Power Engineering - European Union expansion signals major power industry growth opportunities

30 April 2004 - The 1 May accession into the European Union of ten Central and Eastern European countries (Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia) marks the opening of a new era of energy industry market expansion in a region that will require billions of dollars in new investment during the next decade.

With the follow-on accession of four other countries in the region (Bulgaria, Croatia, Romania and Turkey) expected later this decade, and significant energy infrastructure needs in the neighbouring Former Soviet Union countries, this region could be the next major growth area for the global electric power industry.

With post-accession region-wide annual economic growth rates projected to exceed 3%, and looming EU accession requirements on security of energy supplies, environmental compliance and competitive market participation driving a new cycle of power industry changes, companies familiar with the region view the current market opening as a unique opportunity to establish strong - if not pre-emptive - positions in promising markets.

The bulk of the investment capital needed in these countries will come from private sources - financial and strategic investors - rather than from limited governmental resources on which there are many other claims, and it will be accomplished through privatization transactions, acquisitions of utility franchises, new facilities/infrastructure development, joint ventures, concessions, and other structures.

However, companies and investors investigating EU accession-related opportunities are finding that a variety of significant hurdles stand between them and profitable entry into the new markets. These typically include:

Historically low energy pricing based on government subsidies and continued political reluctance to raise prices to cover full costs;
Inconsistent collections of payment due to lax enforcement and corruption, and a reluctance to pressure large state-owned companies;
New regulatory risk introduced by rapidly evolving regulatory changes driven by EU, IMF, and World Bank pressure, and inexperienced and not always politically independent regulators in charge of implementation; and
Challenges of managing firms in a competitive, unbundled system without reliable historic accounting and operational data, leaving little basis for measuring performance or establishing realistic and appropriate valuations.

In addition to these general hurdles, there are also locally unique issues that must be addressed before investments can be made, such as corruption and concerns about judicial independence in Romania, highly generous IPP contracts in Turkey, and union power in Poland..

"None of these by itself is insurmountable," said A.J. Goulding, President of London Economics International, "but they must all be addressed vigorously and comprehensively with asset sellers, the government, and national regulators. Interested parties - purchasers, partners, investors - must understand the variables that are in motion, and the net effects on valuation."

London Economics has conducted more than three dozen projects analyzing valuations, strategies, market opportunities and potential transactions involving Eastern and Central European assets. The firm provides consulting services and expert testimony on economic, financial, regulatory, and strategic issues to corporations, law firms, and public agencies world-wide from its Boston headquarters, with affiliated offices in Mexico City, Melbourne, London and Paris.

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