Mitigating regulatory risk for distribution privatization : The World Bank partial risk guarantee

Abstract

This paper outlines how a World Bank Partial Risk Guarantee (PRG) may be used to promote private sector investment in electricity distribution utilities. The paper explains how a PRG could backstop a government commitment to a pre-defined regulatory framework and a process of dispute resolution, thereby helping to mitigate regulatory risk. As a risk mitigation instrument, the World Bank PRG can also be applied to the privatization of generation, transmission, or integrated power sector businesses, as well as to other infrastructure privatizations. However, this paper focuses on identifying issues and proposing strategies to cover regulatory risk in distribution privatizations, because recent experience in power sector reform in developing countries has shown that distribution privatization can present new risk allocation and risk mitigation challenges for both investors and governments. Although between 1990 and 1998 more than 70 distribution businesses were privatized in developing and transition countries, the post-privatization experience of investors in these businesses has been mixed. Furthermore, in recent years private investors have shown reduced, and in many cases no, interest in power distribution utilities in developing countries. In some instances of distribution privatizations, not a single bid was received.