcommitmentsthat
developersmake.
Governmentscan conductproject solicitationand con-
tractnegotiationin a fairandtransparentmanner.Politicians
need to communicateclearly and frequently with their
own citizensso that voterswillbe supportiveof their gov-
ermnent's IPP policy.
Officiallenderssuch as ECAsand MDBsare well-posi-
tioned to mediatethe interestsof developingcountriesand
privatedevelopersbypromotingprivateinvestmentthrough
mutuallybeneficialmechanisms.For example,competitive
biddingcanhelpdevelopingcountriesobtainpowerat a rea-
sonablecostwhilesimultaneouslyreducingperceptionsof
unfairnessthat maylead to contractrenegotiation.
Maintaining
investorinterests
Policymakers in developingcountriesneed to recognize
that new competingdemandsfor globalpowercapitalwill
decreaseinvestmentsin marketswhereprivatepowerdevel-
opment is cumbersome.Therefore, solicitationprocesses
must be clear,and governmentdecisionsneed to be expe-
ditiousand fair and not subjectto reversal.Governments
shouldmakeexpeditiousrulingson securitypackagesthat
willbe adequatefor deals seekingprojectfinance.
Implementing
effectivecompetitivebidding
Off-takersin developingcountriesneed guidancein using
competitivebiddingto avoidcontroversyandselectthe best
projects.Multilateraland bilateralassistanceagenciescan
giveimpartialadviceon competitivebid solicitationsand
evaluations.And ECAs and private lenderscan adviseon
how to choose projectsthat can be financed,and devel-
operscan showsupportbyparticipatingin competitivebids.
Findingalternativesto sovereign
guarantees
This studyhas shownthat adequate privatepowerproject
securityneednot alwaysinvolvesovereignguarantees,yet
untiloff-takersbecomecommercially viableandrecognized,
manycountrieswillneedto continueofferinga substantial
amountof security.Therefore,governments, officiallenders,
and privateinvestorsallhaverolesin exploringviablealter-
nativesto sovereignguarantees.
Governmentsin developingcountrieswillneed to offer
alternativessuch ascofinanceby localdevelopmentbanks.
The sametypeof cofinancethat Colombia'sFEN provided
to Termovallecanbe madeavailablein other countrieswith
strong development banks (Brazil, China, India).
Governmentsthat are unwillingto offer comprehensive
guaranteescan offer partialones, such as debt repayment
onlyin the eventof termination.Theycan furtherenhance
the project securityenvironmentby makingdevelopment
processesclear and expeditiousand by acceptingcertain
project risks(inflationand foreignexchange).
Officiallenderscanimproveproject securityby contin-
uing to providecreditenhancement,and privateinvestors
can fashioncreativealternativesto sovereignguarantees.
the roleof risk debtcapital
Expanding
There is some evidencethat private risk debt capitalmay
accept greater levels of risk in the future. Global capital
marketsare expandingas institutionaland other investors
look for new investmentopportunities.As a result,private
riskdebt capitalfrom commercialbanks grewin eachyear
from 1994to 1996.
37
TABLE14
Participant roles in promoting private power in developingcountries
Host govemments * Executedear,fair,stable,andexpeditiousIPPdevelopmentpolicies
* Communicateprivatepowerstrategiesto consumers
* Provideadequateprojectsecurity
- Deregulateenergysectors,thusencouraging
thedevelopmentof integratedprojects
* Implementmerchantpowerpricingpoliciesthat encourageinvestrment
Developers * Fosterlong-termrelationships with developingcountries
* Participate
in competitivebid solicitations
* Findcreativealtemativesto sovereignguarantees
Privateriskdebt capital - Providefinancial
adviceon competitivebiddingprocesses
* Increaselendingto low rsk countres
* Endopportunitiesto lendto projectsin highrisk marketswith ECAandMDBparticipation
Officiallenders * Mediateinterestsof developingcountresandprivateinvestors
* Provideunbiasedsourceof adviceon competitivebid solicitations
* Continuestrongrolesin lendingandcredit enhancement
* Providepoliticalrsk enhancements,
especially
for merchantpowerprojects
* Offeradviceon power sectorreform

Private risk debt capital can play an important role in the
future by providing a minorityshare of the debt in projects
that receive financing from ECAs or MDBs. From 1994 to
1996 such minorityparticipationinrelativelylow-risknations
represented the primary use of funding from capital mar-
kets for PPF. Private risk debt capital can also expand its
role by providing a larger share of finance for projects in
both high- and low-risk markets.
Developing countries can encourage greater levelsof pri-
vate risk debt capital by giving projects adequate security
packages. The Tangshan project demonstrated that, even
without assurances from official lenders, private commer-
cial banks may agree to lend to projects where a strong gov-
erinment entity guarantees debt in the event of termination.
Financing
merchant
powerprojects
Countries establishing merchant power systems can take
several steps to improve the risk environment for project
finance. First, pricing rules can be structured so that pro-
jects are compensated based on the full market value of
both capacity and energy. Second, countries can establish
two-tiered markets in which a portion of power sales can
be sold under long-term contracts. Third, by deregulating
their energy sectors, countries can encourage the develop-
ment of integrated fuel and power projects that maybe eas-
ier to finance.
Official lenders can promote merchant power projects
by providing loans, politicalrisk insurance, and other forms
of credit enhancement that reduce concerns about politi-
cal risk. A lower level of political risk will encourage pri-
vate investors to invest in merchant power markets.
Summary
Achievingprivate power's potential in developing countries
requires contributions from all market participants (table
14).Solvingsome problems willrequire coordinated actions
by host country governments, official lenders, private
financiers, and project developers. In this regard, meeting
future challenges will indeed be difficult.
Nonetheless, there is reason for optimism. All partici-
pants have interests in maintaining strong private power
markets (see table 14). Host governments that execute
clear and fair policies and provide adequate security will
be more likely to attract private investment. Developers
who foster long-term relationships with host countries
and find creative solutions to security problems are most
likely to succeed in today's competitive markets, Private
risk debt capital can take advantage of new opportunities
by finding ways to invest safelyin both high- and low-risk
environments. Official lenders can continue to provide
credit enhancement and mediation, maintaining strong
roles in markets that will increasingly rely on private
investment.
By realizing their interests in private power investment,
all market participants can help ensure that private power
continues to make strong contributions to developing
countries in the future.
Note
1. See USAID/Centerfor Environment,Office of Energy,
Environment,andTechnology, TheFinancingCapability
of Indian
Institutionsto ProvideSovereignGuarantees.

38
APPENDIX A

Background Tables

TABLE
AI
Casestudyprojectsponsors
Country, project Leaddevelopers Type Origin Other sponsors
China,Tangshan SitheEnergies:
23% Globaldeveloper Germany AlI, Gov.of Singapore
Investment
Corp.,Muni. of Tangshan
Colombia,Termovalle KMRPowerGroup:70%' Globaldeveloper UnitedStates Marubeni
Honduras,ELCOSA WartsilaDieselDevelopment:15% Equipmentsuppber UnitedStates Scudder.Illinova,IFC
India,Jegurupadu GVKGroup: 13.5 %b; Localdeveloper/utility India AIF,IFC,ABB,APSEB,
CMS:25.3%c VintageInvestments

Indonesia,PT.Jawa Siemens
PowerVentures:50%; Equipmentsupplier Germany PT BumipertiwiTatapradipta
Powergen:35%
Mexico,Samalayuca GECapital:40% Equipment
supplier UnitedStates Intergen,ICA-FluorDaniel,El Paso
Plakistan,
Uch MidlandsPower:47%; Utility!equipment UnitedKingdom Hawkins,HasanAssociates
GE Capital:22%; Tenaska:
23% supplier
Peru,Aguaytia MapleGasCorp. de Peru:11.7% Fuelcompanies UnitedStates PanEnergy,
ElPasoEnergy,Illinova,
Scudder,
Power Markets
DevelopmentCo.
Philippines,
Sual CEPA:92% Regional
developer HongKong IFC,CDC
Turkey,Birecik HolzmannAnlagen:16.9%; Equipment supplier/ Turkey TEAS,Strabag Osterreich.
GECAlsthom:10.5% contractor ACECEnergie,Cegelec,
SulzerHydro, VerbundPlan,
GamaEndustri,TGT Elektrik
a. Includes
KMRCorporation, FloridaPowerandLight,andScudder
LatinAmerica
PowerFund.
b. IndudesfundsfromGVKGroupPublic Shareholders.
c. indudes
fundsfromClassicInvestments,whichisfunded
byCMS.
Note:Allownership shares
areasof thetimeoSf
dosure.
Source:Casestudyprojedsponsors andlenders.

39
TABLE
A2
Sourcesof debt for casestudy projects
(millionsof dollars)
Foreign Foreign
Country,project ECA Multilateral Bilateral commercial
banks capitalmarkets Local
Projectswithoutprivoteriskdebtcapital
Colombia,Termovalle 97 15
Honduras,ELCOSA 56 6
India,jegurupadu 68 10 103
Mexico,Samalayuca 430 75
Pakistan,Uch 246 200 80
Philippines,Sual 786277
Projects
vyithprivoteriskdebtcapitol
China,Tangshan 128
Indonesia,PTJawa 834 250 82 200
Peru,Aguaytia 60 78 20
Turkey,Birecik 985 33C
Total 3,281 833 346 54C 278 138
Percentage of total debt 61 15 6 IC0 5 3
Source:Casestudyprojectsponsorsandlenders,

TABLE
A.3
Government foreignexchangeriskassumptionin casestudy projects
Country/project Government
riskassumption Centralgovernment
role
Government
assumption
ofexchonge
roteandconvertobility risks
China,Tangshan Tariffadjustedfor exchangeratechanges over 5 percent/year. CITICundertaking,
but no specific
Currency convertability andrepatrationrisksmitigated. guarantees
Honduras,ELCOSA Fixedfinancial
andoperationandmaintenance componentsof tariff CentralgovemmentPPAguarantees
indexedto U.S.dollar.Fuelimportcostsa pass-through.
Currency
convertability
only assuredfor fuelcosts.
Indonesia,PT.jawa Foreignexchange ratechanges a pass-through under PPA.PLN No specificguarantees
foreigncurrencyindemnityof convertability.

Mexico,Samalayuca Payments
are denominated
and paidin U.S.dollars. None
Pakistan,
Uch Portionof paymentindexedto dollar.Centralgovemment Centralgovemmentguarantees
of PPA
guarantees currencyconvertability
andtransfer.a
Philippines,
Sual Payments
are madein U.S.dollars,depositedintoa New York CentralgovernmentPPAguarantees
bankaccount.
Turkey,Birecik Payments
denominatedandpaidindeutschemarks. CentralgovemmentPPAguarantees

Govemment assumption
of exchange
raterisksonly
India,jegurupadu Portionof tariffindexedto the U.S.dollar.Termination
payment Centralgovemmentguarantee
calculatedin dollars.PPAandterminabonpaymentspaidin rupees. of terminationpayment

Governmentassumption
of convertobility
risksonly
Peru,Aguaytia The centralbankguaranteeof currencyconversionandnghtto Gasrevenuescoveredfor 30 years,
freelydisposefundsabroad. powerrevenuesfor 10years
a. Exchange
ratesarerecalculated
asleastquarterly
andmayberecalculated
monthly
ifexchange
rateschange
by morethan5 percent.
Note: The governmentof Colombiaassumesno foreignexchangeriskin the Termovalleproject.
Source.Casestudy projectsponsorsand lenders.

40
TABLEA4
Economicand politicalrisk environmentin case studycountries
Euromoney political StandardandPoor's
andeconomicscore Euromoney rank long-termforeign
Country,project (U.S.= 100) (I = lowestrisk) currencyrating
China,Tangshana 71 45 BBB
Colombia,Termovallea 64 52 BBB-
Honduras,ELCOSA 37 104 NR
India,Jegurupadu 65 50 BB--
Indonesia,PT Jawaa 71 43 BBB
Mexico,Samalayuca 64 51 BB
Pakistan,
Uch 49 82 B+
Peru,Aguaytia 48 83 NR
Philippines,
Sual 63 54 BB+
Turkey,Birecik 53 67 B
a. Investment
grade.
Source:EuromoneyandStandard& Poor's,1996.

TABLEA.5
Independentpower producer regulatoryframework in casestudy countries
Independent Competitive Predominant Overall
regulatory bidding utility regulatory
Country, project IPPpolicies
/ law environment framework ownership risk
China,Tangshan Limited No No Public High
Colombia,Termovalle Favorable Yes Yes Mix Low
Honduras,ELCOSA New No No Public High
India,Jegurupadu Slow/complex No No Public Moderate
Indonesia,PTJawa Favorable No No Public Moderate
Mexico,Samalayuca New Yes Yes Public Moderate
Pakistan,
Uch Favorable No Yes Public Moderate
Peru,Aguaytia New Yes N/A Mix Moderate
Philippines,
Sual Favorable No Yes Public Low
Turkey,Birecik Limited No No Public High
Note: Assessmentofthe regulatoryframeworkisbasedon conditionsasof the time of projectdevelopment.Insomecountries,suchasTurkey,the projectenvironmentmayhave
improvedafterthe time of projectdevelopment.
Source:HaglerBaillyServices,
Inc.

TABLEA.6
Overall risk environmentin casestudy countries TABLEA.7
Largestpower project finance markets, 1994-96
Economic/
Country, project political Regulatory Overall Financialclosures,1994-96
China,Tangshana 0 * 3 Country Number Capacity(MW)
Colombia,Termovallea O Q O/O Pakistan 14 4,236
Indonesia 6 3,060
Honduras.ELCOSA * * China 7 2,850a
India,Jegurupadu O O Malaysia 4 2,513
Philppines 9 2,100
Indonesia,PTjawaa 0 I O/OP India 3 1,221
Mexico,Samalayuca * * O/ Turkey 2 1,150
Colombia 3 1,114
Pakistan,
Uch * O O Mexico 1 700
Peru,Aguaytia * O Thailand 3 445
Subtotal 52 19,389
Philippines,
Sual 3 0 0 All others 20 1,609
Total 72 20,998

0 High rsk 3 Moderaterisk 0 Low risk a. Comprisingmostlyprojectsthat aremajority-ownedby municipalties and other
publicsectorentities,thesefiguresexcludeprojectsthat aremajority-ownedby off-
a. Investmentgrade. takers.
Note: Riskenvironmentassessment
basedon informationfrom tableA.4 andA.S. Source:HaglerBaillyIIPKnowledgeBase.

41
APPENDIX B
Note on Source Material
T hisstudydrewinformationfromnumeroussources.
The tables, figures, and text provide some refer-
ence citations. Information on market trends with
respect to the total volume of project finance, identities
of participants, and finance trends was drawn from Hagler
Bailly's Intemational Independent Power (HP) Knowledge
Base. For this study, the knowledge base was enhanced
using additional statistical information on project debt
sources and terms, development times, and project struc-
ture.
Information on case study project structure and riskman-
agement was based on three types of sources: loan docu-
mentation from the World Bank and the IFC; publicly
availableinformation from conference speeches,magazines,
and journal articles and other publicly available sources;
and personal interviews with project sponsors and lenders
and export credit and investment insurance agencies.Based
on this infornation, a profile and a risk allocation assess-
ment was derived for each project. Major investors associ-
ated with each project were given the opportunity to revise
and comment on this information.
The followingentitiesprovided personalinterviewsand/or
information with respect to the case study projects:
42
* China:Deutsche Morgan Grenfell (lender), Asian
Infrastructure Fund (sponsor)
* Colombia:Chase Manhattan (lender), KMR Power
(sponsor)
* Honduras:Wartsila Power (sponsor), Scudder Latin
American Power Fund (sponsor), Inter-American
Development Bank (lender)
* India: International Finance Corporation (lender)
* Indonesia:Powergen (sponsor), Credit Suisse First
Boston (lender), Teachers Insurance and Annuity
Association (lender)
* Mexico: GE Capital (sponsor), Inter-American
Development Bank (lender), Union Bank of
Switzerland (lender)
* Pakistan:World Bank (lender)
* Peru:Maple Gas (sponsor), Scudder Latin American
Power Fund (sponsor), Trust Company of the West
(lender)
* Philippines:Citibank (lender)
- Turkey:Cegelec (sponsor), Chase Manhattan (lender),
Philipp Holzmann (sponsor)
Several glossary definitions are courtesy of Electric
Generation Association.
APPENDIX C

Glossary of Terms Used in the Study

Buildleasetransfer(BLT) Development
period
Structureinwhicha privatesponsorfinancesand buildsa Thetimeit takesto completeallstudies,concludenegotia-
projectandthenleasesit to an off-takerduringa defined tions,and arrangefinancing.
Thestartingdatedependson
period.Theprivatesponsorsowntheprojectuntiltheend howtheprojectisinitiated(biddingprocess,issuanceoflet-
ofthelease,atwhichtimeit is transferredto theoff-taker. terofintent).Theendingdateoccursat financialclosure.
Theoff-takerisresponsiblefor operatingandmaintaining
the project,bothduringand aftertheleaseperiod. Dispatching
Abilityof the utilitypowerpurchaserto operatean inde-
Buildownoperate(BOO) pendentpowerproducer(IPP)projectin a mannercon-
Structureinwhicha privatesponsorfinancesandbuildsa sistentwith the utility'sload requirements.For utilities
projectandthenownsitindefinitely. BOOpowerprojects operatingan integratedelectricsystem,theabilityto assign
maysellelectricity
to a utilityoff-takeror othercustomer generationto specificplantsfor reliabilityand economic
undera long-termcontract,or theymaysellpowerintoa reasons,controloperationsoftransmission systems,oper-
competitivemarketasa merchantpowerplant(seebelow). ateaninterconnection, orscheduleenergytransactionswith
Theprivatesponsorscontinueto owntheprojectafterthe otherinterconnected electricutilities.
conclusionof anylong-termcontractsand areresponsible
for all operationsand maintenance. Energyconversion
agreement
Powersalesagreementwherebyfuelis deliveredto the
Buildowntransfer (BOT) off-takerin exchange
forcapacitypaymentsandothercon-
Structureinwhicha privatesponsorfinances,builds,owns, versionfees.
and operatesa projectfora definedperiodof timebefore
transferringit to anotherentity.WhileBOTpowerpro- Financialclosing
jectsdo not haveto sellelectricityunderlong-termcon- Theconclusion of thedevelopment period(usuallya spe-
tracts,in practicetheyhavealwaysdoneso. cificdate).It occurswhenthe legaldocumentation for all
projectagreementsarein place,allpermitsand govern-
Commercial risk mentsapprovals havebeenobtained,andallfinancing doc-
Risksubjectto the influenceof the projectowner.This uments(debtandequity)havebeenexecuted.Inmostcases
mayincludeprojectdevelopment, construction
oftheplant the lendermakesthe initialdisbursementof fundssoon
withinbudgetandontime,profitable operationoftheplant, afterfinancialclosing.Construction
andcommercialization
and availability
of qualifiedpersonnel. mayoccurpriorto financialclosure.

Debtservicecoverage
ratio Forcemajeure
Theratioofcashavailableforservicing
debt(afteralloper- Risksarisingfromcircumstances,generallyoutsidethecon-
atingandotherexpensesarepaid)andtheamountofdebt trolof the parties,whichentitleone or anotherpartyto
due (principal,
interest,andfees). refrainfromperformingits contractualobligations.

43
Investmentgrade
Indication that a long-term debt instrument is of adequate
quality for the obligor to meet the debt service obligations.
It is normally indicated by assigned rating from credit rat-
ing agencies such as Moody's Investors Service (a minimum
rating is Baa3) or Standard and Poor's Corporation (BBB-
or higher).
Limitedrecourse
financing
A financing arrangement in which lenders have little or no
recourse for repayment of their loans beyond the project
assets that are pledged to secure the financing. Limited
recourse financing is used to raise the majority of inde-
pendent power project debt.
Liquidateddamages
A form of security in various construction, fuel, and power
purchase contracts that stipulates penalty payments for fail-
ure to meet certain contractual terms.
Merchant power plant
A project without a long-term power purchase agreement,
in which the price and quantity of power sold are deter-
mined in a competitive market.
Off-taker
A party that purchases power from the IPP In developing
countries, the off-taker is usually government owned.
Pari-passu
clause
A covenant whereby the borrower agrees to ensure that its
debt payments shall rank at least equally with all its other
unsecured debt.
Political risk
Risk that may include the performance of government-
owned entities (including the purchasing utility in most
developing countries), changes in law, issuance of critical
permits (customs, environment), wars or insurrections,
expropriations, and foreign exchange convertibility and
transferability. These risks, which can generally be con-
trolled or influenced by host governments, vary depend-
44
ing on the circumstances and the perceptions of project
participants.
Privaterisk debt capital
Private-sector financing that does not receive guarantees,
political risk insurance, or other assurances from multilat-
eral development banks, export credit agencies, or bilateral
development agencies.
Projectfinance
A financing approach.in which debt is secured on the basis
of the expected performance of a specific project rather
than on the strength of an existing company's balance sheet.
It involvesan assessment of the project's expected cash flow
performance under various scenarios to ensure a high prob-
ability of repayment: on the project's debt. Sometimes
referred to as nonrecourse or limited recourse financing.
PowerProject Finance (PPF)
Privatepower projects that are financed on a limited recourse
basis, will sell at least a portion of their power to national
utility companies and power grids, and are not controlled
by utility off-takers.
Seniordebt
The financing component of a project (usually the largest)
that has priority over other creditors and equity in the event
of liquidation.
Sponsor
A party that takes equity in a project and plays a role in
structuring the project, negotiating the project agreements,
arranging the financing, negotiating and securing the con-
struction contract, and performing other tasks associated
with project developrnent.
Subordinatedebt
Financing component that is junior to senior debt in the
event of liquidation.
Term (Loan)
Number of years until a loan is completely repaid.
 The World Bank

Headquarters
1818 H Street, N.W.
Washington, D.C. 20433, U.S.A.
Telephone: (202) 477-1234
Fax: (202) 477-6391
Telex: MCI 64145 WORLDBANK
MCI 248423 WORLDBANK
Cable Address: INTBAFRAD
WASHINGTONDC

European Office
66, avenue d'1ena
75116 Paris,France
Telephone: (1) 40.69.30.00
Facsimile:(1) 40.69.30.66
Telex:640651

Tokyo Office
10th Floor Fukoku Seimei Bldg.
2-2-2 Uchisaiwai-cho
Chiyoda-ku, Tokyo 100-0011, Japan
Telephone: 813-3597-6650
Facsimile:813-3597-6695