WHETHER DOING BUSINESS IN SANTIAGO OR Krakow, Budapest or Bang Kraui, American energy service companies agree: It's tough to find a lender to finance international projects.
ESCO executives working around the globe met to commiserate at the International Roundtable on Energy Efficiency Financing Feb. 26-27 at the Ritz-Carlton Hotel in Arlington, Va. Sponsors of the Roundtable included the National Association of Energy Service Companies and the Export-Import Bank of the United States.
Listening to foreign bank representatives, one might think few problems exist, that money is available. Yet from the ESCO perspective, money is there only for perfect customers, for large projects, or not at all. And besides winning a bank's confidence, ESCOs also must educate customers about performance contracting. They must find qualified customers, raft political turmoil and deal with devalued currencies, legal issues, organized crime and inflation.
Brazil, for instance, has essentially no long-term private bank financing, according to a study presented by Howard Geller of the American Council for an Energy Efficient Economy. Shorter-term financing is very expensive. Public development bank financing, available in theory, hasn't reached ESCO projects. Meanwhile, the market promises much: Paulo Cezar Tavares of PROCEL, the Brazilian electric energy conservation program, estimates that in the next five to 10 years, the ESCO business in his country will reap $5 billion, at least $500 million of that profit.
Perhaps the moral of the story worldwide (em drawn from speakers' comments (em is that banks and ESCOs need to allow for more risk in building foreign business, and that bases should be covered via ties to government or quasi-government funding agencies.
South America: A Market With Promise?
Julie Belaga, COO of the Export-Import Bank of the United States, said her organization lessens risks for ESCOs by collaborating with the commercial banking community. The bank looks at credit worthiness of an ESCO and at the company buying its product. "I've been all over the world and all people want to talk to me about is energy, energy, energy," Belaga said. "Congress tells us to reach out to small business. We're Westinghouse's and Boeing's bank, that's true, but we want to reach out to small businesses."
In 1997, 21 percent of the bank's financing (dollar volume) went to small businesses. Some 81 percent of the deals were small business deals. "We're already in your marketplace," Belaga said. "Many of the countries where you're moving, we're already there."
Privately, during the conference, one participant noted banks and ESCOs often don't see eye-to-eye on investments of less than $1 million, and this fact was reinforced by speakers' comments. "Banks aren't interested in the small-scale investments, and then when they are, they require houses and other personal assets to be put up as collateral," said one attendee.
"There's a lot of lip service which is paid to financing small projects, but not many of the larger organizations are willing or can afford to spend the time and effort on small projects given the return they bring in terms of interest and fees," said attorney B. Thomas Mansbach of Dewey Ballantine.
Thomas K. Dreessen, CEO of Energy Performance Services Inc., reports that the average U.S. ESCO efficiency project is $500,000. For projects of that size overseas, there's limited financing. He says that's just the start of the barriers to foreign business. During his company's work with a customer in the Czech Republic, his company couldn't understand the financial statements. Once they were reconstructed, EPS discovered its customer had a huge net worth and no debt. "It was recently privatized and they placed a value on their fixed plant. Just placed [a value] right on [their financial statements]," he said, shaking his head.
He said privatization also has made legal compatibility a problem. And forget about logging payment history, he said. "They don't pay their bills. And they never have. They negotiate that or pay higher taxes. They deal with the government. They say we understand that's the bill, [but] that's not what we pay [for energy]."
Jaime Millan of the Inter-American Development Bank blamed the lack of project financing on communication: Banks say they have no money while project promoters say they have no money; the customer says he's not being asked about energy efficiency projects in the first place.
Eduardo C. Bandeira de Mello of the National Development Bank of Brazil (BNDES) agreed there's pent-up demand for energy efficiency in his country. Helping that is inflation, down to less than 5 percent a year from 4,000 percent annually. His biggest issue, he said, is convincing clients to invest despite Brazil's high interest rates. The maximum rate is about 14 percent, and dropping. It's a floating rate, fixed every quarter.
Geller said that under a broad definition of energy service contracting (em a fixed fee coupled with performance-based guarantees of savings (em there are 30 ESCOs in Brazil. Most are small and all but one, Johnson Controls-Brazil, are Brazilian. Most of the projects cost less than $50,000, although some were $1 million-plus. Some 100-120 projects were implemented by companies in 1996. Total dollar value of ESCO projects in 1996 was $16 million. Fixed-fee contracts are the most common, and performance guarantees are rare. ESCOs depend on the clients to finance the projects and PROCEL and BNDES provide third-party financing.
Europe: A Risk Worth Taking?
Speakers working in Eastern Europe and Russia voiced the same sentiments of their antipodal colleagues.
Bernard Jamet of the European Bank for Reconstruction and Development claimed ESCOs "can make good business" in eastern Europe. The key barrier is the lack of financing and the difficulty of commercial banks to assess the risk in public sector clients (especially those being privatized). Through the EBRD, ESCOs must not only arrange financing, but bear the financing risks by borrowing against their balance sheet, he said. There's no financing given to the client, as there is in the U.S. Small ESCOs, he admitted, aren't able to do this. His bank has invested in four multi-million dollar projects, including a $25-million Honeywell project in Poland. EBRD is a one-third stakeholder, with another third financed through equity and the final third through debt.
Jamet estimated $50 billion 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."
Norbert Kiesling of Honeywell Inc. was asked how his company was handling another risk inherent in doing business in eastern Europe: the lack of hard currency.
"I look to the Central European countries, the former Czech Republic, Hungary, Slovakia, Bulgaria (em we are covering risks in our margins," he said. "If you don't take the risk you won't gain anything. So overall we didn't get paid fully on two projects, but if I take the full scope of our business for the last five years, we are very pleased with the results."
Joseph F. Schuler Jr. is senior associate editor at Public Utilities Fortnightly.
Financing Efficiency
An Agency Short List For Overseas ESCOs
U.S. TRADE AND DEVELOPMENT AGENCY
703-875-4357
www.tda.gov
INTERNATIONAL FINANCE CORP.
202-477-1234
www.worldbank.org
OVERSEAS PRIVATE INVESTMENT CORP.
800-872-8723
www.opic.gov
WORLD BANK GUARANTEE PROGRAM
202-477-1234
www.worldbank.org
EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT
44-71-338-6282
www.ebrd.com
ASIAN DEVELOPMENT BANK
632-632-4444
www.asiandevbank.org
INTER-AMERICAN DEVELOPMENT BANK
202-623-1000
www.iadb.org
GLOBAL ENVIRONMENTAL FACILITY
202-473-0508
www.gefweb.org
BANCO NACIONAL DE DESENVOLVIMENTO ECONOMICO E SOCIAL
021-276-0454
www.bndes.gov.br
FINANCIADORA DE ESTUDOS E PROJETOS
021-276-0454
www.finep.gov.br
Thailand, Japan? Think Again
EDWARD L. VINE of the Lawrence Berkeley National Laboratory,
suggested tips for ESCOs considering tapping the Japanese market. The tips could, however, apply to doing business in many countries.
• The ESCO business is risky; some project it will lose money.
• Marketing is key to success.
• The ESCO industry is based on relationships, not projects. Companies must offer services and solutions, not just projects.
• Government needs to be committed to supporting the industry.
• Prices should factor in environmental benefits.
• The country's business mindset needs to be creative and innovative so that it takes more risks, allowing for performance contracting; ESCOs tend to move fast.
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