Independent Power Projects in Developing Countries: Legal Investment Protection and Consequence for Development

Citation

Bhattacharyya, S. (2010), "Independent Power Projects in Developing Countries: Legal Investment Protection and Consequence for Development", International Journal of Energy Sector Management, Vol. 4 No. 2, pp. 303-306. https://doi.org/10.1108/17506221011058759

This book, an abridged and consolidated version of the author's doctoral thesis, presents a comprehensive analysis of independent power producers (IPPs) as a model for the power sector reform in developing countries and asks whether this model of development is beneficial for them or not. It then tries to find out ways of improving the beneficial consequences without reducing the incentives for private parties to engage in the process. Clearly, the issue of IPPs has remained one of the major debates since 1990s and many studies have been carried out to understand the pros and cons of the model. However, this book covers the entire range of inter‐related issues that has not been so comprehensively analysed in any work earlier. Thus, it represents an original contribution to knowledge and has both academic and professional relevance.

The book is presented in four parts and contains 19 chapters. The introductory chapter sets the background of the book and provides an overview of developments in the IPP investments. It then presents the main research questions addressed in the book. The overall question is “whether the IPP model's beneficial consequences for development be improved without detrimentally compromising the sponsors' willingness to invest”. The author then asks three related questions (or sub‐questions) about:

1. 1.

   The legal protection of investment which involves analysing the risk and responsibility allocation among parties, risk insurance and guarantee mechanisms, predictability and flexibility of contracts, the influence of project's financing on the legal obligations of parties.

2. 2.

   The consequences of investment protection on the development of the countries which is analysed using five sub‐elements:

   • •

     intrinsic structural weaknesses of the model;

   • •

     comparison of efficient versus expensive and sub‐optimal solutions;

   • •

     asymmetry of risk allocation and incentive for investors' inefficient enrichment;

   • •

     tendency to over‐invest in generation capacity; and

   • •

     effect on the liberalisation process;

3. 3.

   Based on the above possible adverse effects, how these negative consequences can be avoided.

Clearly, the above questions set the overall tone of the work and the coverage. Various chapters of the book are directly aligned to answer the above issues.

The second part is devoted to investment protection arrangements in the IPP context. This part contains eight chapters. Chapter 2 presents the context of IPP investments in developing the power sector of developing countries and the need for private investment protection. Chapter 3 presents the legal and financial arrangements used to protect private IPP investments. Chapters 4 and 5 cover the obligations and remunerations received by the project company. Three subsequent chapters discuss different types of contractual hazards (changes in law and contractual breaches) and remedies to them through contracts and external arrangements. Chapter 9 presents the investment protection in IPP model by considering the host's obligations and perspectives. These chapters provide a clear picture of the contractual web created by the IPP model and tell how the risks are allocated and whether the model introduces any bias or imbalance. The analysis is descriptive and deductive. However, quite a significant part of this discussion would be known to those who are involved in any project financing or IPP‐related activities. But students willing to understand the subject would find this useful.

The third part is devoted to answering the second and third sub‐questions – the effects of IPP model on the economic development of the host country and how the negative effects can be avoided. This part contains nine chapters. In this part, the author triangulates the legal analysis with economic arguments and tries to analyse whether the IPP model is beneficial for the developing countries or not. The analysis presented in this part is interesting and thought provoking. Chapter 10 identifies the possible socio‐economics effects of IPP introduction and presents a historic review of the IPP trend over three decades. Chapter 11 analyses which party to the IPP agreement is in a better position to take the risk and to what extent they are exposed to risk. Chapter 12 considers the issue of procurement processes and incentives to moral hazards. Chapter 13 considers the effects of Asian financial crisis on the IPP model. Chapter 14 analyses the case laws related to IPP issues – essentially those related to international arbitration. Chapter 15 consider proactive legal adjudication as a means of reducing the risk while Chapter 16 analyses the related aspect of political risk coverage. Chapter 17 summarises the consequences of IPP on economic development of developing countries while Chapter 18 suggests modifications to the IPP model to salvage it. Chapter 19 provides the concluding remarks.

This part analysed important issues such as whether the IPP contracts behave symmetrically during the periods of economic growth and economic recession and how IPP arbitration has treated the issues arising from the East Asian economic crisis. One important finding of the book is that the IPP model “contains an intrinsic structural weakness in the event of economic downturns” and raises further question about the appropriateness of the model for developing countries. The author is also critical about the IPP case awards analysed in the work and finds support to the claim that international arbitration may not be a completely neutral avenue available to the host country. He also claims that the political risk coverage provided by the export credit agencies has the questionable reputation in terms of deterring corruption.

Another important conclusion of the book is that the IPP model is not necessarily beneficial for the developing countries. The author raises issues of efficiency, moral hazards, and unbalanced contracts but it would have been interesting to analyse whether there is any correlation between these issues and the stage of evolution of the IPP movement. While the author indicates a few case laws in the study, the reader does not get any sense of overall impact of these case laws in the context of the global IPP movements.

Clearly, the third part of the book provides author's own contribution to knowledge and makes the book valuable. These chapters have tried to capture some important issues and have followed a logical flow of ideas to answer the questions. Upon reading the books many other issues will come to the readers' mind. I was wondering about the nexus between international financial organisations and the international IPP in promoting this model in developing countries. Was it a deliberate attempt to transplant a costly solution for profit motives? Similarly, a distinction between the international IPP and the domestic IPP could be made and one can ask whether a domestic IPP is also as evil or good as an international IPP. Although the focus of the book is on developing countries, the California experience could have provided some insights about the handling of crisis in a developed country context. This could be contrasted with that of Asian crisis to bring out the biases or similarities in the treatment. However, no work can be expected to cover everything and therefore, these issue could come as ideas for further work on the subject.

Having had the privilege of reading the original thesis and its transformation into a book, I can confirm that the author has done an excellent job in reorganising the work to make it crisp and focussed. As a consequence, the author has successfully reduced the length of the book to a readable level. A more careful proofreading would have avoided some typos and language inconsistencies but otherwise the book is well presented. I have no doubt that it will emerge as a standard reference for any study on IPP models and would be widely used by students, academics and practitioners.