By Leslie Eden
Partnerships are an important means for approaching the development of large multi-purpose water resource projects — projects where the major objectives include electric power production and water supply. While governments typically play critical roles in project development, partnerships have several advantages. First, partnerships often are the most effective way to ensure a project is achieved in a timely and cost-effective manner. Second, partnerships can be an important instrument for the successful development of small projects. And third, using a partnership approach may make the difference between a project being feasible and not feasible.
This article gives examples of four partnerships and partnership approaches that have been or are being used to complete multi-purpose water resource projects.
Three companies cooperate to develop San Roque
The 345 MW San Roque Project in the Philippines exemplifies the saying, “Where there’s a will, there’s a way.” Successful development of this project is the result of a creative public-private partnership. This partnership was a joint venture among two private companies and one public company. The two private companies — Marubeni Corporation and Kansai Electric Power Co. Ltd. — cooperated to form the San Roque Power Corporation (SRPC), which owns and operates the project. SRPC took on the development of the power component of the San Roque project under a 25-year build-own-operate-transfer (BOOT) arrangement. The public company — the Philippine’s National Power Corporation (Napocor) — would purchase the power produced by the project. This arrangement was arrived at after failed attempts to develop San Roque entirely on a privately financed basis.
The total cost of the San Roque project was US$792 million. The private sector element was financed with a 75 to 25 debt-to-equity ratio. Debt financing made use of a mixture of Japanese export credits and Japanese ten-year commercial loans. The public sector financed the non-power elements of the project — dam, spillway, and related facilities. The public sector element was financed using a US$400 million, low-interest loan to the Philippines from the Japanese Export-Import Bank. In addition, the Philippines’ National Irrigation Administration separately financed and implemented a downstream irrigation component of the project.
Under the power purchase agreement for San Roque, Napocor agreed to buy all power generated on a take-or-pay basis for 25 years. A two-part tariff required payment of a capital recovery fee in US dollars and yen. In addition, an operating fee was to be paid in local currency.
The engineering/procurement/construction (EPC) contractor took on the construction risk for the private sector portion of the project. The public portion of the construction risk was borne by the public sector through adjustment of the capital recovery fee in the event of a cost overrun.
The San Roque project began operating in 2003 to provide peaking power, irrigation water, and flood control. The powerhouse produces about 1,000 GWh of electricity annually.
In December 2009, Strategic Power Development Corp. won its bid for the capacity of the San Roque project. This transition was one of the last preconditions to the inception of open access and retail competition in the Philippine power sector. The company will administer Napocor’s contracts in the project.
Sharing risk to develop Nam Theun 2
The 1,070 MW Nam Theun 2 project in the Peoples’ Democratic Republic of Laos provides a good example of partnering to share risk in developing a large hydro project. The project began operating in March 2010. Nam Theun 2 Project Company (NTPC) is the limited company incorporated under government law to build, own, and operate Nam Theun 2. Shareholders in NTPC include Electricite de France (EDF), the Lao Holding State Enterprise, the Electricity Generating Public Company of Thailand, and the Italian-Thai Development Public Company of Thailand. NTPC will operate the facility for 25 years, then transfer it to the Laotian government.
As a private sector developer, EDF led completion of this project. As the lead contractor, EDF was responsible for overall construction risk. However, EDF, in turn, assigned construction risk to its five subcontractors. Four of these subcontracts were competitively bid, and the fifth was benchmarked against the others.
Total project cost was estimated to be US$1.45 billion, with about 85 percent being funded by the private sector. The debt-to-equity ratio is 72 to 28. The government portion of the funding was secured through a group of multilateral banks: the World Bank, Asian Development Bank, International Development Agency, and European Investment Bank.
Thai commercial banks provided loans of US$500 million. For the loans, the banks are bearing the political risk of both Thailand and Laos — these risks are not separately covered.
The 1,070 MW Nam Theun 2 project in Laos was developed under a risk-sharing arrangement by a combination of public and private companies.The project began operating in early 2010.
The Electricity Generating Authority of Thailand (EGAT) is obligated to purchase up to 5,600 GWh per year for 25 years at an agreed-on tariff, on a take-or-pay basis. Owing to this power purchase contract, EGAT is bearing much of the market risk of the project and, in return, is getting assured delivery of electricity at stable rates. In addition, the Lao power utility, Electricite du Laos, has agreed to purchase another 200 GWh per year for 25 years, on a take-or-pay basis. The World Bank is backing the concession agreements of the Thai and Laotian government entities.
Training is an essential component in the success of a public-private partnership for hydro project development, raising awareness of the business opportunities presented by the development of renewable energy projects.
Applying the enterprise-centered model
Central America needs thousands of megawatts of new electrical generating capacity to meet projected growth in demand, and hydropower is an important contributor. At present, several dozen small hydro projects are under development.
Absence of suitable financing is a limiting factor for small hydro in this region. Commercial investment companies simply do not have capabilities for assessing small hydro projects. And, while due diligence requirements for small projects are similar to those for large projects, the prospective return on investment is not high enough to justify the effort required. Moreover, developers of small hydro projects typically are not in a position to pay the interest rates or provide the guarantees that are typically required.
The private equipment and investment firm E+Co Capital has developed a partnership approach that facilitates the financing of small hydro projects. The company has developed a financing approach called the enterprise-centered model. Under this model, E+Co works in emerging markets with small, privately-owned companies and commercial investors to back renewable electricity projects.1
The company accepts project risk, offers convertible debt, and provides debt and equity financing options. The company also provides support services to the project developer with regard to securing financing.
In addition, E+Co will work with a developer to foster the partnerships and relationships needed to address social issues and regulatory requirements.
In return, the company receives reimbursement in the form of cash flow from the project or upon its recapitalization. The company provides seed capital to the developer to pay for legal, engineering, and environmental preparations. This upfront funding is typically in the range of US$50,000 to US$250,000. E+Co then acts as an advisor, helping the developer work with banks to obtain construction financing; negotiate power purchase agreements; and receive training on approaches to business management and expansion.
Used since 1994, in 17 countries, from 1998 to 2003 the enterprise-centered model was applied to the development of five projects in Latin America, ranging from 480 kW to 13.4 MW.
Training is an essential component to the success of this form of partnership. In 2003, E+Co and the Citigroup Foundation partnered to provide financial and investment training to 20 developers from Central America. As a result of these training activities, additional partnership opportunities were identified among participants. This training also has raised awareness among local banks as to the business opportunities offered by the development of clean, renewable electric projects.
Partnering with indigenous peoples
Canadian provincial utility Hydro-Quebec, the world’s largest producer of hydroelectric power, has a long history of project development. In the late 1990s, Hydro-Quebec changed its approach in working with indigenous peoples. The resulting partnership with the Cree Nation has established a win-win approach that is likely to provide a useful model for pursuing future projects.
The partnership with the Cree Nation was Hydro-Quebec’s first major implementation of its new position that all “new development must be profitable, environmentally sustainable, and well-received by the local communities.”
For four years, beginning in 1998, senior Hydro-Quebec managers met with the chiefs of nine affected north central Québec Cree communities to determine whether a partnership would work for development of the 1,260 MW Eastmain 1 and 770 MW Eastmain 1A projects. The provincial utility proposed that the Cree invest in the projects and receive a share of the revenue and profits. The final partnership included monetary compensation, employment, contracts, remedial work, and, ultimately, revenue sharing.
Field investigations jointly undertaken by Hydro-Quebec experts and the Cree provided an important opportunity for relationship-building. This effort allowed both parties to better understand the needs of the project and the other party’s needs with respect to the project. Hydro-Quebec gained a better understanding of the Cree’s utilization of and connection to the natural resources. Meanwhile the Cree were better able to understand the hydroelectric project development and its operations. This early work built trust among the participants and demonstrated to the Cree that Hydro-Quebec was, in fact, using a partnership approach.2
The partnership negotiations led to the settlement of a multi-million-dollar lawsuit by the Cree Nation that had been pending against Canada, Quebec, Hydro-Quebec, and other resource developers. The Cree contended that these parties had violated the spirit and intent of the Northern Quebec Agreement, particularly in the area of local economic development. As a result of the work on the Eastmain 1 and Eastmain 1A projects, the parties came to an agreement whereby the Cree assume responsibility for administering certain provisions of the James Bay and Northern Quebec Agreement, using C$3.5 billion (US$3.4 billion) in installments over a 50-year period. This money provides funding for needed economic and social development.
The 770 MW Eastmain 1A project is being developed through a unique partnership between Canadian provincial utility Hydro-Quebec and the Quebec Cree nation. The Cree agreed to invest in the project, and in return receive a share of the revenue and profits.
Having set this lawsuit aside, nine Cree communities debated the issues of the Eastmain project developments. Eventually, nearly 70 percent of the Cree voted in favor of the Eastmain agreements. Construction of Eastmain 1 began in early 2002 and was completed in 2007. Construction of Eastmain 1A began in October 2007 and is expected to be complete in 2012.
1 Alvarado, Fernando, and Douglas J. Arent, “A New Financing Approach for Renewable Electricity Projects,” HRW, Volume 15, No. 4, September 2007, pages 36-39.
2 Courcelles, Real, “Involving Indigenous People in the Development of Hydropower,” Hydro Review, Volume 22, No. 3, June 2003, pages 42-44.
Leslie Eden, a consultant, formerly was publisher of HRW magazine, which was acquired by PennWell in December 2008.