Hydro IPPs by Project Finance in Developing Countries

Abstract

From the mid 1980s the number of independent power producers (IPPs) by the BOT (Build, Operate, and Transfer) method in developing countries has been increasing. The debt of the business expenses of an IPP is mostly covered by project finance. Project finance is a non-recourse or limited recourse loan for a specific project. The repayment depends only on the cash flow produced by the project company, and the security of the finance is only project assets. Thus, renders perform detailed risk analysis and they request sufficient risk mitigations to the sponsor and related institutions. Although many of the thermal IPPs have been successfully completed and its numbers are increasing, only a few hydro IPPs are in operation. The reason for such difference is thought to be as the following. Since dams and hydroelectric power stations are constructed in a natural environment and the power generation depends on the river flow, renders tend to think that hydro IPPs are very difficult by project finance due to the environment, completion, and hydrology risks. In this paper, we review the related issues and propose an innovative finance scheme in order to promote hydro IPPs. In this scheme, the dam and the power portion of a hydro-power project are divided, and the dam is constructed and operated by an official development aid-like project finance while the power portion is by ordinary project finance IPP method.