the Dabhol power project in India (see Chapter 5). PLN’s refusal to pay under its PPA with
Paiton Energy in Indonesia (see Chapter 6) and the Fujian (China) provincial government’s
disavowal of its PPA obligations related to the Meizhou Wan project (see Chapter 2) showed
that contract parties – even when they are government organisations – do not honour their
contractual obligations when it is beyond their economic ability, or not in their economic
interest, to do so. The unwillingness of the Indian federal and state governments to make pol-
icy changes that would allow Dabhol to sell electricity to out-of-state entities illustrates a
painful principle of project restructuring: preventative restructuring is rare. Contract parties
usually do not make concessions until there is a crisis.^13
The Paiton Energy case study shows that contracts are of diminished value when a pro-
ject participant can no longer afford to abide by their terms. Nonetheless, the PPA provided a
framework and set the boundaries for several years of negotiations. The strength of the agree-
ment, and the likelihood of litigation and arbitration ultimately favouring Paiton Energy, were
important restraints on the government-owned utility and power off-taker.Political risk
The TermoEmcali case study (see Chapter 3) shows that in a developing country such as
Colombia the political and economic situation, as well as the credit-worthiness of the off-taker,
can change considerably in just a few years, not to mention over the term of a PPA or a bond.
By not honouring their guarantee and counter-guarantee obligations the governments of
India and Maharashtra undermined the foundation of the Dabhol power project. Such politi-
cal decisions could be considered creeping forms of expropriation. International arbitration
was relatively ineffective for both projects.
Persistence, including consistent, steadfast denial of corruption charges and willingness
to explore alternatives such as extending the term of the contract and building new power
capacity, helped the sponsors of Paiton Energy to salvage a difficult situation.
An International Development Agency partial risk guarantee for the Azito power project
(see Chapter 4) was critical in attracting lenders to Côte d’Ivoire, which was not yet an estab-
lished international borrower. With respect to the Golden Pride, Bulyanhulu and Geita gold
mining projects (see Volume II – Resources and Infrastructure), Carver of Barclays comments
that the maximum size of a deal in a country such as Tanzania is driven by how comfortable
the bank and insurance markets are with the political risks.Market risk
For a project such as the El Abra copper mine in Chile, which depends on commodity prices,
lenders must know where prices are in relation to long-term cycles. The Andacollo gold mine
in Chile showed that mining projects are subject to the risk of falling commodity prices and
the risk that, despite the results of expert feasibility studies, ore grades and production costs
will not meet expectations. (See Volume II – Resources and Infrastructure for case studies on
these projects.)
Carver of Barclays observes that gold price hedging has been a one-way bet during a long
period of falling gold prices. Through hedging gold projects consistently have been able to
sell at above-market prices. If the gold market were to reverse and enter into a long-term price
upswing, Carver wonders whether gold producers would maintain their appetite for hedging.INTRODUCTIONIntroduction.qxp 6/4/07 7:04 PM Page 27