Foreword

Jacob J. Worenklein

Managing Director and Global Head of Project and Sectorial Finance Group

Société Générale

Henry A. Davis’s survey of the major project financing developments in the power sector

appears at a critical time for the industry globally. In both the developing world and the rich-

est nations, major portions of the power and infrastructure sectors are convulsed by crisis.

In the developing world, the largest and most important private-sector power projects of

the 1990s – including the multi-billion dollar Dabhol and Paiton projects in India and

Indonesia discussed in Chapters 5 and 6 of this book – went into default. The Indian govern-

ment was unwilling, and the Indonesian government and others were unable, to honour their

obligations to some of the world’s largest industrial and financial companies, as well as to the

governments of the United States, Japan and Germany. These companies, banks and govern-

mental agencies had shown their confidence in these countries – as well as others such as

Argentina and Brazil – by investing billions of dollars in the largest power projects that these

developing nations ever had undertaken. This confidence, however, was shattered and

investors learned tough lessons that, sadly, will hurt developing countries seeking private-sec-

tor infrastructure investments for years to come.

In the United States and the United Kingdom too, the power sector has been racked by

the loss of confidence in the industry among investors, beginning with the failure and fraud

of Enron, and by collapsing power prices arising from excess capacity; the freezing of dereg-

ulation midstream, which created an uneven playing field between regulated and unregulated

entities; the elimination of long-term contracting capability among most power marketers and

traders; and other factors. As a result, many now question both the business models that took

hold in the power sector and the credibility of deregulation. Hal Davis’s excellent studies of

Drax in the United Kingdom (see Chapter 12) and Panda-TECO in the United States (see

Chapter 13) demonstrate how the confluence of many seemingly unrelated events can inflict

significant pain on major participants in these projects. When major corporations fail, such as

TXU Europe and Enron in these two cases, they spread havoc even in unexpected places, as

the failure of Enron did in destroying its subsidiary Nepco, the Panda-TECO contractor.

Focusing on the US and UK power sectors, the magnitude of the financial pain is

unprecedented. The collapse of power prices and asset values, along with the failure of many

of the major players in the unregulated power business (which led to the cascading collapse

of additional players and projects), has resulted in the loss of several hundred billion dollars

by equity and debt investors. The equity market capitalisation of nine of the US industry’s

players alone declined in one year from some US$130 billion to less than US$10 billion. The

carnage permanently destroyed the merchant power model for generation, ensuring that nei-

ther equity investors nor lenders will finance future capacity on a merchant-power basis with-

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