81726 Designing Strategies and Instruments to Address Power Projects Stress Situations Formal Report 329/09 Designing Strategies and Instruments to Address Power Projects Stress Situations August 2009 Formal Report 329/09 Energy Sector Management Assistance Program Energy Sector Management Assistance Program (ESMAP) Purpose The Energy Sector Management Assistance Program is a global knowledge and technical assistance partnership administered by the World Bank and sponsored by bilateral official donors since 1983. ESMAP’s mission is to assist clients from low-income, emerging, and transition economies to secure energy requirements for equitable economic growth and poverty reduction in an environmentally sustainable way. ESMAP follows a three-pronged approach to achieve its mission: think tank/horizon-scanning, opera- tional leveraging, and knowledge clearinghouse (knowledge generation and dissemination, training and learning events, workshops and seminars, conferences and roundtables, website, newsletter, and publications) functions. ESMAP activities are executed by its clients and/or by World Bank staff. ESMAP’s work focuses on three global thematic energy challenges: • Expanding energy access for poverty reduction; • Enhancing energy efficiency for energy secure economic growth, and • Deploying renewable energy systems for a low carbon global economy. Governance and Operations ESMAP is governed and funded by a Consultative Group composed of representatives of Australia, Austria, Denmark, France, Germany, Iceland, the Netherlands, Norway, Sweden, the United Kingdom, the U.N. Foundation, and the World Bank. The ESMAP CG is chaired by a World Bank Vice President and advised by a Technical Advisory Group (TAG) of independent energy experts that reviews the Program’s strategic agenda, work plan, and achievements. ESMAP relies on a cadre of engineers, energy planners, and economists from the World Bank, and from the energy and development com- munity at large, to conduct its activities. Further Information For further information or copies of project reports, please visit www.esmap.org. ESMAP can also be reached by email at esmap@worldbank.org or by mail at: ESMAP c/o Energy, Transport and Water Department The World Bank Group 1818 H Street, NW Washington, D.C. 20433, U.S.A. Tel.: 202-473-4594; Fax: 202-522-3018 Formal Report 329/09 Designing Strategies and Instruments to Address Power Projects Stress Situations Gerald Meyerman Ananda M. Covindassamy Energy Sector Management Assistance Program Copyright © 2009 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, NW Washington, DC 20433, USA All rights reserved Produced in the United States First printing August 2009 ESMAP Reports are published to communicate the results of ESMAP’s work to the development community with the least possible delay. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author and should not be attributed in any manner to the World Bank or its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The Boundaries, colors, denominations, other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the ESMAP Manager at the address shown in the copyright notice above. ESMAP encourages dissemina- tion of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Contents Acknowledgments v Executive Summary vii 1. Introduction 1 2. Overview of PPI Projects, Incidences of Stress, and Their Causes 3 Investment Trends in the Power Sector 3 General Characteristics of Power Projects and Stress 5 Causes of Project Stress in the Power Sector 7 Consequences of Power Project Stress 8 Summary 12 3. Preventing the Emergence of Stress Situations 15 Importance of Adequate Governance Arrangements 15 Toward Stronger Project Governance Frameworks 16 The Role of Stakeholders in Power Projects 19 Promoting Disclosure and Transparency 20 Dealing with Conflicts of Interest 21 Accounting and Financial Reporting 23 External and Embedded Restructuring Mechanisms 23 Setting Up Adequate Restructuring and Bankruptcy Mechanisms 24 Dealing with Macroeconomic Shocks, Sector Shocks, and Political Transitions 25 Relationships Between National and Sub-National Political Institutions 26 Level of Sector Development 27 Market Position and Ownership Structure 27 Creative Use of Risk-Management Tools 28 Risk Sharing in Power Projects 28 Subjecting Private Sector Partners to Less Risk 31 Integrated Risk-Management Systems in Power Projects 33 Complementary Measures 36 Summary 36 4. Strategies for Addressing Stress Situations 39 Facing Stress 39 Time for Action—Stress Has Taken Over 39 Roles of Parties to Address Stress 39 Resolution Approaches 43 Mediation 43 Arbitration 43 The London Approach 44 Instruments to Be Used in Stress Resolution 46 iii CONTENTS Financial Restructuring 46 Credit Enhancement Guarantees 49 Exchange Risk Mitigation 52 Securitization 52 Summary 53 5. Conclusion 55 Annex 1. Changing Incentives in the Project Cycle: Hungary’s Electricity Privatization 59 Annex 2. How Reliable Are Sovereign Guarantees? 61 Annex 3. The Role of International Arbitration 63 Annex 4. Annotated Bibliography 65 List of Formal Reports 97 Boxes Box 3.1 Toward an Effective Project Governance Framework 17 Box 3.2 A Primer on Ethics Committees & Compliances Programs 21 Box 3.3 Restructuring Mechanisms and Prevention of Stress in Power Projects 27 Box 3.4 Exchange Rate Risks in Power Projects 34 Box 3.5 Financial Risk Management and Prevention of Stress in Power Projects 35 Box 4.1 Elements of Financial Restructuring 47 Box 4.2 Alternatives for the Resolution of Stress in Power Projects 49 Box 4.3 Indonesia Applies Learning from East Asia Crisis 51 Figures Figure 2.1 Annual Investment in Electricity Projects with Private Participation by Region, 1984–2005 4 Figure 2.2 Percentage of Various Types of Private Investment, 1990-2005 5 Figure 2.3 Cumulative Investment in Electricity Projects with Private Participation by Region and Type, 1990-2005 6 Figure 2.4 Percentage of Electricity Projects Under Stress by Subsector 7 Figure 2.5 Main Causes of Stress 8 Figure 2.6 Consequences of Stress 9 Figure 2.7 Consequences of Stress by Type of Project 11 Figure 2.8 Consequences of Stress by Region 11 Figure 5.1 Private Investment in Infrastructure by Sector, 1990-2005 55 Tables Table 3.1 Responsibilities of Public and Private Sectors in the Design of Project Governance 22 iv Acknowledgments This report presents the results of a study jointly undertaken and financed by the Energy Sector Management Assistance Program (ESMAP) and the Public-Private Infrastructure Advisory Facility (PPIAF) of the World Bank. The report was primarily prepared by Messrs Gerald Meyerman (independent consultant) and Ananda Covindassamy (Advisor with ESMAP at the time), with inputs from Ms. Ida Wahlstrom (Consultant) and Ricardo Balzaretti (Intern). The team gratefully acknowledges the review and valuable comments of the two peer reviewers: Messrs. Tjaarda Storm van Loewen (Lead Energy Specialist, West Africa Energy Unit) and Pierre Vieillescazes (Consultant). Valuable comments and contributions were also received from members of the Power Investors Round Table coordinated by the Bank, IFC and ESMAP, chaired by Mr. Jamal Saghir (Director Energy Transport and Water with the World Bank) and comprised of representatives from AES Corporation, EdF, Hydro Quebec, Tractebel, CDCGlobelec, ENEL and Ormat, IFC, MIGA and the World Bank. Valuable contributions were also offered by the participants of a Brown Bag Lunch. Insightful comments and suggestions were also provided by Mr. Jonathan D’Entremont Coony (Senior Energy Specialist, ESMAP). The team is indebted to Mr. Ede Ijjasz Vasquez for his support and assistance. The following World Bank staff also provided advice, comments, inputs and support: Mr. Gary Stuggins and Ms. Dominique Lallement, as co-task managers of the Bank-Private Investors Partnership, and Darius Lilaoonwala (IFC). Editorial, publication and distribution support was provided by Shepherd, Inc., and Mmes. Marjorie K. Araya, Nyra Wallace and Ananda Swaroop from the ESMAP Team. v Executive Summary International Financing Institutions (IFIs) or other donors may get involved in the renegotiation of Private Participation in Infrastructure (PPI) contracts in the power sector. In deciding whether and how to approach a distressed PPI contract, intervention teams should be guided by the following principles: • Client ownership • Minimizing moral hazard • Transparency • Effective mitigation of conflicts of interest • Proportionality and consistency • Quality Mediation. Whenever the parties involved in a power project have provided for mediation or conciliation under the auspices of an appropriate forum, they make certain procedures a part of their agreement. The details of the procedures depend on the chosen venue for conflict resolution. The mediator does not have the authority to impose a settlement on the parties but will attempt to help them reach a satisfactory resolution. Mediation is terminated by the parties’ signing a settlement or by the mediator reaching the conclusion that further efforts are not worthwhile, or by a declaration to this effect by a party or parties to the dispute. Arbitration. The parties to a dispute may also select a national or international arbitration forum. Specialized bodies maintain rosters of arbitrators, from which arbitrators are appointed. In this context, it is understood that the term “arbitrator” actually refers to an arbitration panel composed of one or more arbitrators. An arbitrator has the power to rule on his or her own jurisdiction. At any stage of the arbitration proceedings, the parties may agree to conduct mediation to facilitate settlement. The London Approach. The London Approach involves a “workout,” that is, a financial and operational rehabilitation or restructuring of a project that takes place outside an insolvency process. This approach addresses the need to resolve coordination and conflict of interest problems between creditors while avoiding problems with statutory regimes. The London Approach reduces the risk of unnecessary liquidation of projects, enjoys international recognition, and has been widely applied in many countries, including East Asia at the time of crisis in the late 1990s. Financial innovation. A different set of issues is raised by innovations in finance, notably the growth of securitization and credit derivatives. Securitization is the process of converting loans or receivables into negotiable instruments. It enables non-tradable assets that range in marketability, credit-worthiness, and size to become liquid secondary instruments. The impact of securitization of project loans on workouts depends on the extent to which a creditor really does shed the credit risk in a securitization deal: a bank that has securitized part of its loan book may remain exposed to reputational risk if it walks away from a loan it has initiated. Similar considerations apply to credit derivatives, although these appear to offer a clearer route to transfer risk. The growing use of each vii EXECUTIVE SUMMARY of these instruments is part of a broader shift from relationship to transaction-based banking, and from banking to capital market finance. Investment guarantees. Investment guarantee agencies backed by official sources often guarantee cross-border investments, including investments associated with financial restructuring. They usually are flexible regarding eligible types of investments, including equity, shareholder loans, and loan guarantees issued by equity holders. Other eligible investments include management contracts, leases, and franchising and licensing agreements. Guarantees typically protect against the following kinds of risks: currency inconvertibility and transfer restrictions; expropriation; war and civil disturbance; breach of contract; policy and regulation. Guarantees are also frequently used to protect against collateral issues, including fuel price fluctuation risk, project completion risks, national partner debt repayment risk, and force majeure. Exchange rate risk. Exchange risk mitigation is frequently considered to be a major factor in the reluctance of power sector investors to invest in developing country infrastructure projects. Frequently the investment and related debt are denominated in a currency other than the cash flow created through the tariffs approved by regulators in accordance with the agreement between the investor and the government. Risk management instruments that are expected to help deal with contract compliance under extreme circumstances may fail to do so in real-life situations. Hence, designers should include the possibility of contract renegotiation under severe macroeconomic shocks as a last resort. Another approach is the use of hedging mechanisms underwritten by a third party—commercial credit granting agencies or, for less credit-worthy countries, international financial institutions. viii Introduction 1 It is an internationally recognized reality that Many of the factors that cause stress in continued and increased investment in the power projects with private participation can power sector by private firms is essential to be avoided or minimized by proper planning providing affordable and reliable energy to an at inception. Along the same line, a most increasing portion of the world population. common fault is denial by investors and lenders However, investing in power projects in the of the existence of a problem until the stress developing regions of the world exposes level has increased to a point that a workout nations, governments, consumers, and investors becomes difficult and uncertain in outcome. To to unusually high levels of risk. ensure resilience against stress, the pillars of This study will have succeeded if it a project ought to be built of truth and clarity. encourages parties—on all sides—to recognize From the beginning participants must foster an problems as early as possible and concentrate environment of trust and open communication,1 on identifying possible solutions, and then establish clear incentives, and make sure that implementing them. decisions are implemented. To begin with we will summarize the predominant causes, characteristics, and Purpose of This Study consequences of project stress in the energy sector This study marks the interest of investors and of emerging markets. We will seek to describe lenders in finding procedures and instruments and understand the incidence of various patterns to facilitate the resolution of disputes arising of characteristics and consequences of project from stress situations. stress that emerge as power projects are broken It will look at case studies and employ down by type industry stage and region. Then analytical methods to identify problems, suggest we will discuss how to prevent the emergence solutions, and point to possible players who of stress situations in power projects as well as may be of assistance and the instruments they the instruments and strategies available for the may have available. Each stress situation is resolution of power project stress. unique and each solution must be tailor-made indeed, but the study seeks to identify generic instruments that may be helpful. 1 Several instances were observed in which the reluctance to share information between the private partner and the government became a clear aggravating factor in the stress situation. The absence of clear definition between commercially confidential information and information that needs to be shared for an effective regulation of a concession or a utility is a recurrent problem. The unfortunate outcome of Electricité du Mali (EDM) privatization in Mali illustrate this point. 1 Overview of PPI Projects, 2 Incidences of Stress, and Their Causes Telecommunications and electricity led the Investment Trends growth in private activity in developing countries between 1990 and 2002. Total investments in the Power Sector for these two sectors during that period Traditionally, energy services in developing amounted to US$560.1 billion. During that same countries were provided almost exclusively period, more than 100 developing countries by public monopolies that generally failed to opened their telecommunications sector to expand service coverage and improve quality at a private activity, and the total investments reasonable rate. Investors and lenders eventually in telecommunications amounted to 45% saw this situation as a business opportunity of the total PPI investments. Furthermore, and started seeking high returns in developing 79 developing countries introduced private countries with growing energy demand and participation in the electricity and energy underserved markets, particularly at times sector, which accounted for US$239.3 billion when developed country markets seemed to be in investment flows (33% of total PPI inflows), already saturated. At the same time, developing followed by the transport sector with a 17$ share country governments began to redefine their and water and sewerage with a 5% share. role in the power sector, from being exclusive At the regional level, there are marked financiers, managers, and operators to being variations among the different regions, with facilitators and service regulators. greater concentration of PPI in Latin America Private sector involvement in the electricity and the Caribbean, which had the lion’s share sector, as investor or long-term lender, started of PPI projects relative to other regions. Latin in the 1980s with a comprehensive privatization America and the Caribbean (LAC) accounted program in Chile, as well as a few power projects for nearly half of the investments in PPI projects, in other countries. According to the World totaling US$366.3 billion (47%), followed by East Bank’s PPI power projects database, which Asia and the Pacific with US$217 billion (28%), covers infrastructure power projects with private Europe and Central Asia with US$105.2 billion investment in the energy sector, there were (14%), South Asia with US$40.1 billion (5%), and 1,232 electricity power projects in 154 countries Sub-Saharan Africa and Middle East and North with private participation between 1984 and Africa with 3% each.2 2004, attracting investment commitments of 2 See a statistical analysis of PPI in the power sector and distribution by region, type of investment, and legal status by Ananda M. Covindassamy, “Analysis of Power Projects with Private Participation Under Stress,” Energy Sector Management Assistance Program, The World Bank, 2005/10/01. 3 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Figure 2.1 Annual Investment in Electricity Projects with Private Participation by Region, 1984–2005 45 40 35 US$ billions 30 25 20 15 10 5 0 84 86 88 90 92 94 96 98 00 02 04 19 19 19 19 19 19 19 19 20 20 20 Years East Asia Pacific Latin America South Asia Europe Central Asia Middle East North Africa Sub-Saharan Africa Total Source: PPI database 2007. more than US$282 billion. Private activity grew governments struggle to maintain existing rapidly in the power sector in the 1990s, with private infrastructure projects and are now annual investment commitments for private faced with problems surfacing from existing electricity power projects in the developing PPI contracts, including the need to renegotiate world rising from US$1 billion in 1990 to a peak such agreements. Their efficacy in dealing with of US$42 billion in 1997. The peak investment legacy deals will influence, to a large extent, levels were related mainly to the privatization of the levels of political commitment and investor electricity companies in Latin America and the support that can be sustained to make future Caribbean as well as greenfield power projects reforms and projects happen. Concern among in East Asia and the Pacific (EAP). In particular, policymakers and investors has been rising as Brazil became an extremely active country when the number and value of energy power projects it privatized many of its large power distribution with private participation have displayed a companies, accounting for about one third of clear declining trend since the 1997 peak despite private investment in the power sector in the a modest recovery since 2003 due mainly to developing world in 1997. the acceleration of private investment in the Investment commitments then dropped electricity sector in the East Asia and Pacific sharply as a result of the East Asia crisis and region (China). This trend has disappointed the subsequent crises in the developing world many developing and transition countries, starting in September 1997. Private investment which embarked in sector restructuring in in 2005 ($16 billion) is about 38% of the levels the hope that private investment would help achieved during the peak of investment activity accelerate economic growth. Moreover, the in 1997. At present, not only is the flow of new persistence in the energy sector of power projects deals well below investment needs, but many under stress, although in small number, may be 4 Overview of PPI Projects, Incidences of Stress, and Their Causes Figure 2.2 Percentage of Various Types of Private Investment, 1990–2005 0% 4% 40% 56% Concession Divestiture Greenfield project Management and lease contract Source: PPI database 2007. deterring new or additional commitments by existing assets accounted for the rest (4%) of private investors. the cumulative investment in power projects, It follows that the settlement of investment divided between the Middle East and North disputes could potentially contribute to restoring Africa (MENA) and Sub-Saharan Africa (SSA) the willingness of private investors to invest regions. Management and lease contracts have in the energy sector in emerging markets, an been used to introduce private participation idea that was given serious consideration at without requiring the private sector to accept the Investors Roundtable of March 15, 2004. significant investment risks and often without However, it also emerges from an analysis undertaking major sector reforms upfront. Only of power projects under stress that workout 27 power projects involved such contracts, of approaches and instruments need to be flexible which 17 were in the SSA region, where short- enough to be tailored to real-life situations. Each term management and lease contracts were used project is unique, having its own characteristics as a transitory structure while sector reforms are and special history. However, it is still possible to developed. classify the causes and symptoms of stress into a The generation business attracted most number of broad categories, and understanding investment, accounting for 70% of the total. of these categories is a prerequisite for subsequent The stand-alone distribution business was the customization of workout strategies and second most active segment, accounting for 14% instruments. of cumulative investment. Integrated utilities followed as the third most active investment General Characteristics segment. This pattern reflects the trend that emerged in the late 1990s for “unbundling” of Power Projects and Stress the power sector and separating its three basic Greenfield power projects were the most common functions according to their perceived potential type of private participation in the power sector for introducing effective competition (generation, in developing countries and attracted most of which is essentially competitive; transmission, the investment (56% of the value of cumulative which is usually seen as a natural monopoly; investment in 1990–2005). Investment was and distribution, which is sometimes thought to driven mainly by greenfield power projects be competitive). The allocation of investments for independent power generation in the EAP. between generation and distribution reflects Divestitures were the second most common the higher capital intensity of the generation type of private participation (40% of the value business compared to distribution activities. In of cumulative investment in 1984–2005), driven addition, these data illustrate the lack of appetite mainly by the LAC region. Concessions of of investors for the commercial risk of the 5 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Figure 2.3 Cumulative Investment in Electricity Projects with Private Participation by Region and Type, 1990–2005 140,000 120,000 2003 US$ billions 100,000 80,000 60,000 40,000 20,000 0 East Asia Europe and Latin Middle East South Sub- and Pacific Central America and North Asia Saharan Asia and the Africa Africa Caribbean Management and lease contract Greenfield project Divestiture Concession Source: PPI database 2007. distribution business as well as their preference MENA. LAC was the only region to introduce for the generation business where the market PPI on a significant scale in the transmission risk is taken by a third party through “take or business, possibly because it was the only region pay” power purchase agreements. where the sector reform scheme was sufficiently Most electricity power projects in East and advanced and the business climate was adequate South Asia were stand-alone generation facilities. to address the specific issues of the regulation In LAC stand-alone generation businesses of a privatized natural monopoly. emerged from three types of transactions: Build- Altogether, the statistics collected by directly Own-Operate-Transfer (BOOT) and Build-Own- surveying investors, host governments and Bank Transfer (BOT) schemes and privatization of staff indicate that a small proportion of private segments of unbundled vertically integrated power projects went through or are in a stress utilities. Developing countries used two schemes situation: only 4% of the projects in number are to introduce private participation in integrated affected by stress (10% in investment value), and utilities: in most cases minority stakes were sold the distribution and utility projects are much in state-owned enterprises, an approach shared more prone to stress than generation projects.3 with Europe and Central Asia (ECA) and EAP; It is clear that the perceived risk distress of in the other cases, management control was also private power projects is often overestimated transferred to the private sector, an approach compared to the actual small number of projects used in several countries in LAC, SSA, and that are or have been affected. Nevertheless, 3 See Ananda Covindassamy, op. cit., Chapter 3, for a full discussion of the types of projects under stress, by type of project, by subsector, and by region. 6 Overview of PPI Projects, Incidences of Stress, and Their Causes Figure 2.4 Percentage of Electricity Projects Under Stress by Subsector 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Generation Distribution Utility by number of projects by value of projects Source: A. Covindassamy, op. cit. because of the publicity that has surrounded related to the behavior of the host government the cases of distress, the perception of investors vis-à-vis the power sector and macroeconomic is that investment in the power sector in shocks that are not specifically related to the emerging markets is a high-risk activity and power sector.4 In practice, most power projects that the highly visible cases of stress need to seem to come under stress as a combination be resolved satisfactorily as a precondition for of both kinds of shocks. To obtain further more investment to flow to emerging markets specificity, it is possible break down the causes (except China, where investors are still very of stress into five categories: (1) sociopolitical, active). Annual statistics, moreover, show that (2) macroeconomic, (3) industry regulation and most of the cases of stress occurred between 1996 pricing, (4) project structural problems, and and 1999, when more than 10 projects went in (5) investor performance. distress every year, and that the number of stress The most frequent cause of stress was cases annually has considerably decreased since industry regulation and pricing (90.3% of power 1999, to stabilize around two to three projects per projects under stress) followed by sociopolitical year, worth less than $500 million. (73.8%) and macroeconomic issues (71.4%). More specifically, pricing formulae and government interference have been identified as problem Causes of Project Stress areas in power projects under stress. Structural problems and investor performance were the in the Power Sector least possible causes of project stress. Curiously, There are two broad categories of causes of when there have been problems with investor project stress, namely, country-specific issues performance, it is commercial performance and 4 See Ananda M. Covindassamy, op. cit., Chapter 2. 7 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Figure 2.5 Main Causes of Stress 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Sociopolitical Macroeconomic Regulation and Project structural Investors’ causes causes price issues problems performance issues % of projects under stress % of total projects Source: A. Covindassamy, op. cit. service quality that tend to be the weakest areas. be handled through sector-specific strategies, Hence, in power projects that have come under but instruments may be made available to soften stress, the areas that most frequently justified their impact on power projects. However, risk private sector involvement are precisely the ones management instruments that were expected in which investors have failed to perform up to to help deal with contract compliance under expectations. extreme circumstances may fail to do so in We can conclude that the most frequent real-life situations of major macroeconomic causes of stress are essentially project and sector stress. Hence, designers should include the specific and can be addressed through sector- possibility of contract renegotiation under severe specific workout strategies and instruments. macroeconomic shocks as a last resort. The political dimensions of project stress situations resulting from the lack of popular Consequences of Power support for PPI is often underestimated but is, in fact, an important factor in cases of stress. Project Stress This confirms the importance of consensus The consequences of project stress have been building and consultation at the national level categorized into two broad areas that are not before recommending PPI; transparency, open mutually exclusive: financial distress and communication, and participation of the public licensing distress. Financial distress includes should also be part of the workout process. This the following kinds of events: (1) cash flow runs counter to the usual practice of commercial shortages leading to lower than expected returns confidentiality, which subsequently leads to to investors, (2) heightened risk of default to the appearance of lack of transparency in the lenders, (3) inability to pay dues to the host negotiation of a contract, especially when this government, and (4) inability to finance an may affect the public through tariff setting or investment program from internally generated otherwise. resources. Administrative and licensing distress Macroeconomic shocks are also important mainly includes the threat of cancellation or non- causes of stress. Macroeconomic shocks cannot renewal of a license. 8 Overview of PPI Projects, Incidences of Stress, and Their Causes Figure 2.6 Consequences of Stress Frequency of Consequences of Stress Financial distress Inadequate return on equity Risk of default on debt Inadequate self-financing Nonpayments to gov. Administrative and licensing distress License cancellation License nonrenewal 0% 20% 40% 60% 80% 100% Source: A. Covindassamy, op. cit. Previous studies5 have shown that consequences are the risk of a debt default and insufficient investment self-financing (45%). The • More than 90% of power projects under stress incidence of nonpayment of government dues in the power sector report at least one type stands at only 28%, in line with the senior status of financial issue, mainly inadequate return of taxes in project cash flow. on equity and the risk of debt default. The threat of a license cancellation as a • About 25% of power projects report the risk result of stress situations is relatively low, of cancellation or non-renewal of license. affecting about a quarter of power projects under stress. Interestingly, more detailed This pattern suggests that the actions taken analysis has shown that this risk is rarely a by the governments aim at "correcting" what consequence of financial difficulties, as the they perceive as the excessively favorable correlation between financial and licensing financial terms of a PPI rather than challenging distress is low. Instead, administrative distress the principle of PPI itself. In other words, the with a risk of license cancellation seems to majority of power projects that come under result from the political causes. The risk of non- stress seem to do so because governments are renewal of licenses remains low as most PPIs taking action to squeeze project cash flow while are fairly new and still several years away from keeping the project in operation. The most their license renewal date. frequent consequence of project stress is a lower Earlier studies have shown that the return on equity (88% of power projects under consequences of project stress change according stress). The next two most frequent financial to the type of power project under consideration. 5 See Ananda M. Covindassamy, op. cit., Chapter 3. 9 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS In 95% of greenfield power projects under stress on investment program is low (31%) since the main consequence was financial distress, most generation power projects require limited mainly lower return on equity (83%) and a risk future additional investment. The risk of license of debt default (75%). As these power projects cancellation for generation power projects under generally involve the construction and operation stress is lower than for other types of PPIs (10%) of a single plant, there are few consequences reflecting the low political visibility of generation of stress on the investment program. The power projects, compared to distribution power risk of nonpayment of government dues as a projects and utilities. consequence of project stress is also low (33%) Project stress had a strong financial impact reflecting either the privileged creditor status of on distribution, mainly on return to equity (92%) the government or the fact that many greenfield and capacity to repay lenders (84%), reflecting power projects are tax exempt for a number the fact that distribution companies often raise of years. The administrative risk of license debt for project implementation, rehabilitation, cancellation for greenfield projects was low as or extension. The potential impact of stress on well (25%). investment programs is higher (53%) than for Concessions display their own pattern of generation projects, as distribution companies consequences of stress. Concessions power have larger investment programs than IPPs projects under stress presented financial risks (independent power providers). The higher that affected the potential return on equity, risk of cancellation of distribution licenses the company's self-financing capacity as well (46%) as a consequence of project stress reflects as debt repayment capacity (77%). The risk of the relatively large number of cases where nonpayment of government taxes was fairly low distribution power projects went under stress (33%) although concessions do not frequently due to sociopolitical issues. In those cases, the benefit from tax exemptions. Concessions, intent of the government may have been related however, do show a higher risk of license to the principle of PPI for power distribution and cancellation (44%) relative to other types of its political visibility. power projects, perhaps due to the fact that assets The consequences of stress for integrated are government property and would never be utilities are similar to those for distribution power stranded with an unlicensed company. projects, with a high incidence of financial risks. The consequences of stress for divestiture Cash flow shortcomings for the self-financing power projects are fairly similar to those of of investment feature prominently (60%) in greenfield power projects, except that the the case of utilities, but the risk of debt default incidence of a possible default on the debt is is fairly low (30%) compared to other types of lower (66%) possibly because divestiture power PPIs. This reflects the generally low leveraging projects are often less indebted than greenfield of utilities in the initial years after privatization power projects. By contrast, the risk of insufficient compared to other types of power projects. cash flow for sustaining an investment program License cancellation risk is also relatively high is higher (42%) as divestiture power projects (46%) presumably for sociopolitical reasons. typically have large investment programs to The regional analysis shows that the carry out. The risk of license cancellation is low consequences of project stress are largely (19%), probably because of the complex legal dependent upon the type of project and activity implications and the potential consequences for in the power sector prevalent in each region, as service quality in the event of cancellation. well as the regional political climate. Specific incidence patterns also emerge when In Africa (AFR) the consequences of stress power projects under stress are broken down reflect the fact that nearly all power projects by main activity. For generation power projects, under stress are utilities. The consequences of the financial consequences of stress are mainly a stress situations are lower expected financial lower return on equity (89%) and increased risk returns and the inability to finance post- of debt default (84%), while the potential impact privatization investment programs (40%), 10 Overview of PPI Projects, Incidences of Stress, and Their Causes Figure 2.7 Consequences of Stress by Type of Project Frequency of Consequences of Stress by Types of Project 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Risk of default Nonpayments Inadequate Inadequate License License on debt to gov. return on equity self-financing cancellation non-renewal Greenfield Concession Divestiture Source: A. Covindassamy, op. cit. Figure 2.8 Consequences of Stress by Region 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% AFR EAP ECA LAC SA Risk of default Nonpayments Inadequate Inadequate License License on debt to gov. return on self-financing cancellation nonrenewal equity AFR - Africa EAP - East Asia ECA - Europe and LAC - Latin America SA - South Asia and the Pacific Central Asia and the Caribbean Source: A. Covindassamy, op. cit. 11 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS whereas the risk of default on the debt is low In South Asia Region (SAR), power projects (40%) compared to other regions as this type of under stress are split evenly between generation power project is less dependent on debt than and distribution. The prevalence of distribution greenfield generation power projects. On the power projects and the frequent emergence other hand, the risk of cancellation of licenses of governance and sociopolitical issues are is high (40%) compared to other regions, reflected in an unusually high proportion of indicating the political sensitivity of electricity power projects in risk of license cancellation power projects involving direct contact with the (40% of power projects under stress). The public and the apparently low level of political number of leveraged generation power projects, commitment to PPI. on the other hand, explains the risk of default Past studies have shown that all PPI power on the debt (40%). The pattern of consequences projects under stress in the East Asia and Pacific of stress in SAR points to weak sociopolitical region (EAP) reported similar consequences: support for power sector reforms. financial issues and no license cancellation risks. The financial consequences of stress were always a lower rate of return for investors and a higher Summary default risk. This pattern is explained by the Private investment in power projects went fact that all power projects under stress in EAP through a peak in 1998 when they represented are highly leveraged IPPs for which there are nearly 30% of investment in the sector, followed no future investment programs to be financed, by a sharp decline until 2002, when their share while special tax regimes are often applicable. declined to about 10% of sector investment. Since In Europe and Central Asia (ECA), most then, the interest of private investors has been power projects under stress were aiming at moderate, except in China, and private investors improving the management and efficiency of have voiced their concern with risks associated distribution companies and utilities, which with private investment in energy in emerging did not lead to significant increases in debt markets. levels. This explains a high risk of general Private investment in the power sector was financial distress (82% of power projects under directed mainly to the Latin America region, stress) but low risk of debt default (16%). Also, followed by East Asia and Eastern Europe, with there is in ECA a relatively high risk of license Africa coming last. Investments were directed cancellation (16%) resulting from the prevalence mainly at greenfield generation projects (in Latin of distribution and utility power projects with America, East Asia, South Asia), followed by high political visibility. divestitures (mainly in Latin America). Power In Latin America and the Caribbean region generation attracted 70% of investment, whereas (LAC) most power projects under stress distribution represented only 14% of private were meant to increase generation capacity, investment, integrated utilities making for the followed by a smaller but significant number remaining 16%. of distribution power projects. This structure is Despite the widespread perception that reflected in the consequences of stress, which investment in power projects in emerging are primarily of a financial nature, with a high markets is a risky business, statistics over the risk of debt default (96%) as both generation 1984–2005 period show that, in fact, only 5% of and distribution companies in LAC tend to have private projects go through a stress situation. high debt exposures. There is also a high risk on Stress events, though, are widely publicized investment programs of distribution companies and are a deterrent for more investment. The (61%). The LAC region also has a 26% risk of successful workout of power projects going license cancellations mainly on distribution through a stress situation is therefore important power projects. to restore investors’ and lenders’ confidence. 12 Overview of PPI Projects, Incidences of Stress, and Their Causes The main causes of stress that would need sectors of the economy play an important role, to be addressed in a workout are first, pricing though they are not the most frequent issue and regulatory issues, followed by sociopolitical affecting private power projects. issues stemming from a lack of consensus or The consequences of project distress are communication on the role of private investment always a financial return below expectation and in the power sector, and macroeconomic shocks. a risk of default to lenders. Only rarely does the Causes of distress of power projects are therefore host government envisage canceling the license largely sector specific and can be addressed as of the private project. The focus of workout such through project or sector-specific workout. strategies should therefore be on addressing in General macroeconomic issues that affect all priority the financial distress issues. 13 Preventing the Emergence 3 of Stress Situations This chapter explores how adequate governance necessarily mean that there is either an explicit or arrangements help in preventing the emergence implicit sovereign guarantee for the obligations of stress situations in power projects with of the project. However, other avenues for private participation. To prevent the emergence restructuring are available and should be of stress, governance arrangements need to be preferred over formal bankruptcy proceedings, based on accountability and transparency. In including using automatic renegotiation clauses addition, they should promote, in addition to (e.g., in case of macroeconomic crises) and more effectiveness and efficiency in the management, or less formal frameworks for mutually agreed adaptability to changing circumstances. Given renegotiations, all of which can prevent or the high political profile of most power projects resolve stress situations. Later chapters in this in emerging markets, governance arrangements study will provide more details on alternatives need to incorporate appropriate communications for restructuring a power project. and consultation strategies with all stakeholders. Naturally, many of the situations that lead to By their very nature, power projects usually project stress can most often be identified ex ante have some form of government involvement, and in many cases action may be taken to reduce as owner or investor, watchdog or regulator, the probability of their occurrence. The next as well as client and supplier. It follows that in step is to introduce appropriate, comprehensive most cases, the prevention of stress situations risk-management frameworks in a project, in power projects is a shared responsibility including risk-mitigation tools whenever they between the public and private sectors, each are available. Note, however, that the availability having a role to play and each in its own realm of effective restructuring mechanisms often acts of responsibility. as the best tool for the prevention of stress, even The prevention of stress situations in power if those mechanisms are never in fact used in the projects also relies on the existence of a minimum context of a particular project—paradoxically, capacity to reorganize and restructure a project, their very existence makes them less likely to whenever certain combinations of circumstances ever be used. Their existence permits all parties and events might occur. As restructuring to evaluate potential costs and risks of each mechanisms become more effective and diverse, alternate approach and encourages discussion project stress becomes less likely. From its and settlement through negotiation rather inception, a power project should facilitate than through processes over which the parties recourse to bankruptcy laws as a last resort but perceive they have less control. most of all, alternative resolution mechanisms, if and when it becomes necessary to resolve a stress Importance of Adequate situation. Depending on the legal systems in the host country, bankruptcy does not necessarily Governance Arrangements imply liquidation or disruption of services to In designing power projects, there is always consumers. At the same time, simply because a need to consider the political nature of the the public sector is involved, this should not industry. Doing so allows project designers and 15 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS policymakers to identify and exploit differences governments face incentives quite different from in country-, industry-, and firm-level factors with what they faced early in the project cycle. In a view to introducing appropriate governance general, once a project is built governments have arrangements in power projects.6 significantly greater bargaining power than they The governance arrangements of a large did earlier in the project cycle.8 The dynamics of power project should be thought of as including a project’s incentive structure can be said to have the nature of the relationships among various an in-built tendency to cause stress situations supervisory, regulatory, and enforcement and therefore, project designers must always authorities in a country. The legal, regulatory, incorporate hazard mitigating mechanisms in and institutional foundation of implicit and governance arrangements to help prevent the explicit contracts is also part of broadly emergence of stress due to the dynamics of defined governance arrangements. As such, a incentive structures. Subsequent chapters in this governance framework may include elements analysis propose hazard-mitigating mechanisms of legislation, regulation, self-regulation, that can be used in power projects. and voluntary commitments. It also includes W h e n s t re s s s i t u a t i o n s d o e m e rg e , ongoing relationships and commitments toward mechanisms should also be available that help the public and international stakeholders. to increase the chances of project survival. The power industry is characterized by a Sound project design strategy does not consist high level of political scrutiny that results from only, or even mainly, of a collection of ex ante the many uses of electricity in a modern economy mechanisms, but rather a balanced combination as well as the relatively high level of political that would function both ex ante and ex post as influence held by consumers of electricity in effective stress-mitigating mechanisms. We now emerging countries. Moreover, economic and discuss some elements of a project’s governance political volatility cause recurring rounds of framework that contribute to the prevention and negotiation and bargaining between private resolution of project stress. investors and governments—a characteristic of project stress.7 It is often the case that project stress revolves around various aspects of project Toward Stronger Project governance arrangements. Hence, project Governance Frameworks designers and policymakers are advised to take Project designers and policymakers should into consideration that stress events are likely to begin by establishing the basis for an effective lead to challenges to the prevailing governance governance framework, which in itself represents arrangements and therefore, that there will be a solid defense against the emergence of project a need to incorporate features that increase a stress situations. The first principle to be followed project’s capacity for survival. in the design of project governance frameworks Project designers must also take into is to take into consideration their impact on consideration the particular dynamics of the the project’s overall economic and financial incentive structures faced by investors as well as performance and on the incentives created for governments over the project cycle. For example, various stakeholders in the project. In other in the case of projects with private participation words, an assessment of a project’s economic that involve construction of new or expanded and financial performance would explicitly facilities, once an investment has been made and take into consideration decision scenarios under is physically built in the territory of a host country, alternative governance frameworks. A qualitative 6 See Text Box on following page entitled “Toward an Effective Project Governance Framework.” 7 This characteristic is shared by all types of large infrastructure projects, such as oil and gas, ports and airports, and highways. 8 The balance of power also depends on how far the relationship between the controlling investors and government has deteriorated, and how far each is prepared to go. At a moderate level of conflict, the incumbent controls de facto the electricity switch. Ultimately, however, the government holds the capacity to take over project facilities, including by force. 16 Preventing the Emergence of Stress Situations distributions of a project’s present value and Box 3.1 Toward an Effective Project rate of return, taking into consideration the Governance Framework likely decision paths of key stakeholders Project designers should begin by establishing under alternative governance arrangements. the basis for an effective project governance The results could then be used to develop the framework, which in itself represents a solid project’s risk-return profile under alternative defense against stress situations. An effective governance frameworks. governance framework would have the following The sort of analysis just described focuses on a characteristics: project’s internal dynamics vis-à-vis governance framework. It is also desirable to explore what • It would clearly articulate the division of would happen to project dynamics under a responsibilities among different supervisory, variety of external scenarios. Project designers regulatory, and enforcement authorities in a have a responsibility to establish a framework country. that is flexible enough to facilitate project survival • There is an effective legal, regulatory, and institutional foundation upon which and integrity in widely different circumstances. participants can rely in establishing their To achieve this goal, designers should focus on contractual relations. the desired economic and financial outcomes, • An effective project governance framework while undertaking an analysis of the impact of typically comprises elements of legislation, changes in exogenous economic and financial regulation, self-regulation, and voluntary variables9 under alternative incentive structures, co m m i t m e n ts. Th e b est m i x a m o n g simulating the relative strength of an array of legislation, regulation, and self-regulation possible governance arrangements. Certain and voluntary standards, will vary from types of framework would respond better than country to country. others when volatility in economic activity is • Transparency and continuous consultation high, while others would be preferred when with the public is an essential element of an exchange rate volatility would be an issue. effective project governance framework. Project designers need to pay special attention to • Moreover, a project governance framework systemic conflicts of interest that emerge under a should duly consider the need for and the governance framework and pick one that would results from international dialogue and cooperation. prove to be robust across a variety of economic and financial scenarios. Unfortunately for project designers, not all elements of a governance framework can be designed at will. For example, it may be the case assessment of how actors would behave under that only changes in national policies would open alternative governance arrangements is a good the door to the possibility of optimal governance start. However, given the size, significance and arrangements at the project level. In some sensitivity of power projects, project designers jurisdictions, new laws and regulations could could also use other analytical tools to model be needed, for example, to remove restrictions the behavior of stakeholders in a project. For on project financial terms. Second-best scenarios example, it is possible to estimate the statistical need to be modeled when it is felt that legal 9 In this context, project designers need to determine which economic and financial variables are exogenous relative to the project’s governance arrangements. For example, economic variables that typically have an impact on project outcomes include GDP growth and inflation in the host country. GDP growth correlates positively with electricity demand, which means that a sharp slowdown in GDP growth would hurt project revenue growth thus putting pressure on all stakeholders. It follows that GDP growth slowdown changes the incentive structure for all project stakeholders. Is the project’s governance framework robust under these circumstances? Does it lead to desirable outcomes or instead to heightened project stress? 17 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS or regulatory reform is unlikely. Governance should be consistent with the rule of law in all arrangements should be as robust as possible relevant jurisdictions,12 meeting sound standards even in a relatively adverse environment.10 of transparency and enforceability. In special circumstances, the desire to As mentioned before, a project governance facilitate the implementation of a high-profile framework may be formulated in various kinds power project may open the door to legal and of legal and contractual relations, implicit regulatory reform. Legislators and policymakers and explicit. The elements of a governance may be willing to introduce reforms needed framework may include informal practices to attract investment in the power sector. as well as voluntary codes and standards, For example, there could be laws banning which can be both external and internal to the private ownership of facilities in “sensitive” or project. While such practices and codes can “strategic” industries; obviously, a government improve project governance arrangements, wishing to attract private investment would they may leave some or all stakeholders with need to introduce exceptions or even scrap a level of uncertainty. To avoid uncertainty, such laws altogether. Another example relates practices, codes and standards used as part of to consumer protection laws with clauses project’s governance structure should be widely establishing price ceilings or rules for price recognized and made explicit to the extent increases that would allegedly hurt consumer possible. To increase their power and credibility, interests; since the viability of a power project any voluntary codes and standards adopted as may depend on agreement around pricing rules part of a project governance framework should that may sometimes conflict with specific aspects command national and international consensus of a consumer protection law, a government may regarding means of application, compliance choose to modify that law rather than sacrifice and verification, and sanctions. In jurisdictions foreign investment in a power project. where a tradition of applying voluntary codes In these cases, it could be argued that the and compliance does not exist, project designers legal and regulatory framework becomes partly should look for alternatives. “endogenous” to project design and planning. In In the context of governance arrangements, such situations, it may be possible to fine-tune a common source of dispute relates to which governance arrangements to a greater extent, authorities have jurisdiction over a power project. as more degrees of freedom exist to optimize It follows that project designers together with incentive structures. 11 Policymakers should policymakers and government officials should observe certain basic principles, including that articulate clearly the division of responsibilities any policy reforms or changes in laws and among different authorities. Power project regulations should be general and impartial. governance is influenced by many specific legal Also, there is a need to ensure that adequate domains, including power industry regulations, implementation mechanisms will be in place: securities market regulations, accounting and reforming the laws in the books would have auditing standards, bankruptcy laws, contract no effect unless reforms can be made effective. laws, labor laws, environmental protection Needless to say, all legal and regulatory aspects standards, tax laws, and others. Under these of the proposed project governance framework circumstances, overlaps and conflicts are almost 10 Please refer to Deutsche Bank Research, “Corporate Practices and National Governance Systems: What Do Country Rankings Tell Us?” (2004). The paper discusses the linkages between firm-level and national governance arrangements. Note there is also a debate as to which system of governance is optimal, with some of the arguments carrying over to the issue of project governance—see, for example, Chapter 12, Section C of “Institutional Investors and Corporate Monitoring: A Demand-Side Perspective in a Comparative View” in Hopt, K. et al. (1998). 11 It should be noted that the legal and regulatory framework, host country institutions, conventional practices, as well as some international bodies, should be considered part of a project’s governance arrangements to the extent that they influence incentives, dynamics and outcomes within the project itself, including its propensity to come under stress. 12 This allows for the possibility of cross-border enforcement of laws and regulations, as well as appeals to foreign bodies for some form of intervention. 18 Preventing the Emergence of Stress Situations guaranteed to occur, with projects caught in the include mechanisms for dealing effectively middle of turf battles between different national with regulatory authorities, as well as changes entities. For example, industry regulators may in regulation or regulatory institutions. Broader respond positively to the takeover of retail laws of general application, including well distributors of electricity by a dominant power drafted and administered Competition Laws, producer, on the grounds that efficiency and may permit a check on regulators. coordination will improve. By contrast, the Also, weak analytical reports and flawed local competition watchdog may challenge the recommendations for tariff changes will backfire proposed takeover on the grounds that it will on the government and project, as independent weaken competition at the retail level. Another analysts question the robustness of the proposed example relates to approval of a new power tariff changes. Lack of public credibility in tariff plant by national authorities, such as industry adjustment formulae will considerably weaken regulators and the environmental watchdog, one of the pillars of project governance and at the same time as local authorities (say, at may lead to recurrent stress situations. Finally, the municipal level) seek to block construction proper design of a regulatory authority requires of the new plant on the grounds that it is that the regulator pursue its functions without inconsistent with their development strategy bias or conflicts of interest (avoiding capture by, for that region. say, political interests or industry incumbents) Still in the context of designing a project’s thus upholding high standards of behavior and governance arrangements, project designers maintaining the public trust.13 Transparency and policymakers need to ensure that regulatory of the regulatory framework, of the various authorities are adequately designed and funded. processes and representations and the possibility Poorly funded and understaffed regulators, of stakeholders, including consumers, to remain lacking technical and institutional capacity are adequately informed and represented, will be an guaranteed to become sources of trouble for the important ingredient. The role of an informed industry. Understaffed regulatory bodies will and independent media may also be key. invariably delay technical assessments of project performance and threaten the soundness of the analytical underpinnings of tariff adjustments. The Role of Stakeholders Project designers and policymakers need in Power Projects to consider the possibility that changes in Modern governance frameworks recognize regulations and regulatory institutions, whether the role of the various groups of stakeholders justified or not, may also be a source of project in a project, including creditors, shareholders, stress. For example, the extent to which a regulator government, consumers, and labor.14 Moreover, is part of a system of checks and balances the project governance framework should affects the likelihood of project stress. Lack of encourage their active and regular participation, regulatory independence allows politicians to since a key aspect of governance should be manipulate regulators to their advantage, thus concerned with avoidance as well as management opening the door to conflict with investors and of stress situations. The political nature of project stress. Similarly, a renegade independent the power industry makes the principle of regulator can sometimes be a source of problems, stakeholder engagement particularly relevant perhaps as much as a puppet regulator. It follows and urgent. One economic and financial benefit that a project’s governance framework should of a governance structure that seeks to engage 13 For an introduction to economic design and regulation please refer to Chapter 10 in Viscusi, W. et al. (1996). Estache, A., and Rodriguez- Pardina, M. (1999) provide an overview of the experience with regulatory reform in the power sector in selected Latin American countries. In some situations, improving governance arrangements in state-owned electricity utilities may be necessary, perhaps as a step toward introducing private participation; in this context, Irwin, T., and Yamamoto, C. (2004) explore the options available to reformist policymakers. 14 Refer, for example, to “The OECD Principles of Corporate Governance” (2004). 19 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS all stakeholders is that finance capital is more they are an important element in governance likely to continue flowing toward the project. In frameworks.16 In emerging markets, national addition, project governance structures should and foreign creditors are key stakeholders since be designed so that they encourage stakeholders continued access to credit on comparatively good to avoid following strategies that would cause terms reduces the likelihood of project stress. project stress. One obvious first step in this Power projects with a good governance record, direction is respect for the rights of stakeholders, supplemented by an adequate reorganization whether or not rights are established by law or and insolvency framework, are less likely to through legally binding agreements.15 Moreover, undergo episodes of stress caused by financial governance arrangements should provide difficulties associated with a “credit crunch.” stakeholders with the opportunity to obtain redress for violation of their rights, through processes that are efficient, predictable, and Promoting Disclosure transparent. and Transparency One could go a step further and suggest that The project governance framework should stakeholders ought to participate in the process ensure that adequate and timely disclosure of of designing a project’s governance arrangement information is made on all relevant matters.17 A and continue their involvement throughout disclosure regime that promotes transparency the project cycle. This may be difficult if the is essential to monitoring of power projects by process involves a competitive bidding process. investors and other stakeholders, and can help To do so, they should be allowed access to to attract capital and maintain confidence over sufficient, accurate information on a timely the project cycle. By contrast, weak disclosure basis. Stakeholders should also be able to and nontransparent practices likely contribute communicate their concerns initially to project to a loss of integrity and credibility, hurting the designers and policymakers, and later on to project’s ability to attract financing and damaging project management, government, and investors, stakeholder relations. National policymakers through clear and effective procedures. Any should also be concerned that a loss of confidence agreements or contracts entered into by the in a high profile power project could also lead government with private investors should be to a heightened risk perception relative to the available for public scrutiny and comment, economy as a whole. For example, failure of a especially sensitive issues pertaining to tariff well-publicized power project as it is built, or setting and construction of new facilities. The heavy-handed intervention or nationalization agreement should include a clear outline of the by government once a project is finished, will governance framework and contain a specific inevitably increase uncertainty among investors. commitment of all parties to adhere to these Foreign investment projects across the economy, provisions. especially those relating to infrastructure, will be The project governance framework should scaled down or put on hold. be supplemented by a well-functioning Wide and liberal disclosure of key information reorganization and insolvency framework, also improves public and government whether formal or informal, national or understanding of a power project, its structure, international in nature. Various options activities, policies, and performance. If a stress concerning project reorganization and insolvency situation emerges, it will always be easier frameworks will be discussed elsewhere in to command public support (for example, this document, so suffice it to say here that concerning a potential tariff increase) if adequate 15 Clearly, there is also a need to ensure that any such agreements are consistent with the rights of other stakeholders too. 16 Please refer to Chapter 10, “Lenders as a Force in Corporate Governance Enabling Covenants and the Impact of Bankruptcy Law” in Hopt, K. et al. (1998). 17 Please refer, for example, to “The OECD Principles of Corporate Governance” (2004). 20 Preventing the Emergence of Stress Situations disclosure and transparency policies have been in place for some time. Disclosure policies Box 3.2 A Primer on Ethics Committees should include at least the following kinds of & Compliances Programs information: An Ethics and Compliance Management Committee consists of at least one Ethics and Detailed financial and operating results of the Compliance Officer and at least three other project beyond legal disclosure requirements officers in a supporting role. The Committee will to shareholders and the Regulator. monitor the Ethics and Compliance Program as Project objectives and corporate strategy. well as other policies, procedures, and processes Risk factors anticipated. to set a tone of responsibility for the Program. The tone will be one of support and respect for Governance structures and policies. the Ethics and Compliance Code. Share ownership and voting rights. The Committee will provide the oversight Specific issues regarding employees and necessary to guide senior management, the other stakeholders. Ethics and Compliance Officer, and employees Agreed conflict resolution mechanisms. in their efforts to encourage good business practices and maintenance of regulatory High-quality information disclosure and requirements. The Committee will also assure transparency policies also improve the ability the existence of adequate internal controls. of investors and other stakeholders to monitor The Committee will be informed on a regular activities, policies, and performance. basis of all ethics and compliance activities, It should be kept in mind that the channels including training, communications, regulatory agency inspections/outcomes and interactions, for the dissemination of information can be as compliance audit reports, summaries of important as contents. Sometimes gaining access assistance hotline calls, and reports of alleged to information can be cumbersome and costly illegal/unethical behavior. for the average stakeholder in a project. Project The Committee will coordinate regular designers should therefore seek to integrate audits of ethics and compliance. Allegations of different sources of project information, and use wrongdoing relating to accounting and auditing the Internet and other information technologies issues will be reported to the General Counsel for information dissemination. As mentioned and the Chair of the Audit Committee for further earlier, media access to all relevant information investigation and pursuit. should be encouraged. More broadly, the introduction of a project code Dealing with Conflicts of Interest of ethics would aid in the prevention of conflicts Project designers and policymakers need to of interest, especially when underpinned by establish mechanisms for monitoring and adequate and enforceable legal provisions. In a managing possible conflicts of interest in any power project, there could be an audit or ethics area related to the project. Usually, conflict of committee specified as the contact point for interest provisions apply to management and reporting and processing unethical or illegal board members, concerning the misuse and behavior. abuse of project assets as well as other aspects For example, the company responsible of decision making. Frequently the regulator for building, operating, and maintaining an constitutes yet another source of potential energy-delivery infrastructure should do so conflict of interest. The “rotating door” between in a manner that will protect public safety. In government, industry, and the regulator creates doing so, the company should be committed to an atmosphere of “cooperation” and “mutual following all regulations governing the design interest” which can easily slip into behavior and operations of infrastructure. In this context, neither in the interest of other stakeholders and employees should report any safety issues in the frequently constitute a clear conflict of interest. energy-delivery system and it is expected that 21 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Table 3.1 Responsibilities of Public and Private Sectors in the Design of Project Governance Public Sector Private Sector Put in place arrangements to prevent moral Foresee and prepare for adverse changes in hazard and abuse of power as public sector’s private sector’s bargaining power as project bargaining power increases along the cycle matures. project cycle. Introduce necessary laws and regulations Actively participate and assist the required to ensure project success, while government in preparing an adequate legal keeping an eye on overall social and and regulatory framework. economic impact. Resolve possible jurisdictional conflicts in Assist in the identification and request the the early stages of project preparations. resolution of potential jurisdictional conflicts in the early stages of project preparations. Ensure that regulatory bodies are Monitor the status of regulatory bodies and adequately designed, with no potential suggest necessary improvements in the conflicts of interest and with sufficient early stages of a project. technical capacity and funding to carry out their duties. Endorse the private sector’s efforts to Lead the introduction of voluntary codes introduce voluntary codes and international and international best practices in project best practices in project governance. governance. Ensure that enough safeguards are in Lead the introduction of safeguards meant place so that the rights of all stakeholders to protect the rights of all stakeholders in a in a project are routinely observed and project. protected. As an aid in project governance, introduce Introduce and improve alternative and improve formal mechanisms for the resolution mechanisms, including recourse resolution of project stress, including to mediation and international arbitrage adequate bankruptcy and enterprise fora, as well as laying out criteria and steps restructuring laws and regulations. for using the “London Approach” in the resolution of project stress. Introduce and enforce minimum mandatory Lead the introduction of disclosure and disclosure and transparency requirements in transparency standards that meet and the affairs of a power infrastructure project. exceed any minimum requirements set by the government, fostering a culture of compliance. Introduce and enforce formal legal and Introduce and enforce within the project regulatory provisions dealing with conflict specific rules against conflicts of interest, of interest in all its manifestations, within or thus fostering a culture of compliance. outside a project. Put in place mechanisms to ensure the Establish clear lines of responsibility and integrity, transparency and timeliness of accountability throughout the project’s accounting and financial reporting systems. organization, setting up internal programs and procedures to promote compliance. To be effective, the internal incentive structure of the project needs to be aligned with its ethical and professional standards. 22 Preventing the Emergence of Stress Situations the company will not take adverse action against conflict resolution mechanisms, including those employees. Alleged retaliatory action, situations concerning financial or operations however subtle, would have to be reviewed restructuring. Such agreements can be cast on under the code of ethics. formal documents detailing steps to be followed in certain situations, spelling out how the matter Accounting and Financial would be resolved and in what forum, and how a resolution will be made binding on all parties Reporting concerned. Project designers and policymakers should Where the public sector is concerned, a special establish mechanisms that will ensure the provision might be made in law or regulations integrity of the accounting and financial allowing the government to participate directly reporting systems. The integrity of reporting in reorganization proceedings, including through and monitoring systems requires, among alternate mechanisms. A specific commitment other elements, clear lines of responsibility should be made by governments not to take and accountability throughout the project’s actions to undermine the implementation of organization. Designers of power projects such alternative mechanisms through specific, should lay down a requirement for management subsequent, and unilateral laws or regulations to set up internal programs and procedures to prohibiting the participation in such mechanisms. promote compliance with all applicable laws, In countries where legal tradition would not regulations and standards. To be effective in permit that the government directly subject promoting the integrity of accounting and itself on specific matters to bodies charged financial information, the internal incentive with international reorganizations, bankruptcy, structures needs to be aligned with high ethical and alternate resolution mechanisms, suitable and professional standards as defined in the vehicles may have to be found to allow official code of ethics, so that adherence to these government representation and participation in values is rewarded while unethical or illegal such proceedings. For example, a decentralized actions are penalized.18 regulatory body may be allowed to participate while a line ministry would not. These issues External and Embedded should also be explicitly spelled out, to the extent possible, in the legal and regulatory framework Restructuring Mechanisms for the power sector, so as to avoid uncertainty The capacity to prevent stress situations around who would represent the government in power projects relies on the existence of in certain situations. Needless to say, a case by instruments that facilitate the adaptation of a case approach is required since every country’s project to new circumstances. The more effective legal context is different. and diverse the mechanisms available, the more Policymakers ought to keep in mind that unlikely it is that project stress would cause aside from formal bankruptcy procedures, other lasting damage to a project. In order to boost avenues for restructuring are often available, adaptability, the framework for a power project including using automatic renegotiation clauses should facilitate recourse to reorganizations (e.g., in case of macroeconomic crises) and more and bankruptcy laws, as well as alternative or less formal frameworks for mutually agreed resolution mechanisms, whenever necessary. renegotiations (e.g., international mediation and For example, creditors and suppliers can agree arbitration). The exact choice of instruments for among themselves that disputes surrounding reorganizing or restructuring a project depends a project could be resolved through alternative on its particular circumstances, with few general 18 For a discussion on the role of disclosure, accounting, and financial reporting in governance arrangements, please refer to Chapter 9, “Disclosure and Auditing” in Hopt, K. et al. (1998). 23 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS recommendations possible in this regard other hold the upper hand. Similarly, some jurisdictions than careful exercise of good judgment. favor quick moves to liquidation of a bankrupt This chapter focuses on a typology of possible firm while others allow for relatively prolonged sources of stress and on special means available restructurings in the hope that the debtor for dealing with them in the context of a power company may be turned around. Countries infrastructure project. 19 Some of the more also choose different venues for bankruptcy structured, standard instruments for facilitating procedures, with some favoring administrative project reorganization are discussed in greater solutions while others lean on judicial avenues. detail in Chapter 4. The levels of efficiency in the operation of formal corporate restructuring and bankruptcy systems Setting Up Adequate vary widely from country to country, and it is safe to say that in most emerging economies they Restructuring and Bankruptcy tend to be inefficient. Mechanisms Many emerging economies have In many countries and under normal underdeveloped legal frameworks for bankruptcy circumstances, if a private company defaults and capacity to process a complex formal on its debt, debt holders would take over, restructuring may be limited. Adequate formal replace incumbent management, and reorganize restructuring and bankruptcy proceedings are the company. If it is found that the company likely to be more the exception than the norm in simply cannot generate enough resources to developing countries. In the context of the power service its debts, a formal restructuring takes industry with all its nuances and complexity a place where equity investors typically lose bankruptcy process working smoothly in an a portion of their investment. Many options emerging economy may be the exception rather are available in restructuring a company. In than the norm. the restructuring process, a debt holder could There are other problems with restructuring convert part of its debt into equity, or write and bankruptcy in emerging economies, down debt, thus lightening the company’s including the capacity and independence of debt burden and strengthening its balance the judiciary. Despite the fact that bankruptcy sheet. The restructuring may also include asset frameworks can vary widely in their propensity sales, debt conversions, and other transactions to force a business concern into liquidation, aimed at improving the company’s financial there is a tendency in developing countries health. After the restructuring, investors might to associate “bankruptcy” with “liquidation.” choose to sell their equity shares or trade newly In a liquidation proceeding, somebody (e.g., acquired financial instruments with a third party, a committee of creditors or perhaps court- according to their specific needs.20 appointed administrators) takes control of the The story of a typical project restructuring company, sells the company’s assets, recovers is not the same in every country, for the balance as much value as possible, and finally shuts the of influence between stakeholders varies greatly company down. Perception that bankruptcy across borders.21 In certain countries, creditors equals liquidation has consequences for public enjoy much influence and initiative whereas in choice. Few elected politicians or public servants other countries management or shareholders would fancy the prospect—however unlikely or 19 As is often the case in many areas, there is no unique “typology” of risks. For example, Strong, J., et al. in “Managing Risks of Infrastructure Investment in Latin America: Lessons, Issues and Prescriptions” Working Paper, Interamerican Development Bank, propose two alternative typologies of project risk. 20 See Buckley, R. (2004), which explores creative financial restructuring solutions in emerging markets, seeing beyond the Latin American experience with Brady bonds. 21 For an introduction to comparative analysis of insolvency systems please see Chapter 10, “Methodological Issues in Cross-Country Comparisons of Commercial Bankruptcy Law” in Ziegel, J. (1994). 24 Preventing the Emergence of Stress Situations unwarranted—of having one of their country’s the power company, and the government commit most important electricity facilities “shut down” themselves to continued service provision following a bankruptcy, for fear of service regardless of what goes on in the background disruption. They fear that upon liquidation, with managerial, financial, operational, or other management of an important power generating restructuring. Another solution is to work with facility may on purpose disrupt service, or that lenders and other stakeholders under alternative service disruption may come about simply frameworks like arbitration and mediation to through neglect or the inevitable confusion that facilitate an organized bankruptcy, perhaps the follows a management shake up. Similar things most promising avenue in the case of power could conceivably happen with transmission projects under stress in emerging markets. In and distribution facilities during or soon after Chapter 4 we discuss the London Approach liquidation. and other alternatives to formal bankruptcy In reality, liquidation is also unattractive for proceedings. the alleged beneficiaries of liquidation (creditors) since most power infrastructure assets have little Dealing with Macroeconomic alternate use and value other than providing a service in the country where they are located—in Shocks, Sector Shocks, and many cases recovery rates under liquidation Political Transitions may be rather poor.22 There are various forms of exogenous shocks One possible solution to the risk of service that project designers and policymakers have to disruption is that government retains the take into consideration. The most obvious one right to intervene in case of bankruptcy in the is a large macroeconomic crisis which reduces operation of power infrastructure facilities and electricity demand as well as government ensure continued service provision. In fact, revenues, with or without major inflation and governments often do keep this power, although exchange rate collapse. In general, episodes of this may not be enough to help them overcome stress in power projects are much more likely to their reluctance to allow private power providers occur following a macroeconomic crisis, exactly to go bankrupt. One reason for this is that the time when government is least capable of governments do not really want to take over, out lending any financial support.23 The next chapter of conviction that the government’s proper place explores some mechanisms that can be used to is not to manage business concerns, or simply hedge against exchange rate risk (the leading for lack of skills to retake control of the facilities. macroeconomic cause of project stress) and Also, lenders often have “step-in rights” which increase a project’s capacity to adapt and survive allow them to take over a business if it appears a significant crisis. likely to default. To reassure governments Also, project designers and policymakers that service provision will not be disrupted in should take into consideration that large the event that creditors exercise their “step-in sector-specific shocks may occur, for example, rights,” there could be a binding requirement in significant changes in industry demand or the project’s governance framework that lenders supply may lead to episodes of stress. Examples continue to provide the service. of sector-specific shocks include heat waves that This can be done through a “tripartite lead to unprecedented electricity demand and agreement” between lenders, the power company, spikes in the price of fuel (e.g., oil, gas, or coal). and the government. In such agreement, lenders, Other examples may be driven by government 22 For an analysis of the main characteristics and efficiency of liquidations, please refer to Chapter 14, “The Corporate Bankruptcy Decision” in Bhandari, J., and Weiss, L. (1996). 23 A leading cause of stress in large infrastructure projects, including in the power sector, is the exchange rate. See Gray, P., and Irwin, T., “Exchange Rate Risk—Reviewing the Record for Private Infrastructure Projects” (2004) and “Exchange Rate Risk—Allocating Exchange Rate Risk in Private Infrastructure Projects” (2004). 25 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS policy failures such as significant misjudgment Relationships Between National of future demand and the building of excessive and Sub-National Political generating capacity. An example of this may be found in Pakistan during the last decade. Institutions In each of these cases, unanticipated Project designers and policymakers ought to changes in industry conditions may lead to factor into the design of a power project the breach of contracts with private electricity dynamic relationships between national and providers, as governments seek to avoid the sub-national governments in many countries high political costs of passing adjustments (the degree of decentralization of functions through to consumers. In addition, political and devolution of power to sub-national transitions also tend to lead to project stress, as governments varies greatly from country to reforms are often put on hold or even reversed country). In some political systems, the national as a new government tries to distinguish government has the power to intervene and itself from its predecessor. In general, project check the actions of sub-national governments, stress is more likely to occur following a and vice versa. Frequently in developing macroeconomic or sector-specific shock, as well countries, sub-national levels of government as a political transition. To protect against such seem to be sources of unchecked political power. shocks, minimum power rates will frequently In general, project stress is more likely to occur be set in a currency in which most of the debt where sub-national authorities are not or simply or investments are denominated. Although do not feel constrained by national policies this technically hedges the exchange rate (e.g., policy toward the power sector). In view exposure for the debt holder or investor, it of this, project designers and policymakers frequently provokes more stress then it avoids. need to incorporate into a project’s governance Governments may simply be unwilling or arrangements binding mechanisms and specific unable to implement huge tariff increases when provisions that clarify, from the beginning, the their country is already racked by high inflation, rights and roles of national and sub-national unemployment, and economic disaster. In bodies vis-à-vis the project. As the nature of view of this, it would be advisable that relationships between national and sub-national projects include mechanisms for adjustment or government varies from country to country, it is renegotiation of terms once certain conditions almost impossible to set a menu of provisions are met (e.g., a pre-established percentage that would clarify rights and roles vis-à-vis a fluctuation in the exchange rate or a significant power project. There is no way around gaining rise in fuel costs) since flexible but structured an understanding of the specific circumstances in arrangements are more likely to prevent project a country, and incorporating provisions in multi- stress, and possibly a total breakdown in the party agreements aimed at clarifying rights and prevailing governance arrangements.24 A pre- roles. Under some circumstances, it may be established framework for renegotiation of essential to treat such sub-national and other terms can therefore be considered an instrument entities as parties in the initial agreements and to increase a project’s adaptability. Making thus bind them. To increase a project’s capacity to provisions for the adjustment of tariffs over a adapt to a fluid and volatile relationship between longer period of time, linked with forbearance of various levels of government, policymakers creditors, if agreed and planned at the inception should include in the project’s governance of the project, may be possible and avoid the framework mechanisms for renegotiation heavy price of default for all concerned. under certain specific circumstances relating 24 Renegotiation is in fact very common in the case of certain types of private participation in infrastructure projects. See Strong, J. et al., “Managing Risks of Infrastructure Investment in Latin America: Lessons, Issues and Prescriptions.” 26 Preventing the Emergence of Stress Situations Box 3.3 Restructuring Mechanisms and Prevention of Stress in Power Projects Setting Up Adequate Liquidation is unattractive for both governments and creditors. Restructuring and Bankruptcy The proposed solution is to work with lenders and facilitate an Mechanisms. organized bankruptcy, perhaps outside formal channels. Lenders often have “step-in rights” which allow them to take over a project if it appears likely to default: to avoid service disruption, there could be a requirement that lenders continue to provide services, cast through a binding “tripartite agreement” between the lenders, the power company and the government. Dealing with Macroeconomic Stress in power projects is more likely to occur following a Shocks, Sector Shocks, and macroeconomic crisis, a sector-specific shock, or political transitions. Political Transitions. Projects should include mechanisms for renegotiation of terms once certain predetermined conditions are met. Such flexible but structured arrangements are more likely to prevent project stress and a breakdown in governance. Relationships Between Project designers and policymakers need to incorporate in a project’s National and Sub-National governance binding arrangements that clarify the rights and roles Political Institutions. of national and sub-national authorities. Also, there should be procedures for renegotiation in special circumstances. Level of Sector Development Project stress may occur as sector reforms advance and the industry evolves. Project governance should allow for a renegotiation before the legacy of early contracts becomes a problem. Market Position and Ownership There should be enough room in project governance arrangements Structure. to allow for renegotiation in case of a large change in sector equilibrium conditions. to the relations between national and sub- later in the reform process). Project designers national governments. Unfortunately, the and policymakers should therefore allow for the specificity of country circumstances makes it eventual renegotiation of the terms of contracts almost impossible to provide model clauses for once pre-established conditions are met in the renegotiation of terms following a shift in status state of sector development, and before legacy between national and sub-national governments. contracts turn into a source of stress. Triggers Provisions would have to be tailored to a project’s for renegotiation could include completion of situation on a case by case basis. a round of industry restructuring (e.g., a set of privatizations in generation or distribution), approval of legal and regulatory reforms (e.g., Level of Sector Development a new framework law for the electricity sector), Another set of stress factors stems from the emergence of a wholesale electricity market, specific dynamics of power sector reform. For or implementation of connectivity plans with example, long-term contracts in the provision neighboring countries or regions. of electricity tend to lock in prices higher than spot market because they include a risk premium based on risk perception at the beginning of Market Position and Ownership a reform process. Project stress is more likely Structure to occur as sector reforms deepen and the In the electricity industry, bargaining strength is industry evolves from a “market of contracts” related to a company’s market position as well (which emerges early in the reform) to a hybrid as its ownership structure—who its owners are. market (a more mature market that evolves In this context, foreign investors may be worried 27 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS about the role that domestic firms may play and important role as elements in a project’s gover- vice versa. For example, an incumbent System nance arrangements. It turns out that regulation Operator in the electricity sector may have also serves as a tool for risk management and significant market power and enjoy the protection sharing. To understand this, let’s review quickly of political agents. By contrast, investors in a the evolution of broad tariff-setting rules that developing market may be competing against have been used in the electricity sector. There foreign state-sponsored firms that may enjoy was some dissatisfaction with early types of subsidies and other advantages in their home utility regulation. For example, policymakers country. It follows that the likelihood, dynamics, in many developing countries concluded that and effects of project stress are related—in rather “cost-plus” regulation, whereby electricity tar- complex and unpredictable ways—to a firm’s iffs adjust in accordance with changes in costs, ownership structure and market position. Project made regulated firms inefficient.26 Also, this designers and policymakers may not be able approach almost completely shifted the burden to foresee all classes of events that could put a of risks toward government and consumers. project under stress as a result of the interplay This issue should be addressed in the design of of market positions and ownership structures tariff-setting regulations which is beyond the in the power sector, but there should be enough scope of this paper. room in project governance arrangements to To encourage efficiency and find a more allow for renegotiation in case a significant equitable distribution of risks, governments market entry or other sector development causes often deregulate the power sector and seek a substantial change in equilibrium conditions to increase reliance on market competition, in the sector. to promote technical and economic efficiency, and protect consumers from possible risks and market power based tariff hikes. Nevertheless, Creative Use of Risk- some governments also found that competition Management Tools would be too weak a constraint on the ability of incumbent firms to increase prices and shift Many situations that lead to project stress can risks back to the consumer. This led to the be identified in advance and therefore, some adoption of so called “fixed-price” regulation. actions may be taken to reduce the likelihood The main characteristic of fixed-price regulation of their occurrence.25 is that electricity tariffs adjust less frequently (relative to the cost-plus approach) and only Risk Sharing in Power Projects partially to cost increases, as most of the time Project designers and policymakers are able to (but not all the time) tariffs include a fixed fine tune the level of risk borne by private sector part.27 Under this approach, a power utility partners, the government and ultimately the bears in the short term some risks and it is public. This can be done through several means, only after a relatively prolonged period of time including the following: that tariffs are reset to account for actual cost Regulation as a Tool for Risk Management and structure and demand growth. Of course, there Sharing. As mentioned earlier in this chapter, is always pressure from the regulated utilities regulation and regulatory institutions play an to shorten the wait until prices are reset. When 25 See Deloitte (2004) for a description of enterprise risk management systems and their importance. 26 This is because power utilities have no incentive to economize resources, including fuel and personnel costs, since tariffs would quickly catch up with rising costs. 27 In an ideal fixed-price approach, prices are set in advance in real terms for a time horizon, with nominal tariffs adjusted according to a predetermined inflation index (e.g., CPI). 28 We would call these “sector shocks” in the terminology used earlier in this chapter. Clearly, other kinds of shocks may be accommodated in a similar fashion. 28 Preventing the Emergence of Stress Situations the authorities give in to demands for an early Policymakers often think that there is a need reset, the beneficial effects of the “fixed-price” to offer support to debt financing, perhaps approach are diminished. to reduce the likelihood of bankruptcy. At In reality, tariffs are never absolutely fixed the same time, governments have rarely in all scenarios even under the “fixed-price” guaranteed returns to equity, thus implicitly approach—for example changes in fuel costs or encouraging the use of debt rather than equity demand often trigger quick, though temporary, in power projects. Paradoxically, increasing a price changes within the terms of the “fixed- project’s leverage actually raises the likelihood price” approach.28 Nevertheless, this approach of a bankruptcy and transfer of financial ensures that private utilities still bear significant obligations to the government—the outcome business risks most of the time, leading to lower the government wanted to avoid in first place. costs. Of course, risk never just goes away; it It can be argued, therefore, that debt guarantees only transforms itself. Project designers and can be counterproductive. policymakers should keep in mind that this As a rule, if a government is ready to offer approach allocates most business risks and a guarantees, it should be guaranteeing specific significant portion of other kinds of risks to kinds of risks for all investors rather than private enterprises, thus increasing the likelihood guaranteeing all risks for some type of investors. of stress and possibly of bankruptcy. Following this rule, governments would avoid Limits on Leverage as Tools for Risk Management distorting financing choices in power projects. and Sharing. The capital structures of regulated In any case, high debt burdens, whether or power projects can be expected to vary according not fueled by public policies and guarantees, to governance arrangements, including the kind are indeed acceptable when governments are of regulation to which they are subjected as ready to tolerate bankruptcy and the framework well as the type of contract under which they for bankruptcy actually works. As discussed sell output. For example, power producers earlier in this chapter, these conditions are not with relatively low-risk, long-term purchase met in many developing countries. In view of agreements tend to have higher debt burdens, these considerations, government authorities in while producers selling exclusively in spot emerging markets may have to choose from the markets have lower debt ratios.29 In principle, following alternatives: policymakers would not need to discriminate between debt and equity and should let private 1. Accept that private providers may go investors find the optimal capital structure bankrupt in certain circumstances and for a project.30 In practice, governments do focus on improving the framework for discriminate in favor of debt through several bankruptcy resolution (including through mechanisms: formal and informal channels). 2. Reduce the likelihood of bankruptcy 1. Differentiated compensation policies by setting mandatory minimum equity according to sources of project capital levels, on-balance sheet financing, project 2. Debt service guarantees without guarantees from private sector partners equivalent guarantees on returns on at the beginning of a power project, project equity and predictable regulation, particularly 3. Minimum-revenue guarantees linked to with regard to tariff setting at a level debt repayment compatible with sector financial viability 29 This makes sense as a relatively certain income stream can be used for certain debt servicing. By contrast, spot sellers will prefer lower debt ratios because their higher risk income streams may not match debt servicing requirements. 30 Investors have several types of quantitative methods at their disposal for finding optimal capital structures, including but not limited to Monte Carlo and historical simulations. 29 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS (however, note that there may still be an important share of risks, thus reducing discrimination in favor of debt through the probability of stress and bankruptcy. As other mechanisms). always, this benefit is not costless. Besides 3. Reducing the risks borne by power distorting financing choices, investors would utilities and explicitly allocating demand higher returns on equity holdings, thus more risk to government finances or increasing the project’s average cost of capital. customers, perhaps letting private However, any mechanism that actually transfers investors bear market and business risk, risk to private partners will lead to increases while macroeconomic and sector shocks in the cost of capital, as higher risk simply has are handled through some government- to be compensated by higher returns. Hence, sponsored mechanism. the real problem with minimum equity levels lies elsewhere, in that they also limit investor Note that if governments would choose to treat flexibility to source finance capital in an optimal creditors more favorably than other stakeholders fashion. 33 For example, foreign tax regimes in the event of bankruptcy, 31 effective risk may discriminate in favor of debt financing transfer to the private sector invariably requires (independently of distortions at the national that equity investment exceed certain levels. level) and minimum equity levels reduce the Otherwise, the public sector would be picking ability of foreign investors to take advantage of up most of the bill in case of project bankruptcy. favorable tax treatment. Moreover, enforcement Project designers and policymakers should of minimum equity requirements may be costly therefore think about including limits on on an ongoing basis, as monitoring will have to leverage to ensure that the desired level of risk continue throughout the life of the project. is transferred to private investors, especially Full On-Balance Sheet Financing. As many when policies that discriminate in favor of debt other large infrastructure projects, power projects are already in place.32 tend to be project financed, as private investors As we have seen, despite the fact that create new vehicles for each project, thus seeking governments often do not want to see projects to cap the parent company’s maximum risk. with private participation go bankrupt, projects From the perspective of project designers and may be unwittingly designed in ways that policymakers, one way to more effectively increase the likelihood of a bankruptcy (e.g., by transfer risks to private investors is to limit the discriminating in favor of risky debt financing). use of special purpose enterprises. One problem There are tools, however, that can be used to with this strategy is that it invariably leads to fine-tune the share of risks borne by private higher target returns in exchange for the higher sector partners. Some of these instruments have risk levels that the parent company is being been mentioned in passing already and we now asked to bear (remember that any mechanism analyze them in greater detail: that effectively raises risk will inevitably increase Minimum Equity Levels. One way to transfer target return). In some circumstances, foreign risk to private investors, without increasing the investors may simply conclude that the risks in likelihood of bankruptcy, is setting minimum a developing country are so difficult to assess equity levels. Equity investors would absorb and measure that it is impossible to accept a 31 This is in addition to treating them more favorably under normal circumstances. 32 Please refer to Chapter 6 in Irwin, T. (2003) for an overview of techniques for estimating the cost of government support to infrastructure projects in the form of guarantees. Needless to say, this type of guarantee is not costless, as it represents a significant contingent liability in public finances. Please refer to Lewis, C., and Mody, A. (1997) for a discussion on public management of contingent liabilities. 33 In particular, distortions on project capital structure are greatest when minimum equity levels or limits on leverage are introduced to compensate for the distortion caused by existing guarantees on debt or debt servicing. In such situations, it can be argued that one type of distortion is simply being used to offset the distortion caused by other measures—a rather unhappy situation for any project manager. 30 Preventing the Emergence of Stress Situations very large liability—as full on-balance sheet accepting that the public sector will pick up most financing requires. In addition, if a power project of the bill. This led us to the present discussion is placed on-balance sheet, debt issued to finance on how to transfer a share of general project risk the project will bear the parent company’s effectively to private investors. In some cases, name, implying that its credit ratings will come however, the best approach is to incorporate under scrutiny and its overall cost of borrowing more specific risk-sharing mechanisms that might increase. An increase in the overall cost of allocate each type of risk directly to the party capital of a parent company will make investors able to manage and control it. For example, the less willing to accept a project or cause them to risk of cost overruns should be allocated to the demand significantly higher target returns. partner responsible for project construction or Guarantees from Private Partners and Third operations. By contrast, the risk of unexpected Parties. Full on-balance sheet financing may changes in tax regime should be allocated to the prove to be too strong a deterrent for many government, perhaps by requiring compensation private investors, so an alternative could be if any kind of discriminatory tax treatment to require some guarantees from the parent materializes. company. In this case, the transfer of risk to the Unfortunately, there are risks that nobody parent company is the same as in the case of is able to control and these are allocated to the full on-balance sheet financing, but guarantees private sector (e.g., demand risk); this is because offered to the power project will not have the private enterprises have experience managing same accounting treatment on the books of such risks even though they are not fully under the parent company.34 As a result, a guarantee control. Government officials should nevertheless may keep the terms of borrowing by the parent keep in mind that this approach works well in company close to the normal levels and hence, the expectation that the government really is the need for higher target returns on project willing to let investors bear the consequences of investment is diminished. Another alternative risk taking and risk management. If government is that policymakers require performance bonds will in fact intervene to protect creditors and or third-party guarantees on the project. In other investors when the downside materializes, this case, a bank, insurance company, or other the approach would fail. If there is an implicit financial entity accepts some risk, as its resources government guarantee, then the public is will be called upon if the private investor fails to generally paying more than it should because (1) meet its obligations. In exchange for taking up bidders for a project factored in a full transfer of some risk, the investor pays the third party a fee risks to the private sector; (2) investors keep most for the bond or guarantee; this strategy has the of the upside when things go well; and (3) the advantage that the cost to the private investor government and the public keep most of the is known in advance and is non-recurrent, thus downside when things go wrong and a bailout putting little ongoing pressure on the cost of is engineered. Therefore, projects should also capital and target investment returns. incorporate explicit and accurate risk sharing mechanisms, such as the following: Rate-of-Return Bands. Under this mechanism Subjecting Private Sector if a project’s total rate of return falls below a Partners to Less Risk pre-specified level over a period of time, tariffs We have seen earlier that governments often automatically increase to restore profitability. adopt inconsistent or contradictory strategies, This mechanism is symmetrical, so that if total increasing the likelihood of project bankruptcy project returns exceed a predetermined level, by the very measures aimed at reducing it, and tariffs are automatically reduced, in this manner 34 The difference in treatment between guarantees and full on-balance sheet financing and hence the actual impact on investor finances varies from country to country. 31 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS the public also shares in favorable outcomes). consistent with initial projections. Trigger-point This arrangement is called a rate-of-return band resets are similar to a cost pass-through mechanism and it caps upside and downside risks arising except that private partners bear some risk within from deviations in actual from expected prices, trigger points; also, under cost pass-through thus reducing the likelihood of bankruptcy and consumers may often see tariff adjustments the need for bailouts. The main problem with whereas under trigger-point resets adjustments this mechanism is that the government may in are less frequent. The same problem as with earlier practice be unable to endorse tariff increases, to mechanisms emerges if governments give in to avoid a political backlash. pressure against tariff increases, thus disabling Cost Pass-Through. Under this type of the adjustment mechanism. mechanism, power utilities are allowed to pass Shipwreck Clauses. In many circumstances, on to consumers cost increases that are beyond private investors should be allowed to go their control (e.g., fuel price increases). This bankrupt without fear of service disruption. In mechanism differs from “cost-plus” regulation practice, most governments do not want to see a (mentioned earlier) in that only certain types of large power utility go under and they are willing costs are passed on to consumers, namely, costs to bail out a private partner even at a high cost. known to be beyond the enterprise’s control. If a government will bail out private partners For this reason, a lot of the potential inefficiency then “shipwreck clauses” would provide a associated with “cost-plus” regulation is avoided. transparent way to do so. Shipwreck clauses Cost pass-through is also a more precise tool than set out, at the beginning of a project, the terms a rate-of-return band in terms of risk targeting, of possible government intervention in case of although comparisons with rate-of-return bands severe stress or impending bankruptcy. This rely heavily on time horizon. Cost pass-through type of clause has the advantage over an implicit shifts less short-term risks to the private partner guarantee of letting the government and the than a rate-of-return band (as monitoring input public take advantage of private risk reduction prices is easy and can be done quickly), but it by improving financing terms from the private shifts more longer term risks (for example, as sector. The main disadvantage of shipwreck adverse trends in electricity demand would not clauses is the creation of an explicit contingent lead to adjustment under cost pass-through in liability on the balance sheet of the public the way they would under rate-of-return bands). sector, which in turn contributes to heightened Exactly as in the case of a rate-of-return band, sovereign risk perception and pressure on the main problem with this approach is that the sovereign risk ratings. Private partners are not government is like to come under much political completely shielded from all risks, as they stand pressure to prevent tariff increases called for to make substantial losses if a political backlash by cost pass-through. In certain circumstances, or economic crisis follows a bailout. protection from external risks such as sustained In light of the earlier discussion, it should price increases can also discourage technological be clear by now that the first-best solution innovation (e.g., technology to increase fuel to risk sharing with private investors is for efficiency) and private negotiation of contracts bankruptcy to be possible without risk of service to hedge risks. disruption. If governments cannot commit to Trigger-Point Resets. This mechanism allows allowing bankruptcy or fail to improve the adjustments when some variable surpasses framework for bankruptcy, then an internally a specified limit. For example, consider an consistent package of alternatives (such as the agreement where tariffs are set on the basis of ones discussed above) needs to be adopted as a expected electricity demand growth. If the actual second-best solution. rate of growth deviates from the projected rate by Regardless of the package of risk-sharing a critical amount, then tariffs are reset to a level mechanisms chosen, it would be to the benefit expected to place project returns on a higher path of government, private partners and other 32 Preventing the Emergence of Stress Situations stakeholders to adopt modern, enterprise-wide be used to directly estimate expected risk-management systems beginning at an early loss patterns. The main advantage of stage and continuing throughout the project pure statistical methods is their fairly cycle. wide applicability, but unfortunately they do not provide much insight into Integrated Risk-Management the underlying dynamics of a project’s risk profile. Systems in Power Projects 2. Econometric Modeling. Statistical At any point in time, a project is subjected to techniques do not explain expected loss many kinds of risks, including regulatory and patterns; they just help estimate them. political, operational, business, credit, market, By contrast, econometric methods can and liquidity risks. show how project expected losses evolve The design of power projects should incor- over time, on the basis of the underlying porate integrated risk management systems, dynamics of one or more risk factors. For which aim at: (1) identifying and classifying example, when a government provides the risks faced by the project; (2) continuously a guarantee (implicit or explicit) on a quantifying project exposures to each category power project, it exposes itself to the of risk (dynamic risk maps); (3) including the possibility that the project might in fact impact of key risks in the project’s budgeting fail; econometric models can show how and management processes; (4) laying out a the likelihood of failure and the size of project’s risk profile; (5) determining conse- the government’s risk exposure vary in quences for project management, including the response to underlying economic and optimal level of loss reserves for a project; and financial variables. (6) continuously managing and controlling all 3. Contingent Claims Analysis (CCA). Both kinds of risk exposures over time. Integrated statistical and econometric methods risk management systems improve the ability rely on historical data. Contingent to measure, manage and control the many types claims analysis estimates the value of risk arising in a power project, facilitating of financial instruments such as loan management of the overall level of exposure guarantees when historical data is not to be shared among stakeholders as well as the available. “Contingent claims” are likelihood of bankruptcy. Implementation of financial assets or liabilities whose a risk management system is also useful since values can be determined through the it helps identify the risks that should be borne prices of assets or variables which have either by government or private partners. known properties. The same techniques Identifying and Quantifying Exposures. used to value financial options and Identifying every possible source of risk exposure derivative products can be applied to is not feasible, but project designers should at the valuation of loans, guarantees, and least identify and prioritize the key risks faced other instruments granted in support of by a project. Once a project’s risk exposures35 are power projects. understood on a qualitative basis, quantification of exposures can begin. Several techniques exist Risk-Adjusted Performance Measures. Once for quantifying risk exposures: risk exposure is quantified using the techniques mentioned above, government and private 1. Statistical Techniques. Where relevant investors can begin using the new flow of data sets exist, statistical methods can information for risk management and control, 35 The purpose is to elaborate a “dynamic risk map” linking a project’s financial variables to the risk factors that have been identified. Once a linkage is established, the next step is to measure risk exposures starting from the statistical behavior of risk factors and then quantifying their impact on the financial variables of interest. 33 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Box 3.4 Exchange Rate Risks in Power Projects Among the key risks facing foreign investors in end, explicitly linking retail tariffs to the exchange power infrastructure in developing countries is rate will burden consumers right at the time when currency depreciation or devaluation. Sustainable the economic crisis is diluting real incomes. private investment in power infrastructure depends Clearly, raising prices at such times is difficult on a country’s capacity to address this risk well. and governments often choose to breach contracts, Power projects in developing countries have usually rather than enforce them and cause political transferred exchange rate risk to customers or the instability. Many attempts to mitigate exchange government. But because currency devaluation in rate risk therefore transform it into some form of developing countries often occurs in the context of political or regulatory risk——another example of severe macroeconomic crises, such risk allocations how risk does not disappear but simply transforms cannot always be made to work——those who are itself into something different. Foreign investors not expected to foot the bill are being asked to do only expect a decline in value of local currencies, it when they are least capable of doing so. For but they also face great uncertainty as to the rate example, power utilities might raise prices precisely of exchange rate depreciation. So even if investors when the economy is suffering the most, thus are somehow protected against expected currency provoking a political backlash. depreciation, they still face other kinds of risks. High Also, if the government bears the risk because it volatility also implies that the cost to governments has agreed to purchase power from an independent of providing exchange rate guarantees is very high. power producer (IPP) at rates denominated in Nevertheless, Mexico’s FICORCA and the Indonesian foreign currency, steep increases in local currency Debt Restructuring Agency (INDRA) are examples of prices are required just when government finances voluntary programs that have provided predictable are coming under pressure. In the 1990s, this kind foreign exchange rates to private corporations. of problems led to defaults on payments to IPPs in Similar arrangements can be put in place to help in Indonesia and Pakistan. Similarly, if the project is a the management of the exchange rate risks faced concession that deals with consumers at the retail by power projects in emerging markets. establishing exposure limits, alarms, or perhaps losses that surpass existing reserves. Note developing risk-adjusted performance measures that the creation and management of a public for the project. In principle, some of the risk- reserve fund against losses is not something sharing mechanisms described in earlier chapters that normally falls within the realm of a project’s can be applied using risk-adjusted performance integrated risk management framework, as a measures rather than simple accounting ones reserve fund is in fact part of the public sector’s (e.g., instead of creating a rate-of-return band asset and liability management (ALM) system. based on conventional accounting measures of Nevertheless, existence and management of a returns, risk-adjusted rates of return could be reserve fund have a direct impact on a project’s used as the basis for tariff adjustments). risk and incentive dynamics. Risk Preferences and Reserve Policy. Policymakers Another factor that should be taken into should also take into consideration the need to consideration in the design of a public reserve set aside public reserves against losses arising fund is the (social or economy-wide) opportunity from power projects. Preparing for losses also cost of holding funds in reserve rather than helps prevent a backlash against using public spending public resources immediately. On resources to honor government guarantees or the upside, reserves increase the liquidity and otherwise support a project under stress. Ideally, credibility of government guarantees and thus the level of reserves would be kept in a fund their value, helping to attract more private and should reflect the government’s level of risk funding for the power sector. On the downside, aversion as well as its overall ability to withstand holding resources in a fund reduces the 34 Preventing the Emergence of Stress Situations Box 3.5 Financial Risk Management and Prevention of Stress in Power Projects: A Menu of Issues and Options Risk Sharing in Power • View Regulation as a Tool for Risk Management and Sharing. Projects. • Use Limits on Leverage as a Tool for Risk Management and Sharing. • Evaluate the Pros and Cons of Supporting Debt Finance. • Evaluate the Pros and Cons of Setting Minimum Equity Levels. • Evaluate the Advantages and Disadvantages of Requiring On-Balance Sheet Financing by Private Sector Partners. • Evaluate the Advantages and Disadvantages of Requiring Guarantees from Private Sector Partners. Adjusting the Level of • Consider the Pros and Cons of Rate-of-Return Bands. Risk Borne by Private • Consider the Pros and Cons of Cost Pass-Through. Sector Partners • Evaluate the Advantages and Disadvantages of Trigger-Point Resets. • Consider Including Shipwreck Clauses in Agreements. Integrated Risk • Identify and Quantify Risk Exposures. Management Systems • Adopt Risk-Adjusted Performance Measures Together with Private Sector in Power Projects. Partner. • Define Risk Preferences and Develop a Reserve Policy. • Draft Clear Contracts. • Reduce Incentives to Call on Project Guarantees. • Monitoring Performance under Guarantee Agreements. • Deal with Implicit Guarantees. amount available for public spending.36 If the how to invest reserves in the fund. A particular benefits of more public spending exceed those feature of an optimal investment policy for of keeping reserves, the government should a reserve fund against losses is that asset direct more resources toward spending. In any values should rise when government expenses case, once a government has an assessment of increase (e.g., as a result of project stress). Asset risk tolerances and objectives, it can set the values and government expenditures would level of loss reserves. Policymakers should be moving in the same direction. In other determine whether reserves are set with words, reserve funds should invest in an asset reference to an additive loss exposure or instead mix that provides a hedge against the kind of following a portfolio-wide Value-at-Risk developments that could trigger the execution (VaR) approach.37,38 Policymakers would also of contingent liabilities. Note, however, that determine the investment policy of the fund, investing of reserves in assets whose value is including where reserves should be kept (e.g., negatively correlated with the government’s invested at home or abroad). contingent liabilities (arising from a portfolio Investing Reserves. As mentioned in an earlier of projects) would require an active asset paragraph, policymakers need to determine management policy. Note that simply investing 36 However, the inflow of resources toward the reserve fund adds to aggregate savings in the economy. Higher savings means that more resources are available for investment. This benefit should be taken into consideration when assessing the opportunity costs of creating a public reserve fund. 37 Value-at-Risk (VaR) is defined as the maximum loss of value at a predetermined level of statistical confidence, over the chosen time horizon. It is a statistical indicator whose values and formulas depend on a project’s dynamic risk map and the statistical properties of risk variables. 38 A portfolio VaR approach takes into consideration the level of diversification in the country’s portfolio of projects for which the reserve fund is being set up. An additive approach does not take risk diversification into consideration. 35 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS assets in government securities is equivalent to (when the private sector has more experience reducing the government’s net debt position but pricing that type of risk). Finally, the government is not likely to provide a hedge against adverse may simply charge private sector partners for developments in the power sector. When a agreeing to bear certain risks, for example, risk- sector crisis hits and projects come under stress, based guarantee fees can be levied, to offset costs most likely the market value of government to the government and align the incentives of debt will also come under pressure—hence private sector partners. government securities would not provide an adequate hedge in a reserve fund. Note also that if a portion of project liabilities is denominated Summary in a foreign currency—as is often the case with This chapter explored project governance power projects—the government should also be arrangements that may prevent the emergence hedging against exchange rate risk. of stress situations. To aid in the prevention of project stress, governance arrangements Complementary Measures need to be based on reliable and predictable In addition to the mechanisms already discussed, sector regulation. Experience suggests that complementary measures help manage the risks transparency, wide disclosure of information, arising from power projects. These mechanisms and open communication with the public are range from writing clear contracts, introducing important to establish a climate of mutual incentives that tend to reduce calls on project trust that will reduce the risk of stress due to guarantees, and closely monitoring management sociopolitical backlash, which is the second most of a project.39 frequent cause of stress. Communication and In general, policymakers have to determine consultation strategies with all stakeholders are who can access the information needed to assess especially important in the case of high profile a specific type of risk. For example, when the projects and, given the nature of the industry. The government has the best access to information prevention of stress situations in power projects on certain risks, it may provide assistance in also relies on the capacity to set up procedures the form of a specific guarantee (rather than and mechanisms embedded in the project to providing credit) since targeting guarantees is reorganize it before stress reaches a critical level relatively easy. and to avoid the risk of liquidation or disruption Governments can reduce contingent liabilities of operations. For example, although there in other ways too. For example, private investors should be recourse to bankruptcy laws, other can be required to hold a minimum level of avenues for restructuring should be preferred, collateral, thereby giving them an incentive to including using automatic renegotiation clauses, remain vested in the project (together with the which can prevent or resolve stress situations. government) in stress situations. In addition, As a number of situations that can lead to policymakers can introduce requirements on project stress can be identified ex ante, action the management of cash and highly liquid may be taken to reduce the probability of their assets, to ensure that the value of such reserves occurrence. is maintained when projects come under Projects should have comprehensive risk stress. Policymakers should also consider the management frameworks and make use of risk introduction of pro rata risk sharing, whereby mitigation tools. In the structuring of power private partners bear risks together with projects, compliance with certain principles, the government, but the government takes shown below, can reduce the probability of advantage of private sector pricing of risks stress. 39 This takes us back to the issue of optimization of a project’s governance arrangements. 36 Preventing the Emergence of Stress Situations 1. Flexibility in price revision mechanism: backing by the parent company should fixed prices over a long period are rarely be determined by the level of risk sustainable and equitable, either for the attached to the project. host country of for the investor. Pricing 4. Though the commercial risk is generally mechanisms including triggers for fair better managed by the investor, some readjustment should be preferred. sharing of the commercial risk with the 2. A minimum level of equity should be host government is recommended, as required, and guarantees against certain the commercial risk in the power sector categories of risks are advisable, but is often linked to the macroeconomic they should cover not only lenders, risk (the first cause of power projects’ as it is often the case, but also equity distress), which is better managed by the investors. government. 3. Some comfort should be provided by the parent company of the investor, Instruments for the resolution of project stress although recognizing that full recourse are explored in the next chapter. is not recommended. The right level of 37 Strategies for Addressing 4 Stress Situations Facing Stress • These individuals and organization should study the nature of the problem and scope Time for Action——Stress its magnitude. Has Taken Over • The core government team may request The first step toward a successful resolution is an intervention team (defined later in this recognition that a project is actually under stress. chapter). Pretending that there is nothing wrong with the • The intervention team should be given a project will only delay the onset of a satisfactory clear, detailed mandate. solution. Both parties must endeavor to remind • The core government team and the each other that no matter how critical the intervention team should work together to situation, a solution is always possible. Complex define a tentative strategy and agenda. and seemingly hopeless projects and companies • The government calls (or accepts a call) for have been turned around in the past all over the a negotiation. world, and there is no particular reason a specific • The government addresses any issues that project would be an exception. Naturally, there other parties are using to stay away from are also failed projects, and some of them have negotiation. failed in spectacular ways. Following some • Negotiation actually starts. simple steps, parties involved in a troubled • Negotiation is concluded successfully. project can ensure that theirs is not going to be • A complete, detailed report is filed by among the “spectacular” failures but, instead, the intervention team as well as the core in the group of projects that have successfully government team. This document will be weathered temporary difficulties. useful in case there is a relapse and project stress returns, or, it may serve as a blueprint for stress resolution in a similar project. Roles of Parties to Address Stress Private parties should To enhance the chances of a successful resolution, each party to a project must follow some basic steps. Although simple and some would say • Appoint high-level managers or decision “obvious,” these basic actions are very often makers to oversee the process of negotiation forgotten in the middle of an emergency, so (the core team). they cannot be repeated too often. Below are • The core team carries out a preliminary recommended actions for the government: analysis of the situation. • The core team hires external advisers on • Individuals and organizations should be the basis of a preliminary analysis of the appointed, with clear terms of reference, situation (advisers). to address the problem (core government • Advisers should be given a clear, detailed team). mandate. 39 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS • The core team and its advisers work together litigation or arbitration. Usually, much political to define a tentative strategy and agenda. will and financial capital are invested in reforms • The private party calls (or accepts a call) for leading to public-private partnerships and negotiations. this is invariably wasted whenever the private • Any issues being used by government as an sector withdraws from contracts rather than excuse to stay away from a negotiation are successfully renegotiating their terms. resolved. There are legitimate institutional concerns, • Negotiation begins. including policy, legal, and reputational • Negotiation is concluded successfully. considerations, about the manner in which IFIs • A complete, detailed report is filed by the or other donors get involved in, and therefore high-level team and its advisers. lend support to, the renegotiations of PPI contracts. Guiding Principles for the Involvement In all cases, such engagement needs to of a Neutral Partner be contingent on a transparent and candid This chapter has two main objectives: First, assessment of: (1) risks and their effective provide guidance to potential intervention teams mitigation and management; as well as (2) the in identifying issues related to their involvement possible development benefits in terms of in the renegotiation of power infrastructure stabilizing private sector involvement where contracts between public and private sectors, and clients view termination and re-bidding in assessing when and in what form they can get as either not warranted or an unfeasible involved in the renegotiation of projects under alternative. stress; and second, summarize for intervention teams the range of practical tools for assisting in Guiding Principles the renegotiation of PPI contracts in accordance In deciding whether and how to approach a with good practice. distressed PPI contract, intervention teams In this chapter, the term “neutral partner” should be guided by the following interrelated is meant to include foreign governments or principles, not least to preserve the institutional IFIs, without excluding the role that other reputation of their sponsors: neutral parties may play. This chapter addresses Client ownership: As with any type of instances of renegotiation of contracts for the assistance, involvement in the renegotiation of private provision of infrastructure services, a PPI contract should be based on unambiguous but much of the guidance equally applies to client ownership, and a clear mandate for the situations where clients request assistance intervention team as authorized at least by related to the initial negotiation or the renewal the client.40 Any decision about whether to (by means of negotiation) of public/private renegotiate and how to renegotiate an existing infrastructure contracts. Renegotiations are contract must rest unambiguously with the client complex, potentially contentious and often government.41 take a long time to conclude. But just as there Minimizing moral hazard: Renegotiations are risks, the potential exists for high returns of infrastructure contracts raise moral hazard if renegotiations can be concluded quickly and concerns. These arise both for the private amicably without the cost and acrimony of party and the government, if renegotiation 40 More specifically, a “clear mandate” requires exact definition of who is part of the intervention team; precise articulation of its purposes, powers, and responsibilities; well-defined chains of command and accountability within the team and between the team and its client; adequate resources to function and access to high-level decision makers when needed. Support for the intervention team should come from the highest levels of authority. 41 Ideally, in its decision-making process the government has already taken into consideration the interests and views of interest groups in society. In any case, to avoid confusion and eventual failure, the intervention team would be answerable to the government only, unless the government has clearly decided otherwise and determined so in the intervention team’s terms of reference. 40 Strategies for Addressing Stress Situations becomes the norm rather than the exception.42 In different from those needed in routine project addition, moral hazards may arise because both management. For example, in projects with parties may want to turn to IFIs or donors for national significance an intervention team assistance during the renegotiations. In addition needs to be aware of the political influences and to wanting the intervention team to play the role consequences of its actions, as well as trends in of conciliator in the renegotiation process, both public opinion. Since the stakes are very high, parties may also perceive the IFIs or donors the tactics used by actors in a dispute will be as part of the solution in so far as they may be quite different from anything that emerges in persuaded to help finance a restructured contract routine project management. Lines of authority (possibly, for example, in place of write-offs by within a project are often diluted and unexpected investors or a commitment to more stringent alliances may emerge, say, between workers tariff adjustments by the government).43 In each and managers that would not normally arise in instance, therefore, intervention teams must routine project management. An inexperienced carefully explore the existence of moral hazards or unaware intervention team would be highly and suitable ways to minimize them. ineffective, even counterproductive, in such Transparency: Transparency implies notice exceptional circumstances. and, where possible, agreement with the Sunk investments and opportunistic involved parties on the nature of the intervention renegotiation by governments: Although recent team, IFIs, donor assistance during renegotiation empirical evidence suggests that the majority of PPI contracts. of renegotiation requests have been initiated Effective mitigation of conflicts of interest: Due by incumbent firms, a significant share of to the wide array of roles played by IFIs and renegotiations is being initiated by governments. donors, the investment instruments offered, While there may well be sound policy arguments including financing and risk insurance extended for government-initiated renegotiations, to private providers, investment guarantees, including the desire to pursue second generation sovereign lending, and arbitration services, the reforms in infrastructure, such efforts may raise team frequently faces real or perceived conflicts the perception among international investors of interests.44 of insufficient government commitment to Proportionality/consistency: One size does contractual rights and obligations and discourage not fit all. Different issues that may lead to private investment. renegotiation will require different methods of Renegotiation, transparency, and legitimacy: dispute resolution. The PPI contract renegotiation Many governments have sought to award mechanism suitable in one circumstance may not infrastructure contracts through transparent be appropriate in another. Therefore, the response and competitive auction processes not only to contract negotiations needs to be flexible.45 to secure the most efficient bid, but also to Quality: Assisting clients in major contract increase the political legitimacy of such deals renegotiation requires skills often quite by encouraging scrutiny by stakeholders, 42 Frequent renegotiation defeats the very purpose of having a contract, as every time an adverse adjustment needs to be made by one of the parties, compliance with the rest of the terms in the contract may be called into question, thus forcing a renegotiation that effectively delays or even blocks the adjustment. 43 In particular, IFIs risk becoming a sort of “lender of last resort” for troubled projects, with parties to the project asking for intervention by IFIs in the hope that “fresh” funds will be provided, thus softening or avoiding necessary adjustments. 44 As IFIs actually are groups of entities, conflicts do arise in practice. One part of an IFI may wish to promote solutions that strengthen public finances and keep public debt low, while another unit of the IFI may be more willing to accept public expenditures that would save a private enterprise where they have invested. Also, units responsible for guarantee transactions are not always the same as units responsible for loans to the public, or private, sectors. A natural division of work within an IFI thus becomes a source of conflicts of interest and moral hazard. 45 For example, a dispute over pay and benefits in a country´s most important power plant is not like an emerging conflict over tariff adjustments, fuel subsidies, or debt restructurings. Intervention teams and resolution strategies need to be consistent with and reflect the substance of the dispute. 41 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS including the public. Transparency is viewed 3. Advisory support to the government with as a fundamental tenet of good economic the objective of establishing a suitable regulation of infrastructure and, sometimes, institutional framework and broad heightened public scrutiny has legitimized renegotiation policies prior to, or in response contractual arrangements. Sometimes, however, to, specific renegotiations. Such assistance vocal opposition to a project arises, or perhaps may also include the development of back- to adjustments required under contract. In up options should renegotiations not come some cases, public opinion may be swayed by to fruition, including strategies for how misguided leaders or manipulated by interest to deal with the withdrawal of the private groups. Despite this possibility, it must be borne sector or the termination of the contract. in mind that limiting the flow of information to 4. Advisory support to the government in the public makes it even easier for interested terms of technical, financial and legal advice parties to manipulate public opinion. Adequate with the objective to enhance government information should continue flowing at all capacity to engage with private firms in stages of a renegotiation, at least concerning the renegotiations. Given the fact that private facts on the table.46 firms are often in a better position to mobilize funds for technical advisors quickly Defining an Appropriate, Limited Mandate and early in the course of renegotiations, There are various ways IFIs and donors can governments might rightly be concerned provide assistance to clients in the renegotiation that, by failing to secure high-quality advice of contracts.47 The following section outlines the quickly, they will be at a disadvantage in range of services that may be of use to clients in the renegotiations. Failing to secure good a renegotiation situation and have, in the past, advisors early on may also prevent the been provided by IFIs and donors in the context government from comfortably engaging of contract renegotiations. in negotiations at all and may cause minor 1. Advisory support to governments with technical issues to evolve into major disputes the objective of reducing the incidence of and private sector frustration about the lack renegotiation by improving the design of of government commitment to a workable reforms and the structure of individual process.48 contracts and transactions at the drafting 5. Advisory support to both the government and negotiation stage. and the private firm, with the objective of 2. Advisory support to governments with the facilitating a specific renegotiation. objective to enhance government capacity 6. Advisory support to the government and to better manage existing contractual the private firm to provide an independent relationships, to detect and address areas of evaluation of facts and mediation services. dispute early and to prepare for requests for 7. Advisory support to the government, renegotiation prior to specific requests for with the objective of providing an ex- renegotiation. post review and third-party opinion to 46 Logically, the parties to a negotiation should not have an obligation to reveal tactical information prematurely, as that would make negotiation itself impossible. The nitty-gritty of negotiations is largely irrelevant from the public perspective, as a lot of what takes place in a negotiation is probably no more than bluffing or posturing. Revealing details of this to the public would only confound public opinion. 47 See “Toolkit—A Guide for Hiring and Managing Advisors for Private Participation in Infrastructure,” Public-Private Infrastructure Advisory Facility, The World Bank, August 2001. 48 Both parties to a negotiation should have detailed understanding of the technical issues involved. Otherwise, communication may break down as there would be no common language between the two parties. Often, governments lack in-house technical capacity, reliable and trustworthy, to provide advice at the time of renegotiation. By the time the government has secured advisory services from outside, negotiations could have broken down or gone off track. IFIs often maintain a team of experts on the power sector within their ranks, a resource that could be tapped by governments. These experts stand ready to assist governments at their request and at short notice, and effort must be made to ensure that governments are aware that the facility is available. 42 Strategies for Addressing Stress Situations government as to the actual or proposed location. Prior to the first mediation session, outcome of renegotiations. This role may be each party is expected to provide the mediator particularly important where it is essential with a memorandum setting forth its position to develop a broad consensus among with regard to the dispute and such memoranda various stakeholders as to the merits of any may be mutually exchanged by the parties at the particular renegotiation. discretion of mediator. 8. Financing for capital expenditure or subsidy The mediator does not have the authority obligations assumed by the government as to impose a settlement on the parties but will part of the renegotiations. In many such attempt to help them reach a satisfactory cases, clients may view the IFIs or donors resolution. However, the mediator is authorized not only as a source of technical assistance to conduct joint and separate meetings with but also as a source of financing. the parties and to make recommendations for settlement. Whenever necessary, mediators seek expert advice concerning technical aspects of a Resolution Approaches power project, at the expense of parties to the Mediation conflict. Mediation sessions are private and Whenever the parties involved in a power project information disclosed to a mediator remains have provided for mediation or conciliation of confidential. In some jurisdictions, mediators existing or future disputes under the auspices of are protected and cannot be compelled to an appropriate national or international forum, divulge such records or to testify in regard to they make certain procedures a part of their the mediation in a judicial forum. The parties to agreement. The details of the procedures depend a mediation proceeding also agree to maintain on the chosen venue for conflict resolution. the confidentiality of the mediation and will not Normally, any party or parties to a dispute introduce as evidence in any arbitral, judicial, or may initiate mediation by filing submission of other proceeding views, admissions or proposals a request. Where there is no previous agreement made by another party in the course of the or contract providing for mediation, a party mediation proceedings. may request an impartial entity or body to Mediation is terminated by the parties’ invite another party to join in a submission signing a settlement or by the mediator reaching to mediation. Upon receipt of a request for the conclusion that further efforts are not mediation, a qualified49 mediator should be worthwhile, or by a declaration to this effect by appointed. Normally, a single mediator is a party or parties to the dispute. The expenses appointed unless the parties agree otherwise. of witnesses for either side are paid by the party A mediator should have no financial or producing such witnesses. All other expenses of personal interest in the result of the mediation, the mediation, the expenses of any witness and and it should be required that prior to accepting the cost of any proofs or expert advice requested an appointment, the prospective mediator by the mediator, are normally borne equally by disclose any circumstance likely to create a the parties unless otherwise agreed. presumption of bias or conflict of interest. In mediation proceeding, parties may be represented by persons of their choice, which Arbitration should be communicated in writing to all. In The parties to a dispute select a national or standard procedure, the mediator fixes the date international arbitration forum. Specialized and the time of mediation sessions, which are bodies maintain rosters of arbitrators, from held at a convenient and preferably neutral which arbitrators are appointed. In this context, 49 A “qualified” mediator should have several years of experience as a mediator, preferably at an international level. The mediator should also be a member of an internationally recognized mediation and arbitration body. 43 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS it is understood that the term “arbitrator” At any stage of the arbitration proceedings, refers to an arbitration panel constituted for the parties may agree to conduct mediation a particular case, composed of one or more in order to facilitate settlement, although the arbitrators. If the contract names an arbitrator or mediator should not be an arbitrator appointed specifies a method of appointing an arbitrator, to the case. that designation or method has to be followed. The parties mutually agree on the locale When the parties agreed that each party is to where the arbitration is to be held. If any party name one arbitrator, the arbitrators so named requests a specific locale and the other party files must meet the standards of the arbitration forum no objection thereto, the official locale is the one that has been selected or mandated by contract requested initially. By contrast, if a party objects (unless it is understood and agreed that the to the locale requested by the other party, the party-appointed arbitrators are to be non-neutral arbitrator shall have the power to determine the and need not meet those standards). locale and its decision is accepted as final and The initiating party (referred to as the binding. Also, when the parties are nationals of “claimant”) starts arbitration proceedings by different countries, which is often the case in case giving to the other party (the “respondent”) of large power projects in emerging markets, the notice of its intention to arbitrate (the “demand”). arbitration forum will appoint (at the request The claimant also files with the appropriate of either party) arbitrators of nationalities body the demand and copies of the arbitration other than that of any of the parties should be provisions of the contract. The respondent may appointed. file an answering statement with the arbitration forum and send a copy of the answering statement to the claimant. In standard practice, The London Approach if no answering statement is filed within a The London Approach involves a “workout,” that predetermined period of time, the respondent is, a financial and operational rehabilitation or is deemed to have denied the claim. In general, restructuring of a project which takes place outside failure to file an answering statement does not a statutory insolvency process. This approach delay the arbitration. In an arbitration procedure addresses the need to resolve coordination and and after an initial filing of a claim, if either party conflict of interest problems between creditors desires to make any new or different claim or while avoiding potential problems with statutory counterclaim, it shall be made in writing and filed regimes—when these exist. Notably, the London with the arbitrator. However, after an arbitrator Approach reduces the risk of unnecessary is appointed, no new or different claim may be liquidation of projects facing short-term financial submitted except with the arbitrator’s consent. problems but which are viable in the longer run, An arbitrator has the power to rule on his or and it also reduces the danger of reorganizing her own jurisdiction, including any objections projects in manners favorable to one interested with respect to the existence, scope or validity party at the expense of others. of the arbitration agreement. Also the arbitrator Prior to the 1980s there was no internationally has the power to determine the existence or recognized approach for organizing corporate validity of a contract of which an arbitration workouts. The Bank of England, in the late 1980s clause forms a part. Such an arbitration clause took the lead in developing a set of principles shall be treated as an agreement independent for corporate workouts which came to be known of the other terms of the contract. A decision by as “the London Approach.” 50 Largely, this the arbitrator that the contract is null and void approach amounted to a codification of a set of does not for that reason alone render invalid the practices which were already widely accepted in arbitration clause. multi-lender corporate workouts in the United 50 For an introduction to the “London Approach” see G. Meyerman (2000). 44 Strategies for Addressing Stress Situations Kingdom. The approach gained international Implementation of the London Approach recognition and has been widely applied in often requires mediation and facilitation by an many countries, including in East Asia at the impartial body or entity, at the invitation of the time of crisis in the late 1990s. The London parties involved. Approach also has great potential to help in the The trend toward financial disintermediation resolution of power project stress situations in tends to increase the number of creditors emerging markets. involved in a project workout, which may The key features of the London Approach make it more difficult to establish a view on when applied to power projects are these: how to resolve project stress. This raises a key question—the degree of influence to be accorded 1. A willingness by creditors to consider a non- to minority creditors. Traditionally, the London statutory resolution. Approach has been based on unanimity, which 2. The commissioning by creditors of an may be practicable when the creditors comprise independent review of the project’s long- a small group but is less workable when the term viability. creditor group is large, perhaps including non- 3. Operating an informal standstill to preserve banks. More recently, majority voting at the pre- the confidence of suppliers and customers insolvency stage has been suggested, as a large and allowing the project to continue operating and diverse workout group may be prepared to normally. tolerate a departure from unanimity if a failure 4. Working to reach a joint view on whether to achieve unanimity would mean the end of a project is worth supporting in the longer the project. term (there is no presumption that a project Although the London Approach generally will necessarily be rescued). entails an informal standstill, it does not 5. To facilitate discussions, a lead creditor is necessarily involve a moratorium extending designated and a steering committee of over the period of resolution, as a voluntary creditors formed. agreement to remain supportive of the project can 6. Recognition of seniority of claims and come under strain as time passes. Nevertheless, sharing of loss on an equal basis between a formal moratorium potentially increases the creditors in a single category. chances of a successful workout for viable projects, even in cases where a large group of In addition to the maintenance of existing banks and non-banks is involved. financing facilities (exposures at the date of A different set of issues is raised by entry into the informal standstill) it may be innovations in finance, notably the growth of necessary to allow the project to overcome securitization and credit derivatives. The impact an immediate liquidity shortfall. Under the of securitization of project loans on workouts London Approach, fresh resources may be depends on the extent to which a creditor really provided by existing lenders or by the release does shed the credit risk in a securitization deal. of asset disposal proceeds. If there is agreement A bank that has securitized part of its loan book among the creditors that the project is viable in may remain exposed to reputational risk if it the long term, creditors consider more lasting walked away from a loan which it had initiated forms of financial support for the company. and a large bank may have other exposures to Such longer-term financial changes are usually the project outside the securitization package, conditional on the implementation of a business and therefore a commercial interest in the plan which may involve management changes, company’s survival.51 sales of assets or even the takeover of the project. 51 See, for example, Chapter 4 in Strong, John et al., Interamerican Development Bank. 45 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Similar considerations apply to credit 1. Financial markets and the pricing of capital derivatives, although these appear to offer a are now globalized, and investors are now clearer route to transfer risk effectively from less likely to settle for project failure, as this the lender to another institution.52 In theory, reflects negatively on their ability to select credit derivatives might potentially give a bank risks. that has transferred credit risk an incentive to 2. Market finance has become more important, force a company or project into liquidation to particularly, innovations in structured obtain a certain payment from its counterparty, finance are providing opportunities to though bankers dispute this, arguing that the raise funds secured by future income reputational risk is too high. More generally, the streams. This has brought in new types growing use of each of the techniques described of investors, including bondholders, above is part of a shift from relationship to who tend to design their strategies transaction-based banking, and from banking around the functioning of bankruptcy and to capital market finance. To the extent that this restructuring systems. weakens the relationships between projects 3. Moral hazard is weakening. Investors and their bankers, non-bank players become restructuring facilities became used to increasingly involved in discussions on project believe that power projects always enjoyed workouts. an implicit government guarantee but governments are now subjected to financial discipline to a much greater extent with less Instruments to Be Used concern for their “implicit” guarantee. in Stress Resolution This does not imply that there can or should Financial Restructuring be a single model for project restructuring Governance and restructuring arrangements can arrangements worldwide. Yet such arrangements be conceived of as different parts of a continuum need to address certain basic issues: in the life of a power project. This continuity can be seen more clearly by looking at three key 1. Value preservation, which rests on early attributes of a restructuring system: access to the restructuring framework and a stay of execution (as a collective action 1. Its close relationship to project finance process, the framework should aim at arrangements. stopping individual creditors form impairing 2. As a benchmark for attitudes toward risk. key assets). 3. As a governance framework for projects in 2. Market conformity, which means respecting need of restructuring. absolute priority. 3. Credibility through effective imple- Experience suggests that large projects often mentation. do restructure successfully, including power projects. This is encouraging, to the extent that The restructuring framework has an impact on real-world projects rarely conform to a simple the way governance mechanisms handle default “single debtor/single shareholder” model, risk: enjoying instead more sophisticated financing structures. There are various reasons that 1. Lack of credibility has a negative effect on sophisticated financing structures enhance the the quality of governance. The mis-pricing probability of successful restructuring: of debt because of weak restructuring 52 See, for example, Chapter 4 in Strong, John et al., Interamerican Development Bank. 46 Strategies for Addressing Stress Situations Box 4.1 Elements of Financial Restructuring There are many strategies that can be followed years, which gives a project some “breathing space” in a financial restructuring. A typical financial while conditions improve. The term “evergreening” restructuring is a combination of several actions that is sometimes used to describe a type of refinancing together restore the financial viability of a project. meant mainly to improve the appearance of the Some of these mechanisms are listed here: balance sheets of creditors unwilling to recognize Debt for equity swap. In a debt for equity swap their credit losses; clearly, this kind of window a debt holder gets an equity position in a project in dressing is not advisable. exchange for cancellation of all or part of its credit Deeply embedded debt. The debt/equity exposure. This can help avoid project bankruptcy, or distinction is determined by the contingency simply help change capital structure to reduce risks principle. Modern hybrid financial arrangements may or take advantage of stock valuation. be structured by combining different instruments— Debt write-down or write-off. In a debt write- debt with equity, equity with derivatives, debt with down, the lender agrees to reduce the present value derivatives, and derivatives with derivatives. Such of debt to a level consistent with the financial viability instruments may entail periodic or nonperiodic of a troubled project. This mechanism is sometimes payments and may be contingent or noncontingent referred to as the creditor taking a “haircut.” This and may have different tax treatments. Converting clearly involves a capital loss to the lender but, as part debt to a category of equity may significantly of a package of measures, overall losses to lenders enhance the debt equity ratio of the enterprise and may be reduced. An extreme form of debt write-down yet preserve some of the debtor prerogatives and is a write-off, where debt is entirely forgiven. priorities. Some jurisdictions permit the creation of Refinancing, rollover, or “evergreening.” Rather such instruments as a class of special shares with than reducing the present value of debt, lenders agree fixed interest rate payments if yearly profit and loss to refinance loans (or exchange bonds) that improve results meet stated criteria only. In case of default financing terms without necessarily writing down the or liquidation however this class of share typically value of debt. For example, a refinancing may result ranks behind all creditors but ahead of all other in partial or no debt amortization in the first few shareholders. mechanisms further distorts an already Another important area relates to project dysfunctional governance framework, governance arrangements under restructuring starting a vicious circle. proceedings: 2. There should be a possibility for a troubled project to restart on a clean slate after 1. There is a choice to be made between the a successful restructuring. Otherwise, possibility for the debtor’s management to governance will be distorted towards reckless remain in possession and the appointment risk-taking and possibly corruption, once the of a professional administrator or trustee. possibility of bankruptcy emerges.53 2. The project restructuring system needs to 3. Project restructuring systems should provide recognize the information asymmetries for stakeholders to claw back transfers, in between insiders and outsiders. This may cash or in kind, that have been made during be especially problematic in power projects, a period preceding a bankruptcy, if there is since outside opinions and audits may not be a suspicious that such transaction may have credible. Where feasible, this makes market- been meant to siphon away resources. based valuation of assets through auctions processes an attractive option. 53 Parties involved would sense that they have “nothing to lose” or that cooperation does not make sense because the project is already “dead.” 47 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS 3. Creditors should play a leading project Standstill and Interim Financing governance role once stress begins, through Subject to reasonable conditions, the creditors an active creditors committee.54 Creditor should agree to a standstill. During standstill committees may also hire restructuring periods, there is a set of special rules detailing specialists who are then appointed to the what creditors and project management can and boards of troubled projects. cannot do. Creditors should subordinate their claims to In this connection, the decentralized, creditor- any fresh funds advanced after the beginning of the led workout approach to restructuring power standstill, especially for the provision of working projects relies on banks and other creditors capital necessary during these negotiations. to provide a leading role. Lenders have some Access to information should be provided for knowledge of the borrower and since their own an evaluation of requests for interim financing. interests depend on maximizing asset values, Conditions for disbursement and monitoring they are highly motivated to ensure the success interim financing arrangements should be agreed of the workout. This approach has the following between creditors and project managers advantages: Information 1. It ensures that the information that lenders Committee members and their professional have is preserved. advisers should sign confidentiality agreements. 2. It may provide incentives for recovery and Project management would submit financial for avoiding future losses. information to the steering committee and its 3. It avoids a deterioration of payment advisers. Actual information to be provided discipline. can be determined on case-by-case basis, but 4. Lenders can provide additional financing in generally it would include these: the restructuring process. 1. A description of the project structure and The creditor-led workout approach to project a description of all outstanding financial restructuring should adopt a number of basic arrangements (including borrowings, principles, explained below. shareholdings, guarantees, and encumbrances). 2. A balance sheet as of the standstill date and Organization and Representation for previous period (e.g., during the three- Project managers should engage advisers year period before the standstill date) as well experienced in restructuring. A restructuring as a forecast for several years. process may be started by either the company or 3. Collateral security documents, guarantee its creditors, and creditors should form a steering agreements, subordination agreements. committee. The steering committee should select 4. Income and cash flow statements for several its officers on the basis of their experience with years before the standstill date and a forecast restructuring processes. Costs will be borne by for the following years. the project under stress, unless otherwise agreed. 5. Each of the project’s major contracts Senior managers from the project will participate (including with creditors, suppliers, and in the restructurings. These managers should customers). have proven authority and decision-making 6. Other information deemed necessary for the power. restructuring. 54 A “creditor committee” is a group representing investors with claims on a project or company facing bankruptcy or financial distress. 48 Strategies for Addressing Stress Situations Box 4.2 Alternatives for the Resolution of Stress in Power Projects Dealing with the Incentive • Identify all interested parties (usually more than just government and Structures for a Successful private investors). Resolution • Identify and address changes in incentive structures required to bring about a resolution. Choosing a Strategy for • Depending on available tools, it may be possible to choose between the Resolution of Stress voluntary and involuntary resolutions. Situations • It may also be possible to choose from various formal and informal mechanisms to resolve stress situations (e.g., London approach vs. alternatives). • In addition, whenever the framework allows, there may be a choice between court-based vs. administrative resolution mechanisms. • Another choice that needs to be made relates to the jurisdiction or forum where resolution proceedings will take place (domestic or foreign, fully private, or sponsored by official bodies). • Make sure that there are enough financial engineering tools on the table (e.g., securitization). Project Restructuring Proposal Negotiations are voluntary, with commercial Project managers should propose a restructuring considerations controlling each party’s decision plan to the steering committee, built on the making. project’s business plan and forecasts, paying As unanimity between all creditors is attention to all contractual priorities including unlikely, project covenants may be designed to collateral positions. accommodate “pre-negotiated” plans, making them binding on all creditors including those Committee’ s Advisory Report who would not consent to it. However, “pre- Project managers should grant to the steering negotiated” plans should always respect the committee’s advisors access to examine the principle of non-discrimination (e.g., between project’s business and financial situation, to foreign and domestic creditors, or within prepare an advisory report. The advisory report comparable classes of creditors). should include an analysis of operations and future prospects, as well as recommendations and conclusions. Credit Enhancement Guarantees Investment guarantee agencies backed by Negotiation of a Restructuring Plan official sources often guarantee cross-border Using the restructuring proposal prepared by investments, including power projects, indeed, project managers and the committee’s advisory and investments associated to the financial report, the troubled project and its creditors restructuring of projects.55 Investment guarantee should enter into negotiations to achieve a agencies are flexible regarding eligible types of restructuring plan. The plan should respect investments, which include equity, shareholder contractual positions, including creditors’ loans, senior loans, and loan guarantees issued collateral rights and subordination agreements. by equity holders. Other eligible investments 55 Some are government agencies such as the Overseas Private Investment Corporation (OPIC) in the United States. Other agencies enjoy multilateral backing, such as the Multilateral Investment Guarantee Agency (MIGA), an arm of The World Bank Group, and the Partial Risk Guarantee instrument of the World Bank. 49 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS include management contracts, leases, and obtain an award for damages. If, after a franchising and licensing agreements, provided specified period of time the investor has not the remuneration of the investor is ultimately received payment or if the dispute resolution tied to the project’s operating results. Normally, mechanism fails, the investment guarantee applicants must be nationals of a member agency may pay compensation. country other than the country in which the 5. Policy and regulation. Such a guarantee investment is to be made, although sometimes provision may also be included under the agencies may also insure an investment made by Breach of Contract provision and protects a national of a host country provided the funds against government not respecting the originate from outside the country. provisions establishing and/or maintaining Guarantees typically protect against the regulatory agencies, the agency’s following kinds of risks:56 independence or government issuing laws or directives contradicting the provisions of 1. Currency inconvertibility and transfer the underlying contract, especially as related restrictions. They protect against losses to tariff policy, taxation and subsidies. arising from an investor’s inability to convert 6. Guarantees are also frequently sought local currency (capital, interest, principal, to protect against other collateral issues, profits, royalties, and other remittances) including fuel price fluctuation risk, project into foreign exchange for transfer outside completion risks, national partner debt the host country. The coverage also insures repayment risk and force majeure. against delays in acquiring foreign exchange due to host government action, although The leveraging capacity of guarantee currency depreciation is usually not covered. mechanisms and their flexibility are significant. We consider this in section Exchange Risk Many of the guarantee instruments available Mitigation, below. in the market or offered by the WBG and 2. Expropriation. Guarantees often protect other IFIs, have demonstrated that they can against losses arising from host government efficiently contribute to stress alleviation and actions that weaken or eliminate ownership even to preventing the emergence of stress of, control over, or rights to the insured situations. Experience suggests that guarantees investment. In addition to outright from multilateral institutions act as a stress nationalization and confiscation, “creeping” deterrent rather than a post-stress recourse: as expropriation is also covered. an illustration, very few Bank Group–issued 3. War and civil disturbance. Agencies provide guarantees have been called ever, not because of protection against loss or damage to tangible the intrinsic nature of the projects, but because assets caused by politically motivated acts of the involvement of a multilateral institution as war or civil disturbance in the host country. guarantor may facilitate the dialogue between the In many cases, war and civil disturbance various stakeholders. One criticism addressed to coverage also extends to events that result guarantees offered by IFIs is that the procedure in an interruption of project completion or to call a guarantee may be slow, as the nature, operations. extent, and magnitude of the risk needs to be 4. Breach of contract. Guarantees also protect fully documented before the guarantee can kick against government’s breach or repudiation in. This drawback has been addressed in the of a contract with the investor. In the event more recent operations through a mechanism of a breach or repudiation, the investor must based on irrevocable Letters of Credit with a first be able to invoke a dispute resolution local bank, which considerably shortened the mechanism (e.g., arbitration) and seek to time needed to action the guarantee, when it 56 See MIGA “Investment Guarantee Guide.” 50 Strategies for Addressing Stress Situations Box 4.3 Indonesia Applies Learning from East Asia Crisis The East Asia Financial crisis hit Indonesia hard. the legal instability, new regulations, the absence Recovery has led to the realization that continued of an independent power regulator, and the weak economic growth will require more infrastructure financial status of PLN would hinder new projects and that the private sector has a major role to “without adequate government guarantees.” play. The “Indonesia Infrastructure Summit 2005” The government outlined a new “Risk Sharing allowed the government of Indonesia set out 91 Framework.” Prior to the financial crises, the priority infrastructure projects with an estimated government issued guarantees or “letters of value of US$22.5 billion over the next five years. comfort” purporting to insure investors against The priority list included 12 power sector projects a variety of commercial risks. Since the crisis, the with an estimated value of US$5.9 billion. Private government had refused to issue such guarantees sector speakers highlighted long-running concerns because of the large losses it suffered during and regarding pervasive legal ambiguity, the lack of after the financial crisis. The new policy is to be strong, independent regulators, inconsistent tariff “adaptive and pragmatic” and will “only extend policies, and difficulties acquiring land. In the a guarantee on government performance and power sector, the Electricity Law 20/2002, which regulatory risks in well-defined areas and where it liberalized the power sector, was nullified by the is absolutely necessary.” All such guarantees will Constitutional Court in December 2002. A stop-gap only be offered after a complete assessment of measure was immediately enacted and a new law the risk, including contingent liabilities and when was promised for end-2005. Except for exceptions “no other forms of mitigating instruments are for renewable energy, marginal natural gas, and available to cover such risks.” The government mine-mouth coal, excess power or “emergency” has requested help from the World Bank and the projects require private investors to partner with the Asian Development Bank in developing a detailed state-owned power company (PLN) under an open risk-allocation and mitigation framework. tender process. Potential investors pointed out that has to be called. Moreover, MIGA, the IFC, the guarantee is issued by the very sovereign which Bank and most other IFIs have the requisite in- may have triggered the call under the letter house expertise to provide advice and deploy of comfort by not implementing or respecting guarantee instruments to help fix or exit stress contractual obligations. The nature of such situations. As part of the mainstreaming of limits of interest also frequently mean they IBRD and IDA guarantees, and in addition to were entered into without adequate review MIGA, IFC, and other IFI guarantee instruments, and without a complete risk analysis, including diagnoses should systematically be made to contingent liabilities. Perhaps because of this, assess whether guarantee instruments may many projects suffered large losses, especially and should be deployed to remediate stress during and following a macroeconomic crisis. situations. Risk assessment and the assumption of such Especially in the power sector, some countries defined commercial risks is a highly technical offer such limited guarantees directly as part of area and should not be offered lightly, although their own, national risk-sharing framework. their complexity should not be overestimated in Frequently such guarantees take the form of reality as evidenced by the increasing number “letters of comfort” issued to investors to protect of energy projects which have benefited from against stated commercial risks. This mechanism guarantee instruments, particularly in the is not acceptable to many investors since the Middle East and in Africa. The issuance of any 51 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS guarantee, whatever it may be called, should be Shocks cannot be handled through sector- undertaken after a full and complete assessment specific strategies, but instruments may be made of all risks, direct or contingent and including available to soften the impact of macroeconomic the reputational risk to the issuing agency or shocks on power projects. However, one government in case a call is made under the needs to be careful since risk management guarantee instrument. instruments that were expected to help deal with contract compliance under extreme circumstances may fail to do so in real-life Exchange Risk Mitigation situations. Hence, designers should include the Exchange risk mitigation is frequently possibility of contract renegotiation under severe considered as a major factor in the reluctance macroeconomic shocks as a last resort. Another of power sector investors to invest in developing approach is the use of hedging mechanisms country infrastructure projects. This reluctance underwritten by a third party—commercial was enhanced by the East Asia Crisis and credit granting agencies or, for less credit-worthy subsequent currency crises in Argentina and countries, most likely international financial Brazil. As described earlier, there are two broad institutions categories of causes of project stress, namely, country-specific issues related to the behavior of the host government vis-à-vis the power Securitization sector and macroeconomic shocks which are Securitization is the process of converting loans not specifically related to the power sector. or receivables into negotiable instruments. Most power projects seem to come under stress It enables non-tradable assets that range in as a combination of both kinds of shocks both marketability, credit-worthiness, and size to kinds of stress are generally closely related to become liquid secondary instruments through the exchange rate. repackaging, credit-risk enhancements, and Frequently the investment and related debt cash-flow structuring. Securitization facilitates are denominated in a currency other than the the separation of different risk and reward cash flow created through the tariffs approved expectations, broadens the investor base, and by regulators in accordance with the agreement allows loans to be more efficiently priced.57 between the investor and the government. Such Securitization, though, is not without its industry regulation and pricing, is frequently weaknesses. In addition to interest-rate risk and specified as being in, or directly related to, a credit risk, prepayment risks exist and are major currency in which the investment and debt concerns for investors on the secondary level. are mostly denominated. This was generally The placement of securitized products with considered “a perfect hedge” against exchange investors generally requires giving adequate rate fluctuations. Experience has shown that protection against risk of default to eliminate governments, not withstanding their contractual the need for them to monitor the collateral obligations, are unwilling and frequently directly. unable to raise tariffs sufficiently rapidly to Foreign investors seeking to participate in keep pace with rapidly changing exchange a project-related securitization are faced with rates. Especially at the time of rapid, macro- several dilemmas: shock-induced collapse of the local currency and exchange rate, governments are entirely 1. Differentiation of asset quality. Investors are unable to impose large, harsh tariff raises on unfamiliar with the business practices of the already suffering population. As a result, a project and feel they may be misguided the most frequent cause of stress was industry by project managers who possess insider regulation and pricing. knowledge. One way around this problem 57 An introduction to securitization as well as further reference can be found in Ergungor, O., “Securitization,” Federal Reserve Bank of Cleveland (2003). 52 Strategies for Addressing Stress Situations is by taking advantage of a project’s valuable alternative risk transfer mechanisms with such assets, which should be separated out by agency acting as the de facto (umbrella effect) setting up a new legal entity. Through this or de jure guarantor for large energy projects act of differentiation, the asset quality of but do not want to—or cannot—keep the full collateral becomes more transparent. loan exposure on their books. That institution 2. Uncertainty over legal concerns. The underlying may then securitize all or part of a loan or claim to the transferred assets is plagued by loan participation to refinance it, thereby both uncertainty over the true-sale nature of the managing its own risk exposure and freeing up collateral. Because any securitization will debt capacity for additional lending (an example rely heavily on how the cash flow from of such a securitization can be found in a 1995 the debtor project will be accounted for by transaction that IFC structured on behalf of the creditor, it is important to regulate the Mexican cement producer, Apasco SA in the transfer of receivables in the transaction. wake of the peso devaluation). Since most asset securitizations will create a Special Purpose Vehicle (SPV) which will issue securities to foreign investors, there Summary would have to be guarantees that cash The first step for the workout of power projects can be passed from the project onto third is to organize the process. The international parties. Securitization structures also rely experience suggests that the government and on bankruptcy remoteness. Specifically, it the investors should have a parallel workout is important to cleave the assets from the structure with, on the government side, a originators’ balance sheets, to ensure that in Government Team leading the process for the the event of a bankruptcy the “true sale” of government, and an intervention team dealing the assets is legitimate. with the technical aspects of the workout. On the 3. Stability of the cash flow. Investors are wary investor’s side a Core team should be appointed over fluctuations in credit ratings and desire to lead the process, supported by a team of credit enhancements over the annuities. The Advisers. With the government as well as with ability to obtain a reliable credit rating is a vital the investor, the separation between the leading component of securitization in developed and decision-making team, and the technical or markets. While no credit rating agency advisory team dealing with technical matters would have an easy time assessing the risks, and implementing the instructions from the some form of credit enhancement through higher-level team can be expected to accelerate both internal and external collateralization the workout process and to produce better is nonetheless necessary to give investors quality results. a sense of security. Concerns about the The workout process can follow several Stability of Cash Flow might be assuaged routes. Traditionally, the mediation and by the mobilization of alternative WBG arbitration approaches have produced good workout instruments, mixing traditional results, particularly when their rules of WBG guarantee products (for example operation have been embedded in the project project-specific workout technical assistance documentation. More recently, the London package combined with a PCG), to financial Approach for unexpected stress situations has or legal technical assistance support to help produced good results in the financial sector and critical projects exit stress situations. could be applied to the power sector. The workout instruments are becoming Although not adapted to every stress situation more and more complex over time, particularly multilateral institutions can facilitate project with the irruption of securitization and loan securitization. World Bank Group (WBG)- derivative instruments. Each of the restructuring or IFI-assisted project loan securitization may, instruments, discussed below, can involve IFIs under the right circumstances, provide sound in various capacities: 53 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS • Financial restructuring instruments, • Securitization is an increasingly popular including debt for equity swaps, debt write- instrument, but the assessment of the down, refinancing, rollover (“evergreen”). quality of the underlying assets poses a • Credit enhancement, mainly guarantees number if issues; the diverse legal regime a g a i n s t c u r r e n c y i n c o n v e r t i b i l i t y, applicable to the collaterals can also make the expropriation, war and civil disturbances, securitization complex for foreign investors breach of contract and policy/regulatory who are not familiar with the power markets. risk, fuel price provided by bilateral or IFIs and particularly the WBG can contribute multilateral guarantee agencies including to stabilize the underlying cash flow and the WBG, and completion risks. facilitate the securitization of project loans • Exchange risk management is a major risk as part of a workout. for power projects; the revision of pricing formula to match the exchange risk on loans, The workout process remains a case specific has not functioned well in practice; no fully process. Nevertheless, the rules procedures satisfactory alternative has been found, and instruments reviewed in this chapter are except using hedging instruments, when susceptible to facilitate the process in the power available, and allowing for renegotiation in sector. case of wide exchange rate fluctuations. 54 Conclusion 5 The trend in private investment in infrastructure of a high risk compared to the potential return. indicates that private investment in the electricity The need to take action to restore investors’ sector, to the difference of the telecom and confidence in power sector investment is clear. natural gas sectors, has not recovered yet from The preceding chapters have presented the 1998 confidence crisis. The decrease in detailed information on the characteristics of private investment in electricity therefore does power projects that have been or are under not result from an overall flight of investors stress. An analysis of and typology of the types of from emerging markets, but from considerations stress situations observed in reality and of their intrinsic to the power sector and the perception Figure 5.1 Private Investment in Infrastructure by Sector, 1990–2005 70,000 60,000 50,000 US$ billions 40,000 30,000 20,000 10,000 0 1990 1992 1994 1996 1998 2000 2002 2004 Years Airport Elect Railroads Roads Seaports Telecom Utility Nat. Gas 55 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS frequency of occurrence has been presented, on trying to anticipate all possible events and the most frequent consequences of stress and deciding ex ante how they would be for investors, lenders, and governments were handled. identified and discussed. The results show that • The project structure should be considered as power projects with private investment are in fact a partnership in risk management preferable low risk: they have a low probability of stress or to an exercise to transfer risks to other failure, with only 5% of the project affected. This parties. Key risks that are mainly outside conclusion contradicts the general perception of the control sphere of any of the parties, that private power projects in emerging markets such as macroeconomic risk, currency risk, are higher risk than other types of investment price risk, and demand risk may need to be because of their capital intensive nature, their shared between the host country and the long time horizon, and the immovability of the private parties, preferably to being assigned assets. Clearly, infrastructure projects suffer entirely to one party. from a communication bias, through which a • The involvement of the parent company few problem projects attract more attention than of the investing entity (most of the time the numerous successful projects. The analysis, an Special Purpose Company), as well as though, indicates that a determining factor in some backing from the host government the risk level of power project is whether in the should be recognized as necessary. Their normal course of business the project interacts support or level of guarantee should be with the general public. Interaction with the reduced to the minimum needed for the public clearly increases the risk of stress due to project creditworthiness, but it should be sociopolitical problems. recognized that some form of involvement Chapter 3 discussed how to prevent the and guarantee from both parties is likely to occurrence of stress by taking into account a be required. number of principles and applying a number of preventives measures to be built in the project The menu of procedures and instruments design. These principles and measures are the available to facilitate a workout, if the approach following: and principles mentioned above could not prevent the emergence of a project crisis, is • Awareness and acceptance of the fact that expanding. New and flexible procedures and long-term arrangements that underpin instruments have been successfully tested in the most power projects, even if tightly written power sector and in other infrastructure sectors. and legally waterproof, are likely to need The London Approach offers an internationally adjustment at some point in time, in the recognized procedure for handling transparently interest of the investor or the government, and fairly crisis situations, as an alternative to the and reasonable adjustment should be traditional mediation and arbitration procedures integrated in the project life rather than when they were not built into the project resisted. structure. New instruments are available, such • Liberal disclosure to the public of information as securitization for financing project workout, concerning agreements between the investor calling on the financial market and investment and the government and the operation funds rather than commercial banks for new of the project should be encouraged and loans or lines of credit. The positive role of IFIs implemented to build trust and awareness as facilitators of workout, source of additional of shares interest between the investors, the financing under risk structures that commercial government, and the public. banks are not prepared to accept, or guarantor • Procedures need to be built in the project for certain risks for financial restructuring, structure to handle transparently unforeseen securing fresh money, or for securitization is events and situations. The emphasis should recognized by investors as well as lenders and be on flexibility and procedures rather than governments. 56 Conclusion The power sector is special, compared to the skillful integration of workout procedures in other industrial activities, in that the continuity power project design and the recourse to flexible of service and operations is essential. The workout instruments can be a positive risk- reputational risk of an interruption is significant limiting and management factor. The propose for the government, because of the political of the present study was to demonstrate that fallout of an interruption, and for the investors in the rare instances where project workout is and lenders, as the liquidation of a project would necessary, there are procedures and instruments affect their business reputation and their chances that can make the process acceptable from to be involved in future projects in the sector. the business and political standpoint, and These are strong incentives for the governments, therefore, the limited risk of stress should not the investors, and the lenders to work out their be a deterrent to investing in well-structured differences in case of project stress. Ultimately, power projects. 57 Annex Changing Incentives 1 in the Project Cycle: Hungary’s Electricity Privatization In the fall of 1994, the newly elected government in In order to compensate for the lack of a Hungary announced plans for the liberalization long-term pricing formula, the government of the country’s electricity sector. Urgent needs guaranteed investors 8 percent return on their for rehabilitation investments combined with investment to be implemented in January 1996. budgetary pressures, translated into the need The pricing uncertainty needed to be resolved to introduce foreign investment by privatizing after the privatization sale through studies by the generation and distribution assets. During 1995, regulatory authority. In August 1996, however, however, disputes within the government and the Cabinet rejected a 39 percent price increase as pressure by interest groups resulted in delays of proposed by the electricity regulator, yielding to the privatization program. Nonetheless, the need protests by consumers. Instead of relying on the to generate privatization revenues to bolster the regulator, the government established a separate general budget forced the government to move commission to reinvestigate the tariff question. ahead. The review resulted in a tariff increase of only In October 1995, the government announced 22 percent, which investors claimed fell far short tenders for 14 electricity generation and of the promised 8 percent return. distribution companies, with a bidding deadline During the next election campaign in 1998, in December. However, this short timeframe the new government threatened a possible did not allow the government to address key renegotiation of all electricity tariffs, and when regulatory issues, in particular the development in power announced possible further limitations of a long-term pricing formula. At the same time, to tariff increases. By December 1998, the dispute potential bidders complained of having received had finally been settled following a series of unclear and incomplete tender documentation. tariff adjustments that eventually brought the The government therefore was forced to make electricity price to a level acceptable to the last-minute changes in the tender procedures market. However, during the years immediately and requirements. following privatization, investors had to absorb substantial initial losses. Source: SADER, Frank, “Attracting Foreign Direct Investment Into Infrastructure—Why Is It So Difficult?” Foreign Investment Advisory Service, Occasional Paper 12, 2000. 59 Annex How Reliable Are 2 Sovereign Guarantees? In March 1994, the government of Pakistan A new government, elected in February announced a policy regarding private 1997, immediately started a review of these infrastructure investment in order to boost the IPP contracts. The government came under country’s electricity generation capacity. Prior pressure while the state-run Water and Power to this policy, attempts to introduce IPPs failed Development Authority (WAPDA) ran losses, because of a cap on the rate of return imposed making it increasingly difficult to meet the take- on every potential project. According to the or-pay arrangements with the IPPs coming on new policy, sponsors were invited to propose line. WAPDA could not complete transmission individual projects with their own choice of lines to get some projects connected and failed technology, location, and fuel type for a set to make the contractual penalty payments. The tariff per kWh. In addition, the government government claimed fraudulent practices and established a private power board to facilitate corruption were involved in the negotiations. the implementation of IPPs. The government The previous Managing Director of WAPDA was provided guarantee packages for political, temporarily jailed, charges were filed against force majeure, change-in-law and currency several executives, a special review committee convertibility risk. was put in place and the military took control In response, the government received of WAPDA. The Prime Minister demanded a 30 proposals for 7,000 MW of generating capacity, percent cut in tariffs by all IPPs, refusing to pass on and 21 projects were approved and were under these costs to consumers through tariff increases. construction or operational by end-1998. Under In October 1998, a termination notice was sent to this policy, the 1,292 MW Hub River project HUBCO, the Hub power project company and was the first to be implemented. It was also the the government claimed that the company had largest IPP in the country with project cost of received excess payments worth US$370 million. US$1.5 billion and stood out through substantial HUBCO in response claimed breach of contract involvement of the World Bank Group with by the government and initiated international a $225 million loan as well as a $240 million arbitration proceedings at the International guarantee facility. Chamber of Commerce in London. Source: SADER, Frank, “Attracting Foreign Direct Investment Into Infrastructure—Why Is It So Difficult?” Foreign Investment Advisory Service, Occasional Paper 12, 2000. 61 Annex The Role of 3 International Arbitration In 1994, the government of the eastern Caribbean In July 1997 the government finally threatened island of Grenada sold a 50 percent stake in to renationalize the company by buying the island’s electricity company to the U.S. out WRB, but without any indication of the company WRB Enterprises for US$5.6 million. valuation method to be applied. WRB refused to WRB received an exclusive license to generate, renegotiate the agreement, maintaining that its transmit, and distribute electricity, as well as 1994 agreement was legally binding, and brought a waiver on outstanding tax debts prior to the case for arbitration before the International the sale and duty concessions for the import Centre for the Settlement of Investment Disputes of machinery. The agreement was heavily (ICSID) at the World Bank. Upon hearing from criticized by the country’s labor union and the its legal advisors that it had no legal basis for political opposition. When the opposition party challenging the sales agreement, the government came to power in a subsequent election, the finally accepted the privatization in May 1998 government refused to approve the privatization and promised to pass the contentious bill. in Parliament, claiming that the deal had been unfair and that the company had been sold at half its value. Source: SADER, Frank, “Attracting Foreign Direct Investment Into Infrastructure—Why Is It So Difficult?” Foreign Investment Advisory Service, Occasional Paper 12, 2000. 63 Annex Annotated Bibliography 4 (a) PPI and Power stress patterns, the report provides insights in the relationship between power sector reforms, Projects under Stress privatization of power utilities and success/ BESANT-JONES, John and TENENBAUM, failure of private power projects. Bernard, “Lessons from California’s Power Crisis,” Finance & Development, Vol. 38 (3), DECLERCQ, Eddy, “The Concept of Public- September 2001. Private Partnerships,” Terra et Aqua No. 75, June 1999. This article is based on a longer paper, “California Power Crisis—Lessons for Developing Abstract: Implementation of a trans-European Countries,” published by the Energy Sector transport network is of the highest priority Management Assistance Program, a joint in the European Union. Since inter-European program of the World Bank and the United dredging projects are essential to the realization Nations Development Program, and the World of a trans-European transport network, the Bank Energy and Mining Sector Board, in April European Dredging Association (EuDA), with 2001. The paper assesses whether the crisis could the co-operation of Directorate General VII, have been avoided through better market design Transport, sponsored a study to determine the and management. feasibility and form of utilizing public-private partnerships. This article is based on the study commissioned by the EuDA and executed by the COVINDASSAMY, Ananda M. “Analysis of Centre for Intermodal Research (CIR). Power Projects with Private Participation Un- der Stress,” Energy Sector Management Assis- EUROPEAN COMMISSION, Guidelines for tance Program, The World Bank, 2005/10/01. Successful Public-Private Partnerships, Euro- Abstract: This report aims to (1) understand pean Commission, March 2003. what economical, political, or contractual events Abstract: This document was designed as a affecting power projects in a region or a specific practical tool for PPP practitioners in the public country led to project distress; and (2) establish sector faced with the opportunity of structuring how they affected the various private power a PPP and of integrating or “blending” European projects. The report describes and analyzes the Communities grant financing in PPPs. The trends in private participation in the electric report is to focus on a number of critical issues power sector in developing countries over the influencing the successful integration of public 1984–2003 period. The analysis is based on the grants, private funds, IFI loans (such as the survey of 63 electricity projects under stress. It EIB or EBRD) and European Commission identifies the most significant causes of stress, financing. Reference is made to a number of describes the most frequent stress factors and analytical techniques which are well known and their combination in “stress patterns,” and documented. These are not presented with the presents the consequences of the stress patterns objective of promoting a standard methodology on power projects. Beyond the presentation of but rather in an attempt to highlight areas in 65 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS which particular care and analysis needs to be efficiency gains or the reforms that will ensure observed. The Guidelines are not designed to that assets remain private and that private sector provide an exhaustive list of PPP structures actions are constrained by the stable set of rules nor present any structures as having the and regulations. Recently, Colombia has moved endorsement of the Commission. The Guidelines toward the model adopted by other countries on present five thematic parts dealing in turn Latin America—privatizing existing assets—a with: 1. PPP structures, suitability and success policy likely to provide a more enduring basis factors. 2. Legal and regulatory structures. for reform. 3. Financial and economic Implications of PPPs. 4. Integrating grant financing and PPP objectives. HARRIS, Clive, Private Participation in In- 5. Conception, planning, and implementation of frastructure in Developing Countries: Trends, PPPs. Impacts, and Policy Lessons. Washington, D.C.: The World Bank, 2003. FITCH RATINGS, “Public-Private Partner- ships: The Next Generation of Infrastructure Abstract: The rapid growth of private participation Finance,” Special Report, August 2004. in infrastructure (PPI) in developing countries during the 1990s was followed by a subsequent Abstract: This August 2005 report presents decline in investments and the re-negotiation a synthesis of a comprehensive database of and cancellation of some prominent projects. highway infrastructure projects from around This has lead to controversy as to the impact and the world financed or delivered through some the future of PPI. This report attempts to explain form of public-private partnership (PPP). This the factors behind the growth and decline of synthesis provides insights into the nature and PPI, its impact and the policy lessons that have extent of highway infrastructure projects that been learnt from this experience. It concentrates have and are being advanced through various on the experience with the private provision of types of PPP contractual arrangements. They also infrastructure over the last 15 years. reveal the predominant types and sizes of PPP Private Participation in Infrastructure in contracts used in various regions and countries Developing Countries assesses the impact that around the world for developing different types the private provision of infrastructure has had of highway infrastructure, including roads, on service delivery. Finally, this book reviews the bridges, and tunnels. The results of this synthesis main policy lessons that can be drawn, and what are intended to inform those involved in the governments need to do moving forward if they development, funding, or delivery of highway are to ensure that the supply of infrastructure infrastructure regarding the worldwide use of services does not become an impediment to PPPs to delivery highway and other forms of growth. public use infrastructure. GRAY, Philip, “Colombia’s Gradualist Ap- IZAGUIRRE, Karina, “Private Infrastructure: A proach to Private Participation in Infrastruc- Review of Projects with Private Participation, ture,” Public Policy for the Private Sector 1990–2001,” Public Policy for the Private Sector No. 113, The World Bank, May 1997. No. 250, The World Bank, 2002. Abstract: Like the model adopted by many Abstract: Drawing on the World Bank’s Private Asian countries, the Colombian approach to Participation in Infrastructure Project Database, private participation in infrastructure aims this Note reviews developments in 2001 and to attract project financing for new facilities, summarizes trends in 1990–2001. Data for 2001 leaving most existing assets in state hands. While show that total investment in projects with the approach has been successful on attracting private participation was US$57 billion—back to substantial private capital to Colombia, it has 1995 levels—and 150 projects reached financial been less successful in delivering the potential closure. 66 Annotated Bibliography IZAGUIRRE, Karina, “Private Power Projects— in the field, a starting point and reference tool Annual Investment Flows Grew in 2003,” Pub- for anyone working in regulation. lic Policy for the Private Sector No. 281, The Kahn points out that while dramatic changes World Bank, December 2004. have come about in the structurally competitive Abstract: Drawing on the Bank’s Private industries—the airlines, trucking, stock exchange Participation in Infrastructure Project Database, brokerage services, railroads, buses, cable this Note reviews developments in the electricity television, oil and natural gas—the consensus sector in 2003. Data for the year show that total about the desirability and necessity for regulated investment in electricity projects with private monopoly in public utilities has likewise been participation amounted to US$14 billion. Private dissolving, under the burdens of inflation, activity grew strongly in East Asia and Pacific, fuel crises, and the traumatic experience with but remained stable, or fell in other regions. nuclear plants. Kahn reviews and assesses the After the boom of 1996–2000, investment flows changes in both areas: he is particularly frank to electricity fell significantly after peaking in his appraisal of the effect of deregulation on in 1997, but are still comparable to pre-boom the airlines. levels. Annual investment flows in 2001–03 His conclusion today mirrors that of averaged US$12.9 billion, slightly higher than his original, seminal work—that different the US$12.2 billion in 1990–95. During the industries need different mixes of institutional boom of 1996–-2000 annual flows averaged arrangements that cannot be decided on the US$29.8 billion. The decline in private activity basis of ideology. played out differently across the developing regions. Latin America, the most active region KISHI, Masumi, “Foreign Direct Investment in the late 1990s, sustained investment flows by Japanese Firms and Corporate Governance at levels higher than those of the early 1990s, in Relation to the Monetary Policies of China, while East and South Asia saw annual flows Korea and Japan,” Journal of Asian Economics, fall below those levels. 13 (741–748), 2003. Abstract: Reflecting upon the lessons from the KAHN, Alfred, The Economics of Regulation: Asian currency crises, more attention is being Principles and Institutions, MIT Press, 1995. paid to the importance of consolidation for the Abstract: As chairman of the Civil Aeronautics domestic financial and capital markets, as well Board in the late 1970s, Alfred E. Kahn presided as international cooperation to avoid disturbing over the deregulation of the airlines and his book, factors from abroad, such as massive inflows of published earlier in that decade, presented the speculative capital. The aim of financial reforms first comprehensive integration of the economic being executed in the East Asian countries, theory and institutional practice of economic such as Japan, Korea, and China, is to improve regulation. In his lengthy new introduction the managerial efficiency of the business to this edition Kahn surveys and analyzes the corporations and financial institutions. deregulation revolution that has not only swept Recently, foreign direct investment by the airlines but has transformed American public Japanese firms in the rest of East Asia has been utilities and private industries generally over recovering. However, the existence of a financial the past 17 years. system to realize optimal corporate governance While attitudes toward regulation have is indispensable for the enhancement of direct changed several times in the intervening years investment. Namely, it is necessary to improve and government regulation has waxed and corporate profitability, and to distribute the waned, the question of whether to regulate more increment of such profits between the host and the or to regulate less is a topic of constant debate, investor countries, in order to boost the welfare one that The Economics of Regulation addresses of the respective citizens, notwithstanding the incisively. It clearly remains the standard work type of foreign direct investment. 67 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS LYNCH, David, “Financing Private Infrastruc- development in the electric power sector. This ture Projects—Australian Investment Bank’s joint review aims to inform the implementation Experience,” Briefing Paper for the APEC of the WBG’s 2001 Energy Business Renewal Financiers Meeting, Tokyo, Japan, February Strategy and the 2003 Infrastructure Plan. It is 1996. based on an evaluation of the WBG’s assistance Abstract: This briefing note examines the for private sector development of the electric experience of Australian investment banks power sector in 80 countries. (domestic and foreign owned) in private The main messages of the report are these: infrastructure financing, both in Australia and in the Asia-Pacific region as a whole. 1. The WBG should continue to support private Discussion in the paper draws on a range of sector development in the electric power material, including interviews conducted with sector as a key objective. Well-implemented key players in the market, government reports, Bank Group activities in this area can improve bank annual reports, media reports and papers sector efficiency in countries politically by industry participants. A broad overview of committed to the advancement of power banks’ private infrastructure business is given sector reforms. to provide insights that are useful to countries 2. Ou tcome s o f I n te rn a tio n a l F i na nc e in APEC. Corporation and Multilateral Investment Infrastructure is important because it is an Guarantee Agency transactions have essential input to economic growth. Private been positive, but the Bank’s project-level sector finance of infrastructure in the region outcomes were disappointing, mostly has expanded rapidly over the past five years because the Bank underestimated the and this trend is expected to continue over complexity and time required for reforms the remainder of the decade. Banks play an to achieve lasting and equitable outcomes. important role in this process by raising the At the sector level, outcomes have been poor amount of finance available for infrastructure or, at best, mixed, except in countries fully development and lifting the quality of projects committed to reforms. undertaken. Australian investment banks have 3. Private sector development of the electric developed a strong expertise in infrastructure power sector is a work in progress because finance domestically, which they now apply to the power sector reform process is complex, countries across the region. takes time, is resource-intensive, and requires Section Two provides background for the brief phasing and careful sequencing to create the by reviewing important infrastructure concepts. conditions for sector transformation. Section Three outlines investment bank’s 4. Much work remains to integrate poverty experience with private sector infrastructure reduction and environmental mainstreaming financing in Australia. Section Four examines into the design of power sector reform and their corresponding experience in the Asia- related strategies, which to date have focused Pacific region. Concluding comments are given mostly on sector efficiency and macro-fiscal in Section Five. objectives. MANIBOG, Fernando, Power for Develop- NIKOMBORIRAK, Deunden, “Private Sector ment: A Review of the World Bank Group’s Participation in Infrastructure—The Case of Experience with Private Participation in the Thailand,” Institute Discussion Paper No. 19, Electricity Sector, Washington, D.C.: The World ADB, December 2004. Bank, 2004. Abstract: Thailand is one of the economies of the Abstract: Power for Development evaluates the region where there has been the strongest level performance of the World Bank Group (WBG) of private interest in infrastructure, particularly during the 1990s in promoting private sector in telecommunications. 68 Annotated Bibliography This paper examines the details of the Abstract: During the 1990s, the developing contracts issued by the regulatory authorities in world witnessed a massive increase in private different sectors. It highlights some of the key sector involvement in infrastructure investments. problems faced by private investors and points Driven by foreign direct investment, areas that to the inconsistency of treatment in some cases. had traditionally been defined as public sector Nonetheless, Thailand is one of the most favored responsibilities benefited from substantial locations for private infrastructure investment commitments of capital and resources. The in the Asian region. World Bank PPI Project Database indicates that an estimated total of 1,707 private infrastructure RECTOR, Jeff, “The IPP Investment Experi- projects worth US$458.2 billion were concluded ence in Malaysia,” Working Paper No. 46, Pro- from 1990 to end−1998. A dataset compiled gram on Energy and Sustainable Development, by FIAS shows that foreign direct investment Stanford University, August 2005. was the engine behind this development, with Abstract: Malaysia serves as a useful example foreign investors involved in over 80 percent of a highly self-contained model of IPP program of transactions. During this period developing implementation: the composition of project countries received an estimated US$138.3 investors was almost exclusively domestic; billion in foreign direct investment from these debt financing for the projects came exclusively infrastructure investments. from domestic sources and was based in local However, despite this rapid growth, this new currency; and fuel, the largest component industry has been beset with difficulties. Delays in of total project cost in the gas-fired thermal project startups, contract cancellations, and legal plants that Malaysian IPPs employed, came disputes have frequently overshadowed success solely from domestic sources. These features stories and efficiency gains. Governments have made Malaysia’s IPP sector less vulnerable to tended to find it difficult to structure and design the shock of the Asian financial crisis than its these new types of investments, being unfamiliar neighbors, but by no means immune. Malaysia with the complicated nature of project finance s partially privatized but state controlled transactions. Nonetheless, it remains true that, off-taker had high levels of foreign currency supported by a strong policy framework, private debt for which repayment obligations became sector financing and operation of infrastructure enormously burdensome as a result of the facilities can result in significant efficiency gains currency devaluation that Malaysia experienced while alleviating budgetary pressures. during the crisis. Additionally, the Asian financial crisis led to a contraction in the Malaysian SHAW, M. N., International Law, 5th ed., Cam- economy, which resulted in a slow-down of bridge University Press, 2003. electricity demand growth and exacerbated an Abstract: This fifth edition of Malcolm Shaw’s overcapacity problem that was already causing best-selling textbook on international law serious financial strain on the government off- provides a clear, authoritative and comprehensive taker. The outcome of subsequent negotiations introduction to the subject, fully revised and between the off-taker and the IPPs during the updated to spring 2003. Basically preserving Asian financial crisis and its aftermath raise the structure that made the previous edition interesting questions regarding the sources of so successful, a new chapter on Inter-state reliability of state-entity commitments made to Courts and Tribunals considers the role of private power investors. the International Court of Justice and the International Tribunal on the Law of the Sea, SADER, Frank, “Attracting Foreign Direct and there is a new chapter on international Investment Into Infrastructure—Why Is It So humanitarian law. Also examined are arbitration Difficult?” Foreign Investment Advisory Ser- tribunals and the role of international institutions vice, Occasional Paper 12, 2000. such as the WTO in resolving conflicts. The 69 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS prosecution of individuals for violations of THE WORLD BANK, “Study on Investment international law is examined. Additional and Private Sector Participation in Power coverage of events in Kosovo and Iraq analyzes Distribution in the Latin American and Ca- the questions of humanitarian intervention ribbean Region,” Energy Sector Management and the role of the UN. Written in a clear and Assistance Program, The World Bank, April accessible style, setting the subject firmly in the 2005 (draft). context of world politics and the economic and Abstract: In the 1990s, there has been a significant cultural influences affecting it, this book remains involvement of private investors in the electricity a highly readable and invaluable resource for sector in the Latin America and the Caribbean, students and practitioners alike. The scope of which was interrupted abruptly near the end the text makes this essential reading for students of the decade. It appears that investment in of international law, international relations the region as still not recovered, while future and the political sciences. The book is also energy needs for funding in the sector cannot be valuable to professionals and governmental and met without significant re-animation of private international civil servants. sector interest in the region and the sector—most countries operate under tight fiscal constraints that preclude extended public investment. THE WORLD BANK, Private Participation in There are a number of lessons learned Infrastructure: Trends in Developing Countries through experiences in the various countries in in 1990–2001, Washington, D.C.: The World the last 15 years that argue for further studies Bank. in more detail on what happened and why it Abstract: Drawing on data from the World Bank’s went wrong in some places, or worked well Private Participation in Infrastructure (PPI) in others. The desk study presents the results database, this new book provides an overview of a survey and analysis of the data available of the nearly 2500 private infrastructure projects on private participation in the power sector that were implemented between the period 1990– in the period 1990–2002, pointing to a series 2001 in 132 developing countries and mobilized of preliminary findings, and identifies areas investment of some $754 billion. It covers where deeper policy analysis is needed so that projects in the transport, energy (electricity modalities for public-private partnerships can and gas), telecoms, and water and sewerage be proposed and the sector can again attract sectors that received private investment through the needed investments. The final goal of this management and lease contracts, concessions, desk study is to select two or three countries greenfield projects, or divestitures. for further analysis. It would be the objective Overall, the trend in PPI illustrates a of a subsequent phase, to analyze case studies dramatic increase in investment flows between and present key lessons learned in selected 1990–1997 as governments around the world countries and compare them with international turned to the private sector for innovative and experience. cost-effective solutions to increasing coverage, raising quality standards, and aiming for cost THE WORLD BANK, The World Bank’s Role recovery and sustainability in infrastructure in the Electric Power Sector, Washington, D.C.: service provision. However, since the economic The World Bank, 1993. crises of the late 1990s, a few (but high-profile) Abstract: The World Bank is changing the way cases of cancelled projects, visible corporate it does business in the energy sector. This Policy governance and accounting problems, and Paper is one of two that outlines the Bank’s new a general global economic slowdown led to policies for the sector. a chilling effect on investors and resulted The review was prompted by concern in declines in investment so that 2001 levels about the effects of power generation on the paralleled that of the mid-1990s. environment and on populations that may be 70 Annotated Bibliography resettled to make way for projects. Another bring new opportunities but also raise new or stimulus was the macroeceonomic reality of greater challenges in terms of economic and fewer investment resources in many countries. political instability. Containing this instability And many developing countries are becoming and providing an environment that will help more receptive to reforming the way energy is implement a development agenda will be produced and consumed. major institutional challenges. The discussion This paper credits the “public monopoly” focuses on three main aspects of globalization: approach of the last 30 years with facilitating trade in goods and services, international flows expansion of power supplies, capturing technical of capital, and global environmental issues. economies of scale, and making effective The examination then shifts to three aspects use of scarce managerial and technical skills. of localization: the decentralization of political Nonetheless, it recommends several new policies power to sub-national levels of government, to improve the performance of the electric power the movement of population and of economic sector in developing countries. These reforms energy toward urban areas, and the provision will guide future Bank activities in the sector. of essential public services in growing cities. To Bank loans for electric power will go first discuss the appropriate institutional response, to countries clearly committed to improving the report draws on an array of national examples the performance of their power sectors. The and cross-country empirical evidence. Bank will also discourage subsidies on energy prices and will encourage private investment in ZIEGEL, Jacob, and CAUTHIE, Susan I. , eds., utilities. And it will provide financing to help the Current Developments in International and least developed countries import power where Comparative Corporate Insolvency Law, Ox- local generation is not practical. ford University Press, 1994. The efficiency of production and use Abstract: The last decade has witnessed an of electric power in developing countries unprecedented growth in insolvency law is examined in a companion paper, Energy in many parts of the world. A deep and Efficiency and Conservation in the Developing prolonged recession in Europe, the United World: The World Bank’s Role. States, Japan, and beyond has fueled the development of sophisticated and conceptually THE WORLD BANK, World Development Re- complex sets of laws aimed at coping with the port, Entering the 21st Century: The Changing consequences of business failure. The existence Landscape of Development, Washington, D.C.: of an almost simultaneous program of reform The World Bank, 1999. proposals and pressure for further changes in Abstract: This report, the twenty-second in a number of jurisdictions is therefore not mere the annual series, addresses the changing coincidence, but reflects the global character development landscape of the early 21st of the problems caused by corporate collapse. century, particularly the broad pragmatism It is of immense importance to lawyers and that moves beyond economic growth to insolvency practitioners that they are able to encompass important social goals—reduced understand recent developments in insolvency poverty, improved quality of life, enhanced law in a number of jurisdictions, and that they opportunities for better education and health, are aware of what is happening internationally and more. Experience teaches that sustainable to improve procedures and methods to deal with progress toward these goals requires integrated new problems. implementation and that progress must be This collection of essays covers recent firmly anchored in processes that are open, developments in a number of jurisdictions and participatory, and inclusive. The report focuses looks, also, at developments of the leading on two clusters of change—globalization and corporate insolvency specialists in the United localization—recognizing them as forces that States, the UK, Australia, Japan, and Canada. 71 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS This volume will be a vital source of reference BOUBAKRI, Narjess et al., “Post-Privatization on up-to-date matters of law for insolvency Corporate Governance—The Role of Owner- specialists everywhere in the world. ship Structure and Investor Protection,” Jour- nal of Financial Economics, 76 (369–399), 2005. Abstract: We investigate the role of ownership (b) Project Governance structure and investor protection in post- Arrangements privatization corporate governance. We find AOKI, Masahiko, and KIM, Hyung-Ki, Cor- that the government relinquishes control over porate Governance in Transitional Economies: time, mainly to the benefit of local institutions Insider Control and the Role of Banks, Wash- and foreign investors. We also show that ington, D.C.: The World Bank, 1995. private ownership tends to concentrate over time. In addition to firm-level variables, Abstract: When socialist planned economies were investor protection, political and social stability first being transformed into market economies, explain the cross-firm differences in ownership a naive optimism ruled. The transition could be concentration. We find that the positive effect of achieved, it was thought, by simply privatizing ownership concentration on firm performance state-owned enterprises and by introducing the matters more in countries with weak investor equity market as a means of corporate control. protection and that private domestic ownership This textbook notion of the capitalist system leads to higher performance. disregarded issues of political economy, as well as the historical development of national institutions. Recommendations based on such BROGI, Riccardo, and SANTELLA, Paolo, beliefs have proved either unrealistic or simplistic: “Two New Measures of Bankruptcy Effi- no single model is appropriate for every country. ciency,” draft presented at the 2003 Annual This volume presents the results of research on Conference of the European Association of Law corporate governance in transitional economies and Economics, September 2003. from the new perspective of comparative Abstract: This study is aimed at developing institutional analysis. Under this approach, new empirical models for evaluating the banks and other outside institutions can play an efficiency of bankruptcy and creditor protection important role in providing corporate governance. legislations. In the traditional model, efficient governance is The paper is divided in three parts. In the first meant to enable stockholders to exercise corporate part, we analyze from a conceptual point of view control. The volume discusses (1) theoretical the effects on debtor firms of the lack of creditors’ foundations of corporate governance structures, powers in bankruptcy. In the second part, we (2) comparative country experiences, and (3) the develop a new rating method for bankruptcy relevance of lessons from Germany and Japan. legislations according to their degree of creditor By comparing and evaluating various systems protection and apply it to five European of governance, the authors seek to uncover the countries. In the third part, we introduce a factors that support or impede effective corporate new approach for empirically estimating the control, including historical and socioeconomic efficiency of bankruptcy legislation based on conditions and institutional environments. In the cost of banking credit and we test it on the designing corporate governance structures, Italian case. economists should identify the specific conditions under which each model of corporate control (or BUBNOVA, Nina B., Governance Impact on combination of models) can work, the availability Private Investment: Evidence from the Inter- of these conditions in the transitional economies, national Patterns of Infrastructure Bond Risk and the most efficient way of achieving these Pricing, Washington, D.C.: The World Bank, conditions. 2000. 72 Annotated Bibliography Abstract: During the last decade, infrastructure been subject to substantial translation that is finance and provision graduated from traditional consistent with German national culture. means to more innovative ones, primarily initiated by private companies and supported CASTREN, Olli, and TAKALO, Thomas, through their equity and debt. Capital markets “Capital Market Development, Corporate increasingly became the main funding source Governance and the Credibility of Exchange for infrastructure projects worldwide, including Rate Pegs,” Working Paper No. 34, European investments in developing and transition Central Bank, October 2000. countries where infrastructure penetration still Abstract: This paper introduces a framework for falls considerably short of needs. Infrastructure analyzing the role of financial factors as a source bonds served as the most popular method of of instability in small open economies. Our oil, gas, electricity, telecommunications, and basic model is a dynamic open economy model transport project financing in these countries with one tradeable and one non-tradeable good throughout 1990–1999, thereby substituting with the non-tradeable being an input to the government funding. production of the tradeable. We also assume that Using an innovative methodological firms face credit constraints, with the constraint approach, this research paper provides a thorough being tighter at a lower level of financial examination of the effect that governance development. The two basic implications of this frameworks, both political and regulatory, model are the following: first, economies at an have on investors‘ risk perceptions and on intermediate level of financial development are associated costs for infrastructure financing. more unstable than either very developed or It identifies those political and regulatory very underdeveloped economies. This is true risks that most concern investors. It offers a both in the sense that temporary shocks have unique comparative analysis of developed and large and persistent effects and also in the sense emerging infrastructure bond markets. The that these economies can exhibit stable limit analysis demonstrates how the factors that cycles. Thus, countries that are going through drive infrastructure finance in the two country a phase of financial development may become groups differ, which helps to identify the policy more unstable in the short run. Second, in implications of these factors. economies at an intermediate level of financial development, full financial liberalization BUCK, Trevor, and SHAHRIM, Azura, “The may actually destabilize the economy. On the Translation of Corporate Governance Changes other hand, foreign direct investment does not Across National Cultures: The Case of Ger- destabilize. many,” Journal of International Business Stud- ies, 36 (42–61), 2005. CORNERLIUS, Peter, ”Corporate Governance Abstract: Contrasting systems of corporate and National Governance Systems: What Do governance persist internationally but are subject Country Rankings Tell Us?” Deutsche Bank to regulatory and firm-level institutional change. Research, Working Paper No. 16, November Such changes may be viewed as organizational 2004. innovations, often imported from the United Abstract: Nations compete for investment States in the face of different national cultures. capital, and the assurances investors seek as This paper analyzes the implications of national they decide to provide that capital are universal. culture for the translation of innovations and Motivated by the growing appetite for a global provides case study illustrations of regulatory benchmark of corporate behavior, this paper and firm-level governance changes experienced examines the relationship between the measured in Germany. These illustrations demonstrate quality of corporate governance at the firm that the diffusion of both kinds of change has level and national competitiveness. It begins by analyzing the perceived quality of institutions in 73 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS the 23 largest capital markets. Hypothesizing that ratings in more developed countries, and good corporate governance at the company level (3) access to global capital markets sharpens may compensate for perceived weaknesses in the firm incentives for better governance, but institutional framework, the paper then focuses decreases the importance of home-country legal on the pilot governance index developed by the protections of minority investors. Financial Times and ISS and compares it with new survey evidence from the World Economic ENGERMAN, Stanley, and SOKOLOFF, Ken- Forum’s Global Competitiveness Report. Finally, neth, “Digging the Dirt at Public Expense— the paper discusses corporate governance in the Governance in the Building of the Erie Canal EU accession countries and the extent to which and Other Public Works,” NBER Working the quality of governance has affected the mode Paper Series No. 10965, December 2004. of entry for foreign investment. Abstract: The Erie Canal was a mammoth public works project undertaken largely because the DOIDGE, Craig et al., “Why Do Countries scope of the investment was beyond what a Matter so Much for Corporate Governance?” private firm could manage during the early NBER Working Paper Series No. 10726, August 19th century. As with most public works, there 2004. were ample opportunities for public officials to Abstract: This paper develops and tests a model realize private gains from the effort, and many of how country characteristics, such as legal did. On the whole, however, the construction protections for minority investors, and the level of the Erie Canal (and most other major public of economic and financial development, influence works projects of the era) appears to have been firms’ costs and benefits in implementing well conceived and executed; it not only paid measures to improve their own governance off more than its costs through tolls, but also and transparency. The model focuses on an generated substantial welfare improvements for entrepreneur who needs to raise funds to finance the residents of the state of New York in the form the firm’s investment opportunities and who of producer and consumer surplus and a wide decides whether or not to invest in better firm- range of positive externalities. Although there level governance mechanisms to reduce agency was obviously some fraud and mismanagement, costs. This paper shows that, for a given level the public authorities carried out the work at of country investor protection, the incentives costs relatively close to those projected at the to adopt better governance mechanisms at the point of authorization. In an effort to try to firm level increase with a country’s financial and place this episode in a broader perspective, economic development. When economic and we compare the ratio of actual expenditures financial development is poor, the incentives on construction relative to the estimated costs to improve firm-level governance are low at the time of authorization for the Erie Canal, because outside finance is expensive and the to those for a range of other public works adoption of better governance mechanisms is throughout American history up to the present expensive. Using firm-level data on international day. It is our contention that this measure, albeit corporate governance and transparency ratings quite narrow in focus, is informative about the for a large sample of firms from around the quality of governance of public resources. We world, we find evidence consistent with this highlight how, by this standard, the governance prediction. Specifically, this paper shows that of public resources during the canal era stands (1) almost all of the variation in governance up well in comparison with what we have seen ratings across firms in less developed countries is since. Indeed, the cost overrun ratios have risen attributable to country characteristics rather than sharply over the last half-century, coinciding firm characteristics typically used to explain with both a marked increase in the relative size governance choices, (2) firm characteristics of the government sector as well as sustained explain more of the variation in governance economic growth. These patterns suggest how 74 Annotated Bibliography important it is that better measures and other that the strength of corporate governance means of systematically studying how the systems affects the preferred source of financing, prevalence and effects of corruption vary across which in turn helps to explain why investments different contexts be developed. financed in different ways exhibit significantly different rates of return. They find considerable FLEMING, Alexander, LLEWELLYN, David differences between developed and developing T., and CARMICHAEL Jefferey, eds., Aligning countries in the effectiveness of corporate Financial Supervisory Structures with Country governance systems in aligning managers and Needs. Washington, D.C.: The World Bank. shareholders’ interests. Abstract: The financial sector industry has undergone major changes in recent years. HANSMANN, Henry, and KRAAKMAN, Rei- Technological innovation, deregulation, and nier, “The End of History for Corporate Law,” liberalization are changing the context in which The Center for Law, Economics and History, financial supervisors operate. Selecting the right Harvard Law School Discussion Paper No. 280, supervisory model is an important strategic March 2000. decision for a government or financial authority, Abstract: Despite the apparent divergence in and should be done in a way that fits with the institutions of governance, share ownership, institutional setting and resource capacity of the capital markets, and business culture across particular country. While an increasing number developed economies, the basic law of the of countries are planning to integrate financial corporate form has already achieved a high supervisory agencies, others have adopted a degree of uniformity, and continued convergence partially integrated supervisory structure, and is likely. A principal reason for convergence many maintain completely separate agencies. is a widespread normative consensus that Aligning Financial Supervisory Structures corporate managers should act exclusively with Country Needs examines experiences from in the economic interests of shareholders, a variety of supervisors and policymakers from including non-controlling shareholders. This different countries to cross-fertilize ideas on consensus on a shareholder-oriented model issues of financial supervisory structure and to of the corporation results in part from the better understand why and how some countries failure of alternative models of the corporation, have initiated structural changes. This timely including the manager-oriented model that book also identifies the pros and cons of different evolved in the United States in the 1950s and financial supervisory models. 60s, the labor-oriented model that reached its apogee in German codetermination, and the GUGLER, Klaus Peter, MUELLER, Dennis C., state-oriented model that until recently was and YURTOGLU, B. Burcin, “The Impact of dominant in France and much of Asia. Other Corporate Governance on Investment Returns reasons for the new consensus include the in Developed and Developing Countries,” Eco- competitive success of contemporary British nomic Journal, Vol. 113, F511–F539, November and American firms, the growing influence 2003. worldwide of the academic disciplines of Abstract: The authors shed light on three economics and finance, the diffusion of share conundrums in the literature on investment: why ownership in developed countries, and the investments out of different sources of finance emergence of active shareholder representatives earn different returns, why different studies and interest groups in major jurisdictions. Since report different patterns of returns across sources the dominant corporate ideology of shareholder of finance, and why companies in developing primacy is unlikely to be undone, its success countries make greater use of external equity represents the end of history for corporate law. capital to finance their investment than do The ideology of shareholder primacy is likely companies in developed countries. They show to press all major jurisdictions toward similar 75 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS rules of corporate law and practice. Although antees, Output-Based Subsidies, and Other some differences may persist as a result of Fiscal Support,” World Bank Working Paper institutional or historical contingencies, the bulk No. 10, July 2003. of legal development worldwide will be toward Abstract: When governments seek private a standard legal model of the corporation. For investment in infrastructure projects, they the most part, this development will enhance usually find themselves asked to provide grants, the efficiency of corporate laws and practices. guarantees, or other forms of fiscal support. In some cases, however, jurisdictions may Often they prefer to provide support in ways converge on inefficient rules, as when the that limit immediate cash expenditure but universal rule of limited shareholder liability sometimes generate large costs later. Seeking permits shareholders to externalize the costs of to provide support without any immediate corporate torts. spending of cash, for example, governments often agree to shoulder project risks and HOPT, Klaus et al., “Comparative Corporate sometimes encounter fiscal problems later. For Governance—The State of the Art and Emerg- example, in the 1970s and 1980s in Spain, the ing Research,” Oxford University Press, 1998. government was obliged to pay $2.7 billion Abstract: The purpose of this contribution is when the exchange-rate guarantees it had to outline elements of the structure of large given private toll roads were called. More business corporations in Europe, mainly on the recently, the Indonesian government agreed to European continent. The first part deals with the pay $260 million as a result of its agreements, overall characteristics of the factual structure through the electricity company it owns, to bear of the corporate world in Western Europe. demand and foreign-exchange risks in private Differences in legal form are striking, while the power projects. Yet even when governments use of the public securities markets points to have chosen to provide cash subsidies they fundamental differences in ownership. In the have not always achieved their apparent second part, the legal structure of the board of goals: for example, over 80% of the Honduran directors is analyzed. The analysis concentrates government’s “lifeline” electricity subsidies go on the unitary board as the most frequently to customers who aren’t poor. In still other cases, found model. The two-tier board is described, governments’ decisions not to provide support both with and without employee participation. may have caused problems. The third part focuses on the differences in ownership structure. On the basis of the author’s KERF, MICHEL et al., “Concessions for In- research, the concentration of ownership in frastructure: A Guide to Their Design and the different systems within Europe has been Award,” World Bank Technical Paper No. 399, mapped. Further investigation is aimed at 1998. identifying the different classes of shareholders: Abstract: This report provides a guide to the institutionals do not play a predominant role, complex range of issues and options related to shares being mainly owned by other companies, design, award, implementation, monitoring, and by individuals, or by foreign investors. The modification of concessions. The main rationale role of the equity markets is a direct function for concessions is that they can facilitate the of the differences in the use of the markets as regulation of natural monopolies. They can a financing source. A final point of comparison be used to create competition for the market relates to the market for corporate control, both under conditions in which the service provider in its private segment and in the public takeover has significant market power. Concession market. arrangements can take any number of forms involving the shifting of risks and responsibilities IRWIN, Timothy, “Public Money for Private from the public to the private sector. They also Infrastructure—Deciding When to Offer Guar- entail legal and economic issues, including the 76 Annotated Bibliography organization of government entities responsible Abstract: Many infrastructure privatizations for concession programs and the adequacy of the still leave governments—and thus taxpayers— legal and regulatory environment. The design exposed to significant financial risks. This and implementation of concession contracts book examines these risks and considers how that allocate risks and responsibilities and governments should respond to investors’ the mechanisms for evaluating and awarding requests for guarantees and other forms of projects are also of paramount importance. government support. The report examines how The report also assesses the government’s role governments can decide which risks to bear as a regulator and as a provider of support for and which to avoid, how they can reduce the infrastructure concessions. risks that private investors face without giving guarantees, and how they can measure, budget, KLEIN, Michael, “Bidding for Concessions— and account for the risks they do take on. The Impact of Contract Design,” Public Policy for the Private Sector No. 158, World Bank, MEYERMAN, Gerald et al., “Corporate Re- November 1998. structuring and Governance in East Asia,” Fi- Abstract: Infrastructure concession contracts nance & Development, Vol. 36 (1), March 1999. set out the performance obligations and rights Abstract: Corporate restructuring involves of concessionaires and the incentives and risks restructuring the assets and liabilities of under which they operate, including pricing corporations, including their debt-to-equity arrangements. The clarity with which these terms structures, in line with their cash-flow needs can be defined determines whether there is likely to to promote efficiency, restore growth, and be renegotiation after contract award, which may minimize the cost to taxpayers. Corporate undermine the significance of the initial auction. governance refers to the framework of rules The design of incentives and risk allocation will and regulations that enable the stakeholders to affect first the intensity of competition and then exercise appropriate oversight of a company to the sustainability of the original contract. This maximize its value and to obtain a return on their note examines these issues. holdings. Both corporate and financial sector restructuring are central to ongoing reform KLEIN, Michael, “Transactions Costs in Private programs in East Asia. This article focuses on Infrastructure Projects—Are They Too High?” reform efforts in Indonesia and Korea, as well Public Policy for the Private Sector No. 95, as Malaysia and Thailand. World Bank, October 1996. Corporate restructuring and improved Abstract: While the number of private corporate governance are essential parts of infrastructure projects continues to grow, tales of economic reform programs under way in many endless delays and exorbitant development costs countries. How can corporations be restructured still scare both developers and governments. to promote growth and reduce excessive debt The authors show that these costs are related without placing undue burdens on taxpayers? not to project size but to the characteristics of What framework is needed to promote better the policy environment. As governments gain corporate governance? experience and clarify policy, these costs will inevitably fall. “The OECD Principles of Corporate Gover- nance,” OECD Policy Brief, August 2004. LEWIS, Christopher, and MODY, Ashoka, “The Abstract: The OECD Principles of Corporate Management of Contingent Liabilities—A Governance provide specific guidance Risk Management Framework for National for policymakers, regulators, and market Governments,” Chapter 6 in Dealing with Pub- participants in improving the legal, institutional, lic Risk in Private Infrastructure, Washington, and regulatory framework that underpins D.C.: The World Bank, 1997. corporate governance, with a focus on publicly 77 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS traded companies. They also provide practical economic growth. Companies better understand suggestions for stock exchanges, investors, how good corporate governance contributes to corporations, and other parties that have a role their competitiveness. Investors—especially in the process of developing good corporate collective investment institutions and pension governance. They have been endorsed as funds acting in a fiduciary capacity—realize they one of the Financial Stability Forum’s 12 key have a role to play in ensuring good corporate standards essential for financial stability. The governance practices, thereby underpinning the OECD Principles were originally issued in value of their investments. In today’s economies, 1999 and have since become the international interest in corporate governance goes beyond that benchmark for corporate governance, forming of shareholders in the performance of individual the basis for a number of reform initiatives, companies. As companies play a pivotal role both by governments and the private sector. in our economies and we rely increasingly on The Principles were revised in 2003 to take into private sector institutions to manage personal account developments since 1999, through a savings and secure retirement incomes, good process of extensive and open consultations, corporate governance is important to broad and and drawing on the work of the Regional growing segments of the population. Corporate Governance Roundtables for non- OECD countries. The new Principles were SINGH, Ajit, “Competition, Corporate Gov- agreed by OECD governments in April 2004. ernance and Selection in Emerging Markets,” This Policy Brief outlines the salient features of The Economic Journal, 113 (443–464), November the Principles and illustrates how they address 2003. key corporate governance issues. Abstract: The paper introduces the three articles in this feature, concerned respectively ”The OECD Principles of Corporate Gover- with competition, corporate governance, and nance,” OECD, 2004. selection in emerging markets. Apart from Abstract: The OECD Principles of Corporate being important in their own right, it is shown Governance were endorsed by OECD Ministers how these topics have recently acquired urgent in 1999 and have since become an international domestic and international policy significance. benchmark for policymakers, investors, This overview also provides the intellectual corporations, and other stakeholders worldwide. background to the issues raised in the papers and They have advanced the corporate governance examines their interrelationships in analytical, agenda and provided specific guidance for empirical and methodological terms. It outlines legislative and regulatory initiatives in both a research program, which would not only OECD and non-OECD countries. The Financial have direct policy relevance for both emerging Stability Forum has designated the Principles as and mature countries but would also have one of the 12 key standards for sound financial broader analytical significance for many areas systems. The Principles also provide the basis of economic theory. for an extensive programme of cooperation between OECD and non-OECD countries and STILPON, Nestor, “Insolvency Systems and underpin the corporate governance component Corporate Governance: Some General Re- of World Bank/IMF Reports on the Observance marks,” presented at the Third Meeting of of Standards and Codes (ROSC). The Principles Latin American Corporate Governance Round- have now been thoroughly reviewed to take table, Mexico City, April 2002. account of recent developments and experiences Abstract: The Latin American Corporate in OECD member and non-member countries. Governance Roundtable, established April 2000, Policymakers are now more aware of the aims to facilitate public and private sector policy contribution good corporate governance makes dialogue. It provides a forum for the exchange to financial market stability, investment and of experiences between senior policymakers, 78 Annotated Bibliography regulators, and market participants with The fourth edition has been substantially firsthand experience of present developments revised and updated throughout, with new and ongoing work. The Roundtable has also material added and extended discussion of established a Companies Circle to provide policy many topics. Part I, on antitrust, has been given and practical input to the Roundtable’s work and a major revision to reflect advances in economic to promote good corporate governance practices theory and recent antitrust cases, including the at the company level. The Third Meeting of case against Microsoft and the Supreme Court’s the Latin American Corporate Governance Kodak decision. Part II, on economic regulation, Roundtable took place in Mexico City, Mexico, updates its treatment of the restructuring and April 2002, and focused on the Board of deregulation of the telecommunications and Directors, Stakeholders and Transparency and electric power industries, and includes an Disclosure. analysis of what went wrong in the California energy market in 2000 and 2001. Part III, on social TENEV, Stoyan, and CHUNLIN Zhang. Cor- regulation, now includes increased discussion porate Governance and Enterprise Reform in of risk analysis and extensive changes to its China: Building the Institutions of Modern discussion of environmental regulation. The Markets, Washington, D.C.: The World Bank, many case studies included provide students 2002. not only pertinent insights for today but also Abstract: As China continues in its evolution the economic tools to analyze the implications of from a planned economy to a market economy, regulations and antitrust policies in the future. and from an agricultural to a manufacturing and The book is suitable for use in a wide range service-oriented economy, issues arising from of courses in business, law, and public policy, owner diversification, corporate governance, for undergraduates as well at the graduate level. and labor resource allocation have come to the The structure of the book allows instructors to forefront. Most particularly, corporate governance combine the chapters in various ways according is being focused on as the state continues its to their needs. Presentation of more advanced withdrawal from direct ownership. material is self-contained. Each chapter concludes This study evaluates short- and medium- with questions and problems. term corporate governance issues impacting companies involved in ownership diversification. THE WORLD BANK, “Toolkit—A Guide It examines problems associated with governance for Hiring and Managing Advisors for Pri- such as cost and framework design and makes vate Participation in Infrastructure, Public- recommendations concerning the many facets Private Infrastructure Advisory Facility,” of corporate governance. The World Bank, August 2001. Abstract: Increasingly governments worldwide VISCUSI, Kip et al., Economics of Regulation are turning to the private sector to assist them and Antitrust, 4th ed., MIT Press, 2005. in meeting their countries’ infrastructure needs. Abstract: This new edition of the leading text on The toolkit will assist governments in hiring business and government focuses on the insights and managing economic consultants, financial economic reasoning can provide in analyzing advisers, and legal experts, as well as other regulatory and antitrust issues. Departing specialists required to increase the role of the from the traditional emphasis on institutions, private sector in all infrastructure services. The economics of regulation, and antitrust asks how boxed Toolkit, funded by the Public-Private economic theory and empirical analyses can Infrastructure Advisory Facility (PPIAF) and illuminate the character of market operation designed by the World Bank’s Private Sector and the role for government action and brings Advisory Services Department, includes a new developments in theory and empirical CD-ROM self-guided tour of the material, an methodology to bear on these questions. Executive Summary for senior officials, and 79 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS three volumes that contain detailed information have been avoided through better market design on the following subjects: What is PPI and how and management. can advisers help?; donor agencies and the funding of PPI advisory services; how to select BROGI, Riccardo, and SANTELLA, Paolo, and manage PPI advisers. “Two New Measures of Bankruptcy Effi- ciency,” draft presented at the 2003 Annual Conference of the European Association of Law (c) Risk Management and Economics, September 2003. in Power Projects Abstract: This study is aimed at developing new empirical models for evaluating the BANK FOR INTERNATIONAL SETTLE- efficiency of bankruptcy and creditor protection MENT, “The Role of Ratings in Structured legislations. Finance: Issues and Implications,” Committee The paper is divided in three parts. In the first on the Global Financial System, Bank for In- part, we analyze from a conceptual point of view ternational Settlements, January 2005. the effects on debtor firms of the lack of creditors’ Abstract: Structured finance, which involves powers in bankruptcy. In the second part, we the pooling of assets and the subsequent sale develop a new rating method for bankruptcy to investors of tranched claims on the cash legislations according to their degree of creditor flows backed by these pools, has become an protection and apply it to five European important part of the financial system. Issuance countries. In the third part, we introduce a volumes have grown steadily over recent years new approach for empirically estimating the and the dynamics of market development, efficiency of bankruptcy legislation based on together with the benefits afforded to issuers the cost of banking credit and we test it on the and investors, suggest that growth is likely to Italian case. continue. Given this and the prominent role played by the rating agencies in structured B U C K L E Y, R o s s , “ Tu r n i n g L o a n s finance markets, the Committee on the Global into Bonds: Lessons for East Asia from Financial System established a Working Group the Latin America Brady Plan,” Journal on the Role of Ratings in Structured Finance of Restructuring Finance, Vol. 1, No. 1 to explore the rapidly evolving markets for (185–200), 2004. these instruments. This report documents the Abstract: The Brady Plan provided a partial Group’s main findings. It highlights several of solution to the Latin American debt crisis of the characteristics of structured products and the 1980s. This article revisits and analyzes the the challenges arising for the rating agencies Plan in considerable detail and explores the and other market participants. potential application in East Asia today of the ideas behind the Plan, and of the lessons that can BESANT-JONES, John, and TENENBAUM, be drawn from it. Seven lessons are identified. Bernard, “Lessons from California’s Power The Brady Plan was conceived and developed Crisis,” Finance & Development, Vol. 38 (3), in Latin America and the principal lesson is that September 2001. although it may not be replicated, developing Abstract: This article is based on a longer nations may learn from it. Innovative domestic paper, “California Power Crisis—Lessons for solutions are recommended for the resolution of Developing Countries,” published by the Energy financial problems and debt crisis. Sector Management Assistance Program, a joint program of the World Bank and the United DELOITTE, “Assessing the Value of Enterprise Nations Development Program, and the World Risk Management,” (http://www.deloitte.com/ Bank Energy and Mining Sector Board, in April dtt/budget/0,2299,sid% 253D20241%2526cid%2 2001. The paper assesses whether the crisis could 53D67267,00.html), 2004. 80 Annotated Bibliography Abstract: Changing business practices and The authors examine how these problems have burgeoning regulatory requirements mean that played out in five cases. Then they describe how financial services institutions require a broader governments and regulators can quantify the and clearer perspective on company-wide extent of the problems and, using option-pricing risk than ever before. As a result, enterprise techniques, value the customer and taxpayer risk management (ERM) is fast ascending the guarantees involved. Finally, the authors analyze corporate agenda. three options for mitigating the problem: making Yet there remain tremendous variations bankruptcy a more credible threat, limiting the in how institutions define, measure, and private operator’s leverage, and reducing the implement ERM. The differences extend even private operator’s exposure to risk. The authors to the objectives of ERM. For some firms, conclude that appropriate policy depends ERM is simply the logical answer to meeting on the tax system, the feasibility of enforcing a compliance challenge. But for others, ERM bankruptcy, and the benefits of risk transfer from delivers concrete and competitive advantages taxpayer to the private sector. over and above mere compliance. This white paper, written in co-operation ERB, Claude et al., “Political Risk, Economic with the Economist Intelligence Unit, is a timely Risk, and Financial Risk,” Financial Analysts effort to assess the benefits that enterprise risk Journal, 52, Nov.–Dec. 1996. management can offer financial institutions Abstract: How important is an understanding of and to identify the building blocks of the country risk for investors? Given the increasingly business case for ERM. From more efficient global nature of investment portfolios, the capital allocation to an improved culture of risk authors believe it is very important. Their paper awareness, how are leading institutions deriving measures the economic content of four different value from their ERM programs? measures of country risk: the International Country Risk Guide’s political risk, financial risk, EHRHARDT, David, and IRWIN, Timothy, economic risk and composite risk indices, and “Avoiding Customer and Taxpayer Bailouts Institutional Investor’s country credit ratings. in Private Infrastructure Projects,” World First, they explore whether any of these measures Bank Policy Research Working Paper 3274, contain information about future expected stock April 2004. returns by conducting trading simulations. Abstract: Many private infrastructure projects Next, they conduct time-series-cross-sectional mix regulation that subjects the private company analysis linking these risk measures to future to considerable risk, a government or regulator expected returns. Second, they investigate the that is reluctant to see the company go bankrupt, relation between these measures and other, more and high leverage on the part of the company. If standard, approaches to risk exposures. Finally, all goes well, equity holders make a profit, debt they analyze the linkages between fundamental holders are repaid, customers pay no more than attributes within each economy, such as book-to- they expected, and the government is not called price ratios, and the risk measures. Their results on to bail the company out. On the other hand, if suggest that the country risk measures are things do not go as well as hoped for, the prospect correlated future equity returns. They find that of bankruptcy will loom. Unwilling to see the the country risk measures are correlated with company go bankrupt, the regulator will have each other; however, financial risk measures to permit an unscheduled price increase, or the contain the most information about future government will have to inject taxpayers’ money equity returns. Finally, they find that country into the firm. In other words, the combination risk measures are highly correlated with country means customers and taxpayers bear more equity valuation measures. This provides some risk than would appear from the regulations insight into the reason for higher returns for governing the private infrastructure project. value-oriented strategies. 81 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS GRAY, Philip, and IRWIN, Timothy, “Exchange with political actors, and offer a detailed analysis Rate Risk—Reviewing the Record for Private of how country-level institutions, firm-level Infrastructure Contracts,” Public Policy for positions and actions, and commonly employed the Private Sector No. 262, The World Bank, strategies at the project level affect investor June 2003. fortunes during periods of adverse bargaining. Abstract: Over the life of a typical contract for We also suggest that a pattern of alternating an infrastructure project—say, 25 years—the favorable and adverse bargaining periods value of developing country currencies is likely is an intrinsic feature of doing business in to fall substantially. Sometimes the decline infrastructure industries. We refer to this pattern is gradual, but sometimes it is precipitous. as the “infrastructure bargaining cycle.” Many contracts have been structured so that taxpayers or customers bear the exchange rate KERF, Michel et al., “Concessions for In- risk. During crises the result has often been frastructure: A Guide to Their Design and traumatic: governments breach contracts, Award,” World Bank Technical Paper No. 399, adversely affecting their access to capital 1998. markets, or customers must bear large price Abstract: This report provides a guide to the hikes, undermining support for privatization. complex range of issues and options related to This Note tracks the record. A companion Note design, award, implementation, monitoring, and proposes better ways to manage exchange rate modification of concessions. The main rationale risk. for concessions is that they can facilitate the regulation of natural monopolies. They can HENISZ, Withold, and ZELNER, Bennet, be used to create competition for the market “Managing to Keep the Lights On (and the under conditions in which the service provider Profits Flowing)—Political Risk Identification, has significant market power. Concession Mitigation and Analysis in Electricity Gen- arrangements can take any number of forms eration,” presented at the Fifth Annual Con- involving the shifting of risks and responsibilities ference of the International Society for New from the public to the private sector. They also Institutional Economics, September 2001. entail legal and economic issues, including the Abstract: This paper adds to the burgeoning organization of government entities responsible literature on privatization by moving beyond for concession programs and the adequacy of the the increasingly refined studies that have been legal and regulatory environment. The design done of privatization “triggers” and efficiency and implementation of concession contracts consequences to consider the ongoing challenges that allocate risks and responsibilities and faced by private infrastructure investors as a the mechanisms for evaluating and awarding result of the inherently political nature of the projects are also of paramount importance. industries in which they operate. We draw our The report also assesses the government’s role insights from interviews with over 150 managers, as a regulator and as a provider of support for political officials, bureaucrats and consultants in infrastructure concessions. the electricity sectors of 10 nations. We begin by examining the decision by politicians to open KREPS, David, A Course in Microeconomic the sector to private participation in order to Theory, Harvester Wheatsheaf, 1990. avert increasingly severe power shortages and Abstract: Placing unusual emphasis on modern public unrest. We then highlight politicians’ non-cooperative game theory, it provides the subsequent attempts to redistribute investor student and instructor with a unified treatment returns to consumers during episodes of broader of modern microeconomic theory—one that economic or political crisis. We examine the set of stresses the behavior of the individual actor precipitating factors that were responsible for the (consumer or firm) in various institutional shift from “favorable” to “adverse” bargaining settings. The author has taken special pains to 82 Annotated Bibliography explore the fundamental assumptions of the credit risk (the covariance model, the actuarial theories and techniques studied, pointing out model, the Merton-based simulation model, both strengths and weaknesses. the macroeconomic default model, and the The book begins with an exposition of the macroeconomic cash-flow model) and then standard models of choice and the market, with focuses on the details of the covariance model, as extra attention paid to choice under uncertainty understanding this method lays the foundation and dynamic choice. General and partial for understanding the other approaches. The equilibrium approaches are blended, so that the other approaches are discussed in Chapter 21. student sees these approaches as points along a Although the topic necessitates some technical continuum. The work then turns to more modern detail, this chapter carefully steps through the developments. Readers are introduced to non- algebra making it easier to follow. cooperative game theory and shown how to model games and determine solution concepts. UNCITRAL, “Legislative Guide on Insolvency Models with incomplete information, the folk Law,” UNCITRAL, June 2004. theorem and reputation, and bilateral bargaining Abstract: Placing unusual emphasis on modern are covered in depth. Information economics is non-cooperative game theory, it provides the explored next. A closing discussion concerns student and instructor with a unified treatment firms as organizations and gives readers a taste of modern microeconomic theory—one that of transaction-cost economics. stresses the behavior of the individual actor (consumer or firm) in various institutional LEWIS, Christopher, and MODY, Ashoka, “The settings. The author has taken special pains to Management of Contingent Liabilities—A explore the fundamental assumptions of the Risk Management Framework for National theories and techniques studied, pointing out Governments,” Chapter 6 in Dealing With Pub- both strengths and weaknesses. lic Risk in Private Infrastructure, Washington, The book begins with an exposition of the D.C.: The World Bank, 1997. standard models of choice and the market, with Abstract: Many infrastructure privatizations extra attention paid to choice under uncertainty still leave governments—and thus taxpayer— and dynamic choice. General and partial exposed to significant financial risks. This equilibrium approaches are blended, so that the book examines these risks and considers how student sees these approaches as points along a governments should respond to investors’ continuum. The work then turns to more modern requests for guarantees and other forms of developments. Readers are introduced to non- government support. The report examines how cooperative game theory and shown how to governments can decide which risks to bear model games and determine solution concepts. and which to avoid, how they can reduce the Models with incomplete information, the folk risks that private investors face without giving theorem and reputation, and bilateral bargaining guarantees, and how they can measure, budget, are covered in depth. Information economics is and account for the risks they do take on. explored next. A closing discussion concerns firms as organizations and gives readers a taste MARRISON, Chris, The Fundamentals of Risk of transaction-cost economics. Measurement, McGraw-Hill, 2002. Abstract: The simple realization that default UYEMURA, Dennis, and VAN DEVENTER, events could be correlated increases the Donald, Financial Risk Management in complexity of approaches to measuring the Banking—The Theory and Application of Asset & credit risk of a portfolio over approaches to Liability Management, McGraw-Hill, 1993. measuring the credit risk of a single position. Abstract: An in-depth review of the tremendous This book begins by discussing that there are risk and volatility in bank financial management. five common approaches to measuring portfolio Financial Risk Management in Banking provides 83 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS a practical and comprehensive overview of BORNSTEIN, Morris, “Post-Privatization En- aggressive asset and liability management terprise Restructuring,” Working Paper No. (ALM) which highlights the nuances that set 327, Department of Economics, University of ALM apart from basic financial concepts and Michigan, July 2000. practices as they are taught even at the MBA Abstract: Post-privatization restructuring level. It demonstrates how ALM apart from of former state-owned enterprises (FSOEs) basic financial concepts and practices as they are encompasses both shorter-run “defensive” taught even at the MBA level. It demonstrates actions and longer-run “strategic” measures. how ALM can strengthen the capital position Restructuring involves changes in corporate of today’s financial institution. Topics include: g o v e r n a n c e , o rg a n i z a t i o n a l s t ru c t u re , how accounting concepts can interfere with management, labor, capital, technology, output, ALM; currency and international funds risk; and sales. Various performance indicators may the multi-dimensional aspects of bank financial measure the results of restructuring, but care is risk; the relationship between cash flow, market required in the selection and interpretation of value and risk. indicators. In the restructuring of FSOEs foreign strategic investors have many advantages over domestic investors. The study includes examples (d) Arrangements for from experience in the Czech Republic, Hungary, Project Restructuring and Poland. and Reorganization Committee on the Global Financial System, BHANDARI, Jagdeep, and WEISS, Lawrence, “The Role of Ratings in Structured Finance: Is- Corporate Bankruptcy—Economic and Legal sues and Implications,” Bank for International Perspectives, Cambridge University Press, Settlements, January 2005. 1996. Abstract: Structured finance, which involves Abstract: This collection is the first comprehensive the pooling of assets and the subsequent sale selection of readings focusing on corporate to investors of tranched claims on the cash bankruptcy. Its main purpose is to explore the flows backed by these pools, has become an nature and efficiency of corporate reorganisation important part of the financial system. Issuance using interdisciplinary approaches drawn volumes have grown steadily over recent years from law, economics, business, and finance. and the dynamics of market development, Substantive areas covered include the role together with the benefits afforded to issuers of credit, creditors’ implicit bargains, non- and investors, suggest that growth is likely to bargaining features of bankruptcy, workouts continue. Given this and the prominent role of agreements, alternatives to bankruptcy, and played by the rating agencies in structured proceedings in countries other than the United finance markets, the Committee on the Global States, including the United Kingdom, Europe, Financial System established a Working Group and Japan. on the Role of Ratings in Structured Finance to explore the rapidly evolving markets for • First collection of its kind covering economic these instruments. This report documents the and legal issues in bankruptcy. Group’s main findings. It highlights several of • Classic and recent papers in law and the characteristics of structured products and economics have been highly edited to focus the challenges arising for the rating agencies on bankruptcy. and other market participants. • Includes foreword by Richard A. Posner, the leading economist-turned-judge in the IAE, Lessons from Liberalised Electricity Mar- United States, who has considerable name kets. The International Energy Agency, 2005. recognition. 84 Annotated Bibliography Abstract: After a decade or more of experiences subjects the utilities to new sources of pressure in reforming electricity markets in several to perform well. This paper considers ways in pioneer regions, some important lessons can which a government might seek to achieve this now be drawn. This book gives an assessment goal without privatizing. It focuses on changes of these developments, focusing on the issues in corporate governance—that is, changes that are critical for successful electricity market in the rules that structure the relationship liberalization. One lesson is that it is a long process between the company and the government which requires strong ongoing government as its owner. It concludes that governments involvement and commitment. should be cautious about the prospects for Experiences and examples in the study improvement without privatization—since, are mainly drawn from the UK, Australian, among other things, creating a truly arms-length Nordic, and North Eastern United States (the relationship between the government and the PJM interconnection) markets, which have all utility will always be difficult as long as the operated with some success for a number of government remains the utility’s owner but that years. They have improved efficiency without improvements in corporate governance are still substantially jeopardizing system security. worth pursuing. These markets are described in greater detail in annexes of the book but the main analysis KESSIDES, Ioannis, “Reforming Infrastruc- focuses on key issues rather than on specific ture: Privatization, Regulation, and Competi- countries and regions or specific market models. tion,” World Bank Policy Research Report, The study explores different solutions used in World Bank, Washington, D.C., January 2004. those markets and the remaining challenges. Abstract: Infrastructure industries and services The issues covered in the study are the rationale are crucial for generating economic growth, and benefits of liberalization; the governance alleviating poverty, and increasing international required to create effective competition; the role competitiveness. Safe water is essential for life, of prices and transparent wholesale markets; and health. Reliable electricity saves businesses consumer protection; incentives for investment, and consumers from having to invest in and; impact of addressing security of supply and expensive backup systems, or more costly environmental policy. alternatives, and keeps rural women and children from having to spend long hours fetching IRWIN, Timothy, and YAMAMOTO, Chiaki, firewood. Widely available and affordable “Some Options for Improving the Governance telecommunications and transportation services of State-Owned Electricity Utilities,” Energy can foster grassroots entrepreneurship, and and Mining Sector Board Working Paper thus are critical to generating employment, No. 11, The World Bank, February 2004. and advancing economic development. In most Abstract: Most government-owned utilities developing and transition economies, private in developing countries perform poorly when participation in infrastructure, and restructuring judged as providers of electricity, in part because have been driven by the high costs, and poor politicians and officials use their power, not performance of state-owned network utilities. to encourage the utilities to increase sales, Under state ownership services were usually improve the collection of bills, and cut costs, under-priced, making it difficult to expand but to transfer resources to politically influential services. The report indicates that although groups and, sometimes, extract bribes. To privatization, competitive restructuring, and improve the performance of government- regulatory reforms improve infrastructure owned electricity utilities as electricity utilities, performance, several issues must be considered rules and practices must be changed in a way and conditions met for these measures to that reduces politicians’ willingness or ability achieve their public interest goals. First, reforms to use the utilities for political purposes and have significantly improved performance, 85 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS leading to higher investment, productivity, increase economic efficiency, consolidate public and service coverage and quality. Second, finances, attract foreign direct investment, and effective regulation—including the setting to more effectively “plug into” the European of adequate tariff levels—is the most critical Single Market on the northern shore of the enabling condition for infrastructure reform. Mediterranean Sea. Regulation should clarify property rights, and assure private investors that their investments NEWBERY, David, Privatization, Restructur- will not be subject to regulatory opportunism. ing and Regulation of Network Utilities, MIT Third, for privatization to generate widely Press, 1999. shared social benefits, infrastructure industries Abstract: Network utilities, such as electricity, must be thoroughly restructured and able to telephones, and gas, are public utilities that sustain competition. Thus restructuring, to require a fixed network to deliver their services. introduce competition should be done before Because consumers have no choice of network, privatization, and regulation should be in place they risk exploitation by network owners. to assure potential buyers of both competitive, Once invested, however, a network’s capital and monopoly elements. is sunk, and the bargaining advantage shifts from investor to consumer. The investor, fearing MULLER-JENTSCH, Daniel, The Development expropriation, may be reluctant to invest. The of Electricity Markets in the Euro-mediterranean tension between consumer and investor can be Area: Trends and Prospects for Liberalization side-stepped by state ownership. Alternatively, and Regional Intergration, Washington, D.C.: private ownership and consumers’ political The World Bank, 2001. power can be reconciled through regulation. Abstract: Electricity markets world-wide are Either way, network utilities operate under undergoing a transformation, as state-owned terms set by the state. and vertically integrated monopolies are David Newbery argues that price-setting being replaced by competitive dynamics and rules comprise only part of the policy agenda. private participation. Policy reforms driving Network utilities pose special problems of this transformation include the corporatization ownership and regulation. He discusses and restructuring of state-owned utilities; the history of ownership and regulation, the unbundling of generation, transmission, privatization, and theories of regulation. and distribution; the creation of independent Examining three network utilities in detail— regulators; and the promotion of private sector telecoms, electricity, and gas—he contrasts the involvement in investment and management. regulatory approaches of Britain and the United This study reviews international reform States. He also looks at liberalization in a variety trends and best practice in sector policy, with of other countries. specific reference to Latin America. It documents History shows that the mature forms of how regulatory reform, privatization, and cross- regulatory institutions are remarkably similar border integration are unfolding throughout under both public and private ownership. This the European Single Market, triggered by raises obvious questions such as, Will the forces EU legislation. This study also shows that that caused convergence to regulated vertical sector performance and sector reforms in the integration in the past reassert themselves? southern Mediterranean countries are lagging Can the benefits of competition be protected considerably behind international trends. Finally, against the pressure to reintegrate? Will different it argues that a number of reform initiatives at utilities differ in their form and structure? A full the national and regional level should be taken understanding of the forces shaping regulatory to promote policy reforms and cross-border institutions is necessary to answer these integration in this sector. This would help the important questions. countries of North Africa and the Middle East to 86 Annotated Bibliography POHL, Gerhard, ANDERSON, Robert E., based on best practice and actual experience, and DJANKOV, Simeon. Privatization and and indicates the factors influencing the choice Restructuring in Central and Eastern Europe: of strategy and options. The Toolkit is illustrated Evidence and Policy Options, Washington, with examples, checklists, and templates that D.C.: The World Bank, 1997. walk decision makers through best practice Abstract: Because privatization methods show methodologies. Users of the Toolkit should be similar results, the extent of restructuring is better placed to understand the benefits and compared across firms in the seven countries risks of dealing with labor issues and choose and used for determining which country’s among available strategies and options. policies have been most effective in encouraging restructuring. SUNITA, Kikeri, KENYON, Thomas, and Measures of restructuring are examined, PALMADE, Vincent, Reforming the Investment including profitability, proportion of the firms Climate: Lessons for Practitioners. Washington, with a positive operating cash flow, average D.C.: The World Bank, Coming soon. operating cash flow as a percent of revenue, Abstract: Most people agree that a good growth of labor productivity, growth of total investment climate is essential for growth and factor productivity, and growth of exports. poverty reduction. Less clear is how to achieve Econometric analysis was also used to identify it. Drawing from more than 25 case studies, this the government policies that most encouraged book shows that reform often requires paying firms to restructure. as much attention to dealing with the politics and institutional dimensions as to designing PPIAF, Labor Issues in Infrastructure Reform: policy substance. While there is no single recipe A Toolkit, Washington, D.C.: The World Bank, or “manual” for reform, the authors highlight 2003. three broad lessons. The first is to recognize and Abstract: A universal concern in reforms seize opportunities for reform. Crisis and new involving private participation in infrastructure governments are important catalysts, but so is is the effect such reforms have on labor. Fears of the competition generated by trade integration job loss and changes in employment status have and new benchmarking information. The second often led enterprise workers and unions to be is to invest early in the politics of reform. Public among the most vocal and organized opponents education can help gain wide acceptance for of privatization and to take actions that delay reform, while pilot programs can be valuable or block reforms. Many developing country for demonstrating the benefits and feasibility of governments have been reluctant to undertake change. And the third is to treat implementation reforms because of labor opposition and the and monitoring as an integral part of the reform political costs involved. Such difficulties are process and not merely as an afterthought. In often compounded by concerns about the social the absence of public sector reform, reformers impact of reforms, particularly in countries can draw on private sector change management where social safety nets and labor markets are techniques to revitalize institutions and put lacking. in place mechanisms to monitor and sustain It is thus important that ways be found reform. The book provides an emerging checklist to deal with labor issues in infrastructure for reformers and identifies areas for future privatization. The objective of the Toolkit, which work. includes a CD-ROM, is to provide practical tools and information to help policymakers and TIROLE, Jean, The Theory of Industrial Orga- practitioners deal with these sensitive issues. nization, MIT Press, 1992. The Toolkit helps governments identify and Abstract: The Theory of Industrial Organization select appropriate strategies and approaches, is the first primary text to treat the new industrial offers guidelines for design and implementation organization at the advanced-undergraduate 87 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS and graduate level. Rigorously analytical and agencies as aid donors and providers of credit filled with exercises coded to indicate level of support. difficulty, it provides a unified and modern treatment of the field with accessible models that THE WORLD BANK, Doing Business 2007: are simplified to highlight robust economic ideas How to Reform. Washington, D.C.: The World while working at an intuitive level. Bank, 2006. Tirole begins with a background discussion Abstract: Doing Business 2007 focuses on of the theory of the firm. In part I he develops reforms, identifies top reformers in business the modern theory of monopoly, addressing regulation, and best practices in how to reform. single product and multi- product pricing, static This volume is the fourth in a series of annual and intertemporal price discrimination, quality reports investigating global regulations that choice, reputation, and vertical restraints. enhance business activity and those that In part II, Tirole takes up strategic interaction constrain it. Co-sponsored by the World Bank between firms, starting with a novel treatment and the International Finance Corporation— of the Bertrand-Cournot interdependent pricing the private sector arm of the World Bank problem. He studies how capacity constraints, Group—this year’s report measures quantitative repeated interaction, product positioning, indicators on business regulations and their advertising, and asymmetric information affect enforcement compared across 175 countries— competition or tacit collusion. He then develops from Afghanistan to Zimbabwe—and over topics having to do with long-term competition, time. Doing Business 2007 updates indicators including barriers to entry, contestability, exit, developed in the three preceding reports. and research and development. He concludes The ten indicators are starting a business, with a “game theory user ’s manual” and a dealing with licenses, hiring and firing, section of review exercises. registering property, getting credit, protecting investors, trading across borders, paying taxes, WORENKLEIN, Jacob, “The Global Crises in enforcing contracts, and closing a business. Power and Infrastructure—Lessons Learned The indicators are used to analyze economic and New Directions,” Journal of Structured and and social outcomes, such as informality, Project Finance, Vol. 9, Issue 1, Spring 2003. corruption, unemployment, and poverty. This Abstract: As a result of high-profile, power- annually published report gives policymakers project defaults in the developing world; the the ability to measure regulatory performance collapse of power prices and asset values in in comparison to other countries, learn from best markets such as the U.K. and the United States; practices globally, and prioritize reforms. This and continuing ripple effects of the failure and year’s report covers 20 additional countries. fraud of Enron, major portions of the power and infrastructure sectors are convulsed by crisis and a resulting loss of investor and lender (e) Project Restructuring confidence. To attract investors when new and Reorganization capacity is needed in the future, regulators in the Real World need to help create a climate of stability in which reasonable investor expectations can BOONE, Audra, and MUHLERIN, Harold, be fulfilled. For the poorest countries, where “Valuing the Process of Corporate Restructur- capital for infrastructure investment is so badly ing,” Claremont Colleges Working Papers in needed, the author proposes a new public- Economics, May 2001. private partnership model. Such a model would Abstract: The authors study the process of put the initiative and creativity of the private corporate restructuring for a sample of 298 firms sector to work supported by the resources of during the 1989–98 period that announce that multilaterals, ECAs, and other government they are considering restructuring alternatives. 88 Annotated Bibliography We find that restructuring is a lengthy process, entails setting up a government agency—an with the majority of the restructuring period asset management company—with the full occurring prior to any definitive proposals for responsibility for acquiring, restructuring, and corporate change. Only 70% of the firms that selling of the assets. A decentralized approach initially propose restructuring later make a relies on banks and other creditors to manage definitive proposal to sell either all or part of and resolve nonperforming assets. The authors the firm, with other firms taking themselves study banking crises where governments out of play or declaring bankruptcy. Hence, adopted a decentralized, creditor-led workout the market reaction to the initial restructuring strategy following systemic crises. They use a announcement underestimates the full wealth case study approach and analyze seven banking effects of completed restructurings. The estimate crises in which governments mainly relied on of the full value of restructuring across the banks to resolve nonperforming assets. The sample firms averages 7.5%, with the greatest study suggests that out of the seven cases, gains of 30% accruing to firms that are acquired. only Chile, Norway, and Poland successfully The average gain for the full restructuring restructured their corporate sectors with period for firms divesting a unit is 5%, which companies attaining viable financial structures. is roughly double that estimated for the initial The analysis underscores that as in the case announcement in prior studies of corporate of a centralized strategy the prerequisites divestitures. for a successful decentralized restructuring strategy are manifold. The successful countries BUCKLEY, Ross, “Turning Loans into Bonds: significantly improved the banking system’s Lessons for East Asia From the Latin America capital position, enabling banks to write down Brady Plan,” Journal of Restructuring Finance, loan losses; banks as well as corporations had Vol. 1, No. 1 (185–200), 2004. adequate incentives to engage in corporate Abstract: The Brady Plan provided a partial restructuring; and ownership links between solution to the Latin American debt crisis of banks and corporations were limited or severed the 1980s. This article revisits and analyses the during crises. Plan in considerable detail and explores the potential application in East Asia today of the ESTACHE, Antonio, and RODRIGUEZ- ideas behind the Plan, and of the lessons that can PARDINA, Martin, “Light and Lightning at the be drawn from it. Seven lessons are identified. End of the Public Tunnel: The Reform of the The Brady Plan was conceived and developed Electricity Sector in the Southern Cone,” World in Latin America and the principal lesson is that Bank Working Paper 2074, March 1999. although it may not be replicated, developing Abstract: This paper provides an overview nations may learn from it. Innovative domestic of the recent privatization experiences in solutions are recommended for the resolution of Argentina, Brazil, and Chile. The paper focuses financial problems and debt crisis. on achievements but also on outstanding problems, in particular with respect to the DADO, Marinella, and KLINGEBIEL, Dan- capacity of regulators to enforce compliance iela, “Decentralized Creditor-Led Corporate and to ensure that the spirit of the reform—i.e., Restructuring–Cross Country Experience,” to unleash the forces of competition in the Policy Research Working Paper No. 2901, The sector—can remain the guiding force through World Bank, October 2002. the unavoidable adjustments and fine-tuning Abstract: Countries that have experienced that effective regulation requires. banking crises have adopted one of two distinct approaches toward the resolution of FARUQI, Shaki, Financial Sector Reforms, non-performing assets—a centralized or a Economic Growth, and Stability: Experiences in decentralized solution. A centralized approach 89 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Selected Asian and Latin American Countries, for the benefit of a wider audience. It provides Washington, D.C.: The World Bank, 1994. useful information for policymakers and banks Abstract: These papers provide valuable in developing countries on these project finance information for analysis of financial system activities. It describes the essentials and some reforms undertaken over the past decade in of the complexities of project structuring and many Asian and Latin American countries. explains the importance of “getting it right.” A The reform policies were designed to restore primary message is the importance of clearly domestic economic stability and to strengthen identifying and addressing project risks up-front an economy’s capacity to address favorable and and the potential costs of complacency in dealing unfavorable external shocks. The specific reform with critical issues, such as foreign exchange packages vary from country to country, as do or market demand risks. In addition to strong the policy responses of individual countries. fundamentals, the projects most likely to succeed This diversity of experiences provides lessons are those that are conservatively structured and from which the countries engaged in reform can that carry strong sponsor support. The report benefit and which can be useful as models for concludes that project finance can play an countries currently contemplating reform. important role in an appropriate environment. The papers were presented at a senior policy It does not, however, offer a “free lunch,” but seminar held in Bali, Indonesia, in February 1993. demands a rigorous framework if it is to be The Asian countries represented at the seminar successful. were Bangladesh, India, Indonesia, Japan, Malaysia, Pakistan, the Philippines, Thailand KAREKEZI, Stephen, and MAJORO, Lugard, and Vietnam; Latin American participants came “Improving Modern Energy Service for Afri- from Chile, Colombia, Mexico, and Paraguay. ca’s Urban Poor,” Energy Policy, 30 (1015–1028), 2002. INTERNATIONAL FINANCE CORPORA- Abstract: The urban population of most sub- TION, Project Finance in Developing Countries: Saharan African countries is growing rapidly. IFC’s Lessons of Experience. Washington, D.C.: It is estimated that urban growth rates are The World Bank, 1999. almost double the national population growth Abstract: IFC Lessons of Experience No. 7. rates. As expected, urban energy consumption “Project finance to developing countries is growing rapidly, driven by the fast growth of surged in the decade before the Asian crisis. urban centres. Although urban poor households The financial crisis that began in East Asia has in most cities of the region constitute over 50% brought a dramatic slowdown in this trend.” of the total households, the provision of modern Project finance structuring techniques were used energy services to these households does not to attract international financing for many large- seem to be receiving the requisite attention scale projects, helping to meet investment needs from policymakers. This article provides a brief in infrastructure and other sectors. However, overview of the urban energy sector in Africa, the crisis in East Asia has created stresses and with special emphasis on energy services for the strains for many projects, raising concerns urban poor. The energy-consumption patterns about the viability of some and highlighting among the urban poor households and small the importance of careful structuring and risk and micro-enterprises are assessed and options mitigation. IFC was one of the early pioneers of for improving the provision of modern energy project finance in developing countries 40 years services to the urban poor are proposed. The ago, and project finance remains an important article is based on field survey studies of core of IFC’s activities today. In just the past energy services for the urban poor undertaken decade, IFC has supported over 230 greenfield in Ethiopia, Tanzania, Uganda and Zimbabwe. projects in 69 developing countries with limited- Supporting data and information from other recourse project finance. This volume is written 90 Annotated Bibliography sub-Saharan African countries is used to validate Georgians, with other ”energy poor” republics, key conclusions and recommendations. have been subject to higher costs and declining service levels for household utilities, particularly KHATHATE, Deen, and ISMAIL, Dalla, Regu- energy. The combination of low household lated Deregulation of the Financial System in incomes, high international prices for fuel, the Korea, Washington, D.C.: The World Bank, need for utilities to rely on internally generated 1995. funds for capital investment, low household Abstract: World Bank Discussion Paper incomes, and the political ramifications of No. 292. Examines the anatomy of the Republic removing subsidies at a time of general economic of Korea’s financial reform policy since 1979 decline have led to a ”worst of all worlds” in order to place the nation’s financial reform situation. plan of 1993 in a proper context. Financial Revisiting Reform in the Energy Sector reviews deregulation in the Republic of Korea, initiated the changes in the supply of electricity and gas in 1979, coincided with similar programs in in Georgia from the perspective of households, South America and East Asia. The reforms were utility operators, and the government. It high- successful in spite of a mild form of financial lights lessons from the reforms implemented repression and a deregulation policy that ran and applies them to the future reform program an erratic course. The republic moved decisively planned for the rest of the energy sector. The title in 1993 toward a conventional type of financial concludes that improved service quality and the liberalization by announcing a blueprint of increased supply of clean and subsidized natural reforms to be implemented over a five-year gas have offset the potentially negative impact period ending in 1997. This paper examines the of higher electricity prices. anatomy of the Korean financial reform policy since 1979 in order to place its financial reform MEYERMAN, Gerald et al., “Corporate Re- plan of 1993 in the proper context. The report structuring and Governance in East Asia,” Fi- presents a conceptual framework of the Korean nance & Development, Vol. 36 (1), March 1999. financial system and policies, examines interest Abstract: Corporate restructuring involves rate reforms on various levels, and discusses restructuring the assets and liabilities of changes in the credit allocation system that were corporations, including their debt-to-equity undertaken in earlier phases of the reforms. structures, in line with their cash-flow needs The book goes on to review the rationale of the to promote efficiency, restore growth, and final financial reform phase, the sequencing of minimize the cost to taxpayers. Corporate its various elements, and the assessment. Broad governance refers to the framework of rules conclusions are presented. and regulations that enable the stakeholders to exercise appropriate oversight of a company to LAMPIETTI, Julian, et al., Revisiting Reform in maximize its value and to obtain a return on their the Energy Sector: Lessons from Georgia, Wash- holdings. Both corporate and financial sector ington, D.C.: The World Bank, 2003. restructuring are central to ongoing reform Abstract: An English-Russian bilingual edition. programs in East Asia. This article focuses on Revisiting Reform in the Energy Sector: Lessons reform efforts in Indonesia and Korea, as well from Georgia is part of the World Bank Working as Malaysia and Thailand. Paper series. These papers are published to Corporate restructuring and improved communicate the results of the Bank’s ongoing corporate governance are essential parts of research and to stimulate public discussion. economic reform programs under way in many One of the harsher realities of independence countries. How can corporations be restructured for the former Soviet republics has been the loss to promote growth and reduce excessive debt of subsidized transfers from the center for fuel without placing undue burdens on taxpayers? and utilities. In the years since independence, 91 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS What framework is needed to promote better PPIAF, Private Solutions for Infrastructure corporate governance? in Honduras, Washington, D.C.: World Bank, 2003. MEYERMAN, Gerald, “The London Approach Abstract: This book is designed to promote and Corporate Debt Restructuring in East the development of infrastructure services Asia,” Chapter 10 in Managing Financial and in Honduras, with the aim of improving the Corporate Distress: Lessons from Asia, Brook- country’s competitiveness and contributing ings Institution Press, 2000. to poverty reduction. Its central argument is Abstract: More than three years have elapsed that Honduras needs a significant increase in since the East Asian financial crisis erupted, private investment in infrastructure services, threatening economic and financial stability which should take place in more competitive in the region and beyond. Although many environment and be subject to an adequate legal of the region’s economies have since staged and regulatory framework. a remarkable turnaround, much additional The study details the progress to date in restructuring and reform is needed. Managing Honduran infrastructure sectors, identifying Financial and Corporate Distress: Lessons from the principal problems that exist and outlining Asia, stands out from other works on the East a strategy for their solution. It proposes a Asian crisis by moving beyond macroeconomic general set of principles that should guide the assessments to offer an institutional treatment provision of infrastructure services. In addition, of the microeconomic aspects of the corporate it recommends specific policies for each sector. and bank restructuring. Contributors draw on The document’s scope includes the following their practical, hands-on expertise in various services: transportation, water and sanitation, aspects of finance to provide complementary electricity, and telecommunications. perspectives on how best to set in place strong and responsive institutions that might be able to PPIAF, Private Solutions for Infrastructure in resolve and avoid future crises in other emerging Mexico, Washington, D.C.: The World Bank, markets. 2003. Abstract: During the past two decades, Mexico PAREDES, Ricardo, “Redistributive Impact has proven itself a pioneer in Latin America of Privatization and the Regulation of Utili- in encouraging private sector participation in ties in Chile,” World Institute for Develop- the economy. In the last decade, Mexico has ment Economics Research, Discussion Paper also made major gains in infrastructure service No. 2001/19, June 2001. provision. However, for Mexican enterprises Abstract: Privatization has been one of the to compete effectively and profit from open primary factors generating changes in the Chilean trade particularly within NAFTA, they will economy over the last decade. Privatization has increasingly require higher quality infrastructure faced some opposition due in part to its uncertain services, particularly in the water and energy effect on employment and prices. Despite the sectors. importance of the topic, only few attempts have Private Solutions for Infrastructure in Mexico been made to analyze empirically the gains and begins with a review of Mexico’s recent losses associated with the privatization process macroeconomic performance and the business and its concomitant regulatory framework. The environment. This book considers various sources purpose of this paper is twofold. First, to provide of financing for infrastructure investment, and an idea of the effect of privatization on efficiency reviews recent legal and regulatory reforms and then, to understand whether those who that are critical to attracting private sector oppose further privatization, can justify their financing. The remainder of the book explores position on the grounds that privatization, in current issues as well as prospects and concerns fact, negatively affects the poorest. regarding private entry and investment in each 92 Annotated Bibliography infrastructure sector ’s telecommunications, autonomous from particular business interests natural gas, urban water and sanitation, toll with established institutional channels capable roads, railroads, ports, civil aviation and of securing generalized business cooperation airports. and support. This article argues that the market reform experiences of Argentina and Mexico PPIAF, Private Solutions for Infrastructure: reinforced preexisting power structures and Opportunities for the Philippines, Washington, political practices, strengthening the economic D.C.: The World Bank, 2000. clout and personalized political access of the Abstract: The Philippines has led many of its East owners of powerful holding companies, a Asian neighbors in creating a policy environment situation diametrically opposed to the sort of that is conducive to private sector participation business state relations conducive to further in infrastructure. Together with a strong essential reforms. As the case of Argentina commitment to generating results, this policy illustrates, this sort of skewed policy influence environment produced an impressive record of is liable to generate strong opposition and private sector transactions in a relatively short resistance to the market model. period of time. However, some problems remain. This report, prepared at the request of the W O D O N , Q u e n t i n , F O S T E R , Vi v i e n , Philippine government, describes and assesses and ESTACHE, Antonio. Accounting for the current status and performance of key Poverty in Infrastructure Reform: Learn- infrastructure sectors and the policy, regulatory, i n g f ro m L a t i n A m e r i c a ’s E x p e r i e n c e , and institutional environment for involving the Washington, D.C.: The World Bank, 2002. private sector in those sectors. Its purpose is to Abstract: During the 1990’s a number of assist policymakers in framing future reform countries in Latin America including Argentina, and development strategies for infrastructure Bolivia, and Chile, developed policies focused and to assist potential private sector investors on utility sector liberalization through increased in assessing investment opportunities. private sector participation. This focus resulted from the recognition that overall quality TEICHMAN, Judith, “Private Sector Power and and availability of services were inadequate. Market Reform: Exploring the Domestic Origin Infrastructure reform is inexorably linked of Argentina’s Meltdown and Mexico’s Policy to poverty alleviation and therefore must be Failure,” Third World Quarterly, Vol. 23, No. 3 carefully constructed and enacted. (491–512), 2002. This book provides practical guidelines and Abstract: The failure of market reforms in options for infrastructure reform that result in Latin America to produce sustained growth access and affordability for the poor. Accounting and equitable prosperity is demonstrated most for Poverty in Infrastructure Reform: Learning clearly by Argentina’s most recent economic and from Latin America’s Experience includes political meltdown. But economic difficulties, analysis of the trade-offs that must be made poverty and searing inequality has continued between efficiency, equity, and fiscal costs of the to plague the Mexican case as well. Latin options. It includes a new model for reform that American policymakers themselves have consists of three main components—policies, begun to contribute to the growing discussion regulation, and provision which when properly of policies necessary to confront the lingering balanced minimize the risks associated with economic and social challenges. Included reform. among the recommended policy prescriptions are increased social spending, supported by WOODHOUSE, Erik, “The Experience of tax reform, assistance to small and medium Independent Power Producers in Developing enterprise, and an end to corruption. Such Countries,” Seminar Draft, Program on Energy policy reforms require governments that are 93 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS and Sustainable Development, Stanford Uni- sector reforms in seven countries in the ECA versity, June 2005. region. Sector deficits have been falling over Abstract: Private investment in electricity the last decade and the savings from lower generation (so called “independent power deficits have not translated into higher social producers” or IPPs) in developing countries spending. More emphasis must be placed on grew dramatically during the 1990s, only to monitoring deficits and tailoring policy reform decline equally dramatically in the wake of to country-specific circumstances. The impact the Asian financial crisis and other troubles of reform on utility efficiency, as measured by in the late 1990s. The Program on Energy and the cost of generation, system loss collections, Sustainable Development at Stanford University and operational efficiency, is ambiguous. While has undertaken a detailed review of the IPP overall revenue per kilowatt-hour increased in experience in developing countries. The study almost all countries, problems continue with has sought to identify the principal factors that losses, collection rates, and staffing. In terms of explain the wide variation in outcomes for IPP social impacts, electricity spending as a share investors and hosts. It also aims to identify of income increased, especially for the poor, lessons for the next wave in private investment while consumption stayed the same. In terms in electricity generation. of environmental impacts, reforms slightly This paper presents the conclusions and improved energy efficiency in power plants, analysis of the study of the experience of though this has little direct impact on human investment in greenfield IPPs in developing health, because the electricity sector’s share of countries. The term “independent power the total health damage from air pollution is producer” has been used to refer to several negligible. types of enterprises, but for this paper, “IPP” Several lessons emerge from this analysis. refers to a privately developed power plant that Undertaking simple ex ante simulations of sells electricity to a public electricity grid, often reform impacts will allow better identification under long term contract with a state utility. For of potential reform benefits and costs. Placing this study and report, the lead actors in every more emphasis on outcome-based indicators IPP are private investors—usually foreign, but of service quality would help ensure that often with local partners. The classic foreign- future operations produce the intended end- sponsored, project-financed IPP has taken root in user benefits. In many cases, tariff increases more than fifty emerging countries that display can and should be explicitly timed to coincide wide variation in economic, political, and social with service quality improvements. Yet, this environments. The wide variation in settings for may not always be possible. Where it is not, the IPPs affords a special opportunity for researchers adverse impact of tariff increases, especially for to probe systematically the critical factors that low-income consumers, should be mitigated by contribute to outcomes for host countries and improving access to and efficiency in the use of for investors. clean alternatives. Contains three related previously published THE WORLD BANK, Power’s Promise: Elec- titles on CD-ROM. tricity Reforms in Eastern Europe and Central Asia, Washington, D.C.: The World Bank. THE WORLD BANK, The Private Sector and Abstract: Power’s Promise is part of the World Power Generation in China, Washington, D.C.: Bank Working Paper series. These papers are The World Bank, 2000. published to communicate the results of the Abstract: World Bank Discussion Paper no. 406. Bank’s ongoing research and to stimulate public ”The Chinese government remains aware of the discussion. potential threats to the economy (foreign capital This study analyzes the fiscal, efficiency, flight, loss of competitiveness, drop in consumers’ social, and environmental impact of power confidence, etc.) and is striving to continue 94 Annotated Bibliography to provide a stable environment for domestic countries began their reforms from different investment and household consumption to starting points. The Hungarian power and gas maintain growth.” Since the early 1980s, the sectors had a long history of being relatively Chinese government has eased restrictions well managed. In contrast, Kazakhstan inherited on the power industry and ensured private pieces of the old systems that were designed participation in power sector development. to serve the needs of the Soviet Union and had In the aftermath of the Asian economic and to develop new organizations to manage the financial crisis, concerns are being raised about system. Privatization of the Power and Natural Chinese currency (Renminbi) devaluation and Gas Industries in Hungary and Kazakhstan the impact of the slowdown of electricity growth analyzes how each country dealt with the on the implementation of past contracts and key issues involved in the restructuring and new investment opportunities. To address these privatization of the power and gas sectors. These concerns, China’s Ministry of Finance and the issues include industry structure, wholesale World Bank sponsored a two-day conference, market, labor and management relations, held in Beijing June 22–23, 1999. The conference regulatory framework, privatization objectives, aimed to improve understanding and narrow and privatization methods. the gap in perceptions of risks related to project development among government officials, THE WORLD BANK, World Development Re- representatives of provincial power companies port, Sustainable Development in a Dynamic and financial institutions, and private investors. World: Transforming Institutions, Growth and The first part of this publication is dedicated Quality of Life, Washington, D.C.: The World to the narrative summary of the conference. Bank, 2003. The second part presents a background paper Abstract: Three billion people will be added to prepared for the conference to take stock of the world’s population over the next 50 years the progress achieved and identify issues and and 2.8 billion people today already live on problems that still need to be addressed to create less than $2 a day—almost all in developing an environment conducive to further private countries. Ensuring these people have access involvement in power sector development. This to productive work and a better quality of publication will be useful to the international life is the core development challenge of the community that is interested in past and future first half of this century. Growth could itself development of private sector involvement be jeopardized over the longer term, unless a in China’s power sector, such as, Chinese transformation of society and the management government officials, power companies, private of the environment are addressed integrally with financial institutions, and private investors. economic growth. Now in its 25th edition, this year’s World Development Report examines, THE WORLD BANK, The Privatization of over a 50-year period, the relationship between Power and Natural Gas Industries in Hungary competing policy objectives of reducing poverty, and Kazakhstan, Washington, D.C.: The World maintaining growth, improving social cohesion, Bank, 1999. and protecting the environment. The World Abstract: World Bank Technical Paper no. 451. Development Report 2003 emphasizes that Hungary and Kazakhstan have privatized a large many good policies have been identified but not portion of their electric power and natural gas implemented due to distributional issues, and industries, but have followed different strategies. barriers to developing better institutions. The In contrast, the other former socialist countries Report reviews institutional innovations that in Central and Eastern Europe have privatized might help overcome these barriers and stresses almost none. Has the privatization in these two that ensuring economic growth and improved countries been a success? What lessons can other management of the planet’s ecosystem requires countries learn from their experience? These a reduction in poverty and inequality at all 95 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS levels: local, national, and international. If such the promise of the accord. As in previous years, an accord makes sense, then the outline above the report contains an appendix of selected will require more careful work over the next few indicators from the World Development years, to develop an implementable program to Indicators. adjust to contingencies, without undermining 96 List of Formal Reports Region/Country Activity/Report Title Date Number SUB-SAHARAN AFRICA (AFR) Africa Regional Anglophone Africa Household Energy Workshop (English) 07/88 085/88 Regional Power Seminar on Reducing Electric Power System Losses in Africa (English) 08/88 087/88 Institutional Evaluation of EGL (English) 02/89 098/89 Biomass Mapping Regional Workshops (English) 05/89 —— Francophone Household Energy Workshop (French) 08/89 —— Interafrican Electrical Engineering College: Proposals for Short- and Long-Term Development (English) 03/90 112/90 Biomass Assessment and Mapping (English) 03/90 —— Symposium on Power Sector Reform and Efficiency Improvement in Sub-Saharan Africa (English) 06/96 182/96 Commercialization of Marginal Gas Fields (English) 12/97 201/97 Commercializing Natural Gas: Lessons from the Seminar in Nairobi for Sub-Saharan Africa and Beyond 01/00 225/00 Africa Gas Initiative——Main Report: Volume I 02/01 240/01 First World Bank Workshop on the Petroleum Products Sector in Sub-Saharan Africa 09/01 245/01 Ministerial Workshop on Women in Energy 10/01 250/01 and Poverty Reduction: Proceedings from a Multi-Sector 03/03 266/03 and Multi-Stakeholder Workshop Addis Ababa, Ethiopia, October 23–25, 2002 Opportunities for Power Trade in the Nile Basin: Final Scoping Study 01/04 277/04 Energies modernes et réduction de la pauvreté: Un atelier multi-sectoriel. Actes de l’atelier régional. Dakar, Sénégal, du 4 au 6 février 2003 (French Only) 01/04 278/04 Énergies modernes et réduction de la pauvreté: Un atelier multi-sectoriel. Actes de l’atelier régional. Douala, Cameroun 09/04 286/04 du 16–18 juillet 2003. (French Only) 97 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Africa Regional Energy and Poverty Reduction: Proceedings from the Global Village Energy Partnership (GVEP) Workshops held in Africa 01/05 298/05 Power Sector Reform in Africa: Assessing the Impact on Poor People 08/05 306/05 The Vulnerability of African Countries to Oil Price Shocks: Major Factors and Policy Options. The Case of Oil 08/05 308/05 Importing Countries Angola Energy Assessment (English and Portuguese) 05/89 4708-ANG Power Rehabilitation and Technical Assistance (English) 10/91 142/91 Africa Gas Initiative——Angola: Volume II 02/01 240/01 Benin Energy Assessment (English and French) 06/85 5222-BEN Botswana Energy Assessment (English) 09/84 4998-BT Pump Electrification Prefeasibility Study (English) 01/86 047/86 Review of Electricity Service Connection Policy (English) 07/87 071/87 Tuli Block Farms Electrification Study (English) 07/87 072/87 Household Energy Issues Study (English) 02/88 —— Urban Household Energy Strategy Study (English) 05/91 132/91 Burkina Faso Energy Assessment (English and French) 01/86 5730-BUR Technical Assistance Program (English) 03/86 052/86 Urban Household Energy Strategy Study (English and French) 06/91 134/91 Burundi Energy Assessment (English) 06/82 3778-BU Petroleum Supply Management (English) 01/84 012/84 Status Report (English and French) 02/84 011/84 Presentation of Energy Projects for the Fourth Five Year Plan (1983–1987) (English and French) 05/85 036/85 Improved Charcoal Cookstove Strategy (English and French) 09/85 042/85 Peat Utilization Project (English) 11/85 046/85 Energy Assessment (English and French) 01/92 9215-BU Cameroon Africa Gas Initiative——Cameroon: Volume III 02/01 240/01 Cape Verde Energy Assessment (English and Portuguese) 08/84 5073-CV Household Energy Strategy Study (English) 02/90 110/90 Central African Republic Energy Assessment (French) 08/92 9898-CAR Chad Elements of Strategy for Urban Household Energy The Case of N’djamena (French) 12/93 160/94 Comoros Energy Assessment (English and French) 01/88 7104-COM In Search of Better Ways to Develop Solar Markets: The Case of Comoros 05/00 230/00 98 List of Formal Reports Congo, Democratic Republic of Energy Assessment (English) 01/88 6420-COB Power Development Plan (English and French) 03/90 106/90 Africa Gas Initiative——Congo: Volume IV 02/01 240/01 Côte d’Ivoire Energy Assessment (English and French) 04/85 5250-IVC Improved Biomass Utilization (English and French) 04/87 069/87 Power System Efficiency Study (English) 12/87 Power Sector Efficiency Study (French) 02/92 140/91 Project of Energy Efficiency in Buildings (English) 09/95 175/95 Africa Gas Initiative——Côte d’Ivoire: Volume V 02/01 240/01 Ethiopia Energy Assessment (English) 07/84 4741-ET Power System Efficiency Study (English) 10/85 045/85 Agricultural Residue Briquetting Pilot Project (English) 12/86 062/86 Bagasse Study (English) 12/86 063/86 Cooking Efficiency Project (English) 12/87 Energy Assessment (English) 02/96 179/96 Gabon Energy Assessment (English) 07/88 6915-GA Africa Gas Initiative——Gabon: Volume VI 02/01 240/01 Gambia, The Energy Assessment (English) 11/83 4743-GM Solar Water Heating Retrofit Project (English) 02/85 030/85 Solar Photovoltaic Applications (English) 03/85 032/85 Petroleum Supply Management Assistance (English) 04/85 035/85 Ghana Energy Assessment (English) 11/86 6234-GH Energy Rationalization in the Industrial Sector (English) 06/88 084/88 Sawmill Residues Utilization Study (English) 11/88 074/87 Industrial Energy Efficiency (English) 11/92 148/92 Corporatization of Distribution Concessions through Capitalization 12/03 272/03 Guinea Energy Assessment (English) 11/86 6137-GUI Household Energy Strategy (English and French) 01/94 163/94 Guinea-Bissau Energy Assessment (English and Portuguese) 08/84 5083-GUB Recommended Technical Assistance Projects (English & Portuguese) 04/85 033/85 Management Options for the Electric Power and Water Supply Subsectors (English) 02/90 100/90 Power and Water Institutional Restructuring (French) 04/91 118/91 Kenya Energy Assessment (English) 05/82 3800 KE 99 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Kenya Power System Efficiency Study (English) 03/84 014/84 Status Report (English) 05/84 016/84 Coal Conversion Action Plan (English) 02/87 —— Solar Water Heating Study (English) 02/87 066/87 Peri-Urban Woodfuel Development (English) 10/87 076/87 Power Master Plan (English) 11/87 —— Power Loss Reduction Study (English) 09/96 186/96 Implementation Manual: Financing Mechanisms for Solar Electric Equipment 07/00 231/00 Lesotho Energy Assessment (English) 01/84 4676-LSO Liberia Energy Assessment (English) 12/84 5279-LBR Recommended Technical Assistance Projects (English) 06/85 038/85 Power System Efficiency Study (English) 12/87 081/87 Madagascar Energy Assessment (English) 01/87 5700-MAG Power System Efficiency Study (English and French) 12/87 075/87 Environmental Impact of Woodfuels (French) 10/95 176/95 Malawi Energy Assessment (English) 08/82 3903-MAL Technical Assistance to Improve the Efficiency of Fuelwood Use in the Tobacco Industry (English) 11/83 009/83 Status Report (English) 01/84 013/84 Mali Energy Assessment (English and French) 11/91 8423-MLI Household Energy Strategy (English and French) 03/92 147/92 Mauritania Energy Assessment (English and French) 04/85 5224-MAU Household Energy Strategy Study (English and French) 07/90 123/90 Mauritius Energy Assessment (English) 12/81 3510-MAS Status Report (English) 10/83 008/83 Power System Efficiency Audit (English) 05/87 070/87 Bagasse Power Potential (English) 10/87 077/87 Energy Sector Review (English) 12/94 3643-MAS Mozambique Energy Assessment (English) 01/87 6128-MOZ Household Electricity Utilization Study (English) 03/90 113/90 Electricity Tariffs Study (English) 06/96 181/96 Sample Survey of Low Voltage Electricity Customers 06/97 195/97 Namibia Energy Assessment (English) 03/93 11320-NAM Niger Energy Assessment (French) 05/84 4642-NIR Status Report (English and French) 02/86 051/86 100 List of Formal Reports Niger Improved Stoves Project (English and French) 12/87 080/87 Household Energy Conservation and Substitution (English and French) 01/88 082/88 Nigeria Energy Assessment (English) 08/83 4440-UNI Energy Assessment (English) 07/93 11672-UNI Strategic Gas Plan 02/04 279/04 Rwanda Energy Assessment (English) 06/82 3779-RW Status Report (English and French) 05/84 017/84 Improved Charcoal Cookstove Strategy (English and French) 08/86 059/86 Improved Charcoal Production Techniques (English and French) 02/87 065/87 Energy Assessment (English and French) 07/91 8017-RW Commercialization of Improved Charcoal Stoves and Carbonization Techniques Mid-Term Progress Report (English and French) 12/91 141/91 SADC SADC Regional Power Interconnection Study, Vols. I–IV (English) 12/93 —— SADCC SADCC Regional Sector: Regional Capacity-Building Program for Energy Surveys and Policy Analysis (English) 11/91 —— São Tomé and Principe Energy Assessment (English) 10/85 5803-STP Senegal Energy Assessment (English) 07/83 4182-SE Status Report (English and French) 10/84 025/84 Industrial Energy Conservation Study (English) 05/85 037/85 Preparatory Assistance for Donor Meeting (English and French) 04/86 056/86 Urban Household Energy Strategy (English) 02/89 096/89 Industrial Energy Conservation Program (English) 05/94 165/94 Seychelles Energy Assessment (English) 01/84 4693-SEY Electric Power System Efficiency Study (English) 08/84 021/84 Sierra Leone Energy Assessment (English) 10/87 6597-SL Somalia Energy Assessment (English) 12/85 5796-SO South Africa Options for the Structure and Regulation of Natural Gas Industry (English) 05/95 172/95 Sudan Management Assistance to the Ministry of Energy and Mining 05/83 003/83 Energy Assessment (English) 07/83 4511-SU Power System Efficiency Study (English) 06/84 018/84 Status Report (English) 11/84 026/84 Wood Energy/Forestry Feasibility (English) 07/87 073/87 101 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Swaziland Energy Assessment (English) 02/87 6262-SW Household Energy Strategy Study 10/97 198/97 Tanzania Energy Assessment (English) 11/84 4969-TA Peri-Urban Woodfuels Feasibility Study (English) 08/88 086/88 Tobacco Curing Efficiency Study (English) 05/89 102/89 Remote Sensing and Mapping of Woodlands (English) 06/90 —— Industrial Energy Efficiency Technical Assistance (English) 08/90 122/90 Power Loss Reduction Volume 1: Transmission and Distribution System Technical Loss Reduction and Network Development (English) 06/98 204A/98 Power Loss Reduction Volume 2: Reduction of Non-Technical Losses (English) 06/98 204B/98 Togo Energy Assessment (English) 06/85 5221-TO Wood Recovery in the Nangbeto Lake (English and French) 04/86 055/86 Power Efficiency Improvement (English and French) 12/87 078/87 Uganda Energy Assessment (English) 07/83 4453-UG Status Report (English) 08/84 020/84 Institutional Review of the Energy Sector (English) 01/85 029/85 Energy Efficiency in Tobacco Curing Industry (English) 02/86 049/86 Fuelwood/Forestry Feasibility Study (English) 03/86 053/86 Power System Efficiency Study (English) 12/88 092/88 Energy Efficiency Improvement in the Brick and Tile Industry (English) 02/89 097/89 Tobacco Curing Pilot Project (English) 03/89 UNDP Terminal Report Energy Assessment (English) 12/96 193/96 Rural Electrification Strategy Study 09/99 221/99 Zaire Energy Assessment (English) 05/86 5837-ZR Zambia Energy Assessment (English) 01/83 4110-ZA Status Report (English) 08/85 039/85 Energy Sector Institutional Review (English) 11/86 060/86 Power Subsector Efficiency Study (English) 02/89 093/88 Energy Strategy Study (English) 02/89 094/88 Urban Household Energy Strategy Study (English) 08/90 121/90 Zimbabwe Energy Assessment (English) 06/82 3765-ZIM Power System Efficiency Study (English) 06/83 005/83 Status Report (English) 08/84 019/84 102 List of Formal Reports Zimbabwe Power Sector Management Assistance Project (English) 04/85 034/85 Power Sector Management Institution Building (English) 09/89 —— Petroleum Management Assistance (English) 12/89 109/89 Charcoal Utilization Pre-feasibility Study (English) 06/90 119/90 Integrated Energy Strategy Evaluation (English) 01/92 8768-ZIM Energy Efficiency Technical Assistance Project: Strategic Framework for a National Energy Efficiency Improvement Program (English) 04/94 —— Capacity Building for the National Energy Efficiency Improvement Programme (NEEIP) (English) 12/94 —— Rural Electrification Study 03/00 228/00 Les réformes du secteur de l’électricite en Afrique: Evaluation de leurs conséquences pour les populations pauvres 11/06 306/06 EAST ASIA AND THE PACIFIC (EAP) Asia Regional Pacific Household and Rural Energy Seminar (English) 11/90 —— China County-Level Rural Energy Assessments (English) 05/89 101/89 Fuelwood Forestry Preinvestment Study (English) 12/89 105/89 Strategic Options for Power Sector Reform in China (English) 07/93 156/93 Energy Efficiency and Pollution Control in Township and Village Enterprises (TVE) Industry (English) 11/94 168/94 Energy for Rural Development in China: An Assessment Based on a Joint Chinese/ESMAP Study in Six Counties (English) 06/96 183/96 Improving the Technical Efficiency of Decentralized Power Companies 09/99 222/99 Air Pollution and Acid Rain Control: The Case of Shijiazhuang City 10/03 267/03 and the Changsha Triangle Area Toward a Sustainable Coal Sector In China 07/04 287/04 Demand Side Management in a Restructured Industry: How Regulation and Policy Can Deliver Demand-Side Management Benefits to a Growing Economy and a Changing Power System 12/05 314/05 A Strategy for CBM and CMM Development and Utilization in China 07/07 326/07 Fiji Energy Assessment (English) 06/83 4462-FIJ Indonesia Energy Assessment (English) 11/81 3543-IND Status Report (English) 09/84 022/84 Power Generation Efficiency Study (English) 02/86 050/86 103 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Indonesia Energy Efficiency in the Brick, Tile and Lime Industries (English) 04/87 067/87 Diesel Generating Plant Efficiency Study (English) 12/88 095/88 Urban Household Energy Strategy Study (English) 02/90 107/90 Biomass Gasifier Preinvestment Study Vols. I & II (English) 12/90 124/90 Prospects for Biomass Power Generation with Emphasis on Palm Oil, Sugar, Rubberwood and Plywood Residues (English) 11/94 167/94 Lao PDR Urban Electricity Demand Assessment Study (English) 03/93 154/93 Institutional Development for Off-Grid Electrification 06/99 215/99 Malaysia Sabah Power System Efficiency Study (English) 03/87 068/87 Gas Utilization Study (English) 09/91 9645-MA Mongolia Energy Efficiency in the Electricity and District Heating Sectors 10/01 247/01 Improved Space Heating Stoves for Ulaanbaatar 03/02 254/02 Impact of Improved Stoves on Indoor Air Quality in Ulaanbaatar, Mongolia 11/05 313/05 Myanmar Energy Assessment (English) 06/85 5416-BA Papua New Guinea Energy Assessment (English) 06/82 3882-PNG Status Report (English) 07/83 006/83 Institutional Review in the Energy Sector (English) 10/84 023/84 Power Tariff Study (English) 10/84 024/84 Philippines Commercial Potential for Power Production from Agricultural Residues (English) 12/93 157/93 Energy Conservation Study (English) 08/94 —— Strengthening the Non-Conventional and Rural Energy Development Program in the Philippines: A Policy Framework and Action Plan 08/01 243/01 Rural Electrification and Development in the Philippines: Measuring the Social and Economic Benefits 05/02 255/02 Solomon Islands Energy Assessment (English) 06/83 4404-SOL Energy Assessment (English) 01/92 979-SOL South Pacific Petroleum Transport in the South Pacific (English) 05/86 —— Thailand Energy Assessment (English) 09/85 5793-TH Rural Energy Issues and Options (English) 09/85 044/85 Accelerated Dissemination of Improved Stoves and Charcoal Kilns (English) 09/87 079/87 Northeast Region Village Forestry and Woodfuels Preinvestment Study (English) 02/88 083/88 Impact of Lower Oil Prices (English) 08/88 —— 104 List of Formal Reports Thailand Coal Development and Utilization Study (English) 10/89 —— Why Liberalization May Stall in a Mature Power Market: A Review of the Technical and Political Economy Factors that Constrained the Electricity Sector Reform in Thailand 1998–2002 12/03 270/03 Reducing Emissions from Motorcycles in Bangkok 10/03 275/03 Tonga Energy Assessment (English) 06/85 5498-TON Vanuatu Energy Assessment (English) 06/85 5577-VA Vietnam Rural and Household Energy-Issues and Options (English) 01/94 161/94 Power Sector Reform and Restructuring in Vietnam: Final Report to the Steering Committee (English and Vietnamese) 09/95 174/95 Household Energy Technical Assistance: Improved Coal Briquetting and Commercialized Dissemination of Higher Efficiency Biomass and Coal Stoves (English) 01/96 178/96 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices In Vietnam 02/01 236/01 An Overnight Success: Vietnam’s Switch to Unleaded Gasoline 08/02 257/02 The Electricity Law for Vietnam——Status and Policy Issues—— The Socialist Republic of Vietnam 08/02 259/02 Petroleum Sector Technical Assistance for the Revision of the Existing Legal and Regulatory Framework 12/03 269/03 Western Samoa Energy Assessment (English) 06/85 5497-WSO EUROPE AND CENTRAL ASIA (ECA) Armenia Development of Heat Strategies for Urban Areas of Low-income Transition Economies. Urban Heating Strategy for the Republic of Armenia. Including a Summary of a Heating Strategy for the Kyrgyz Republic 04/04 282/04 Bulgaria Natural Gas Policies and Issues (English) 10/96 188/96 Energy Environment Review 10/02 260/02 Central Asia and The Caucasus Cleaner Transport Fuels in Central Asia and the Caucasus 08/01 242/01 Central and Eastern Europe Power Sector Reform in Selected Countries 07/97 196/97 Increasing the Efficiency of Heating Systems in Central and Eastern Europe and the Former Soviet Union (English and Russian) 08/00 234/00 The Future of Natural Gas in Eastern Europe (English) 08/92 149/92 Kazakhstan Natural Gas Investment Study, Volumes 1, 2 & 3 12/97 199/97 105 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Kazakhstan & Kyrgyz Republic Opportunities for Renewable Energy Development 11/97 16855-KAZ Poland Energy Sector Restructuring Program Vols. I–V (English) 01/93 153/93 Natural Gas Upstream Policy (English and Polish) 08/98 206/98 Energy Sector Restructuring Program: Establishing the Energy Regulation Authority 10/98 208/98 Portugal Energy Assessment (English) 04/84 4824-PO Romania Natural Gas Development Strategy (English) 12/96 192/96 Private Sector Participation in Market-Based Energy-Efficiency 11/03 274/03 Financing Schemes: Lessons Learned from Romania and International Experiences. Slovenia Workshop on Private Participation in the Power Sector (English) 02/99 211/99 Turkey Energy Assessment (English) 03/83 3877-TU Energy and the Environment: Issues and Options Paper 04/00 229/00 Energy and Environment Review: Synthesis Report 12/03 273/03 Turkey’s Experience with Greenfield Gas Distribution since 2003 03/07 325/05 LATIN AMERICA AND THE CARIBBEAN (LCR) LCR Regional Regional Seminar on Electric Power System Loss Reduction in the Caribbean (English) 07/89 —— Elimination of Lead in Gasoline in Latin America and the Caribbean (English and Spanish) 04/97 194/97 Elimination of Lead in Gasoline in Latin America and the Caribbean– –Status Report (English and Spanish) 12/97 200/97 Harmonization of Fuels Specifications in Latin America and the Caribbean (English and Spanish) 06/98 203/98 Energy and Poverty Reduction: Proceedings from the Global Village Energy Partnership (GVEP) Workshop held in Bolivia 06/05 202/05 Power Sector Reform and the Rural Poor in Central America 12/04 297/04 Estudio Comparativo Sobre la Distribución de la Renta Petrolera en Bolivia, Colombia, Ecuador y Perú 08/05 304/05 OECS Energy Sector Reform and Renewable Energy/ Energy Efficiency Options 02/06 317/06 The Landfill Gas-to-Energy Initiative for Latin America and the Caribbean 02/06 318/06 Bolivia Energy Assessment (English) 04/83 4213-BO National Energy Plan (English) 12/87 —— 106 List of Formal Reports Bolivia La Paz Private Power Technical Assistance (English) 11/90 111/90 Pre-feasibility Evaluation Rural Electrification and Demand Assessment (English and Spanish) 04/91 129/91 National Energy Plan (Spanish) 08/91 131/91 Private Power Generation and Transmission (English) 01/92 137/91 Natural Gas Distribution: Economics and Regulation (English) 03/92 125/92 Natural Gas Sector Policies and Issues (English and Spanish) 12/93 164/93 Household Rural Energy Strategy (English and Spanish) 01/94 162/94 Preparation of Capitalization of the Hydrocarbon Sector 12/96 191/96 Introducing Competition into the Electricity Supply Industry in Developing Countries: Lessons from Bolivia 08/00 233/00 Final Report on Operational Activities Rural Energy and Energy Efficiency 08/00 235/00 Oil Industry Training for Indigenous People: The Bolivian Experience (English and Spanish) 09/01 244/01 Capacitación de Pueblos Indígenas en la Actividad Petrolera. Fase II 07/04 290/04 Boliva-Brazil Best Practices in Mainstreaming Environmental & Social Safeguards Into Gas Pipeline Projects 07/06 322/06 Estudio Sobre Aplicaciones en Pequeña Escala de Gas Natural 07/04 291/04 Brazil Energy Efficiency & Conservation: Strategic Partnership for Energy Efficiency in Brazil (English) 01/95 170/95 Hydro and Thermal Power Sector Study 09/97 197/97 Rural Electrification with Renewable Energy Systems in the Northeast: A Preinvestment Study 07/00 232/00 Reducing Energy Costs in Municipal Water Supply Operations 07/03 265/03 “Learning-while-doing” Energy M&T on the Brazilian Frontlines Chile Energy Sector Review (English) 08/88 7129-CH Colombia Energy Strategy Paper (English) 12/86 —— Power Sector Restructuring (English) 11/94 169/94 Energy Efficiency Report for the Commercial and Public Sector (English) 06/96 184/96 Costa Rica Energy Assessment (English and Spanish) 01/84 4655-CR Recommended Technical Assistance Projects (English) 11/84 027/84 Forest Residues Utilization Study (English and Spanish) 02/90 108/90 Dominican Republic Energy Assessment (English) 05/91 8234-DO Ecuador Energy Assessment (Spanish) 12/85 5865-EC Energy Strategy Phase I (Spanish) 07/88 —— 107 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Ecuador Energy Strategy (English) 04/91 —— Private Mini-hydropower Development Study (English) 11/92 —— Energy Pricing Subsidies and Interfuel Substitution (English) 08/94 11798-EC Energy Pricing, Poverty and Social Mitigation (English) 08/94 12831-EC Guatemala Issues and Options in the Energy Sector (English) 09/93 12160-GU Health Impacts of Traditional Fuel Use 08/04 284/04 Haiti Energy Assessment (English and French) 06/82 3672-HA Status Report (English and French) 08/85 041/85 Household Energy Strategy (English and French) 12/91 143/91 Honduras Energy Assessment (English) 08/87 6476-HO Petroleum Supply Management (English) 03/91 128/91 Jamaica Energy Assessment (English) 04/85 5466-JM Petroleum Procurement, Refining, and Distribution Study (English) 11/86 061/86 Energy Efficiency Building Code Phase I (English) 03/88 —— Energy Efficiency Standards and Labels Phase I (English) 03/88 —— Management Information System Phase I (English) 03/88 —— Charcoal Production Project (English) 09/88 090/88 FIDCO Sawmill Residues Utilization Study (English) 09/88 088/88 Energy Sector Strategy and Investment Planning Study (English) 07/92 135/92 Mexico Improved Charcoal Production Within Forest Management for the State of Veracruz (English and Spanish) 08/91 138/91 Energy Efficiency Management Technical Assistance to the Comisión Nacional para el Ahorro de Energía (CONAE) (English) 04/96 180/96 Energy Environment Review 05/01 241/01 Proceedings of the International Grid-Connected Renewable Energy Policy Forum (with CD) 08/06 324/06 Nicaragua Modernizing the Fuelwood Sector in Managua and León 12/01 252/01 Policy & Strategy for the Promotion of RE Policies in Nicaragua. (Contains CD with 3 complementary reports) 01/06 316/06 Panama Power System Efficiency Study (English) 06/83 004/83 Paraguay Energy Assessment (English) 10/84 5145-PA Recommended Technical Assistance Projects (English) 09/85 Status Report (English and Spanish) 09/85 043/85 Reforma del Sector Hidrocarburos (Spanish Only) 03/06 319/06 Peru Energy Assessment (English) 01/84 4677-PE Status Report (English) 08/85 040/85 108 List of Formal Reports Peru Proposal for a Stove Dissemination Program in the Sierra (English and Spanish) 02/87 064/87 Energy Strategy (English and Spanish) 12/90 —— Study of Energy Taxation and Liberalization of the Hydrocarbons Sector (English and Spanish) 120/93 159/93 Reform and Privatization in the Hydrocarbon Sector (English and Spanish) 07/99 216/99 Rural Electrification 02/01 238/01 St. Lucia Energy Assessment (English) 09/84 5111-SLU St. Vincent and the Grenadines Energy Assessment (English) 09/84 5103-STV Sub Andean Environmental and Social Regulation of Oil and Gas Operations in Sensitive Areas of the Sub-Andean Basin (English and Spanish) 07/99 217/99 Trinidad and Tobago Energy Assessment (English) 12/85 5930-TR MIDDLE EAST AND NORTH AFRICA (MNA) Turkey Turkey’s Experience with Greenfield Gas Distribution since 2003 05/07 325/07 Egypt, Arab Reb. of Energy Assessment (English) 10/96 189/96 Energy Assessment (English and French) 03/84 4157-MOR Status Report (English and French) 01/86 048/86 Morocco Energy Sector Institutional Development Study (English and French) 07/95 173/95 Natural Gas Pricing Study (French) 10/98 209/98 Gas Development Plan Phase II (French) 02/99 210/99 Syrian Arab Republic Energy Assessment (English) 05/86 5822-SYR Electric Power Efficiency Study (English) 09/88 089/88 Energy Efficiency Improvement in the Cement Sector (English) 04/89 099/89 Energy Efficiency Improvement in the Fertilizer Sector (English) 06/90 115/90 Tunisia Fuel Substitution (English and French) 03/90 —— Power Efficiency Study (English and French) 02/92 136/91 Energy Management Strategy in the Residential and Tertiary Sectors (English) 04/92 146/92 Renewable Energy Strategy Study, Volume I (French) 11/96 190A/96 Renewable Energy Strategy Study, Volume II (French) 11/96 190B/96 109 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Tunisia Rural Electrification in Tunisia: National Commitment, Efficient Implementation and Sound Finances 08/05 307/05 Yemen, Republic of Energy Assessment (English) 12/84 4892-YAR Energy Investment Priorities (English) 02/87 6376-YAR Household Energy Strategy Study Phase I (English) 03/91 126/91 Household Energy Supply and Use in Yemen. Volume I: Main Report and Volume II: Annexes 12/05 315/05 Republic of Yemen: A Natural Gas Incentive Network 12/07 327/07 SOUTH ASIA (SAR) Bangladesh Energy Assessment (English) 10/82 3873-BD Priority Investment Program (English) 05/83 002/83 Status Report (English) 04/84 015/84 Power System Efficiency Study (English) 02/85 031/85 Small Scale Uses of Gas Pre-feasibility Study (English) 12/88 —— Reducing Emissions from Baby-Taxis in Dhaka 01/02 253/02 India Opportunities for Commercialization of Non-conventional Energy Systems (English) 11/88 091/88 Maharashtra Bagasse Energy Efficiency Project (English) 07/90 120/90 Mini-Hydro Development on Irrigation Dams and Canal Drops Vols. I, II and III (English) 07/91 139/91 WindFarm Pre-Investment Study (English) 12/92 150/92 Power Sector Reform Seminar (English) 04/94 166/94 Environmental Issues in the Power Sector (English) 06/98 205/98 Environmental Issues in the Power Sector: Manual for Environmental Decision Making (English) 06/99 213/99 Household Energy Strategies for Urban India: The Case of Hyderabad 06/99 214/99 Greenhouse Gas Mitigation In the Power Sector: Case Studies From India 02/01 237/01 Energy Strategies for Rural India: Evidence from Six States 08/02 258/02 Household Energy, Indoor Air Pollution, and Health 11/02 261/02 Access of the Poor to Clean Household Fuels 07/03 263/03 The Impact of Energy on Women’s Lives in Rural India 01/04 276/04 Environmental Issues in the Power Sector: Long-Term Impacts And Policy Options for Rajasthan 10/04 292/04 Environmental Issues in the Power Sector: Long-Term Impacts and Policy Options for Karnataka 10/04 293/04 Energy Assessment (English) 08/83 4474-NEP 110 List of Formal Reports Nepal Status Report (English) 01/85 028/84 Energy Efficiency & Fuel Substitution in Industries (English) 06/93 158/93 Pakistan Household Energy Assessment (English) 05/88 —— Assessment of Photovoltaic Programs, Applications, and Markets (English) 10/89 103/89 National Household Energy Survey and Strategy Formulation Study: Project Terminal Report (English) 03/94 —— Managing the Energy Transition (English) 10/94 —— Lighting Efficiency Improvement Program Phase 1: Commercial Buildings Five Year Plan (English) 10/94 —— Clean Fuels 10/01 246/01 Household Use of Commercial Energy 05/06 320/06 Regional Toward Cleaner Urban Air in South Asia: Tackling Transport 03/04 281/04 Pollution, Understanding Sources. Sri Lanka Energy Assessment (English) 05/82 3792-CE Power System Loss Reduction Study (English) 07/83 007/83 Status Report (English) 01/84 010/84 Industrial Energy Conservation Study (English) 03/86 054/86 Sustainable Transport Options for Sri Lanka: Vol. I 02/03 262/03 Greenhouse Gas Mitigation Options in the Sri Lanka Power Sector: Vol. II 02/03 262/03 Sri Lanka Electric Power Technology Assessment (SLEPTA): Vol. III 02/03 262/03 Energy and Poverty Reduction: Proceedings from South Asia 11/03 268/03 Practitioners Workshop How Can Modern Energy Services Contribute to Poverty Reduction? Colombo, Sri Lanka, June 2–4, 2003 GLOBAL Energy End Use Efficiency: Research and Strategy (English) 11/89 —— Women and Energy——A Resource Guide The International Network: Policies and Experience (English) 04/90 —— Guidelines for Utility Customer Management and Metering (English and Spanish) 07/91 —— Assessment of Personal Computer Models for Energy Planning in Developing Countries (English) 10/91 —— Long-Term Gas Contracts Principles and Applications (English) 02/93 152/93 Comparative Behavior of Firms Under Public and Private Ownership (English) 05/93 155/93 Development of Regional Electric Power Networks (English) 10/94 —— 111 DESIGNING STRATEGIES AND INSTRUMENTS TO ADDRESS POWER PROJECTS STRESS SITUATIONS Round-table on Energy Efficiency (English) 02/95 171/95 Assessing Pollution Abatement Policies with a Case Study of Ankara (English) 11/95 177/95 A Synopsis of the Third Annual Round-table on Independent Power Projects: Rhetoric and Reality (English) 08/96 187/96 Rural Energy and Development Round-table (English) 05/98 202/98 A Synopsis of the Second Round-table on Energy Efficiency: Institutional and Financial Delivery Mechanisms (English) 09/98 207/98 The Effect of a Shadow Price on Carbon Emission in the Energy Portfolio of the World Bank: A Carbon Backcasting Exercise (English) 02/99 212/99 Increasing the Efficiency of Gas Distribution Phase 1: Case Studies and Thematic Data Sheets 07/99 218/99 Global Energy Sector Reform in Developing Countries: A Scorecard 07/99 219/99 Global Lighting Services for the Poor Phase II: Text Marketing of Small “Solar” Batteries for Rural Electrification Purposes 08/99 220/99 A Review of the Renewable Energy Activities of the UNDP/ World Bank Energy Sector Management Assistance Program 1993 to 1998 11/99 223/99 Energy, Transportation and Environment: Policy Options for Environmental Improvement 12/99 224/99 Privatization, Competition and Regulation in the British Electricity Industry, With Implications for Developing Countries 02/00 226/00 Reducing the Cost of Grid Extension for Rural Electrification 02/00 227/00 Undeveloped Oil and Gas Fields in the Industrializing World 02/01 239/01 Best Practice Manual: Promoting Decentralized Electrification Investment 10/01 248/01 Peri-Urban Electricity Consumers——A Forgotten but Important Group: What Can We Do to Electrify Them? 10/01 249/01 Village Power 2000: Empowering People and Transforming Markets 10/01 251/01 Private Financing for Community Infrastructure 05/02 256/02 Stakeholder Involvement in Options Assessment: 07/03 264/03 Promoting Dialogue in Meeting Water and Energy Needs: A Sourcebook A Review of ESMAP’s Energy Efficiency Portfolio 11/03 271/03 A Review of ESMAP’s Rural Energy and Renewable Energy 04/04 280/04 Portfolio ESMAP Renewable Energy and Energy Efficiency Reports 05/04 283/04 1998–2004 (CD Only) Regulation of Associated Gas Flaring and Venting: A Global 08/04 285/04 112 List of Formal Reports Overview and Lessons Learned from International Experience ESMAP Gender in Energy Reports and Other related Information 11/04 288/04 (CD Only) ESMAP Indoor Air Pollution Reports and Other related Information 11/04 289/04 (CD Only) Energy and Poverty Reduction: Proceedings from the Global Village Energy Partnership (GVEP) Workshop on the Pre-Investment Funding. Berlin, Germany, April 23–24, 2003. 11/04 294/04 Global Village Energy Partnership (GVEP) Annual Report 2003 12/04 295/04 Energy and Poverty Reduction: Proceedings from the Global Village Energy Partnership (GVEP) Workshop on Consumer Lending and Microfinance to Expand Access to Energy Services, Manila, Philippines, May 19–21, 2004 12/04 296/04 The Impact of Higher Oil Prices on Low Income Countries 03/05 299/05 And on the Poor Advancing Bioenergy for Sustainable Development: Guideline 04/05 300/05 For Policymakers and Investors ESMAP Rural Energy Reports 1999–2005 03/05 301/05 Renewable Energy and Energy Efficiency Financing and Policy Network: Options Study and Proceedings of the International Forum 07/05 303/05 Implementing Power Rationing in a Sensible Way: Lessons Learned and International Best Practices 08/05 305/05 The Urban Household Energy Transition. Joint Report with 08/05 309/05 RFF Press/ESMAP. ISBN 1-933115-07-6 Pioneering New Approaches in Support of Sustainable Development In the Extractive Sector: Community Development Toolkit, also Includes a CD containing Supporting Reports 10/05 310/05 Analysis of Power Projects with Private Participation Under Stress 10/05 311/05 Potential for Biofuels for Transport in Developing Countries 10/05 312/05 Experiences with Oil Funds: Institutional and Financial Aspects 06/06 321/06 Coping with Higher Oil Prices 06/06 323/06 Greenfield Gas Distribution: Cross-country Experience 12/07 328/07 Designing Strategies and Instruments to Address Power Projects Stress Situations 08/09 329/09 113 Green Initiative Environmental Benefits Statement The Energy Sector Management Assistance Program, together with the World Bank, is committed to preserving endangered forests and natural resources. To this end, this publication has been printed on chlorine-free, recycled paper with 30 percent postconsumer fiber in accordance with recom- mended standards for paper usage set by the Green Press Initiative, a nonprofit program supporting publishers in using fiber that is not sourced from endangered forests. For more information, visit www.greenpressinitiative.org Energy Sector Management Assistance Program 1818 H Street, NW Washington, DC 20433 USA Tel: 1.202.458.2321 Fax: 1.202.522.3018 Internet: www.esmap.org E-mail: esmap@worldbank.org