PF Archive

Setting the pace

01 10 2001

Attracting foreign investment and, more specifically, project financing to global power markets requires addressing a common mix of issues concerning project cost and revenue risks. Solutions can vary, however, to accommodate resource and institutional differences among markets. Herein we use three markets ? Brazil, China, and Indonesia ? as examples that offer attractive supply/demand fundamentals but remain challenging for foreign investment and project finance. Currently, Brazil faces significant impediments to attracting project finance in urgently needed thermal capacity, while China and Indonesia being relatively dormant despite strong underlying fundamentals, as each country is in process of changing its structural approach to securing power generation investment. The unique resource and institutional features of fundamentally strong but economically challenging investment environments beg for finding structural and market solutions. We review current impediments to securing investment and suggest several institutional and structural modifications to overcome financing hurdles. Framework While regulatory, market, contract, and investment protection frameworks differ between countries, overall political and macroeconomic stability represents perhaps the most important feature determining relative attractiveness to investors. As a central component of effective national economic development, power sector infrastructure investment policies often closely reflect the country's political and economic stability; specifically, the country's ability to balance fiscal with sector investment and income distribution policies. The ability to attract investment capital is dependent on the country's ability to manage cost recovery across the power sector through effective tariff, tax collection, and/or cross-subsidy systems. These efforts are eased by an efficient, competitive and transparent market structure. In sum, the ability to affect a solution to the project financing challenge, based on a market model, relies on a predicate of: ? An effectively functioning...