Independent Power Projects in Developing Countries

For developing countries, a stable and secure supply of electricity is crucial for industrial and commercial development, and for the well-being of their populations. Since the early 1990s, the main mechanism for constructing power generation facilities in developing countries has been the independent power project (IPP) model, where a foreign private entity enters into long term investment contracts with host government entities. This model has succeeded in attracting investment, but raises complex regulatory and contractual challenges in addition to public concerns. This book - drawing on project contracts, available information about relevant contractual practices (including private interview sources), case law from disputes between investors and host countries, and literature commenting on the legal and economic aspects of the investment's structure - analyzes the IPP model's consequences for development. The author identifies six main consequences for development: *The IPP model has led to private investment, which has increases reliability, modernization and introduced private standards; *It contains an intrinsic structural weakness in times of economic downturns; *It has shown a tendency to lead to overinvestment in generation capacity; *It has shown a tendency to lead to to expensive and suboptimal solutions regarding choice of design and technology; *The model (and its institutional surroundings) contains insufficient disincentives against moral hazard and exploitative behavior (including corruption); and *The IPP model does not facilitate the further development of the host country's power sector. The author argues that these consequences for development can be improved without detrimentally compromising the private sector's willingness to continue to invest. While pursuing this analysis, the author also explores such issues as the following: *the web of parties and contracts constituting the IPP model; *the extent of the host country's legal obligations; *the private investors' legal investment protection, including political risk insurance; *the aggregate allocation of risk and responsibility,including to what extent foreign investors also are protected . against commercial and credit risks; *the competing needs of predictability and flexibility; *how the IPP model, and its institutional surroundings, have reacted to nummerable and *credible allegations of corruption during procurement *the role an investor's home government including its national export credit institution; *incentives as catalysts of moral hazard, observable in Indonesia's IPP program; and *identification of factors reducing, or increasing, the IPP model's tendency to fail during severe economic recessions