Role of the World Bank in Promoting Energy Sector PPPs

April 11, 2014: Christophe de Gouvello, Senior Energy and Climate Change Specialist at the World Bank, talks about the role that large development banks such as the World Bank play in stimulating PPPs in Latin America and the main pitfalls in putting together PPPs in the region.

“PPPs are needed because there won’t be enough public resources and perhaps also expertise in the public institutions and companies to address the challenges of scaling up renewable energy. It is important to create an enabling environment to help these PPPs flourish.”

What role is the World Bank playing to stimulate energy sector PPPs in Latin American and Caribbean countries?

Christophe de Gouvello: PPPs are a topic of major interest for the World Bank because we see them as a great tool to leverage public resources that many governments, either national or municipal, have at their disposal. We have some instruments that are in fact supporting PPPs in Latin America. We have a very specific instrument for instance, which is a trust fund called the Public Private Infrastructure Advisory Facility (PPIAF) that helps countries develop PPPs by providing technical assistance to governments to support the creation of a sound, enabling environment for the provision of basic infrastructure services by the private sector.

In fact the World Bank has different arms. The most widely known is the International Bank for Reconstruction and Development (IBRD). Then there is another one called the International Finance Corporation (IFC) which focuses on the private sector. The IBRD is working exclusively with governments, meaning that it requires certain guarantees from the governments when making loans. The demand for a loan has to come from the governments, which limits the possibility to do direct financing for PPPs through that specific arm. Having said that, the Bank finances technical assistance for governments to prepare themselves to build PPPs or sometimes will finance funds that would eventually allow the financing of PPPs. The IFC arm does extensive work in promoting PPPs.

Development banks are commonly associated with the development of large infrastructure by national governments. More than ever, coping with energy access and climate change issues requires a full array of means, including the development of smaller energy infrastructures, either grid-connected or off-grid, in cooperation with private proponents and sub-national governments (regional and/or provincial). How is the World Bank adapting to that reality?

Christophe de Gouvello: The Bank has new funds like the Clean Technology Fund (CTF) aimed at financing low carbon technologies and reducing greenhouse gas emissions until a new global climate change agreement is negotiated and becomes effective. Most of the low-carbon projects funded through the CTF are big projects. Having said that, the Bank also works on small infrastructure projects, even if sometimes it seems that it promotes only large projects.

I will give you two examples: one in Bolivia and one in Argentina. In both cases these projects are of about US $20 million – which is quite a large amount of money – but the money is being used to finance the verification of larger-scale renewable energy projects, such as photovoltaic systems. Of course you cannot come to such a large scale immediately. In the case of Argentina and Bolivia, smaller-scale pilot initiatives will be completed first with this financing. Once these projects are more mature, we can actually provide more money to scale up the schemes. This shows how schemes like these can be piloted by institutions such as the World Bank or sometimes NGOs. And once it works, then the Bank is able to provide more financing – even for off-grid systems.

Have you observed a growth of private investment in PPPs in Latin America and the Caribbean?

Christophe de Gouvello: Regarding the private sector participation in this sector, you need to differentiate between countries who have already made a strong and deep reform of the power sector and those that have not yet taken such a reform. For instance, most of the large Latin American countries actually de-verticalized and privatized their power sectors in the 1990s. This means that today, private financing is almost a rule in all these countries as most of the electricity generation is financed by the private sector and by private companies. In the case of distribution companies, it is mixed. Some distribution companies have been privatized in these countries, some have not. Now there’s the case of the other countries where such reforms have not been made. Here the private sector’s participation is far more difficult in either generation or distribution, whether for conventional or renewable energy.

What do you see in the future for Latin America in the next 20 years? What would you expect could happen?

Christophe de Gouvello: I think renewable energy will be ramping up as it has been ramping up in other emerging economies like India and China. China has been extremely impressive and to a certain extent India has been so too. In Latin America, the resources for renewable energy are fantastic and the potential is big. For example, there are only one or two pilot projects using concentrated solar power. In this sense, the region has been trailing behind other regions. For example, Morocco (which is in many ways a smaller country than Brazil or Mexico) already has two large solar power projects which are among the ten largest green projects in the world. There is a huge potential for Latin America but you need to do some pilot projects first and have the different stakeholders willing to test these technologies. The first project is always the most risky.

From the World Bank’s standpoint, what are the main pitfalls in putting together viable PPPs in Latin America and the Caribbean and how can we avoid them?

Christophe de Gouvello: My sense is that it is mainly a question of capacity building. PPPs require complex contracts and complex bidding processes and so, in many cases, PPPs in general are taking place at sub-national levels. It is not the national government which is directly signing PPPs, but the municipalities or public companies which will develop partnerships with the private sector. At the level of municipalities or other sub-national entities like states or provinces, there is a lack of knowledge on how to do that and how to properly engage in PPPs. Capacities are important and this is probably also true for the local private sector. This is what I would say is the main barrier to be addressed first: capacity building and learning how to prepare an issuance and a contract.

The second thing is procurement laws. Usually, countries have very specific procurement laws which are not adapted for selecting a private sector partner. Most of the time you also need to have an adjustment of the procurement laws and to pass, for instance, a PPP law that will enable this kind of partnership, especially from the side of the public sector, enabling it to actually sign a contract, select a partner, etc.

In conclusion, what message would you like to share with those, whether public or private, who are engaging or contemplating engagement in PPPs to meet the universal energy access goals and climate objectives?

Christophe de Gouvello: The first is that PPPs are needed because there won’t be enough public resources and perhaps also expertise in the public institutions and companies to address the challenges of scaling up renewable energy. The second is that it’s important to create an enabling environment to help these PPPs flourish. For instance, it is usually necessary to create rules in procurement laws to enable that. And third, the financing of PPPs is still a challenge and it’s where we need to develop new instruments to be able to channel the large amount of resources that are available in international financial markets into these energy projects. On this specific challenge, development banks like the World Bank have a role to play. They can use their triple A rating to issue bonds that can be attractive for institutional investors and then use the proceeds of these bonds to specifically finance renewable energy projects.