Equator principles as a hindrance to developing economies

The equator principles defines the term "Designated countries" as "those countries deemed to have robust environmental and social governance, legislation systems and institutional capacity designed to protect their people and the natural environment." The list (which can be viewed at: http://www.equator-principles.com/index.php/ep3/324) of such countries comprises of almost exclusively developed countries. I find this quite one sided, it is obvious that developed countries will have far less pollution and energy usage emenating from construction when compared to developing countries. The latter have not reached their optimum yet, and as such they obviously need to keep their economic stability first.

To put things in perspective, there are just 6 out of the 70+ lending institutions from Asia and the Middle East, and just one from India (IDFC). IDFC only joined in the earlier half of this year, so it will be quite interesting to see how this move is received.

The equator principles, if applied to institutions financing projects in these countries, would definitely hinder their growth. This is probably why we see so few institutions from Asia and the Middle East.

It is not that these principles have not been violated. There have been cases such as the Baku-Tbilihi-Ceyhan pipeline, where the principles were tossed aside because the project had to go ahead. Selectively applying them in situations can lead to all sorts of irregularities in the future, all the way up to banks strong arming the client into doing things their way in the name of these principles. 

These factors have made lending institutions of developing countries very wary of the principles as they view them as something that will just slow them down and reduce their competitiveness.

Eminent Domain and its implication for project finance

This is an interesting article regarding eminent domain that was published very recently:
http://www.theatlanticcities.com/housing/2013/10/why-eminent-domain-cant-save-broke-cities-richmond/7358/

In most cases, we see it being used to seize land for an infrastructure or construction project. This is a case where the government of Richmond, California is attempting to seize the land from the project sponsors in order to save the numerous homeowners who have defaulted on their mortgages.

This has quite a few implications for the infrastructure market, as explained by this article.

While not illegal, this is a move that brings extremely bad faith.The main implication is that banks will have to stop lending to cities willing to resort to this form of eminent domain. These cities are then likely to fall behind due to a lack of funds to pursue projects. And if this is done by every city in America with similar issues, the effect on their economy would be crushing. Creditworthiness and trust would take a huge hit, similar to what happened to India after Dabhol.

Therefore, I am inclined to agree with the author when he says that this move is somewhat suicidal to the economy of Richmond or any other city that does it.

Findings on Tirupur Project

I came across a case study which was quite contradictory to the one which we had
discussed in class. The case study which was authored by Gaurav Dwivedi stated Tirupur as a
failure in meeting its customer needs leading to a lot of slum dwellers still depending on
water vendors and other water sources due to scarcity. A lot of facts regarding the
concession like operations, shareholding, debt, revenue, expenditure and profits, remains
unavailable to the public. Also there were confidential clauses incorporated in the
concession which were against the transparency concerns. In fact the author had to move
legally against the New Tirupur Area Development Corporation Limited (NTADCL) in order to
obtain real data regarding the project.

Ref: http://www.manthan-india.org/IMG/pdf/PPP-Tiruppur_Paper_IIMB_Conference_for_Website.pdf

USD 1 trillion for Infrastructure development

According to 12^th Five Year Plan in India, infrastructure sectors which includes power, roads, ports , civil aviation etc. has a projected investment of $ 1 trillion with an equal participation of private sector. In an annual plenary meeting of IMF and WB, finance minister P Chidambaram promoted PPP and included many sub-sectors like modern storage, education, health, irrigation, etc. for VGF scheme to achieve his target (reference).

Another upcoming example of PPP is 5MJC, a company that has a vision of building five major cities in the nation of Malawi. The government of 5Major Cities (Shekinah City, Heaven’s Gate City, Zion City, Zoe City and Zeal City) has planned to provide "strong" mayor-council system. The cities governments being responsible for public education, correctional institutions, libraries, public safety, recreational facilities and sanitation, water supply and welfare services which is in line with the Mercer’s Quality of Living  which for 2012 Infrastructure is based on electricity supply, water availability, telephone and mail services, public transportation, airports and traffic congestion.

One sided nature of the MoU between the MSEB and Enron in the Dhabol Project

The World Bank commented on the MoU between Enron and the MSEB as that it was biased in favour Enron. After the WB’s comment on the MoU the GOI’s Central Electricity Authority (CEA) did their own analysis and found certain abnormalities in the MoU. The findings include:

i) no specific details of project costs were provided as per Indian Law

ii) the date of start of the contract and payments were not mentioned i.e when the electricity is available or when the contract was signed

iii) the payment structure was different from the usual norms

iv) high price of power higher than anywhere else in the country

v) no provision to scrutinize the project was made to make sure that the payment of MSEB was corresponding to the actual electricity cost

vi) while MSEB guaranteed to buy a minimum amount of fuel, the fuel supplier was not adhered to providing minimum fuel.

vii) no study of economical justification or verification of the price of fuel was done by MSEB

Even after all these findings the authoritative bodies of the GOI gave approval for the project which was immediately followed by MSEB signing the PPA with Enron. 

Still even more anomalies can be observed in the project which makes it obvious of the quantum of illegal movements which would have taken place in the project.

Article ref: http://www.atimes.com/reports/CA13Ai01.html

A new kind of infrastructure risk

We’ve spoken a bit about the factor of risk in infrastructure projects, and categorized them as well.

The article here (A New Type of Risk in Infrastructure Projects, by Maria Craciun), adds to that categorization, using a few different lines of thinking. It also talks about a kind of risk we haven't mentioned..

Please find below a paragraph from the paper of particular significance with respect to PPPs:

To the above three risks it seems appropriate to introduce a fourth one, manifested especially in the latest years: the risk of financing. The global financial crisis that affected, 2008-2010, a significant part of the world economy, including the U.S., EU or Japan, gave birth to a new type of risk, one that initiators of investment projects had not witnessed before. This risk is determined by events which can lead to loss of project funding opportunities. So far, usually, the inability to finance a project has been due for the most part, to the project itself. Either this did not meet the requirements of potential lenders or providers of capital, or was confronted with a number of risks whose costs and whose ownership was deemed too expensive.

Please note the final risk the author talks about is something that has become predominant relatively recently. This risk is the risk of a good project not being able to take off because of the lack of sufficient funds. That point really stresses on the importance of PPPs because the risk can be totally mitigated if governments really are willing to fund and support private projects and set up partnerships with them. 

Although, I am not sure how valid this kind of risk is for the Indian scenario at present.