ASi" kUCTURE FlOR DEVELOPMENT

'W -:' "'-_ - .'' . ' f. '. ':v
timated to have as many as fifty projects under way. vertibility after tihe first ten years, and certain fJe
In the next few years India, Indonesia, and Palistan rnajeure risks.
could each have more than five projects, and several ProElectrica, a 100-megawatt, $70 million gas tur-
: projects are being considered in Sub-Saharan Africa bine plant near Cartagena, Colombia, financed en-
* : : : as welL tirely by the private sector, provides another good*.
Adapting project finance t-drniqz-es
example of carefully structured project finance for a
;..::Adopting projecEfnitoce tediniqutes
small project A group of large industial consumers
Differences in project, countiry, and sectoral charac- has contracted to buy electricty for fourteen years
te.; tics . influence the availability of finance, the in- from P.rElectrica. Foreign exchange payments have
struments of risk allocation, and the degree and na- been guaranteed through prepayments into an inture
of govemment involvement The main sectoral ternational esaow account In addition to short nedivide
is.betwe toll.rads (and urban transit sys- gotiations and early implementation, the benefits of
tems) and all other projects. Toll-road financing re- PoElectrica may extend to the regulatory reform it
quires greater government involvement than do has triggeredc The Colombian government has reother
infrastructure projects (see also Chapter 2 on sponded by creating arrangernents to ensure that
the unique problems of this sector).
the local transmission utility "wheels" the power
from the generator to users, a step that creates a
PRoJEcr szE As project size increase, the comr- precedent and a model for further new entry by priplexity
of risk allocation increases rapidly, requiring vate generators.
many complicated agreements between equity
holders, creditors, input suppliers, and buyers of CRMIBiE coNitAcrs. The credihility of the reguservice.
The dictum "start small, therefore, has its latory regime determines the bounds of available fi-
*:. . attractions. However, many contractual agreements nance (although success in financing a specfic projare
requiredirrectve of project sze, and the high ect creates a body of precedents that itself helps to
transaction costs entailed often mean that investors imnpxrve the. regulatory regime). Project financing is
are not interested in projects below a certain size. a key mechanism for initiating a process of change
The average size of projects in low-income countries. in countries or sectors with limited track records in
has-been $440 million, and that of projects in the private infratructureprovision.
pipelne has been even higher, at $640 mfllon (see The Phflippines, as noted in Chapter.3, has sig-
Table 5.2). In middle-incpme countries, average nificant experience with privately financed power
project sizes are more. than 25 perent smaller. The pecs. The achievements have bee considerable,
-infrence is that transaction costs in middle-income especally in attracting foreign investmentt, given - -
countries are lower, maldng smaller projects more the obstadles the countryfaced in mobilizing foreign
feasible-
investment in the late 1980s. Although the Philip-
Large projects can create serious problems in pines now has an extensive, and sophisticated, legal
low-income countries. An early and innovative ef- and administrative environment for. independent
fort using project finance for power generation is power projects, the country's earlier experience
the $1.8 billion Hub River Project m Paldstan, the shows that much can be achieved in less sophisticounts
first private power projec When con- cated crcumstances, provided that the ability to
pleted, the project wilI be one of the lagest private write credible contracts exists. This lesson is also
power facilities in the world.- It has suffered signifi- demonstrated by the expience of a power comcant
delays, howeverc because of complex negotia-. . pany in Guatemala (Box 5.4).
tions over.the division of responsibilities and risks An important additional element of contractual
* among the many parties involved. This expeience effectiveness is the mechanism for resolving disappears
to support the wisdom of learnmig dtough putes. International arbitration procedures are comsmaller
projects before moving on to larger ones. mon-for example, arbitration may be in a neutral
A Sri Lankan power project is a good example of jurisdiction using an interationally reognized set
what is needed when a country begins to seek pi- .'of rules, such as those laid down by the Intermavate
infrastructure investment The project is small tional Chamber of Commerce. Sponsors and lenders
(44 megawatts), and the foreign and local enhepre- may also seek to have key elements of the contract
neurs -involved are technically and finandally determined according to the legal framework of a_
strong. The goverment has guaranteed-payments- mutually acceptable third country- For example,
by the state-owned power puchaser, a dollar-based contracts for the Hopewell Shajiao C power station
.tariff for the first ten years, foreign exchange con- in China were drawn up using Hong Kong law.
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