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It May Look Like Paradise, But Investors Here Aren’t on Vacation

To the adventurous traveler, the archipelago nation of Solomon Islands looks like heaven: 997 tiny, verdant islands ringed by reefs that glow through clear, blue water, lots of sun, stunning beaches, and 230 varieties of wild orchids.

But to an international investor, things look more precarious. The islands are sparsely populated and remote, making for weak local markets. Some 600,000 people live in a watery expanse that would stretch from London to Rome. The nearest export market is Australia, 2,000 kilometers away.

Moreover, there are almost no roads, and little farmland, because rugged mountain spines bisect the largest islands. And the government has had a history of instability. 

So why are two Korean companies—Korea Water Resources Corp. (K-water) and Hyundai Engineering Co. Ltd. (HEC)—taking a chance on Solomon Islands? Because, despite the hurdles, they see opportunity, and have a coalition of backers, including the Multilateral Investment Guarantee Agency (MIGA), that are helping make a proposed venture viable.

 

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Auki, Solomon Islands — Family with children canoeing on the Langa Langa Lagoon

 

Their plan is to build a $211 million hydropower plant on the main island, Guadalcanal, where a 72-meter-high dam on the Tina River will feed a 15-megawatt power station 20 kilometers from the capital, Honiara. When completed in 2025, the plant could deliver power at up to half of what it costs in the city, and a third of what Solomon Islanders pay now in small towns.

Electricity is scarce beyond Guadalcanal, reaching just 12 percent of the population. Even in Honiara, power is unreliable because it’s produced by aging generators that run on expensive, imported diesel. Frequent maintenance means equally frequent blackouts. As a result, Solomon Islands consumes less power per capita, at higher cost, than any other country in the Pacific (see chart, below).

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K-water and HEC had hoped to build the power plant with only commercial financing, but that approach proved untenable, even for two experienced, ambitious firms. K-water has developed plants in the Philippines and in Pakistan. HEC has constructed hydro projects in Indonesia and other countries.

None of those places presented the challenges of Solomon Islands. K-water and HEC will have to ship almost all supplies across thousands of kilometers of ocean. Not even cement is produced locally. The project just couldn’t support the high rates demanded from risk-averse commercial lenders.

So, K-water and HEC tapped a host of multilateral institutions: the World Bank’s International Development Association, the Asian Development Bank, the Green Climate Fund, the Economic Development Cooperation Fund of the Government of Korea, the Australia-Pacific Islands Partnership Trust Fund of Government of Australia, the International Renewable Energy Agency, and the Abu Dhabi Fund for Arab Economic Development.

Together, they account for 95 percent of the project’s cost.

Even that funding wasn’t enough to make the project happen. There were multiple risks, and the companies had to mitigate for all that they could. Most of all, they needed insurance against political instability, war, expropriation and breach of contract of the project by the government. Solomon Islands is still considered a “fragile” country because of its turbulent history.

Private insurers are often hesitant to enter such situations, but for MIGA, doing business in places like Solomon Islands is familiar territory. MIGA has been providing political risk insurance since 1988, helping to increase the flow of badly-needed capital into low-income nations. K-water used MIGA guarantees to protect its investment in Star Hydro Power Ltd, a run-of-river project in northern Pakistan. 

For the Tina River project, K-water and HEC wanted to protect both their investment in the Tina River project and some portion of future earnings.

MIGA had never insured a project in Solomon Islands, but in key respects, the country looked comparable to other fragile countries where it had operated.

Following extensive negotiations and planning, MIGA agreed to insure the $10.8 million that K-water and HEC are investing in the project, plus $4.9 million in potential future earnings, for a term of 20 years. The guarantees cover breach of contract, expropriation of the project by the government and war and civil disturbance.

MIGA also used a new tool on the project: the IDA Private Sector Window. In simple terms, the window is a source of funds from the World Bank’s International Development Association that can be used to cover some portion of the first losses to arise if a project runs into trouble. In this case, the Private Sector Window is prepared to cover $5.1 million, giving K-water, HEC, and MIGA more cushion.

As with all MIGA projects, the agency hopes Tina River Hydropower will reward K-water and HEC for taking a chance on an unproven situation, and that their success will convince other private-sector developers to tap MIGA for the investment guarantees that can make difficult projects real.

The best outcome for K-water and HEC is that reliable power prompts more investment in Solomon Islands. Economic stability could also prompt more tourists to visit Solomon Islands. Its unspoiled beaches and magnificent reefs are a lure to divers, in particular.

In a not too-distant future, the island nation could look attractive to tourists and investors alike.