1. Sustainable Policies for the Electricity Sector and the Inter-American Development Bank Carlos Rufín, Babson College World Resources Institute Washington, April 2004

2. © C Rufín 2003 2 The reform experience in the electricity sector Massive reform throughout the world in 1990s Cookie cutter approach: Chilean/British model diffused by IFIs, donor agencies, and private consultants Emphasis on competition and private investment Problems by late 1990s: political backlash, investor retreat

3. © C Rufín 2003 3 Distribution of electricity reforms, 1982-1997 ~

4. © C Rufín 2003 4 Sustainability of electricity reform: the IDB experience Institutionalist approach: need to “get the institutions right” But… which institutions? – “technical”: system coordination; transmission – property rights: market organization; regulation Less emphasis on other sustainability issues – The market will take care of supply – Need to attract private investment

5. © C Rufín 2003 5 Why this view of sustainability? Technical complexity of electricity sector – A highly complex machine can easily break down The world-view of economics – Belief in market mechanisms: emphasis on property rights and private investment – No special action needed to address poverty— economic growth sufficient Financial mission – Emphasis on creditworthiness

6. © C Rufín 2003 6 Governance: the dual personality of development banks As development institutions, interested in sustainability – Economic – Increasingly, environmental and social too As financial institutions, interested in low credit risks – Desire to maintain high ratings

7. © C Rufín 2003 7 Addressing Sustainability in Guatemala Significant threats to economic sustainability of reforms – Political interference with regulation – Use of state-owned assets for political purposes Less interest in other kinds of sustainability – Renewables law pending approval – Reconstruction of planning entity – Innovative rural electrification program

8. © C Rufín 2003 8 Guatemala’s innovative approach to rural electrification Proceeds from privatization deposited in trust account – Controlled by internationally reputable banks – Strict disbursement rules Distribution concessionaire (Unión Fenosa) draws from fund as it expands electrification coverage Why does it take a civil war to adopt this approach?

9. © C Rufín 2003 9 Solutions for the crisis in the Dominican Republic? IDB seems involved mainly in lending to large thermal projects, e.g. CESPM – Little participation in electricity reform discussions Renewables efforts funded by USAID – Wind map – Work with NRECA to develop co-ops Renewables law pending approval

10. © C Rufín 2003 10 Is a broader definition of sustainability compatible with market reform? Need to develop viable business models for private investment in renewables within deregulated markets – GEF as a model? – Potential demonstration effect for lending to private renewable projects Institutional development must also include policy analysis units – Add environmental sustainability to policy analysis and development

11. © C Rufín 2003 11 Can this work under the current governance mechanisms? New business models could meet – Financial viability (lending bias) – Market test (economic bias) – Environmental sustainability But uphill battle to incorporate environmental sustainability to institutional development programs – Opposition of private investors and developers; skepticism of economists – Organizational inertia

12. © C Rufín 2003 12 Reconciling private interest with sustainability writ large Viable business models – Understanding risk profiles for renewables projects in electricity markets – Developing risk management tools, e.g. diversified project portfolios – Opening up to local investors Investor pressure: green funds Consumer pressure in developed countries Local pressure: siting/permitting decisions

13. © C Rufín 2003 13 Incorporating the concerns of local communities and stakeholders Transparency – Permit applications – Permitting decisions Participation – Advance notice – Local public hearings – Technical capacity building – Organizing local stakeholders

14. © C Rufín 2003 14 A little planning may be good for the market Energy is a legitimate concern for representative political institutions – Massive economic, social, and environmental effects Such concerns can be compatible with market processes – Incentives rather than commands Need for sophisticated analytical tools and capabilities – Economic, social and environmental impact assessment – Cost-benefit analysis