By Sanna Markkanen

The new FutureDAMS working paper is the second in a series emerging from the CISL’s contribution to the FutureDAMS project, with a specific focus on the questions around sustainable finance for sustainable hydropower projects in low-income and lower-middle income countries.

The first paper in the series introduced the key concepts and terminology in sustainable finance for hydropower. Read: Financing sustainable hydropower projects in emerging markets: an introduction to concepts and terminology

Developing on the initial paper, Mapping the evolving complexity of large hydropower project finance in low and lower-middle income countries, seeks to provide the foundation and background for discussion of hydropower finance in a historical and comparative perspective. The purpose of the paper is to illustrate, with examples, how the financing landscape has evolved over time and what the implications of the different financing models are for new project development and the host countries.

Hydropower has a specific role to play in the broader context of sustainable development, particularly, but not exclusively in improving energy access. The financing options available for Low-income countries (LICs) and lower-middle-income countries (L-MICs) affect the way these countries are able to utilise their natural resources for social and economic development, including progress towards the Sustainable Development Goals (SDGs).

This paper traces the evolution and complexity of hydropower financing from the early 1970s to the present day, showing how the types and roles of various actors have changed over time and how new types of financing packages have surfaced to meet the growing need for large energy infrastructure projects in LICs and L-MICs. It focuses on the three most commonly used models of hydropower project financing in LICs and L-MICs:

  • fully public finance
  • public-private-partnerships (PPPs)
  • new bilateral finance

Examples from LICs and L-MICs are used to illustrate the ‘typical’ features of each financing models, as well as their strengths and limitations.

The changes in hydropower finance over time have been influenced by the broader political and economic context characterised by reduced availability of public sector funds, and the sustainable development imperative.

Among the most prominent developments in the hydropower project financing landscape since 2000 are the growing complexity of the financing packages and the rise of new actors such as China and South Korea as key players in the global economic and political stage.

Projects developed through PPPs often involve a complex mix of investors and lenders from both public and private sectors, as well as guarantees from MDBs and other risk mitigation measures. New forms of bilateral financing arrangements signal a return to ‘simpler’ financing models akin to the fully public projects in the pre-2000s, but typically involve a different type of contractual arrangements and sources of origin. Such finance also comes with a set of constraints and risks that are different from those associated with fully public projects or PPPs, such as the absence of safeguards and increased government debt for the countries that access them. Although ‘new’ bilateral finance is issued by many countries, including some OECD countries, the predominant position of China in this field has resulted in ‘new’ bilateral finance often being referred to as ‘Chinese finance’.

Read the full working paper.

Note: This article gives the views of the author/academic featured and does not represent the views of FutureDAMS as a whole.

Image by tuproyecto from PixabayCC BY-NC-ND 2.0.

%d bloggers like this: