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News Analysis

Fortnightly Magazine - April 15 1998

will be needed for energy efficiency in the coming years in Eastern Europe. A large part of that will go toward the 10,000 district heating projects that need to be rehabbed.

Dreessen disagreed with Jamet's financing approach.

"We have multiple projects where the only thing that kept the customer honest in paying us was the fact that it was going to injure their credit ratings or ability to borrow money if they did not honor their repayment of the debt," he said. When financing and performance are bundled, customers take advantage of the fine line between performance and credit risk, he added.

Robert Ichord of the U.S. Agency for International Development said the potential for energy efficiency in Russia is enormous. However, to get into the market, companies may have to do business through barter, because of the non-payment problem. "Cash payments are still [made on] only 20 percent of electricity bills," he said. They've got a long way to go in dealing with that problem. Most of Eastern Europe has solved that problem." Russia's regulatory framework is poor, he added. There are about 72 regional electricity energy commissions.

Shirley J. Hansen, chairwoman/CEO of Hansen Associates Inc., said performance contracting eventually will work in Russia, largely because there's a potential for a 40-percent energy savings there. The problems, as she sees them, are political and economic. There's 42 percent inflation on rubles and 22 percent on hard currency. But economic indicators are improving. "The discount rate a year ago was 48 percent," she said. "The latest one, November '97, 28 percent. Inflation a year ago: 24 percent. The latest as of November: 11 percent."

One attendee asked how organized crime in Russia has affected business.

"That's very difficult to answer," Hansen said. "I can tell you that we have some very major American companies over there that are doing just fine."

"It's no problem if you pay them," Dreessen added.

"And that fits within the Foreign Corrupt Practices Act, Tom?" Dreessen was asked.

"You get a consultant in country and you pay that in-country consultant and what he does with that money you don't know," Hansen said, to laughter.

Dreessen wondered whether performance contracting will work in Russia. "I think clearly not until the payment issue is resolved. Because if they're not going to pay their bills, it doesn't matter what [financial] model you follow."

The only model that does work is where you have a totally securitized transaction, "where they have to pay it or it's going to hurt them real badly," he added.

Mansbach was asked if he saw a trend in ESCOs securitizing their unconventional assets to win greater access to markets while protecting themselves. The attorney said his firm's securitization department is active and was seeing more securitization in Latin American and in central and eastern Europe. "It depends on a certain extent how developed the economy is," he said. "How developed the legal community is. Because the legal underpinnings of securitization are very important, obviously, if you're going to go out and merchandise the final product."