With finance and investment in infrastructure projects on hold or looking for the exits in many developing economies, project finance players can be excused for looking for the deal equivalent of a Caribbean island ? a warm, welcoming and simple environment in which to close.

While no crystal-clear financing paradigm for semi-private projects has broadly come to the fore, the capitalization model currently on exhibit in the diminutive Dominican Republic ? and prior to that in Bolivia ? could prove a useful model in the evolutionary scheme of quasi-PPP projects. And it is not just a speculative exercise: power shortages and brownouts on the sunny island straddling the Caribbean and Atlantic have triggered social agitation, protests and sporadic violence. It is virtually axiomatic that unexpected weather can and often does upset the balmy breezes that project finance players prefer.

Although the uneasy alliance of public-private ownership in capitalized projects may create political and regulatory uncertainties that exceed the tolerance quotient of some project players, long-term commitment, insider market status and a hyper-selective attitude towards project partners compose the factors that go a way towards mitigating lurking risk variables for others.

?The country is not on the radar screens of a lot of institutions and they don't know a lot about it,? says Jim Liddell, head of international project finance at Toronto-based Scotiabank, who recently wound up a business trip to seven countries in the region. ?Some of the financing that has been done has been hurt because of what's happened in the power sector? and shallow insight into the country has led to a scarcity of players, he adds.

?In the case of the Dominican Republic, the power sector has always been a challenging one,? says Liddell, who adds that Scotiabank's approach is quintessentially a ?selective? one throughout the region, one he terms ?very much dependent on the sponsor group and country concerned.? Liddell cites Scotiabank's active presence in the Dominican Republic for about 80 years and its responsibility in the 1980s for restructuring the country's debt as testimony to the bank's roots and experience in the country.

?If the right parties are in the deal, then we'll be a player,? says Liddell. The bank's strong connections in the business community and selectivity have enabled it to stay in the market, he adds.

The capitalization approach now under experiment in the Dominican Republic is by no means completely new. Down south across the Caribbean, in landlocked Bolivia, the government was already making substantive plans in the early 1990s for private-sector involvement in half a dozen state-owned infrastructure firms, including utilities, in its first big step towards capitalizing public enterprises. Like the modality implemented in the Dominican Republic, the Bolivian scheme called for a 50-50 private-public ownership structure by way of public tender, while its ?Capitalization Law? stipulated full administrative and operating control to private investors. Most important of all, the strategic investor's cash equity injection made in payment for the erstwhile public assets would remain in the new company to be used only for crucial funding and investment purposes of the newly capitalized company(s). The remaining 50% stake of the government was placed into private pension funds managed by international trustees.

More recently, a $463 million project expansion of Bolivia's Transredes S.A. hydrocarbons transportation company proposed in late 2002 involves a 40-year concession for a gas and liquids pipeline system for domestic and export purposes that originated in May 1997 as part of the country's capitalization program.

But the question remains whether or not the tricky balance between state and private ownership of a major sector project will work. As in Bolivia, the semi-privatization of Corporacion Dominicana de Electricidad (CDE), the Dominican Republic's public utility ? the first step in the capitalization plan ? provided for 50-50 ownership of the targeted distribution and generation companies between the state and the strategic investor. The capitalization, which occurred in 1999, also awarded full operational and management autonomy to the investor, including crucial discretion in regard to equity capital paid for state assets and strictly allocated for the project's funding needs.

Yet the prospects for long-term sanctity of a legally binding and enforceable contract amid the social and political vicissitudes of the Dominican Republic may be less reassuring. More to the point, the government-as-partner model creates a host of a hidden variables stemming from uncertainty over state responses to future diverse contingencies, an official at the Inter-American Development Bank, which advised on the capitalization modality and has an advisory role on projects thus enabled, points out.

To be more specific, conflicts of interest are potentially rife in the regulatory and corporate governance spheres. The country's superintendency of electricity, tasked with enforcing rules and compliance in the industry, in effect vies for state attention side by side with its own corporate shareholder status. The dual role of government as both agent and regulator can be a little risky if the regulator has to punish the agent for one sin or another, rendering the model potentially vulnerable to arbitrary application or abuse. As the government is, above all, ?guardian of the public interest,? its relationship to the strategic investor in the partnership is bound to require substantial ?sorting out,? the official adds.

In addition to uneasiness connected with exigencies outside the contractual domain, the capitalized entity will constantly run into ad hoc project-specific issues, the IDB official says. While the first stage ? structuring and carrying out the asset payments required for implementation ? is obviously critical, the in perpetuo second level calls for ongoing maintenance and a knack for dealing with surprises. Most of the regulatory fine-tuning is related to enforceability and governance issues invisible in the capitalization architecture but that surface down the road, the official says. Even though any privatization scheme involving an airport or other infrastructure concession involves a host of second-tier tweaking, the issues with a capitalization are ?different? because of the government role, he adds.

?It's like you build a car, you put it out and inasmuch as your engineers and your researchers spent five years with the prototype, it's not until people actually begin driving it in daily traffic on the road? that they really see what's going on. ?You have to decide how to modify the design. The main challenge facing project investment in the Dominican Republic under its capitalization approach is adjusting the structure as problems pop up,? he adds.

Against this backdrop, it should come as no surprise that few institutions have the thick skins and/or deep pockets required to stick around and take their lumps in the region. Scotiabank's Liddell laments the ?fair weather? approach of sponsors and lenders who surface in the Dominican Republic but then walk out on a deal when they encounter heavy seas that go with the surf. Liddell says one major European bank that recently laid out ambitious goals in the country made a U-turn and vacated the project scene with virtually no explanation.

On the other hand, smaller and regional niche-type lenders are often actively involved in frontier project deals. Scotiabank's recent arranging and closing of a $195 million project financing facility to build a container terminal on the Caucedo Peninsula also included German bank DEG (backed by the IFC and France's Coface). And several years ago, financing for construction of the 300-MW San Pedro de Macoris thermal power plant, sponsored by Cogentrix Energy, included a three-tranche $95.4 million loan from Germany's Kreditanstalt fur Wiederaufbau (KfW) guaranteed mainly by the German ECA (Hermes), with the Britain's ECGD backing a $14.2 million tranche. (As in all the capitalization structured transactions, the IDB provided the underpinning. San Pedro was bolstered by an IDB facility that helped the project get a BBB rating from Duff & Phelps ? fairly good for a sub-investment grade neighborhood.)

So, why the sudden exodus of bigger banks? Liddell says over the last six months a kind of revisionist trend has taken hold of European and North American institutions in the region that reflects a ?knee-jerk? reaction to the meltdown in telecommunications and power. This phenomenon created a ripple effect in other project areas. Some lenders have drastically curtailed their activities in the Dominican Republic or pulled out lock, stock and barrel. Others have climbed and become stuck on a slippery slope trying to nurse bleeding portfolios so that new business proposals amount to a distraction, Liddell says.

While this explanation accounts for the recent trend, the proneness of global banks to bolt the island in tough times may also stem from unindemnified defaults and regulatory risk. On the political-risk side, a commercial guide issued by the US Embassy in Santo Domingo states concerns that parallel those of private-sector department officials at the IDB. It cites problems associated with a regulatory-administrative apparatus that upholds centralization at the expense of frequently arbitrary interpretation, as well as shifting regulatory norms and ground rules that open the door to corruption. While the embassy notes efforts to upgrade the business environment under both the prior Fernandez and the current Mejia administrations, including the 1999 capitalization of the electric power sector and reduction of import duties, it emphasizes that substantial difficulties remain.

In contrast with trends worldwide that mostly relegate churlish conduct like expropriation to the political-risk reliquary, the Dominican Republic sometimes takes a casual attitude to slide back into the public domain. Expropriation standards on the island have been beyond the pale: ?Several foreign firms and individuals have outstanding disputes? with authorities. ?Even when compensation has been ordered, investors and lenders often have not received prompt or adequate payment,? according to the embassy guide. It also notes ?unmet contractual obligations in the electric sector? as well as ?patent protection that does not meet World Trade Organization standards.?

In current markets, the biggest challenge for lenders has been the authorities' devaluation of the peso that has, to some degree, hit all foreign banks depending on project and domestic portfolio in the Dominican Republic, Liddell says. While the IDB also recognizes the challenge posed by devaluation, the official notes that banks usually find ways to deal with it and other currency issues like transferability and convertibility. When the economics get out of kilter lenders may have to take a hit, alter tactics and take a fresh tack. Uncertainty and government fiat are the killers, according to the official.

When the government gets ?forced into the position of remediation? and has a mandate for decisive response ?it's a large looming risk that all sponsors face,? according to the IDB official, who notes the ?compelling logic? of drastic state action ? normative standards aside.

Given the potential investment hazards, banks clearly need a certain mentality to feel comfortable in the Caribbean. Scotiabank, for one, claims to have come up with a workable stay-the-course approach that includes the rigor and flexibility required in the Dominican Republic. Liddell's personal view is that certain local players and ?suitcase bankers? will go hot and cold and that a project's pricing and security package will reflect appetite in line with supply and demand, a situation the bank tries to avoid.