“Optimism bias” and Mega Power Plant Projects

A recent study by Oxford University found that the vast majority of mega dams around the globe are unprofitable undertakings as a result of exorbitant cost overruns. 

As many as three-quarters of mega-dam projects in the Oxford University survey suffered from cost overruns. Analyzing 245 dam projects in 65 countries over a seven-decade time period (from 1934 to 2007), the report found that large projects routinely come in late and over budget. This paints a dismal picture for large scale projects. Why does this happen? Various misrepresentations contribute to this problem and a few are worth noting. 

I like the term used in the study --“optimism bias” -- describing when politicians (most frequently in democracies) make far fetched estimates of the time in which projects can be completed. “Strategic misrepresentation,” another new term I am sure we’ll hear more of, occurs in relation to project promoters, who intentionally underestimate costs in order to increase the likelihood of approval. 

Though the study reviewed hydro projects, I can tell you this problem also applies to other large scale power plant projects including nuclear and carbon capture and sequestration power plants. 

What's the solution? Smaller, more flexible hydroelectric projects that can be built and go online quicker, and can be more easily adapted to social and environmental concerns are less likely to fall prey to the “optimism bias” of project promoters. One country doing this well is Norway. The government encourages small hydro development (plants with an installed capacity of 10 megawatts or less) typically using low head and run-of-the-river technologies. Its flexible approach has yielded substantial payoffs -- 99% of its electricity is produced from water and is highly successful in the country.

Emerging economies as Brazil, China, Indonesia and Pakistan need to take note -- China especially, with its plans to almost double its current hydropower capacity of 250,000 megawatts through a huge dam-building effort. A more flexible approach, with smaller plants and investment can help a developing country from drowning in debt as a result of mega projects.

Read more here: http://sourceable.net/mega-dams-make-for-bad-investments-oxford-study/

Crimean conflict reminds Europe - diversification of power sources is a good plan

European nations who vowed to shut down their nuclear plants and turn to renewables or piped in natural gas to provide their energy needs, may be rethinking that decision as the conflict in Crimea unfolds.

Russia supplies Europe with 14% of their of natural gas consumption (source: Deutsche Bank) and being vulnerable to such a neighbor, who is at best unpredictable and at worst aggressive, is never good a good thing -- especially when you are counting on them to keep your lights on.

A country with a diversified power generation portfolio (i.e. coal, nuclear, gas and renewables) has the flexibility to respond to geo-political events with confidence, able to switch direction when required.

Even before this event, Germany felt the impact of reducing coal and nuclear generation with high electricity costs. They are now importing part of their energy needs from nuclear plants across the border in France.  

Ukraine relies on four Russian-built nuclear power plants (15 reactors) for almost half its electricity and fortunately for that country, they’ve kept them operating consistently during the crisis.  

Read more information here about how the conflict raises prospects for nuclear energy. 

Surging ahead...Colombia’s economy surpasses Argentina

As a result of the recent devaluation in Argentina, Colombia’s $350 billion economy has surged ahead of Argentina to become the third largest economy in Latin America, led only by Brazil and Mexico. 

My wife and I vividly remember the devaluation of Argentina’s currency in 2001. The streets were full of the Argentinian citizens, banging on pots and pans, chanting loud protests against the state of affairs at the time.  The country did manage to recover, but it was a fragile recovery. Argentina is now suffering its second large devaluation in the last 15 years.

Colombia’s ranking is a monumental improvement from the Colombia I knew in the 1980's and 90’s -- then known for its drug violence and civil war. When I was in Bogota last month, I was encouraged to hear the Colombian government is promoting public-private partnerships with global companies for new infrastructure projects in the country. One example is the new, state of the art, impressive international airport in Bogota.  I look forward to watching the county take off. 

Read more about this exciting “win” for Colombia here...click link.

New Rules for Globalization

State capitalism is driving globalization strategies. The playing field has changed and an article from this month's Harvard Business Review says it best--

"Until 2008 going global seemed to make sense for just about every company in the world. Since then, we’ve entered a different phase, one of guarded globalization. Governments of developing nations have become wary of opening more industries to multinational companies. They are defining national security more broadly and perceiving more and more sectors to be of strategic importance, taking active steps to deter foreign companies from entering them and promoting domestic, often state-owned enterprises. Indeed, the rise of state capitalism in some of the world’s most important emerging markets has altered the playing field.

To factor globalization’s new risks into strategy, executives must consider their industry’s strategic importance to the host government and their home government. They can then choose among various approaches: strike alliances with local players, look for new ways to add value abroad, enter multiple sectors, or stay home." Read the full article here:http://hbr.org/2014/01/the-new-rules-of-globalization/ar/1

Emiratisation, A Lift for UAE Energy Sector

During my recent trip to the United Arab Emirates (UAE), I heard a lot of discussion about "emiratising" the workforce there. Most private sector jobs are held by expats, though private companies are required to hire locals. Ninety-five percent of small and medium-sized businesses (SMEs) of a more entrepreneurial bent employ expats, resulting in high unemployment rates for Emeratis. 

In the last year, the government has turned a more focused eye on this problem with two initiatives. First, they are encouraging businesses to hire locals by subsidizing salaries to help compensation equal government sector jobs. Secondly, the government is initiating quotas for hiring of personnel. The hope is, creativity and entrepreneurialism will stay in the country.

Local energy companies, like Al Mansoori Specialised Engineering and the Emirates Nuclear Energy Corporation and multi-national energy companies such as Dolphin Energy, Halliburton, Petrofac, Schlumberger, Total, and Total Tractebel are all trying their best to attract and hire UAE locals with job fairs, recruitment and other ways to connect Emeratis with SMEs. 

Promoting talent from within is critical for any organization, region or country and will be central to the growth and success of the UAE economy. Read more in this article from The National, an Abu Dhabi English language publication. 

Nigeria and its energy industry -- can private industry do it better?

Nigeria’s attempts to manage its vast energy industry resources have been complicated. "From 2000 to 2010, more than 100 refinery construction projects were announced in Africa. Only one was built, according to consulting firm Citac Africa, Ltd and others often fell victim to political interference or high borrowing costs," says WSJ.com.  But now, private industry has stepped in to close the gap. (see article)

This change means opportunity for international energy companies who are chomping at the bit to get into Nigeria's power generation and fuel products industry. Many U.S., Asian and European companies are expanding operations in Africa. In addition, this will also support recent efforts to privatize Nigeria's power plants. It’s an exciting time for the country. Read more in the Wall Street Journal Article, Africa's Richest Man Bets Big on Oil Refinery, Aliko Dangote Set to Spend $9 Billion on Refinery Project as Wave of Consumerism Sweeps the Continent.

Stealth competition -- from Asia

One of the more interesting trends in global business is the strategic moves being made by Asian companies to expand outside their traditional markets

Asian companies, especially the small to mid-sized ones established in their own right at home, are looking to expand outside their countries into larger markets that once saw them as simply a source of back room support. 

I saw this trend first-hand when a mid-size Indian company manufacturing power generation equipment invited me to their home offices in India to see their facilities and help them understand the potential for the company’s entry into the US and Latin American markets. 

The company is a good example of the spirit of entrepreneurialism sweeping across Asia looking to expand into the US and Latin America. While in India, I was impressed with the “can do” attitude of the company’s employees. They were excited and eager to learn about doing business in this region. I was also struck by the contrast of the old with the new -- seeing a shiny, new facility ready to take on the world, standing right next to the company’s original, legacy manufacturing building. 

My research of this company and my interviews with current customers and prospective new customers in the Americas, indicated it could successfully establish a presence and compete for market share.

More challenging will be the need for companies such as this to understand the nuances of the local markets they enter. They’ll need to ramp up service capabilities for their products in the markets in which they’d like to sell and provide better training, documentation and direct customer care.

It seems just yesterday US companies were establishing operations in India and other countries to take advantage of the low labor and manufacturing costs. Those days are over. Small to mid-size Asian companies are using a variety of strategies to rapidly move their global expansion agenda to the Americas.