Title: Power Projects Under Stress: What Happened and What Risks call for Mitigating Measures Ananda Covind
1Power Projects Under Stress What Happened
and What Risks call for Mitigating
MeasuresAnanda Covindassamy
2Introduction
- Participants in the March 2004 Power Investors
Roundtable stressed that one of the reason for
the decrease of investment in power PPI was that
a number of projects had gone sour - They indicated that the settlement of the
disputes related to these projects would
contribute to restoring their confidence in the
energy sector of emerging markets
3Outline
- This presentation comprises four parts
- An overview of private participation in the
electric power sector - An analysis and classification of the stress
situations. - An analysis of the causes of stress
- An analysis of the consequences of stress
4Financing Gap for the Energy Sector in Emerging
Markets, 19902020
5Investment in Power Projects with Private
Participation in Developing Countries by Type of
PPI, 19842003
Total US256.3 billion
6Annual FDI Inflows in Developing Countries by
Region, 19842003
7Overview Private Participation in the Electric
Power Sector
- FDI in electricity has been more volatile than
total FDI in developing countries and has been
more affected by the post-2000 decline. - Investment concentration in generation (70
percent) and much less in distribution (14
percent), suggest an aversion toward taking
market and commercial risk. - FDI in electricity was concentrated
geographically, with 15 percent of the countries
accounting for 86 percent of investment. - EAP Greenfield IPPs in East Asia and the
Pacific, with little sector reforms - LAC More investment in distributionthough with
significant investment in generation, as
wellwith major sector reforms.
8Outline
- This presentation comprises four parts
- An overview of private participation in the
electric power sector - An analysis and classification of the stress
situations. - An analysis of the causes of stress
- An analysis of the consequences of stress
9Electricity Projects Under Stress
- Stress situation in the electricity sector is a
rare event 4 percent of power projects in number
and 10 percent in value. - Workouts played an important role 21 percent of
the projects that incurred stress were ultimately
worked out. - Stress occurrence is linked to overall country
performance There is a positive correlation
between sovereign credit rating and the
percentage of power projects under stress. - There is a country risk level beyond which no
investment occurs. When a country credit rating
falls below CCC, according to SP ratings,
private sector investment in the power sector
falls to zero.
10Electricity Projects Under Stress
Electricity Projects under Stress by Subsector
Geographical Allocation of Projects under Stress
11Electricity Projects Under Stress by Region
- South Asia had the highest risk of stress.
- Sub-Saharan Africa becomes appears as high risk,
with a percentage of 11 percent. - LAC region had a relatively low risk levels at 6
percent. - Eastern Europe and Central Asia and the East Asia
and the Pacific regions have low risk levels, 3
percent and 1 percent, respectively.
12Electricity Projects Under Stress by type of
project
- Divestirures are more risky More than half of
the electricity projects under stress, due to the
more complex nature of divestiture. - Greenfield projects, which are mainly IPPs for
power generation based on long-term power
purchase agreements (PPAs), are less prone to
stress.
13Outline
- This presentation comprises four parts
- An overview of private participation in the
electric power sector - An analysis and classification of the stress
situations. - An analysis of the causes of stress
- An analysis of the consequences of stress
14Frequency of Causes of Stress
15Causes of Stress
- Stress Risk for Investors and Lenders
- Risk management instruments do not prevent stress
under extreme circumstances the possibility of
renegotiation of contracts under severe
macroeconomic conditions should be included to
ensure that the balance between the interests of
the parties is maintained, even under extreme
situations. - PPI needs to be accompanied by an effective
consensus-building process with the public. The
closing of a deal with the government is not
sufficient for a successful PPI. - There is a clear regional differentiation in
causes of stress - East Asia and the Pacific IPPs problems were
mainly macrto-economic - LAC faced also some socio-political problems in
distribution - Africa was affected by an uncertain national
adherence to adopted sector reforms - ECA suffered from socio-political uncertainties
16Causes of Stress
- Regarding the Formulation of Workout Strategies
- The importance of contractual- and
regulation-related issues indicates that many
stress issues can potentially be addressed
through a workout process. - Financing- and exchange raterelated issues are
the second priority to be addressed in project
workout, through the deployment of specific
financial engineering instruments. - Communication should be included in workout
strategies for the transaction to receive
political and social support. - The workout process should also include the
formulation of a management strategy, because the
performance of investors was perfectible on
occasions in the area of commercial management
and quality of services. - Workout strategies should be differentiated by
type of project.
17Outline
- This presentation comprises four parts
- An overview of private participation in the
electric power sector - An analysis and classification of the stress
situations. - An analysis of the causes of stress
- An analysis of the consequences of stress
18Consequences of Stress by Region
19Consequences of Stress
- In all regions, the consequences were primarily
financial and subsidiarily administrative. - Interregional variations seem to reflect the
level of political support for sector reforms and
for PPIs. - The most frequent occurrence of administrative
threat to PPIs because of a stress situation is
in Africa and in Eastern Europe and Central Asia
- In East Asia and the Pacific, where the reforms
may be less structural, the administrative threat
to PPIs is much less. - The financial consequences in each region are
related to the type of PPI projects in the
region - regions with a high number of IPPs under stress
showed a high risk of default to lenders (East
Asia and the Pacific and Latin America and the
Caribbean). - Regions where PPIs were developed mainly in
utilities or in the distribution sector (Africa
and Eastern Europe and Central Asia) show less
risks for the lenders.
20Conclusions
- Reforms without strong consensus generate stress
and consensus building should be part of the
workout - Workouts imply a willingness to renegotiate and
to depart prudently from the principle of
sanctity of contracts - The Bank may have an important role to play for
consensus (re)building and financial engineering