Partnerships with Monarchs – Two Case Studies: Case Two – Partnerships with Monarchs in the Development of Energy Resources: Dissecting an Independent Power Project and Re-Evaluating the Role of Multilateral and Project Financing in the International Energy Sector

Abstract

This Article is part of a series. The twin Articles offer the academic and legal community a comprehensive and critical examination of the patterns of economic development in a Third World environment in the capital-intensive energy sector. Both cases use the Socialist Republic of Vietnam as the representative deal and factual context. Case One, Partnerships with Monarchs in the Search for Oil: Unveiling and Re-examining the Patterns of Third World Economic Development in the Petroleum Sector, focuses generally on patterns of confidential negotiation between the host government and a foreign investor in petroleum exploration. The instant Article (Case Two) focuses specifically on the development of energy resources once petroleum has been extracted. Case Two dissects an Independent Power Project (IPP) and evaluates the role played by multilateral financing and project financing in the IPP project. Together, the two case studies describe the full cycle of petroleum resource development in a Third World country. Specifically, Case Two examines non-recourse project financing as a means to isolate a multinational petroleum company's corporate assets from political risk exposures in the developing economies. Project financing has poured billions of dollars of funding into the Third World, either separately or as piggy-backs of multilateral financing. In this regard, multilateral financing serves as a step-up credit enhancement tool for project financing. For the corporate investor, both financing structures – project financing and multilateral financing – operate as a risk-allocation mechanism that ultimately puts risks of loss upon the taxpayers of the developed nations, as well as the poor inhabitants of the Third World. Both financing techniques can also operate to preclude participation by smaller or medium-sized entrepreneurs, in favor of mega-corporate players who typically join forces to share risks among themselves, thereby reinforcing the existence of de facto cartels dominating the sector and the region. The Article concludes that in order to fulfill its role and objective in international economic development, project financing should no longer be the privileged financing method exclusively for elitist mega-projects. Neither brand-name recognition of project participants nor the existence or availability of multilateral financing should serve as a step-up credit enhancement tool for private bankers in assessing project financing eligibility for Third World development projects. Funding from smaller banks should be made available to smaller or medium-sized entrepreneurships, including native businesses, so long as the self-sustaining, income-producing nature of the project can be verified and contractually assured under project financing principles.