Foreign aid via 3-Party Covenant Financings of capital-intensive infrastructure

Abstract

Purpose The purpose of this article is to analyse electricity supply in the Solomon Islands face extraordinarily expensive electricity tariffs – currently set at 96 c/kWh – making them amongst the highest in the world. Power is supplied by a fleet of diesel generators reliant on imported liquid fuels. In this article, the authors model the 14,100 kW power system on the island of Guadalcanal and demonstrate that by investing in a combination of hydroelectric and solar photovoltaic generating capacity, power system costs and reliability can be improved marginally. However, when the authors model a 3-Party Covenant (3PC) Financing structure involving a credit wrap by the Commonwealth of Australia, electricity production costs fall by 50 per cent, thus resulting in meaningful increases in consumer welfare. Design/methodology/approach This study’s approach uses an integrated levelised cost of electricity model and dynamic partial equilibrium power system model. Doing so enables the authors to quickly analyse the rich blend of fixed, variable and sunk costs of generating technology options. The authors also focus on the cost of capital that is likely to be achieved under various policy settings. Findings The authors find that a 3PC Financing policy can substantially reduce the production costs associated with capital-intensive power projects in an unrated sovereign nation. Such a policy and associated prescriptions are not specific to the Solomon Islands or power generation. The conceptual framework and associated financial logic that underpins the initiative can be generalised to other “user pays” infrastructure projects and to other developing nations. The broad applicability of 3PC financing means that it is not country specific, project specific or asset class specific. Research Limitations/implications It is important to note that the analysis in this paper has a number of limitations in that the authors do not deal with rural electrification or distribution network costs. The focus of this paper is to identify policy interventions that are capable of making profound changes to the cost and the reliability of wholesale electricity production. Originality/value The focus of this paper is to identify a policy intervention capable of making profound changes to the cost and the reliability of wholesale electricity production. While there is nothing novel associated with a 3PC Financing per se, the authors are unaware of its direct use as a form of delivering foreign aid. A 3PC Financing has the effect of shifting the source of aid funding from fiscal account surplus/deficit (i.e. cash outlays) to balance sheet (i.e. credit wrap). However, this is not a “magic pudding” – 3PC Financing creates an asset-backed contingent liability and will have the effect of reducing the donor country’s own debt capacity by a commensurate amount, holding the nation’s credit rating constant.

Mainstreaming sustainable development goals in Ghana’s energy sector within the framework of public–private partnerships: challenges, opportunities and strategies

“…However, the private sector's participation has mainly been the management of public service in the waste, energy, telecommunication and sanitation sectors (Kwofie et al, 2019). Hitherto, physical public infrastructures such as roads, railways, power plants, airports, bridges and public hospitals have private investors' participation been relatively low before the 1990s, but on a contrary, this is no more the case in recent times (Simshauser et al, 2016). It has, therefore, become necessary in recent times for the government to engage the private sector to assist in the delivery of more physical public infrastructures following the global financial crisis, which has limited the flow of donor funds (Liang and Hu, 2020).…”

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Determinants of cost of capital in the electricity sector

“…Dobrotkova et al 2018, Apostoleris and Chiesa 2019, Botta 2019, Ðukan and Kitzing 2021. Moreover, researchers evaluated the potential impact of various innovations that might lower the CoC for renewable energy technologies, including development finance instruments (Simshauser et al 2016, Shrimali et al 2019 and blockchain-based crowdfunding (Stekli and Cali 2020).…”

General equilibrium impact evaluation of food top-up induced by households’ renewable power self-supply in 141 regions

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