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Global Power Projects: Evaluating Market Potential

Fortnightly Magazine - September 1 1995

the company goes public in New York a few years later (em … la Telefonos de Mexico. My point is not that there are no good answers, but that teaching forms an important part of successful project development.

Over the past seven years, I have devoted probably half my time as pro bono counsel to cabinet-level and subordinate officials in emerging markets, explaining what has worked best (em among the half-dozen models of privatization (em in terms of protecting government interests and providing a solid return to investors. It was time well spent. If you can show political figures how sensible policies can yield them the political benefits of providing additional generating capacity to consumers (voters) faster and at lower cost, while also improving the country's fiscal and balance of payments situation, you are well on your way toward a successful project. You will have created the most important ingredient for any successful project (em trust between the developer and the government. Such a relationship must be developed not only with the political leadership at the top but also with the career establishment down to the third and fourth level; otherwise a project, once begun, may suffer prolonged delays when elections occur.

Once a relationship of trust is established with the host government, project development involves varying amounts of engineering, finance, and management. While the engineering component (em especially assuring a predictable fuel supply (em is never easy, there are a number of very competent American utilities, oil and gas companies, and EPC (engineering, procurement, and construction) contractors available. Indeed, one of the happy outcomes of the downsizing of the 1980s is that it left American companies as leaders not only in EPC work, but in equipment supply, management, and most importantly, price competitiveness.

The finance dimension has also become less problematic. Raising equity has been made easier by the conscription of a number of international equity funds, underwritten by investors attracted by returns in excess of 25 percent. The AIG-Asian Infrastructure Fund (just over $1 billion) is almost fully invested, and its manager is well along in subscribing an equivalent fund. A third fund is also planned. Near-equivalent funds have been raised by the Beacon Group, the Energy Investors Fund in the Bay area, and several others. The debt side has become more difficult, but here too a solid relationship between the project sponsors and the host government will go far toward shortening the due-diligence period for lenders. If there is a single lesson that stands out regarding debt finance, it is "the simpler the better." Here and there, developers shopping for a lower cost of capital for a given project have enlisted a dozen sources who end up so complicating and extending the due-diligence phase and generating exorbitant development costs that any hoped-for savings are lost. Worse, the project participants lose considerable goodwill with the government of the host country.

Where's the Action?As concerns the relative attractiveness of their power sectors, the seven most promising countries vary considerably in their understanding of, and therefore commitment to, private participation in power