Hydropower financing:current trends and key issues

In the late 2000s the power sector in many countries experienced a major revolution. The old vertically-integrated, nationally owned power utilities were unbundled and the concept of freestanding independent power generating companies (IPPs) was established. This trend was part of a wider process of encouraging more private participation in the ownership and development of infrastructure, including hydropower and multi-purpose water projects. With this arrangement most projects were developed using the BOOT model (build-own-operate-transfer) under which a special purpose private company finances the scheme (usually on a non-recourse basis) and assumes virtually all of the project risks. In return it owns the infrastructure for the duration of the concession.

While this formula worked well for the thermal power sector, it quickly became apparent that the situation is more complicated when it comes to major water resources projects. In general the experience with projects such as large hydropower schemes has not been favourable, with many MOUs being signed between governments and prospective private developers, but few schemes actually reaching the construction stage. In many cases the main problem has been an inability to finance the project.

A number of Case Studies have been undertaken by the author. Although each is different, it is possible to detect certain overriding issues which dominate the private financing scene. They are:

1. RISKS dominate the availability and cost of finance, and are tending to migrate back to the public sector.
2. TARIFFS tend to be higher (than the public sector alternative) due to high soft costs, the layering of risk, and heavy debt service obligations.
3. FINANCIAL viability tends to compete with wider economic considerations, and it can distort the optimisation.
4. The PUBLIC SECTOR has yet to find a workable model for attracting private participation.

Faced with these problems, there is an increasing tendency to move towards something that is often referred to as a “Pubic-Private Partnership” – although this term has no clear definition and can mean different things to different people. The objective is to move towards come half-way project structure that preserves the best of both the traditional public sector model and the perceived benefits of private sector participation through a BOOT type of arrangement.

The structuring of a project (in terms of ownership, risk sharing, etc.) is often dominated by financing considerations. There is no single generic solution that can be applied to all projects, but the paper will discuss some of the key issues that arise in selecting the most appropriate financing model for a particular project.