Power Projects Under Stress: What Happened and What Risks call for Mitigating Measures Ananda Covind - PowerPoint PPT Presentation

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Power Projects Under Stress: What Happened and What Risks call for Mitigating Measures Ananda Covind

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Title: Power Projects Under Stress: What Happened and What Risks call for Mitigating Measures Ananda Covind


1
Power Projects Under Stress What Happened
and What Risks call for Mitigating
MeasuresAnanda Covindassamy
2
Introduction
  • 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

3
Outline
  • 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

4
Financing Gap for the Energy Sector in Emerging
Markets, 19902020
5
Investment in Power Projects with Private
Participation in Developing Countries by Type of
PPI, 19842003
Total US256.3 billion
6
Annual FDI Inflows in Developing Countries by
Region, 19842003
7
Overview 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.

8
Outline
  • 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

9
Electricity 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.

10
Electricity Projects Under Stress
Electricity Projects under Stress by Subsector
Geographical Allocation of Projects under Stress
11
Electricity 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.

12
Electricity 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.

13
Outline
  • 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

14
Frequency of Causes of Stress
15
Causes 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

16
Causes 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.

17
Outline
  • 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

18
Consequences of Stress by Region
19
Consequences 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.

20
Conclusions
  • 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
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