The 2008 Global Financial Crisis had little impact on the flow of funds to South Asia’s power sector. All told, the sector still needs up to $150 billion in additional investments to meet its growing electricity demand by 2015 says a new report. The Impact of the Global Financial Crisis on Investments in the Electric Power Sector: the Experience of India, Pakistan, and Bangladesh report has just been released by the World Bank’s Energy Sector Management Assistance Program (ESMAP). It says financing for the power sector mostly came from government budget allocations in Bangladesh, multilateral institutions in Pakistan, and domestic commercial banks in India.
The South Asia region has significant electricity shortages partly because of its rapid economic growth since the 1990s and partly because of chronic under-investment in earlier years. The region was largely cushioned from adverse effects of the financial crisis because remittances, domestic investments and exports of certain categories of goods and services kept up during the crisis,Mohua Mukherjee, Senior Energy Specialist, The World Bank and largely also because of its limited integration with, and dependence on, the world financial markets. In addition, strong and timely policy interventions in most countries helped minimize the impact, said the co-editors of the report Mohua Mukherjee and Kumar V Pratap. “In our view, India’s buoyant economy, the highly liquid domestic banking sector, and large deficits in generation capacity and network infrastructure will drive future growth in the power sector. The provision of risk mitigating instruments like the partial risk guarantee by multilaterals will likely give other financiers confidence to invest in Pakistan and Bangladesh,” they said.
The specific impacts of the crisis on investments in the electric power sectors of India, Pakistan, and Bangladesh are given below.
In India, the impact of the global financial crisis on its power sector was only marginally adverse in the short term. No major medium-term or long-term impact is likely, says the report. India’s relatively strong economic fundamentals provided room for cushioning the impact of the crisis through fiscal stimulus packages in December 2008 and January 2009. India’s monetary policy was also eased and interest rates were sharply lowered during the crisis. However, the negative impact of the global financial crisis was felt on private sector investments, but it lasted only for a few months in the latter part of 2008. Similarly, investments in renewable energy projects became relatively unattractive due to perceptions of technology risk on top of the usual commercial and financial risks.
Some of the beneficial indirect impacts of the crisis on India’s Power sector are:
- It helped weed out speculative developers who had a relatively short-term outlook on the sector;
- It underscored the importance of entities with strong balance sheets;
- It discouraged speculative behavior in competitive bidding for power projects and brought tariffs to realistic levels.
Pakistan, on the other hand, was more vulnerable to the crisis because of its unique conditions. Its current account imbalance and fiscal deficit increased, inflation surged and growth slowed down. Pakistan underwent a stabilization effort beginning with an $11 billion IMF package which supported the country’s foreign exchange reserves.
Multilateral institutions including the World Bank, the Asian Development Bank, and the International Finance Corporation increased their funding for power projects to help Pakistan’s economic recovery. The Government of Pakistan announced a “Vision 2020 Program” to address the power shortfall over the medium-term. It planned to add around 20,000 MW into the system by 2020 at an estimated cost of over $32 billion.
The study recommends that Pakistan’s power sector needs to improve in a holistic way through:
- Promoting affordability of power through a lower cost expansion program focused on domestic power resources;
- Regulatory streamlining to improve efficiency of decision making and private sector participation;
- Enforcing autonomy and accountability of public sector entities throughout the energy chain; and
- Enhanced regional co-operation for energy trade as a means of diversifying energy supply and thereby enhancing energy security.
Bangladesh was mostly insulated from the first round effects of the crisis and its economic growth rate was hardly affected. Two important factors responsible for such low volatility in Bangladesh growth rate are the resilience of Bangladeshi exports and strong inflow of remittances. In addition, the overall impact of the global financial crisis on the power sector was subdued in Bangladesh because there had been no major private foreign investment in the power sector since 2002.
The salient features about financing power projects in Bangladesh in the current economic environment are summarized below.
- There are limitations in domestic sources of finance not only in terms of quantum, but also cost of finance and tenor that may not be ideally suited to large infrastructure projects.
- Larger independent power projects will require international finance and support from multilaterals.
- Lenders have indicated that the Power Purchase Agreement is likely to require tariff adjustment for domestic currency fluctuation, inflation, and fuel price increase.
- Market soundings have indicated that foreign sponsors and financiers will need a government guarantee of the Power Purchase Agreement, backed with a Partial Risk Guarantee from multilaterals.
- Increased funding through budgetary support would be required to make up for any shortfalls in commercial financing.