Viewpoint Note No. 154 September 1998 Ada Kannza Private Participation in the Electricity Izaguirre Sector-Recent Trends The PPI Project Over the past decade a growing number of the 1980s to create a competitive private mar- Database covers developing countries have opened their elec- ket) and a few isolated experiences in other private participation in infrastructure in tricity industries to the private sector. The new countries. The investments in electricity projects developing countries. wave of policy reforms designed to promote with private participation amounted to US$3.6 The database records private participation has been driven by three billion between 1984 and 1989.' details of all projects owned or managed by main forces: the need to expand the capacity private companies in or increase the reliability of systems, or both; Private participation has grown substantially 1984-97 in the water, public sector budget constraints; and the posi- since 1990, with electricity becoming one of transport, electricity, telecommunications, tive results of the early experiments with pri- the leading infrastructure sectors in attracting and natural gas vate participation in Chile and the United private investment. Between 1990 and 1997 the transmission and Kingdom. Between 1990 and 1997 sixty-two private sector took on the management, op- distribution sectors. d This Note focuses on developing countries introduced private par- erations, rehabilitation, or construction risk of private electricity ticipation in the electricity sector to varying 534 projects, with total investments of US$131 projects that reached degrees-ranging from management contracts billion (figures 1 and 2). 2These projects have financial closure between 1990 and 1997, for the state-owned utility in Mali to the privat- been implemented under schemes ranging from surveying regional ization of most sector operations in Argentina, management contracts with or without invest- trends and types of Bolivia, and Hungary. ment commitments to divestitures to greenfield private participation. fie See box 1 for an faclities under build-operate-own (BOO), explanation of the PPI Before 1990 private participation in electricity build-operate-transfer (BOT), or similar ar- project criteria and in developing countries was limited to Chile rangements. This Note provides an overview database terminology. (which introduced comprehensive reforms in of the patterns and trends in these projects. FIGURE 1 ELECTRICITY PROJECTS WITH FIGURE 2 INVESTMENTS IN PRIVATE PRIVATE PARTICIPATION IN ELECTRICITY PROJECTS IN DEVELOPING COUNTRIES, 1990-97 DEVELOPING COUNTRIES, 1990-97 120 1997 US$ millions 50,000 100 40,000 80 60 ~~~~~~~~~~~~~~~~30,000 40 20,000 20 10,000 1990 1991 1992 1993 1994 1995 1996i 1997 1990 1991 1992 1993 1994 1995 1996 1997 Source: PPI Project Database. Source: PPI Project Database. WM The World Bank Group * Finance, Private Sector, and Infrastructure Network 2 Private Participation in the Electricity Sector-Recent Trends Da"tbso ovea tiamtkes over the magemntof a state- * To be included, a project must have reached owned enterprise for a given period during financial closure and directly or indirectly serve which the private entity also assumes signifi- the general public. cant investment risk. This category includes • The sectors covered are water transport, build-transfer-operate, build-lease-transfer, and electricity, natural gas, and telecommunications build-rehabilitate-operate-transfer contracts as • The following segments of the electricity sector applied to existing facilities. are included: generation, transmission, and * Greenfield projectA private entity or a distribution. publc-private joint venture builds and operates * Moveable assets, incinerators, stand-alone a new facility. This category includes build- solid waste projects, and small projects such as operate-transfer and build-own-operate windmills are excluded. contracts as well as merchant power plants. * The period covered is 1984-9. * Divesn_-A private consorlium buys an * The countries covered are developing coun- equity stake in a state-owned enterprise. The tries, as defined and classified by the World private stake may or may not imply private Bank, in East Asia and the Pacific, Europe and management of the company. Central Asia, Latin Amrica and the Caribbean, Definon offinacial cose. For grenfield the Middle East and Noulh Africa, South Asia, pection or mangemen an orains prWOpS and for management: and operations and Sub-Saharan Africa. contracts with significant private investment Definiion of private paticipation. The private financial closure is defined as the existence of a company must assume operating risk during the legally binding commitment of equity holders or operating period or assume development and debt financiers to provide or mobilize funding for operating risk during the contract period. In the project The fending must account for a addition, the operator must consist of one or more significant part of the project cost, securing the corporate entities, with significant private equity construction of the facility. For management and participation, that are separate from any govern- operations contracts a leas agreement or a meat agency. contract authwring the commencement of Definition of project A corporate entity created to management service must exist. For divestitus operate infrasimclure facilities is considered a the equity holders must have a legally binding commitment to acquire the assets of the facility. project. When two or mere physical facilities are operated by the same cportity, al of them Sources together are considered one project * The World Wide Web. * Commercial databases. Project types Managpement and operations contracts-ma * Specialized publications. • Management and opoions contracts-Tha Develpers and sponsorsa private entity takes over the management of a Ragperyandisp - state-owned enterprise for a given period. This categery includes management contacts and Conota The database is maintained by the Private leases. Participation in lnfrastructure Group of the World * Management and operations contracts with Bank. For more infonnation contact Mina Salehi at major capital expenditure-A private consor- 202 473 7157 or msalehi@worldbankorg. The World Bank Group 3 Four major trends tion, the private stakes in Chinese projects have been inversely proportional to the size of the The PPI Project Database shows strong, steady projects. Relatively big electricity projects have growth in private participation in electricity, been developed by consortia in which the pri- whether measured in number of countries, vate sponsors own less than 50 percent of the number of projects, or value of investments. It equity, while in smaller projects the private also shows four main underlying trends: stake may be up to 70 or 80 percent. Public- * A regiona4 and national concentration of private joint ventures of this kind overstate the projects. private involvement in electricity projects in * A higher concentration of investment in gen- China compared with other countries, where eration than in distribution and transmission. private electricity projects tend to be wholly or * A dominance of greenfield projects and substantially privately owned. Second, although divestitures compared with management and Chile has had significant investment in private operations contracts. electricity projects, it is not included in the list * Different regional approaches to private of top ten because much of the investment participation. occurred in the 1980s. Investments reflect a regional and national The list of top ten countries changes substan- concentration tially when the total investment in private elec- tricity projects is expressed in per capita terms A regional breakdown of private electricity (table 3). Relatively small countries, such as projects shows a concentration of projects in Belize, Jamaica, and the Lao People's Demo- East Asia and the Pacific and Latin America and cratic Republic, appear more active in private the Caribbean. This trend has also been no- participation in electricity by this measure. Lao ticeable in such sectors as water and transport. PDR is an unusual case. Its high per capita in- East Asian countries awarded 165 contracts, vestment is explained mainly by its two ex- representing a total investment of about US$50 billion, between 1990 and 1997 (table 1). In Latin America and the Caribbean 169 private electricity projects, representing a total invest- TABLE 1 PRIVATE ELECTRICITY PROJECTS IN DEVELOPING ment of US$45 billion, reached financial clo- COUNTRIES, BY REGION, 19911-97 sure during the same period. Total investmenit Although private participation in electricity has ill projects with been spreading rapidly among developing private participation countries, a few countries still capture most of Region Projects 1997 USS iiiilliolls) the investment. The top ten countries ranked by investment in projects with private partici- Ea Asiaatdm thSePacffic 165 4!741 pation accounted for 58 percent of the projects and almost 76 percent of the total investment LuAri andC tha asia n 162 40,36 in 1990-97 (table 2). Two things should be LatinAmericaandtheCaribbean 169 45311 noted in relation to the list of top ten countries Middle East and Norf Africa 10 6,M by investment. First, China has taken a more South Asia 57 16,799 cautious approach to private participation than Sub-Saharan Africa 21 2040 any other top-ten country. Most of its projects have been developed as joint ventures between Total 534 131,04U private sponsors and state-owned enterprises, with the Laibin B project the only one owned Source:PPlProiectDatbase. by a fully private consortium so far. In addi- 4 Private Participation in the Electricity Sector-Recent Trends port-oriented private electricity projects, the TABLE 2 TOP TEN DEVELOPING COUNTRIES IN country's only private electricity projects to PRIVATE PARTICIPATION IN ELECTRICITY, reach financial closure by 1997. BY TOTAL INVESTMENT, 1990-97 Investments focus on new generation A striking characteristic of private participation in electricity has been the concentration of in- vestments and projects in generation compared with transmission and distribution (figure 3). Brazil 17.644 20 Of the total investment in private electricity China 15X015 60 projects in developing countries, 73 percent Argentina 12011 63 has been captured by the 377 projects that in- volve the construction of power generation plants (table 4). Most of these projects have Indonesia 9,569 13 been in East Asia and the Pacific, Latin America India 9219 29 and the Caribbean, and South Asia. Most of Pakistan 6,924 20 the projects that involve stand-alone distribu- Malaysia 6R330 9 tion businesses have been in Latin America and Colombia 5R873 16 the Caribbean (thirty projects) and Europe and Thailand 5,645 39 Central Asia (twenty). Integrated utilities with private participation have been mainly in Eu- Total 99,130 308 rope and Central Asia (sixty-three) and Latin America and the Caribbean (eleven). Only Latin SouP P Prject Datbase. America and the Caribbean has had stand-alone electricity transmission projects with private TABLE 3 TOP TEN DEVELOPING COUNTRIES IN PRIVATE participation. PARTICIPATION IN ELECTRICITY, BY INVESTMENT PER CAPITA, 1990-97 Greenfield projects and divestitures dominate Another interesting feature of private partici- pation in electricity has been the predominance 1 - l - li i_ of greenfield projects and divestitures (figure 4). Of the total investment in private electricity projects, about 56 percent has been directed Chile 5,000 347 to the 286 greenfield projects, and 40 percent Argentina 12,011 341 to the 223 divestitures. Divestitures have been Malaysia 6,330 308 a more common route for introducing private Belize 61 276 participation in electricity than in the water sector, where privatizations have been rare (see Hungary 2P091 205Viewpoint 147). Morocco 4.823 179 Colombia 5873 157 Management and operations contracts have Philippines 10,901 152 been rare in the electricity sector compared Jamaica 314 123 with the water sector. By 1997 twenty-five such Lao PDR 552 117 contracts had been signed for electricity facili- ties. Of these, eighteen involved significant Sowce.PPI Project Database. capital expenditure by private sponsors in ex- panding or rehabilitating the facilities. The other The World Bank Group 5 TABLE 4 ELECTRICITY PROJECTS WITH PRIVATE PARTICIPATION IN DEVELOPING COUNTRIES. BY SEGMENT, 1990-97 seven were management or lease contracts, which transfer the management of generation Segment Projects or distribution facilities to the private sector while leaving the public sector primarily re- Distribuion only 55 sponsible for new investments. Transmission only 10 Regional approaches vary Generation only 377 Distribution and generation 6 The dominant type of private participation has Integrated utilities 86 varied among regions. Latin America and the Tota 534 Caribbean and Europe and Central Asia have favored divestitures, while Asia has shown a Sourcee:PPI ProjectDatabase. clear preference for greenfield projects. These patterns reflect country policy priorities. FIGURE 3 INVESTMENTS IN PRIVATE ELECTRICITY PROJECTS Latin America and the Caribbean. Following the IN DEVELOPING COUNTRIES, BY SEGMENT, 1990-97 Chilean model, most Latin American countries l have introduced private participation in elec- tricity as part of broader reforms that usually Distribution only include the establishment of a more competi- tive market structure. This approach has involved vertical separation of the electricity sector into Integrated three basic business units (generation, transmis- utilities sion, and distribution), transfer of at least gen- eration and distribution to the private sector and Generation only Transmission only (11%) establishment of new regulatory frameworks, Distribution and and introduction of market mechanisms to en- 73% generation (1%) courage competition.3 This strategy has been reflected in an emphasis on divestitures. Of the 169 private electricity projects in the region, 97 have been divestitures. These projects have ac- counted for 67 percent of the investment in Source PPIProjectDatabase privatized electricity companies in developing countries and 77 percent of the total investment in private electricity projects in the region (fig- prices and demand growth. Of the US$34 bil- ures 5 and 6). lion invested in divestitures in the region, more than US$5.5 billion has been invested in ex- The dominance of divestitures in the region has panding or rehabilitating the facilities of priva- prevailed across the segments of the sector. Ar- tized companies. Of the seventy greenfield gentina, Bolivia, Brazil, Chile, Colombia, and projects that reached financial closure in the Peru have privatized significant distribution and region by 1997, twenty-nine were merchant generation facilities as stand-alone businesses. power plants, with total investment of US$5.4 Argentina, Bolivia, and Chile have also priva- billion. These investments have showin that tized most transmission facilities, and Brazil and private financing of power investment in com- Colombia are planning to divest soon. petitive markets is feasible in a sound business environment. In this new business environment investments in private electricity projects have been driven The development of private power plants under mainly by market signals such as electricity BOT or BOO contracts has been less popular in 6 Private Participation in the Electricity Sector-Recent Trends Latin America and the Caribbean than in Asia. Rica, Jamaica, the Dominican Republic, and Thirty-seven BOT or BOO contracts reached fi- Honduras, which in most cases have adopted nancial closure in the region by 1997, repre- the Asian model of private participation. senting a total investment of US$4.8 billion. Most of that investment was captured by eighteen Europe and Central Asia. Private participation projects in Colombia, Brazil, and Guatemala, in electricity in Europe and Central Asia has countries that had already embarked on com- been concentrated in the Czech Republic, Hun- prehensive reform of their electricity sectors. The gary, Kazakhstan, the Russian Federation, and other nineteen contracts were signed by Costa Turkey. Except in Turkey, the approach has been similar to that in Latin America-privatiz- ing vertically disaggregated companies. This FIGURE 4 INVESTMENT IN PRIVATE ELECTRICITY PROJECTS IN approach reflects a priority on improving the DEVELOPING COUNTRIES, BY TYPE OF PROJECT, 1990-97 reliability and efficiency of existing assets rather than expanding capacity. Of 112 private elec- 1997 US$ millions tricity projects, 105 have been divestitures, ac- 50,000 Management counting for 66 percent of the investment in - and operations the region. The privatization mechanism has 40,000 X Greenfield differed across countries, however. Hungary Divestiture and Kazakhstan have sold controlling stakes 30,000 to private consortia, while the Czech Republic and Russia have opted for mass privatization 20,000 programs. 10,000 The new investment that has come along with divestiture has been limited, with additional O _ _ _ _ _ ^ 1 _ _ investments in privatized companies reaching 1990 1991 1992 1993 1994 1995 1996 1997 only USS2.7 billion by 1997. The main reason has been low retail tariffs, which have been Source: PPI Project Database. inadequate to provide long-term funding for additional investment. Another reason has been FIGURE 5 INVESTMENT IN PRIVATIZED ELECTRICITY PROJECTS, the excess capacity in most of these countries. BY REGION, 1990-97 The same reasons explain why greenfield projects have been an exception in the region. 1997 US$ millions Only seven greenfield projects, all under BOT 35,000 or BOO arrangements, had reached financial 30,000 closure by 1997; these projects accounted for investments totaling US$3.5 billion. Five of 25,000 these projects, representing a total investment 20,000 of US$3.2 billion, have been in Turkey. 15,000 Asia. Asian countries have introduced private 10,000 participation in electricity mainly through pri- vate financing of new generation capacity in 5,000 the form of independent power producers. This 0 approach reflects the priority given to expand- East Asia Europe and Latin America Middle South Asia Sub-Saharan ing capacity to keep pace with expected de- andthe CentralAsia andthe Eastand Africa mand growth and the slow progress in Pacific Caribbean North Africa implementing deeper sectoral reforms. Of the Source: PPI Project Database. 165 electricity projects reaching financial clo- The World Bank Group 7 sure in East Asia and the Pacific by 1997, 139 Africa and the Middle East. Private participation involved the construction of new power gen- in electricity in Sub-Saharan Africa and in the eration plants. These projects accounted for 57 Middle East and North Africa remains at a rela- percent of total investmcnt in private greenfield tively early stage. This situation reflects limited electricity projects in developing countries and progress in implementing cost-covering tariffs 84 percent of the total investment in private and in opening the sector to private capital and, electricity projects in the region (figures 7 and particularly in many countries of Sub-Saharan 8). In South Asia fifty-four of fifty-seven pri- Africa, investor perceptions of high country risk. vate electricity projects involved the construc- tion of new power plants. These projects represented 21 percent of the total investment FIGURE 6 INVESTMENT IN PRIVATE ELECTRICITY PROJECTS IN in greenfield projects and 93 percent of the LATIN AMERICA AND THE CARIBBEAN, BY TYPE OF total investment in private projects in the region. PROJECT, 1990-97 The priority given to expanding generation ca- 1997 US$ millions pacity is also reflected in other forms of pri- 25,000 Greenfield vate participation pursued in East Asia and the * Divestiture Pacific. The eleven managemnent and operations 20,000 contracts signed in the region have involved investment commitments to rehabilitate exist- 15,000 ing generating facilities. Most of the fifteen partial divestitures in the region have been in- 10,000 ternational public offerings of minority stakes in state-owned generating companies aimed at 5,000 raising funds for the construction of new fa- cilities, or negotiated sales of shares in small provincial generating plants. 1990 1991 1992 1993 1994 1995 1996 1997 Introducing private participation in generation Source: PPI Project Database. without first-or at least simultaneously-un- dertaking deeper sectoral reforms is potentially FIGURE 7 INVESTMENT IN PRIVATE GREENFIELD PROJECTS IN problematic. In many cases this strategy has ELECTRICITY, BY REGION, 1990-97 reduced pressures to implement cost-covering retail tariffs. Postponing tariff adjustments af- 1997US$millions fects the creditworthiness of power off-takers 50,000 and usually leads to demands for government guarantees of power purchase agreements, ex- 40,000 posing taxpayers to substantial contingent li- abilities. In most cases taxpayers are also left 30,000 to bear the risk of misestimates of future de- mand for bulk power. Many of these problems 20,000 have become dramatically apparent in the past year as the region has weathered a major mac- 10,000 roeconomic crisis (see Vliewpoint 146). The cri- sis will likely lead to a reassessment of past 0 approaches and accelerate progress in intro- East Asia Europe and Latin America Middle South Asia Sub-Saharan ducing private participation in distribution and and the Central Asia and the East and Africa in implementing related structural and regula- Pacific Caribbean North Africa tory reforms. Source: PPI Project Database. 8 Private Participation in the Electricity Sector-Recent Trends FIGURE 8 INVESTMENT IN PRIVATE ELECTRICITY PROJECTS IN EAST ASIA AND THE PACIFIC, BY TYPE OF PROJECT, 1990-97 1997 US$ millions Management 12,000 and operations the political will to abandon a long history of contract with subsidized tariffs and to establish regulatory l i 0 expansion frameworks that offer credible commitments to 8,000 U Gretedinvestors. The sustainability of forms of private g . Greenfield participation that do not involve these elements 6,000 Divestiture is being tested in some countries in Asia, where recent experiences should provide important 4,000 m 0|rg lessons for countries that are at an earlier stage 2,000 j L Itl[i L L L in framing their private participation strategies. 0 ' All dollar amotnts are in 1997 U.S. dollars. 1990 1991 1992 1993 1994 1995 1996 1997 2 The PPI Project Database records total investment, not private in- vestment alone, in infrastructure projects with private participation. Source: PPI Project Database. For a discuassion on power matkets in Argentina and Chile see Peter Lalor and Hernan Garcia, "Reshaping Power \Markets-Les- sons from Chile and Argentina" (Viewpoint 85, June 1996) and In Sub-Saharan Africa private participation has Antonio Estache and -Martin Rodriguez-Pardina, "Regulatorv Les- taken different forms. Five countries (Comoros, sons from Argentina's Power Concessions" (Viewpoint 92, Septem- her 1996). Cote d'Ivoire, Gabon, Guinea, and Guinea- Bissau) have transferred the management of their Ada Karina Izaguirre (aizaguirre@worldbank. Viewpoint is an open integrated utilities to private firms through man- org), Consultant, Private Participation in forum intended to agement and operations contracts with major Infrastructure Group encourage dissemina- capital expenditure, while three countries tion of and debate on (Ghana, Mali, and Sao Tome and Principe) have ideas, innovations, and awarded five management contracts. There have best practices for ex- panding the private been nine greenfield power projects and two sector The views pub- divestitures in the region. The divestitures have aished are those of the been relatively small and have involved isolated be attributed to the cases rather than entire electricity utilities. World Bank or any of its affiliatedo ganizay In the Middle East and North Africa private conclusions represent participation in electricity has so far been lim- official policy of the ited to a few greenfield projects and a man- World Bank or of its agement and operations contract awarded by Executive Directors or the countries they Morocco that covers both power and water. represent. But if recent proposals are implemented, there To order additional should be a rapid increase in private participa- copies please call tion throughout the region over the next few 202-458- 1111 or contact years. Suzanne Smith, editor, Room F6P-188, The World Bank, Conclusion 1818 H Street, NW, Washington, d.e. 20433, The electricity sector is at the forefront of the or Initernet address ssmiTh7©worldbank.org. worldwide trend of growing private participa- The series is also tion in infrastructure. Although sixty-two devel- (www.worldbank.org/ oping countries have made at least some html/fpdl/otes/ progress in introducing private participation in notelist.html). electricity, the breadth and depth of the private @ Printed on recycled participation remain uneven. The most success- paper. ful countries have been those that have found