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Going Global: The Top 10 Risks

What utilities ought to know
before doing business overseas.
Fortnightly Magazine - February 1 2002

'We are getting so much from Argentina,' we say, 'No, you are not,'" she explains.

The strategy of geographic diversification may be a function of the perceived term of investment with the associated long-term growth in demand rates. With power generation concessions carrying 20-year to 30-year terms, there are ample opportunities to amortize investments. "In looking at possible investments, we take a long view and look at a whole range of variables in a very disciplined approach before deciding to enter a market or pick up an asset. That provides the best risk management," says Stephen Morrisseu, a spokesman for Duke Energy.

Just how much money is being risked in overseas electric generation, distribution and transmission plants? A bundle, reckons Bill Reinhardt, the editor of the 2001 International Projects Survey, which has tracked public-private partnership investments in infrastructure since 1985, including concessions and privatizations. Combining all forms of energy projects for the past 15 years, he calculates that there are 724 projects in various stages of planning, development, or operation globally, worth an estimated $314.2 billion. Of these, only 282 had been financed by October, tapping an estimated $145.3 billion. The trend of late is for governments to contribute little-if anything-to such development, placing the burden on the private sector.

Of course, the 724 projects are only a fraction of the investments made by the private sector globally. But experts believe 724 projects are probably a close number for those private sector investments in lesser-developed countries-which are usually done in partnership with a government or multilateral development institution. Also, private-sector investment banks are more comfortable with making loans for energy projects when the development institutions are involved, say analysts.

Regionally, the spread of the funded projects tracked by Reinhardt creates some surprising shapes in the bulge brackets. Asia accounts for 135, worth $80 billion; Latin America accounts for 83, worth $30.9 billion; Europe accounts for 39, worth $23.9 billion; Africa and the Middle East account for 12, worth $5.9 billion; and North America accounts for only 13 projects, worth $4.6 billion, says the Harrison, New Jersey-based publisher. The as-yet-unfunded project tally is far higher for all the regions, suggesting that competition for funding is a race that constantly is accelerating.

With the United States and the European Union perceived to be the most stable markets in the world, it is not surprising that a high volume of investment flows between the two regions, albeit in different economic seasons. "Five or six years ago, everybody in the United States was looking for diversification in foreign projects, but a lot of them didn't achieve the earnings they expected, and in many cases, they got burned. So, assets traded hands with a blurring speed," says Phil Kassin, a partner in the Energy Utility Practice at PricewaterhouseCoopers Consulting, in New York. "Now we are seeing a reverse where some of the major global European utilities like E.ON, Centrica, National Grid and PowerGen have run out of running room in their own back yard and the United States is the land of expansion," he says.

2) Political