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Slice of the action

Utility Week

26 April 2013

Many utilities can point to some success in securing funding, be it renewal of established facilities or new money. But few sleep easily over time, and not

just because of the scarcity or cost of funding, important factors though these are. Taking a 360-degree view of risk to incorporate the perspectives and needs of investors, governments and other third parties, utilities can make a radical difference to their attractiveness and give greater certainty of access to the funds they need.

While most modern utility projects are well conceived, investors have a variety of priorities and look beyond the outputs of the utility and the returns of the investment alone. Key considerations are factors such as level of risk, liquidity and longevity. Accordingly, it makes sense for utilities to consider the perspectives and needs of the potential investor groups when structuring a project.

To maximise investor appeal, both risk and returns have to be structured. Let's suppose we can divide a project conveniently into:

  • low risk short-term aspects, for example site preparation such as clearance and leasing of diggers, and working capital for operation after completion

  • medium risk medium-term aspects, for example final phase construction, final assembly of generators

  • higher risk longer-term aspects, for example main phase construction, turbine commissioning.

To perfectly match investor needs in each group, repayment or target returns would need to be similarly sliced. In principle, this would require each non-long-term chunk to generate its own discrete returns within its life, just as factored debt or mortgages do. This rarely happens, because by their very nature utility projects depend on future energy revenues, which are long term.

It is hard - if not impossible - to rework the returns side of the equation to fit. This means utility projects are vulnerable to competition for investor funds from more able projects - a shopping mall can generate revenues from anchor tenants and entertainment even while most of the site is still under scaffolding. So when it comes to competing for scarce or reasonably priced investor monies, utilities are starting on the back foot.

However, looking at the earlier list of investor factors - risk, liquidity and longevity - the relative and absolute attractiveness of utility projects can be addressed (see boxes).

If it were possible to contract initiatives at an early stage between government and suppliers, with clear and appropriate accountabilities for each side, the situation could be improved dramatically. There are wide-ranging and admirable precedents for this. In Costa Rica, the government dedicated its high carbon vehicle to a joint venture with the private sector, with the aim of creating not just a sustainable energy sector but an eco-tourism industry as well.

Some of this rightly can be considered little more than common sense. So why are these suggestions not already commonplace? In most cases the cause is one of insularity, unfamiliarity or ignorance rather than informed hostility. This can be overcome by ensuring an objective, fact-based environment that fully represents the interests of the various parties from the outset, so that engineering, investment and politics share a successful outcome. And that begins with engaging potential sources of finance at an early stage in project conception, so that their needs and preferences may be understood and factored in.

Contact the financial services team

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