Financing utility projects in today’s international markets

Gary W. Foster, P.E. and Robert J. Rusch, P.E., Stanley Consultants

The energy sector in the developed countries of Europe and the United States has entered an era of slower growth. Deregulation is partly responsible for significant changes.

While slower growth may be the situation in the developed world, the opposite is true in under-developed economies, such as the Caribbean. Inexpensive labor, the portability of industries, and the demand for product has made these economies attractive areas for expanded manufacturing. Consequently, a major challenge for Caribbean electric utilities is to provide reliable electric service at a cost that is competitive.

As utilities seek to upgrade facilities, they will find there is no shortage of financing options. Most organizations find providing funds for a utility attractive because of the almost constant and relatively assured inflow of revenue from the service.

Financing can be arranged through one of several methods:

Grants-Grants to government agencies from multi-lateral sources are usually interest free or repayment free. They are typically reserved for countries with less economic development or inability to repay a loan, or for governments who do not have the capability to provide basic essentials for the population. Grants typically are not intended for major capital expenditures.

Multi-lateral financing-The World Bank is the largest multi-lateral lending institution and tends to set lending trends. The Inter-American Development Bank (IDB) allocates more money to Latin America and the Caribbean than does the World Bank. The Caribbean Development Bank focuses on the Caribbean only. Forty-six member countries own the IDB. The IDB group includes the Inter-American Investment Corp. and the Multi-Lateral Investment Fund. IDB’s regional focus is Latin America and the Caribbean. The IDB performs four basic types of analysis to ascertain whether the project is justified: socioeconomic, technical, institutional/financial and legal.

The Caribbean Development Bank (CDB) serves most of the islands in the Caribbean region.

Bi-lateral financing-Bi-lateral financing is the result of direct government- to-government transactions through the contributing country’s aid agency. These agencies can be contacted directly through embassies. The United States Agency for International Development (USAID) focuses more on governmental institutional issues. Aid agencies from other countries are still heavily involved in infrastructure projects.

Export credit agencies-In the United States, the United States Export-Import Bank (Ex-Im) typically provides loan guarantees to organizations that fund purchases made by a foreign entity. The Ex-Im Bank must be open for business in that country.

In the United States, the Overseas Private Investment Corp. provides risk insurance regardless of the type of purchase. The risk insurance will cover all normal forms of risk and also the convertibility of currency.

Internal financing-In the United States, most utilities will finance their own improvements either by raising capital through issue of bonds, selling stock, or through use of retained earnings and profit. Internal financing options include:

  • One hundred percent debt financing. Prior to assuming any debt, debt servicing and its impact on a utility’s cash flow are primary considerations.
  • One hundred percent equity financing. The major difference between 100 percent debt and 100 percent equity financing is the outlay of cash. The outlay for debt is the debt service, which will be a contract amount per period of time. The cash outlay using equity reduces any reserves a utility may have.
  • Financing by debt/equity mix. A mix of debt and equity is desirable due to the benefits of leverage including tax reduction.

Project financing-A loan for a project is repaid from cash flows originating from the project itself and not as a result of other cash generators. Project financing and non-recourse financing are sometimes used interchangeably and mean that the debt repayment is totally dependent on the project as a net revenue generator and that a schedule has been created that outlines the debt repayment based on projected cash flows of the project.

Privatization-Many governments have come to realize they can no longer finance or effectively manage consumer type businesses. Privatization is the key to this business transfer. Privatization needs to be a transparent transaction and may involve competitive bidding or public auction.

For large projects, there are sources of financing from funds such as the “Energy Investors Fund.” These funds are usually aligned with larger utilities or energy buyer-operators and may not consider including equity positions in smaller utilities in their portfolios.

Major projects usually require outside expertise for their organization and execution. A plan that includes specific experience can be key to a financier’s positive review of a project. Through a planning process, a consultant, working closely with the utility, can identify increased capacity needs, upgrade of power delivery, or expanded services into a new development.

A developing economy requires adequate and reliable sources of electric energy. A key to utility expansion is a supply of capital that is large enough to fund targeted projects and is not cost prohibitive. The choice of the financing approach is unique to both the project and the utility.

Foster, vice president of Stanley Consultants, Muscatine, Iowa, has primary responsibility for marketing in Africa and the Caribbean regions. Rusch serves as chief electrical engineer and is a vice president of Stanley Consultants. He has worked throughout the United States and internationally. His experience includes design of industrial, institutional, and electric utility distribution, transmission, substation and thermal generation facilities. They may be contacted at ruschrobert@stanleygroup.com and fostergary@stanleygroup.com

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