Attracting investors for big energy projects: "Finance is the go-between"
By Haig Simonian
Roland Chalons-Browne, Chief Executive Officer of Siemens Financial Services and the man who helps make deals happen, explains how innovative financial structures can serve emerging and developing countries, mitigate risks and bring customers and investors together in big energy projects.
The Magazine: Has financing become a “deal winner” or “deal breaker” for big energy projects?
Roland Chalons-Browne: Financing is definitely a key differentiator. Particularly in developing countries, there is a need for help on the financing side. But even elsewhere, customers increasingly expect technology suppliers not just to provide the kit, but also to participate financially – or at least help mitigate the risk.
Remember, most large projects are now structured as special purpose vehicles. Siemens can take minority equity stakes, bring in other parties and even help develop the entire contractual framework to make the project more “bankable”. Risk mitigation is key: It is often impossible to avoid risk entirely, but it is crucial to formulate a scheme that reduces risk to a manageable degree or allocates risk to the party who can deal with it best in a project.
Finance is the go-between here. There is tremendous demand for infrastructure development. And there is lots of liquidity available. But investors can have different time frames, risk tolerances and return spectrums. It is challenging to bring the two sides together.
So, on one side you have the customers, on the other the investors. Where do you find customers have the greatest need for financing?
The need is everywhere, but in different forms. There is an increasing focus on the emerging markets of Latin America, the Middle East and Africa. But risks tend to be greater there than in mature markets, meaning we have to take a bigger role in project development. In many countries, with the exception of China, and, to some extent, Japan, it is the private sector that is the driving force today.
What are the biggest challenges in financing a big energy project? How can one create more bankable schemes to attract a wide range of investors?
Broadly speaking, the challenges involve structuring, accepting an element of potential risk and de-risking a scheme as far as possible to make it interesting and financeable.
There are a number of crucial factors. First is the host country. Is there an adequate legal framework? Can property rights and claims be enforced? What are the specifics of local power markets, and how sure can investors be of projected returns?
Second are the financial institutions and credit insurers. Are there export credit agencies? And is there a development bank or multilateral institution involved? The presence of such lenders reassures investors and can help host countries establish viable frameworks.
Third is the role of the supplier. We see more and more so called EPC contracts (engineering, procurement and construction). To what extent can we reduce some of the construction risk, ensure performance guarantees and be comfortable that services will be delivered as planned?
Fourth are the compliance requirements, which can now mean that participating banks might have a much broader range of concerns than the payback period or interest rates. Employee health and safety on a project, for example, has become very pertinent. And finally, there is always the risk of the unexpected. Many projects now involve renewables, with financing for wind parks and the like based on subsidy regimes for the electricity produced. However, we know policy can change – even overnight.
As policy changes, do your customers and investors change?
Yes, most definitely. Historically, our customers were big utilities, often state owned, with commercial banks providing project finance loans as required. Now, the customer is increasingly an independent power producer, often private equity financed. Such backers can have very different requirements and expectations. A pension fund or insurance company, for instance, may not want to be involved at the outset because of construction risk. But they may be very drawn by the likely stable income streams once a project is running.
So, there are no longer any “plain vanilla” clients. Some 90 to 95 percent of today’s schemes are finance related. You have either got an emerging market government that cannot afford the financing, or a mature market one that does not want to allocate resources and prefers public-private partnerships (PPPs). In a recent Argentine deal, for example, Siemens won the contract for four industrial power plants involving 12 gas turbines. Our customers were two Canadian private equity groups, operating the facilities as independent power producers, with Siemens committing a US$115 million loan to support construction.
Similarly, Thameslink, the London rail transport project, saw two equipment suppliers in competition. Our innovative financial structure was the key differentiator allowing us to win a contract that includes rolling stock and two new depots. We offered a loan of up to £400 million and took a one-third equity stake.
What trends do you see emerging?
I foresee a continuing shift towards private sector involvement. But governments have to play their part too by ensuring a sustainable investment environment. That means a clear and reliable legal framework, the ability to enforce claims and property rights, protection for foreign investments and assurances that local power purchase agreements make sense.
There are some megatrends influencing energy needs as well, such as urbanization, demand for clean and reliable power, and rising electricity consumption for transportation. All are part of the changing dynamics. Roughly one-third of our activities are energy related. Of that, about 40 percent are for traditional gas-powered generation and 40 percent for renewables, particularly offshore and onshore wind. The other 20 percent are transmission, pipelines and other energy-related infrastructure assets.
Haig Simonian is an independent journalist based in Zurich.
Picture credits: Florian Jänicke, Mariela-Bontempi
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