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p. 13 of 30 BACK | NEXT Introduction Regional Energy Context Energy Policy Issues Structural Reform Background Multilateral Coordination Power Subsector Reforms Hydrocarbon Subsector Reforms Private Sector Role Energy Efficiency Energy Pricing Energy and Environment Rural Energy Development Regional Cooperation and Energy Development Conclusions and Recommendations

Bank Policy Initiatives for the Energy Sector : Energy Policy Issues : Structural Reform

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Private Sector Role

32. Private sector initiatives and market-oriented behavior are expected to improve the energy sector's performance and efficiency. Increased private sector participation in DMCs can be promoted in several ways depending on country-specific circumstances and government objectives. Three broad categories, somewhat sequential and overlapping in scope, can be distinguished. In DMCs with very weak institutional bases, technical functions such as O&M of power plants, and commercial functions such as billing and collection, could be contracted to private firms through competitive bidding. In DMCs with stronger institutional, operational, and financial capabilities, the private sector could be attracted to independent power generation (through BOOT/BOO schemes), turnkey hydrocarbon production, and refining and transmission activities, provided a credible legal framework exists. In DMCs with a mature energy sector, the private sector could be interested in investing on its own or jointly with the public sector, or in making equity investments in energy sector entities that have been successfully restructured into corporations and listed on the stock exchange. The private sector can also play an important role in improving energy efficiency by investing in the production of energy efficient goods, and should specifically be encouraged to do so.

33. In the power subsectors of DMCs with very weak institutional bases, technical functions such as O&M of generating plants or even the power system as a whole, commercial functions such as metering, billing, and collection, or housekeeping functions such as fleet maintenance, could be contracted to private firms on the basis of international competitive bidding (ICB) as far as possible. Through its technical assistance activities, the Bank could assist the utilities to prepare bid documents, evaluate bids and enter into performance contracts with the selected bidder. The contracts will, of necessity, be for specific periods such as three years, at the end of which rebidding will have to take place. The foreign currency requirements of such contracts for specific periods could be financed by the Bank under project loans financing a time slice of the power development plan of the given DMC. Bank could also arrange bilateral cofinancing of such contracts.

34. If a utility's financial condition or implementation capacity does not allow it to undertake new projects, independent power producers could be invited to set up new generating plants and the utility can purchase power from them. Even when a utility has the necessary ability to finance and construct new generating plants, it is sensible to check through competitive bidding among IPPs whether IPPs could quote power prices lower than what it would cost to the utility if it were to set up the plant, and take the “make” or “buy” decision on that basis. Governments could also encourage such entry of privately owned power plants to provide a measure of efficiency competition¹ to the public utility. These power plants could be built, owned, and operated for a number of years by a private firm and then transferred to the utility (BOOT) or built, owned, and operated throughout its plant life by the private firm (BOO) on the basis of a power purchase agreement between the utility and the private firm. When there is a competition for the limited resources available with the Bank for investment, the Bank would give preference to BOO projects over BOOT projects since the former is less likely to distort power pricing through rapid amortization of debts.

35. For financing a BOO/BOT project from its private sector window, the Bank would promote selection on the basis of international or local competitive bidding. Where necessary, the Bank, in coordination with bilateral and multilateral agencies active in the area, would assist DMCs to identify projects for BOOT/BOO, prepare request for proposals (RFPs), prequalify bidders, evaluate bids, and select the BOO/BOT entrepreneur. Unsolicited proposals might, however, be considered under certain circumstances such as severe time constraints, a first time BOO/BOT effort on the part of the concerned Government in the absence of an established competitive process or when the sponsor has access to a unique site or fuel resources that would not be accessible to other potential bidders. Under such circumstances, the Bank will reasonably satisfy itself that host DMCs facing serious energy shortages are not led to pay uneconomic prices and excessive returns to BOO/BOT entrepreneurs. Such unsolicited proposals should not be seen as cases of favoritism and the resulting cost should be comparable to utility's "avoided costs"² and costs obtained in other similar cases based on competitive bidding. Unsolicited proposals may also merit consideration if there are special economic and environmental benefits, such as cogeneration, or unique institutional features particularly in the initial stage of private sector participation in the power subsector of a DMC. The purpose of resorting to the BOO/BOT option is to secure for the utility and the economy additionality of financial resources, project implementation capability, and superior management structures, construction technology and O&M services. In this context, the Bank's role should be seen as catalytic and its financial support by way of equity and long-term loan without government guarantee should be seen as modest, demonstrational and a source of comfort to the entrepreneurs, rather than as the main source of funds.³

36. In the early stages of attracting private sector entrepreneurs, some DMC governments might be prepared to allow some government guaranteed Official Development Assistance (ODA) to go directly to such entrepreneurs or through an appropriate development finance institution (DFI)/Apex lending institution or a special window.⁴ Power projects are capital intensive and because of their long useful lives, need loans of longer maturities than are normally available to private entrepreneurs. For large BOOT/BOO projects, the Bank could be willing to act as the lead agency and syndicate equity and commercial loans from the International Finance Corporation (IFC), Asian Finance and Investment Corporation, Ltd. (AFIC), insurance companies, social security funds and commercial banks. Complementary cofinancing could be considered to enable the entrepreneur access to credit with longer maturities and to provide relief from the debt service burden in the early years. Thus, by combining guaranteed and unguaranteed assistance and complementary co-financing, the Bank could provide the entrepreneur comfort, risk sharing, longer maturities and a share of total funds. While syndication should be the norm, such multiple assistance by the Bank would be an exception and should be resorted to with prudence and under certain conditions. First, the entrepreneur should contribute substantial equity and loans. Second, government-guaranteed assistance must not divert scarce ODA funds from more pressing needs of the economy. Third, such multiple assistance may be justified only in DMCs that, for the time being, have limited or no access to world capital markets.

37. Because of the wide range of commercial and country risks faced by the foreign investor, BOOT/BOO projects, even obtained on the basis of international competitive bidding, tend to be somewhat costlier than others (the premium over the normal utility costs varying as a function of the country's access to world capital markets and the performance and efficiency of the power purchasing utility). As DMCs gain experience in this process, and as more entrepreneurs enter the competition, the premiums are expected to fall. Since BOOT projects generally involve greater returns on equity (to cover country and projects risks) than are usual in the case of public utilities, and since the commercial credits available to BOOT projects have maturities ranging from 5-10 years, (far shorter than the economic lives of 20-25 years for most power facilities) extensive resort to BOOT options will tend to distort the pricing of electricity and may have balance of payment implications, especially in the case of smaller DMCs.

38. Some priority could be given to BOOT/BOO cases in which a significant part of the resources is raised by the issuing equities and bonds in the local capital market, as experience in many OECD countries indicates that utility and capital markets can help each other to grow. Also, the local private sector may not view the country risk aspects with the same degree of skepticism as foreign investors. New generating plants being set up on the basis of joint ownership among the government/utility and private entrepreneurs (as is being done in the Lao People's Democratic Republic and Thailand) with governments borrowing from the Bank to invest in the equity of such new companies (as is being contemplated in Lao PDR) is also a practical option. In less developed countries such as Lao PDR and Nepal having hydropower potential as perhaps the only significant item for export, mechanisms will have to be devised so that foreign private investment in hydroprojects will maximize the country's potential export earnings.

39. The overall purpose of encouraging BOOT/BOO operations is to provide support to the power subsector and improve its health. The analysis of BOOT/BOO projects must, therefore, be carried out all the time with that purpose in view; thus, impact of the BOOT/BOO projects on the utilities' finances should be carefully evaluated, and the sustainability of the options clearly demonstrated. The BOOT/BOO project should be a part of the least-cost power development plan prepared for the country or the utility. The analysis should attempt to capture all social costs by foregone taxes and duties and other incentives (to the extent they are not applicable to the utility or to similar transactions in other subsectors) as well as the temporal and efficiency gains such options bring in. The Bank should finance BOOT/BOO projects only if the DMC government is committed to improve the efficiency and performance of its power subsector and only after substantial policy dialogue has been held with the government and appropriate covenants agreed to under the public sector lending mode.

40. Privatization of the government-owned utility in whole or part (such as specific generating stations) would be an attractive option in DMCs that have well-developed capital markets and stock exchanges. Since the investments in the power subsector in many DMCs are much larger than the total value of market capitalization, one has to proceed with this option in stages, and time each issue carefully so as not to strain the market. First, the utilities have to be brought under the company law, which governs all companies and commercialized. The utilities' accounts have to be compiled following generally accepted accounting practices under the company law, and subjected to a transparent external audit. The utilities' properties and debts have to be inventoried and correctly valued and the correct net worth of the company in terms of stock exchange regulations established. Thereafter, well-planned equity issues as advised by competent financial advisors have to be carried out.

41. In the normal course, bureaucratic resistance and labor resistance are the two key impediments to privatization of a government-owned utility and the government should be helped to tackle these problems. The concept of privatization has to be promoted among all staff as a major efficiency objective of the government and safety nets created to soften the social impact on staff identified for separation. Preferential stock issues to retained as well as separated staff have generally been found effective in securing staff support. The essential precondition to privatization is to free the power tariffs from direct government control and to enable them to be set by a transparent regulatory body based on clearly enunciated financial objectives, so that investors will be attracted to invest in the utility. Introducing and stabilizing an autonomous corporate culture enhancing the utility's overall accountability to the shareholders and debtors is also an essential prerequisite. The main focus of the Bank's work in relation to government-owned energy utilities would thus be on restructuring them into corporations, commercializing them and partially or fully privatizing them. Loans from the public sector window, TA and related sector work activities will be directed to DMCs that are amenable to proceed in this direction.

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