Underlying Factors and Regional Trends

Financial Developments in Global Power

Electric power is expected to be the fastest-growing source of end-use energy supply throughout the world over the next two decades. To meet global power projections, it is estimated that over $1 trillion will have to be spent during the next 10 years {see Endnote 194}. The electric power industry has undergone a substantial degree of privatization in a number of countries over the past few years. Power generation growth is expected to be particularly strong in the rapidly growing economies of Asia, with China leading the way (Table 3).The reasons for electric utility privatization are numerous and vary from country to country.

Some of the more evident reasons include the following:

Electricity demand is expected to grow fastest in the developing nations, particularly those with rapidly growing populations and economies. For developing nations, privatization is one means of obtaining badly needed foreign capital. It is also a means of transferring western technology to second and third world countries.

Privatization of formerly state-owned electric power assets has opened up enormous investment opportunities. For foreign investors, investment in overseas electricity assets offers opportunities to achieve potentially higher returns and, in many cases, to realize greater growth opportunities than are available at home.

The financing of power projects around the world has changed in recent years. Non-private sources of investment funds have grown increasingly scarce, and the critical role such publicly-financed institutions, such as the World Bank, have played in financing electrical projects has diminished significantly. However, several new entrants in financing of overseas electric power investment have recently emerged--particularly in the area of equity finance. Some of these new sources of capital include the world's major petroleum companies, natural gas pipeline companies, electric utilities, and also some of the world's major construction and power equipment manufacturing companies. Construction companies are increasingly setting up project financing departments and committing their own capital to financing power projects {see Endnote 195}. Investors based in the United States have been the leading source of capital for many of these projects. Some U.S. mutual funds have been started for the exclusive purpose of investing in Latin American power production. The growth trend in U.S. direct investment in foreign electric utilities (and similar services) has clearly been upward in contrast to U.S. direct investment abroad in petroleum {see Endnote 196}.

There are a number of ways to privatize electric power. One involves the sale of state-owned electric power assets. Another involves allowing less restricted or unrestricted investment in new power assets--the independent power project. Arrangements whereby a foreign company builds a power unit and operates the unit for an agreed-upon number of years before transferring ownership to the host country has been another important vehicle for financing electric power. This latter investment arrangement is commonly referred to as a build, operate, transfer agreement, or BOT. In several nations, rate reform has also played a critical role in encouraging such non-utility electric power investments.

In several cases discussed later in this chapter, privatization has involved foreign utilities purchasing one or more utilities in other countries. Some privatization efforts have involved consortiums of foreign and domestic companies. Joint ventures with host nation companies have been another avenue of privatization. In other cases, foreign companies or investors have purchased shares in newly-privatized electric utilities. In a few cases, recently-privatized companies have acquired ownership interests in other recently-privatized companies.

The Convergence of Electricity and Natural Gas

Privatization has also resulted in a growing convergence of petroleum-related activities and electric power-related activities. The growing interconnection between petroleum companies (particularly those with substantial natural gas production and/or distribution activities) and electric power generation stems from a number of developments. In certain regions, natural gas is becoming the fuel of choice for new electricity generation projects, in part, because of the relative environmental advantage that natural gas has over coal or oil. The much improved efficiency of gas-fired electricity generation units over the last several years has also improved natural gas's relative competitiveness as a fuel for the generation of electricity. Furthermore, in several countries natural gas deregulation has accompanied the deregulation of electric power. In the aftermath of several prominent deregulatory efforts in the U.S. natural gas market--culminating in the Federal Energy Regulatory Commission's (FERC's) final deregulatory push in 1993, through the FERC Omnibus Order 636--U.S. natural gas pipeline companies have become particularly well-suited to enter newly-opened markets in a variety of international regions undergoing a deregulatory and transitional phase. The sections that follow review developments in power generation, transmission, and distribution privatizations as they have occurred across international regions.

Regional Developments

The privatization of electric utilities has occurred and is continuing to occur in both developing and developed countries. Although varying extensively in degree and method, countries as different as India and the United States have exposed their electric power generation industries to greater market forces. Chile has led the way with electric utility privatization in the late 1980's, followed by the United Kingdom. Currently, most Latin American countries are privatizing their electric power industries to some extent. Prominent electric power privatization efforts also are currently underway in Australia, Canada, China, Scandinavian countries, India, Indonesia, Morocco, Pakistan, the Philippines, and Eastern Europe. A brief discussion of the different regions is appropriate to highlight their differences and similarities in electricity privatization.

Some countries in OECD Europe have taken steps to introduce elements of competition in their power industries. Others are in the process of formulating regulatory changes that will ensure a move toward privatization and an overall restructuring of their electricity markets. Currently, the European Union energy ministers are working on plans to create an internal electricity market, but progress has been slow due to resistance from some state-owned electricity monopolies. OECD European nations currently undergoing major privatization efforts include the United Kingdom, Finland, Norway, Sweden, and Portugal. These efforts vary considerably across countries and are for the most part still in a transitional phase {see Endnote 197}.

Similarly, the shape of the electric power industry is changing in Canada. In some jurisdictions, consideration is being given to unbundling electricity supply to its three principal functions--generation, transmission, and distribution. Privatization of North America's largest power utility, Hydro Ontario, is also being considered, excluding its nuclear generating plants.

Of all world regions, Asia is expected to show the most rapid increase in economic growth and electricity consumption over the next few decades. This region is also expected to lead the way in the level of independent power producers activity. While non-OECD Asia accounted for only 14 percent of total world electricity consumption in 1992, it is expected to account for nearly one-third of total demand growth between now and 2010. China, India, and Australia are, respectively, Asia and Oceania's largest economies, as well as the next largest consumers of electricity after Japan (an OECD country). They also account for some of the largest foreign investments in electricity generation overseas. All three nations have undergone significant attempts at electricity privatization. Some of the relatively smaller economies such as Indonesia, New Zealand, Pakistan, and the Phillippines, have also undergone significant privatization efforts.

Africa, too, is undergoing changes in its electricity industry structure. Morocco is undertaking the privatization of its electricity industry, much as the smaller countries of Asia and Oceania.

Privatization efforts are generally sweeping Latin America and the electricity industry is no exception. Many Latin America nations have undertaken economic and political reforms of historic dimensions in recent years. Democratic government and free market economics have been central to these reforms. Both have done much to restore Latin America's creditworthiness. There are several reasons for the current wave of electricity privatization in Latin America. Poor economic performance during the 1980s left many Latin American countries with deteriorating electricity infrastructures and no increase in generation capacity despite rapid population growth.

Latin America's growing economies and growing populations are expected to continue to stimulate expansions in electricity generation capacity well into the future. In the first half of the 1990's, most Latin American countries experienced increased economic growth rates. Long-term economic growth prospects also improved. Future economic growth is very dependent on Latin America's expanding its power-generating capacity. Expansion of access to electricity is also important as currently 30 percent of the population of Central and South America have no access to the power grid {see Endnote 198}. Forecasts of electricity demand predict a 2.6-percent annual growth in Latin America well into the next century {see Endnote 199}.

Latin America has many primary resources that can be used to generate electricity, including water for hydroelectric generation, and coal, natural gas, and oil for steam-fired generation. Historically, hydroelectric generation has been the primary method of generating electricity in Latin America {see Endnote 200}. However, new power generation projects seem to indicate a movement to natural gas and coal. As of 1994, 30 percent of electricity generation in all of Latin America was fueled by natural gas {see Endnote 201}. Concurrent and related to the movement to natural gas-fired electricity generation has been increased investment in natural gas pipelines (see the box "Latin America's Emerging Regional Natural Gas Pipeline Network").

Electricity privatization is different, depending on the particular country on which one focuses. However, some countries are more similar than others. While some countries have sought aggressive privatization and reform of their electric power sectors, others have been slow to reform. Thus, a review of electricity privatization efforts on a nation-by-nation basis is provided to demonstrate the differences and similarities between countries.