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Re-engaging Investors

How the World Bank Group removes generation risks in emerging markets.

Fortnightly Magazine - February 2006

inconvertibility and transfer restriction, and war and civil disturbance. Often such guarantees can make the difference between a go and a no-go project decision, particularly for complicated investments in infrastructure projects.

The agency also provides complementary services to achieve its mission, including mediating investment disputes and providing advice to developing countries on the needs of foreign investors to help countries attract and retain private investment. In-house sector experts help ensure that deals are sound, projects are viable, and expectations are clear on all sides. And MIGA’s guarantee products provide that extra level of comfort needed to protect an expensive investment in a frontier market.

What will it take to get the private sector back into emerging markets? Political risk insurance is one obvious piece of the equation, but that’s not all. It will take government goodwill, getting economies back on track, creating better regulatory regimes, and better fiscal discipline. It also will take the creation of legislative frameworks to protect private ownership of projects. The help of multilaterals such as MIGA and the other World Bank Group agencies is critical to make up for the loss of private appetite to provide equity for these projects, and to encourage the types of reforms needed to offer a real assurance that private investments will be safe from government interference.

“Developing countries that demonstrate favorable market fundamentals together with stability and transparency in their laws and regulatory systems will have no trouble attracting investors,” says William Luraschi, executive vice president with global power company AES Corp.

But none of these factors alone, or in combination, can compensate for the need to get project fundamentals right to start with. Though critical, no amount of financial engineering, or even a favorable investment climate, will make a good project bad. The deal structure has to be sound as well.

Power Investment in Bulgaria

MIGA recently issued €99 million in guarantee coverage to Calyon of France, acting on behalf of a syndicate of banks, and to AES Bulgaria Holdings BV, a subsidiary of AES Corp., to protect a power investment in Bulgaria. The investment involves the construction and operation of a power plant, AES Maritza East 1, near Galabovo, Bulgaria. The guarantees cover €89 million in principal and interest on loans syndicated by Calyon of France, and a €10 million equity investment by AES Bulgaria Holdings BV, which is wholly owned by AES Corp. in the United States. The guarantees extend up to 16 years, and protect against the risks of expropriation (loans only), war, and civil disturbance (loans and equity).

As part of its steady progress toward a competitive market economy, Bulgaria has overhauled its power sector, privatizing distribution, certain generation assets, and restructuring the state-owned grid operator, NEK. Private-sector led generation projects such as AES Maritza East 1 are an integral part of the country’s energy sector reform.

“In the case of Bulgaria, southeastern Europe’s electricity market is attractive because of its growing need for power,” says Lurashi. “The region is estimated to need approximately €15 billion in investments to upgrade its existing power plants or build