A new era of change

Kenneth W. Oberg,

Managing Director,

CLP Power International,

Hong Kong

Since the onset of the Asian financial crisis in 1997, three questions have been asked repeatedly: whether the power market will recover, and if so, when and to what extent? But less frequently asked is whether the power market in the Asia-Pacific is the same market that we knew before the crisis.

The economic and political turmoil in some Asian countries in the last two years has slowed down the market. The economic downturn has halted growth in demand, and contributed to higher excess capacity in most Asian markets, except for India, Taiwan and Korea.

At the same time, there has been a quick bounce in economies, notably Thailand and Indonesia; a move towards privatization and deregulation, accompanied by major opportunities in the power market; and some successes.

As a dedicated market player in the region, CLP shared some of these successes. There was the acquisition of a strategic stake in Electricity Generating Public Company of Thailand (2056 MW) in July 1998 and the financial close of the Ho-Ping Power Project (1320 MW) in Taiwan in December 1998. In mainland China, CLP also closed the 3000 MW Shandong Zhonghua Power Project, the largest IPP with foreign investment in China, in May 1998. Together these projects represented over US$2 billion loans raised in the depth of the Asian crisis.

Elsewhere, there are increased project activities and signs that bode well for improvements in the power market.

In terms of economic recovery, we are a long way from being out of the woods. However, the economic free fall in the latter part of 1997 has halted and several countries that were hardest hit by the economic crisis have gradually stabilised, or are recovering. Among these are Thailand and Indonesia. Thailand saw a dramatic growth of GDP from -8 per cent in 1998 to an estimated +1.0 per cent in 1999, and +4.6 per cent in 2000; and Indonesia`s GDP grew from -13.7 per cent in 1998 to a projected +0.5 per cent in 1999, and +4.0 per cent in 2000. (Source: Global Financial Market Outlook, April-May 1999, Bank of America).

The currency risk and other financial risks in these countries have been somewhat lowered, but some lenders appear to have kept a cautious approach. Banks will likely require additional conditions as a result of their experience during this economic crisis. The restructuring that is currently taking place with the IPP projects in Indonesia should provide some indication of what future financing will require.

Looking at the pace of deregulation, the increased financial burden caused by economic crisis is leading to a liberalization in the rules governing foreign investment and accelerating the power industry privatization process in some countries. This should create opportunities for the acquisition of efficient, high quality power assets.

However, talk about privatization is not being matched by action. In the region, Victoria in Australia appears to be the market that has moved furthest in privatizing its generation, transmission and distribution assets. China, Thailand, and Malaysia have started the process, but other countries are taking a slower approach. In the Philippines, the Napacor privatization is being delayed while the long awaited Omnibus Bill is debated in the Senate. In Thailand, union opposition to the sale of the Ratchaburi power plant is creating uncertainty over the future of the privatization of generation assets of the Electricity Generating Authority of Thailand.

The proposed shift from state to private ownership of a significant portion of the power business in these countries represents a fundamental shift in the status quo. This shift creates uncertainty and fear to those with a stake in the status quo – governments, workers and consumers. As developers, we need to be mindful of these legitimate concerns and do everything possible to allay them and reinforce the long term benefits of private investment in this crucial industry.

Political and social instabilities associated with economic uncertainties in some countries will remain a challenge to project developers. But in general the political and social situations are stabilising. The recent election in Indonesia offers hope for potential stability that is a pre-requisite for economic growth and development. Moreover, the development of the power infrastructure is a long term need and should not be deterred by short-term political influences. We hope that Asian leaders will have the will and commitment to follow through with this long-term mission.

In terms of market structure, some countries are moving away from long term fixed-price power purchase agreements. They wish to emulate the experiences of the United Kingdom and Australia and implement power pools. In that way, they hope to achieve the dual goals of an ample supply of power at low cost. However, it is not that easy. For a power pool to operate successfully, a number of elements need to be in place: a well-developed transmission grid, an effective and transparent legal and regulatory framework, an adequate number of generation competitors, and the ability of consumers to pay market prices. Countries that have these factors in place will be successful in implementing pools in the foreseeable future. Bridging the gap between the reality of today and a future world of operating power pools will require creativity by developers, utilities, governments, investors and lenders.

The Age of change

As a result of the financial crisis, the power market in Asia Pacific has entered into a new era of change. This is an era of uncertainties, risks and opportunities. It offers opportunities with the accelerated pace in deregulation and power pooling but it also presents higher political and financial risks. As such, commitment, creativity and adaptability is required. Although it may be too early to ask when and how the power markets will recover; the key question for us now is whether we have the willingness and ability to participate in change.

While the crisis caused setbacks, it also offered new opportunities and a chance for a useful stock-taking. It has demonstrated that with strong sponsors, innovative structures, and real commitment; project development is still possible and profitable.