There is only one way for Asia's poor countries to avoid looming widespread blackouts: they must keep improving their regulatory framework, a senior official at the Asian Development Bank (ADB) said last Wednesday. Asia needs billions of dollars a year to build power plants. But some cash-strapped countries, such as the Philippines and Indonesia, are not doing enough to create the environment needed to attract private-sector investment, the official said.
"I think the only way to bring in a large block of money or investment capital is to provide a much greater level of certainty for the capital investors," said Robert Bestani, Director General of ADB's Private Sector Finance Department.
ADB, as a multilateral financial institution, helps the private sector invest in developing countries by providing equity investment, loans, and political/credit risk guarantees.
But it is impossible for ADB to provide more than a fraction of the $250-300 billion required by Asia annually for infrastructure investment over the next 10 years, he said. What ADB can do is act as broker for Asian governments and investors, and help the governments improve their regulatory regime, he said.
Shaky regulatory frameworks, marked by government or legal meddling in power tariffs, have prevented overseas investors from investing in the power sectors of the Philippines and Indonesia as they suffer chronic electricity shortages.
To lure capital, Manila and Jakarta may have to accept demands from private-sector investors for long-term power purchasing agreements, known as PPAs, which protect future returns for the investor by locking in a price formula for the electricity the plants produce, Bestani said.
The Philippines and Indonesia are reluctant to offer PPAs - which are currently the price of foreign power funding in developing countries - partly on concerns they would add to their already heavy debt burdens, bankers say.
They also regard the terms asked by some foreign investors as excessively high, bankers say.
Many of the PPAs signed in the 1990s in Asia have been renegotiated to make them less onerous for governments following the 1997/98 Asian crisis, when massive devaluations in some Asian currencies plunged US dollar-financed projects with revenues in local currencies into crisis.
The Philippines is preparing to launch this year a freed-up power market, under which power stations would sell their electricity to a "power pool" at prices based on supply and demand.
But critics say no investor would build a merchant power plant in the Philippines due to the high regulatory risks there.
"Why have some power projects failed in Asia? One reason is the lack of a regulatory framework. That framework continues to be a problem," Bestani told Reuters in an interview on the sidelines of the Asia Power Conference in Singapore.
More talks are needed between private investors and the governments, which ADB can help, he said, adding that both the public and private sectors may need to lower their expectations so that a risk-reward balance can be restored.
"The era is going to require a much greater dialogue that would reduce the risks and allow reward to go down as well. And then you have a much greater chance of success in the transactions," he said.
But the private sector would still have the final say on the rules of the game, he said. Indeed, senior officials from the Philippines and Indonesia indicated at the power conference they would provide PPAs for select power projects.
"If the industry is saying they need PPAs to come in, then there is nothing that is going to force them to come in without that," he said.
"If it's a question of having electric power or not having electric power, then the choice I think is very clear. It is a black-and-white situation," Bestani said.