This article examines three cases in the power sector of Latin America in which a certain quanitity of public resources (monetary or equivalent) has been used to make private delivery of public services (electricity generation and distribution) feasible in smaller economies. The cases reviewed have received financing from the Inter-American Development Bank through its Private Sector Department, as described in Table 1.
Table 1: IDB financing (US$ million)
Total B-Loan and
Project project costs A-Loan cofinancing
Privatization of electricity 94 25 25
distribution in Guatemala
Capitalization of electricity 285 75 113
distribution in the
Construction and operation 66 16.5 33
of a geothermal power plant
in Costa Rica
Total 445 116.5 171
For certain projects (e.g. electrification in poor rural areas, power generation based on fuels with costly exploration) the level of investment and/or risk assumed by the private investor is not commensurate with either: (a) a reasonable equity payback period; or (b) a reasonable cost of service provision (e.g. tariffs, tolls). In other words, for the same level of payback period for investors, these types of projects would require a higher price for their output/services; or alternatively, for a given level of output/service prices, these projects would require a longer equity payback period.
Governments will therefore select the modality of private participation in power projects, as well as the risk allocation between public and private agents, based on its likelihood of achieving certain socioeconomic objectives such as improvements in electricity distribution service, additional generation capacity at a lower cost, and introduction of new technologies and know-how. These are areas where...
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