MAKING THE FUTURE WORK

Hydropower is, indeed, at a crossroads. Changes are taking place in the electric power business that will affect the growth of hydropower. The financial constraints of the public sector and the poor perfor- mance of most national electric power monopolies are forcing countries to consider alternative institu- tional arrangements for the sector. A major feature of this changed institutional environment is the intro- duction of competition and the private ownership and financing of power plants.

There are those who maintain that hydropower projects will only be built in the future with explicit public support. Some even go as far as to say private power will not build hydropower projects.

Under the present way of doing business, they are right. Significant private financial resources will be reserved for power projects that are reliably planned and minimize environmental and other risks. On the other hand, continuing public support as it is present- ly done, particularly in developing counties, will pro- vide further ammunition to the critics, and weaken the longer-term competitiveness of hydropower.

What is needed is a new model of public/private partnership. The private sector would agree to under- take greater responsibility for project results in exchange for greater control over selection, design, construction and operations. The government, in exchange for a lower level of public financing, would agree to restructure the electric power sector so that it is a competitive business subject to normal com- mercial rules. In the transition period, public funds or guarantees will have to be an important part of the total financing. There should be, however, a clear understanding that it is a temporary measure and once the project (or industry) has demonstrated its capacity to perform, public funding would be reduced.

ENDNOTES

1.World Energy Council, Energy for Tomorrow’s World (New York: St. Martins Press, 1993).

2.Goldemberg, J., T. Johansson, A. Reddy and R. Williams, Energy for a Sustainable World, Wiley. Eastern Ltd. 1988.

3. World Bank, “1981 PPAR Colombia: Guatape II Hydroelectric Project.” Report No. 3718. Washington D.C. 1981.

4.Merrow, E.W., and R.F. Shangraw Jr.,

“Understanding the Costs and Schedules of World Bank Supported Hydroelectric Projects,” World Bank Industry and Energy Department Working Paper, Energy Series No. 31 (1990).

5.Sanghvi, A., R. Verstrom and J. Besant-Jones. “Review and Evaluation of Historic Electricity Forecasting Experience (1960-1985),” World Bank Industry and Energy Department Working Paper, Energy Series No. 18 (1989).

P a p e r C o n te n ts

Introduction ...112 The Structural Issue ...113 Managing Risk ...114 Adapt or Die: Can the

Industry Respond? ...116

Profile of the Successful Developer ...116 The Firm ...116 Some Tactics and Strategies ...117 Conclusions ...117 Endnotes ...118 The Aksombo Dam on the Volga River, Ghana.

PHOTO COURTESY OF THE WORLD BANK

By

A

A. C

,

Anthony Churchill is a senior advisor with Washington International Energy Group, an inter- national financial and project development consulting firm based in the United States.

This paper was first presented at the 27th International Symposium on Hydraulic Engineering in Aachen, Germany, January 3-4, 1997

ABSTRACT

This article reviews the hydropower industry’s present poor performance and outlines actions that are needed. The criticisms leveled at the hydro industry are analogous to those leveled at the U.S. defense industry: poorly defined products, lack of dis- cipline and political, rather than economic, decision- making. The weaknesses of the hydro industry are institutional in nature and are associated with public procurement. The industry is currently composed of diverse and specialized firms that compete for con- tracts in which all of the risk is undertaken by gov- ernment. As such, it is not well-suited to a environ- ment in which private capital is playing an increasing- ly central role. To survive, the industry must adapt by creating developers—that is, firms with sufficient capital, technical skills and marketing ability to finance and manage the risks inherent in hydropower projects. These firms will have to develop a diverse portfolio of projects in order to spread risks, and negotiate a better way to share risks with govern- ments. The role of the developer is to develop plants, not run them forever. Only through a restructuring of the industry will firms emerge with the ability to

compete in the international power market.

1. INTRODUCTION

The World Energy Council’s Energy for

Tomorrow’s World suggests annual global production of energy from hydropower will grow from the pre- sent 2,000 terawatt-hours per year to 5,000 terawatt- hours by 20201_{. This implies a growth rate of about 4}

percent, or half that of the 1970s and 1980s. On the basis of this scenario, only 30 percent of technically feasible potential, up from 10 percent today, will be in production.

There are several problems with these scenarios. First, based on more recent data, the implied growth rate in energy demand in these and other similar sce- narios is seriously underestimated. More recent information, and a more optimistic outlook for growth in the developing world, suggest that the increase in global demand could be double the present consen- sus outlooks. Second, the share of hydropower in this growing demand is not likely to increase. If we take the output of the industry of the last few years and project it into the future, a possible decline in hydro’s proportion of new capacity is possible. For those in the hydro industry and those concerned with the possible adverse effects of increased fossil fuel consumption on global climate, this is bad news.

What has brought about this sorry state of affairs, and what can be done about it? Let us start with a review of the industry’s performance and then move on to the major factors accounting for the record.

1. Hydro projects have become a source of envi- ronmental concerns. Almost every major project today faces a suspicious environmental community. In view of this opposition, potential sources of finance, both public and private, have backed away from financing these projects. The poor past perfor- mance of the industry in handling environmental issues, particularly where resettlement is involved, will continue to adversely affect public perceptions.

2.The industry’s record of overruns is an embar- rassment. Although not all projects have suffered from poor performance in this regard, enough have done so, and this in turn has resulted in a perception in the financial community that these are high-risk

A

A. C

Anthony Churchill is a senior advisor with the Washington Energy Group, an international financial and project development con- sulting firm based in the United States. Until July 1994, he was principal advisor for finance and private sector development at the World Bank.

Anthony Churchill

Washington International Energy Group Three Lafayette Centre

Suite 202

1155 21st Street, NW Washington, D.C. 20036 Fax. (202) 331-9864

E-mail. [email protected]

Note: This paper was included in the background documentation

for the joint IUCN-The World Conservation Union/World Bank workshop. Any personal opinions should in no way be con- strued as representing the official position of the World Bank Group or IUCN.

projects. Endless litigation between contractors, engi- neers, and owners has added to this perception2_.

3. This performance, in turn, has resulted in a loss of confidence in engineering and technical staffs. Cost estimates prepared by engineering firms, for example, are routinely factored up by multiple amounts based on the past record. The poor quality of site information, which produces expensive “sur- prises” in a majority of projects, adds to this lack of trust.

In response to this perception of its performance, the industry has tended to react in a defensive man- ner. Facts and figures are disputed. There are good projects that have come in on cost and on time. Not all projects have been environmental disasters. The industry is being unfairly judged relative to the alter- natives—after all, fossil plants have their own environ- mental consequences. Hydro is capital-intensive and ought to receive financing at favorable interest rates. And so the debate continues. It may make those in the industry feel better, but it seldom alters public perceptions. In fact, the defensive nature of the responses probably adds to public suspicions.