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Canadian Money Targets Power Generation Overseas

Fortnightly Magazine - September 1 1998

represents about 20 percent of electricity production.

"The bulk of the new market will be in Asia," says Ramchandani. "With more and more projects on the horizon, equipment suppliers are changing from just being suppliers of turbines and generators ... to full developers."

Pearson of Agra Development agrees. "Engineering contractors are willing to take a design-and-build contract today for a power plant plus dam, plus facilities, that 10 or 15 years ago they just wouldn't have considered because of the risk." He adds, "Our fundamental understanding of those risks has gotten better."

"We see a supplier convergence," adds John Balint, vice president of project finance for the EDC. "Suppliers are now trying to be developers. Sometimes they're prepared to do investments. Perhaps they're in the development phase, or into the project. We're also seeing vertical integration, with the fuel suppliers and power generators becoming one and the same."

Newcourt's Morash describes this as shared risk, in the absence of a long-term purchased power agreement. "Everyone brings something that reflects the risk that they are able to control," he says. "Basically you have a structure that survives by virtue of limited levels of financial support from each of the participants."

Political Risk:

Surviving the "Asian Flu"

The EDC's political risk insurance program was established in 1969 and has grown more important to clients over the last five years. Derek Baas, who represents the program, says the policy covers risks associated with transfer and inconvertibility, expropriation and political violence.

"Once the benefits to Canada are established, and once the risk acceptability of the project and country are established, there's no nationality test to be able to qualify for coverage," Baas says.

This approach differs from other insurers, which have more stringent ownership requirements in terms of the banks they will cover. "It gives us the ability to work with foreign banks and developers," Baas adds. "We have a limit of [about] $200 million per project, but for very large projects with good risk-sharing arrangements, we might be able to look a little bit higher."

Project specifics matter: Whether the company receives insurance, will depend on due diligence that will concentrate on agreements, relationships and responsibilities of the governments involved.

Another important distinction is that EDC's insurance is "priced to the risk, not to the capacity in the market," Baas adds. "Unlike in the private market, as more coverage builds up, the price of each additional dollar of coverage also goes up. In our policy, given equal projects in the same country, the first dollar of coverage should cost the same as the $500 millionth."

The EDC also is unique because its corporate goals include an appetite for high-risk markets. It's covering markets that private political insurers aren't entering, or aren't interested in now. These markets include the former Soviet Union, South Africa, Papua New Guinea and Guyana.

Canada can play an advocacy role in support of investors, even on a diplomatic front.

The currency crisis in Asia is in the spotlight now, according to Boren. "Three or four years ago we thought those companies