THE NEXT Congress of the International Commission On Large Dams (ICOLD) will be held in Montreal, Canada, from 16-20 June 2003. Along with the more traditional topics related to technical aspects of building and operating large dams, the Congress will also be discussing how these projects are financed. The marketplace and government policies are changing in ways that will have significant implications for developing and implementing projects involving large dams, particularly in the area of project financing. Although the basic need for projects involving dams remains, the manner in which they are implemented is changing. Traditionally, national electricity and water utilities would construct these projects using their own funds or in conjunction with financial institutions such as the World Bank or the Asian Development Bank. Now, this approach is shifting towards a greater emphasis on private sector involvement. Governments are refocusing expenditures and, increasingly, soliciting funds from the private sector to build and/or share in the development of these projects. In some cases, the governments are no longer even the main shareholders of these assets. Certain markets, such as Latin America and Asia, are more advanced in the privatisation process and are becoming heavily reliant on private sector funding and operating expertise.

In response to these trends, new players are getting involved in the development and financing of hydro and water projects including a variety of private investors and commercial banks. With the advent of non-traditional players, hydro and water projects have taken on many different forms, including build-own-operate (BOO), build-operate-transfer (BOT), private-public-partnerships (PPPs), project specific companies (PSCs), limited or non recourse financing, leasing arrangements, and securitisation concepts. In the case of hydro power, the notion of merchant plants is becoming more prevalent, further increasing the challenge of financing projects. With these type of plants, the revenues from the power generation rely on selling into spot markets rather than through established tariff structures and long term contracts offered in traditional power purchase agreements.

However, the standard expectations of these new investors, short term returns for example, are generally not consistent with the long term outlook required for projects involving dams. Other critical factors that impact the development and financing of such projects include, environmental and resettlement issues, land and water rights, and hydrological and geological risks. The end result is that fewer dams have been built in the last few years. In the case of energy projects, thermal plants have been preferred to dams because their relatively short construction period and reduced construction risks make them more attractive to private sector financiers.

Nonetheless, recent developments, such as fluctuating oil and gas prices, emphasis on reducing greenhouse gas emissions, public acceptance of green power and renewable energy, and the benefits of mixed energy sources, have begun to reverse this trend. More dam projects are being planned and offered to the private sector, as evidenced by the recent public invitation to build new hydro developments in Brazil.

Non traditional approaches to project development and financing still represent a relatively small percentage of the total number of projects and potential projects. However, successful BOO and BOT projects in Brazil, Peru, Nepal, the Philippines, Laos, and Turkey are encouraging examples of how private sector involvement in dam project development can be advantageous in spite of the challenges mentioned above.

As the trend towards private sector involvement increases so will the need for new approaches to financing and development of projects involving dams. In this spirit, ICOLD has selected Financing of Dams as one of the key issues to be discussed at its conference to be held in Montreal in 2003.
Related Articles
Spotlight on… Canada