1. What it takes to put a renewable greenfield energy project together

There are four main elements required to put together a renewable greenfield energy project:

First, it requires an endowment of nature that permits the generation of energy, namely a location that is either particularly windy, sunny or that has geothermal power, etc. Precise measurements must be made and documented, usually over a protracted period of time, to show that there is a consistent and sustainable source of energy.

Second, it requires a plant using one or more technologies, that converts the energy into electricity, heat, or another other source of energy that may be used by one or more end users.

Third, it requires a connection to the electricity grid or to the user(s). While some installations might be “captive” (e.g. a factory might create its own energy source), more often than not, there will be an off-take agreement, which sets out the terms and conditions of the energy purchases on an arms-length basis. This is often an off-take agreement for selling electricity onto the grid.

Fourth, it often requires a subsidy to be commercially viable. This may be in the form of a high purchase price (e.g. when an electricity distributor purchases electricity for the grid).

Finding investors will usually require a business plan which sets out the above information, calculates cash flows and financial performance (e.g. payback period, internal return on investment, etc.)

1. Why renewable energy has been all the rage

The European Union, as well as various governments, have established aggressive targets with respect to renewable energy. For example, the European Union has set an objective of obtaining 20 percent of its energy requirements from renewable sources by the year 2020. This creates huge impetus for new projects, usually backed by EU or government funds or subsidies.

Incumbent electricity providers will often pay a substantial premium for renewable energy projects, as it bolsters their green credentials and is considered “sexy”.

Entrepreneurs respond to the signals given by governments. In Spain, for example, the private sector has responded so overwhelmingly to government incentives to install wind generation capacity, that the windier parts of the country are carpeted by windmills, to the point where the government’s budget is under strain to honour its long-term commitment to subsidize the wind generation sector.

For the entrepreneur, bringing a project into operation is often an opportunity to create serious wealth. The entrepreneur need not even build out the project (which often requires many millions of euro in investment). There is a ready market not just for built renewable projects, but also for ready-to-build projects, where the feasibility of the project has been established and all permits are in place.

1. Why greenfield projects are so challenging

There are challenges at each stage of the development process. The entrepreneur must invest into studies that establish the feasibility of the project (e.g. to determine that there is sufficient and sustainable wind at a particular location). The energy source may not materialize, as predicted in the study (e.g. less wind than predicted). The entrepreneur must also purchase or tie-up the land on which the project will be located (e.g. for construction of the windmills). He or she must invest into obtaining the myriad of permits required to build the project. There may be a technological risk associated with the technology used for generating energy. Often there is an off-take agreement to negotiate. Incumbents have often been resistant to negotiate agreements for connecting to the grid—renewable energy makes their life more complex and costly. There may also be a cost involved in building transmission wires to the grid, as well as connecting to the grid. If the entrepreneur stumbles on any single permit or other aspect of the project, total investment in the project may be lost. In other words, there is substantial risk.

Another challenge is that governments have discovered that they wield considerable power in issuing permits. The issuance of permits decides who will be the winners and losers. Governments (including their various agencies and bodies) have been known to favour their friends, or to use the granting of permits to extract commitments for campaign financing, or to put it bluntly, the power of issuing permits also creates an opportunity for blatant corruption.

There are hundreds, if not thousands of renewable energy projects to be developed being shopped throughout Central Europe today. Due to the aforementioned risks, probably not more than a fraction of these will ever be built.

Competitiveness for a business may mean being the lowest cost producer; but a business may also be competitive at a premium price where it offers quality, brand, a well differentiated product or service, or intellectual property, that are valued by the market.

In this article I will first talk of the three pillars of competitiveness, as defined in Hamel and Prahalad’s seminal book, Competing for the Future (the remaining part of my article draws extensively from this book), as a framework for analysing where corporate competitiveness stands in Central Europe.

Hamel and Prahalad talk of three pillars in the quest for competitiveness:

First, restructuring and reducing headcount is the most common remedy that company managers resort to when they feel the need to be more competitive. The theory is that by reducing fat, companies will be leaner and fitter in the race to market leadership and profitability. One problem is that companies are often poor at distinguishing fat from muscle, and by cutting, weaken themselves. According to Hamel and Prahalad, restructuring seldom results in a fundamental improvement of the business; it usually only buys time. It has more to do with shoring up today’s industries rather than creating the industries of the future. Downsizing belatedly attempts to correct the mistakes of the past; it is not about creating the markets of the future. The simple point is that getting smaller is not enough.

Second, re-engineering process/continuous processes improvement is something that fewer companies undertake, let alone successfully. Are you documenting best practice and continuously building best practice into your documented procedures? Are you consistently ironing out inefficiencies from your processes, and finding new ways to please your clients? Some companies use various processes like ISO or Six Sigma to provide them with a methodology for capturing best practice and ensuring continuous improvement. There is usually a measurement of service or quality parameters, once again with the goal of continuous improvement.

Third, reinventing industries and regenerating strategies is something that only a select minority of companies succeed in accomplishing. Very few industry leaders are able to envisage the future and position their companies at the forefront of trends. What are the types of products/services that customers will be requesting five or ten years down the road? What types of competencies does a company require in order to provide those products or services? How will it need to reconfigure the customer interface?

How do companies in Central Europe perform in these three facets of competitiveness? This would be an interesting subject for an empirical study. I can only offer, based on my impressions of being exposed to a few thousand companies throughout Central Europe over the last twenty years, some anecdotal evidence. My analysis pertains solely to locally owned companies; local branches of multinationals usually have their processes handed down from head office, and any attempts to invent the future are usually made at head office, or at least in the home country, and hence analysing these parameters in Central Europe might be irrelevant and misleading.

So based on my anecdotal evidence of visiting locally owned companies, the third category – namely reinventing industries – is rarer than hens’ teeth in Central Europe, and yet, according to Hamel and Prahalad, this is the area of most importance for true competitiveness. While there are some locally owned companies that are attempting to progress on the second facet of competitiveness, namely process re-engineering, there are very few that do it well. Even with respect to the first category, of restructuring and cost cutting, many Central European companies were in denial during the recent recession, and postponed or neglected efforts to bring their cost structures into alignment. So the report card is not particularly good. Please do not misunderstand: there are exceptions. I have seen a select few Central European companies which have their costs in order, have real mastery of processes, and others that even invent the future.

So where to from here? Throwing government assistance at companies that do not have an understanding of what is required is a recipe for waste, possibly for disaster. The solution needs to come from within the corporate sector itself, a paradigm shift in thinking. One might start by reading Hamel and Prahalad.

Last week I introduced the owners of aHungarian company to the owners of a Croatian company that they wereconsidering acquiring. They talked for several hours about theirrespective industries in each country, and the Hungarian company wasshocked to learn about the muscularity of some of its Croatiancompetitors. In fact, the largest Croatian company in that particularsector was several multiples the size of the largest Hungariancompany. So the tables were turned: the Hungarian company that wasconsidering entering Croatia all of a sudden felt vulnerable: what ifthe largest Croatian company decided to enter the Hungarian market?

Many of us in Central Europe live insuch sheltered environments, seldom venturing away from our hometurf, other than perhaps as occasional tourists. This is especiallytrue in the business context: most companies never venture outsidetheir home markets, except perhaps to make a few opportunistic sales.There are at least three reasons why venturing abroad should beconsidered seriously by most financially healthy companies:

• First, and perhaps most obviously, it is a potential source of growth. Home markets eventually become saturated. Chances are that if you have a product or service that is competitive at home, there is a real chance that it may also be competitive in other countries.

• Second, it may be an important way to diversify risk. My firm, Euro-Phoenix, for example, began a regional diversification strategy about seven years ago, and over the past three years we have averaged less than 20% of our revenues in our home market. This was quite fortunate, given the economic difficulties faced by the Hungarian economy.

• Third, going abroad is an excellent defensive move as well. Better to meet your future competitors on their turf, learn from them, and learn how to compete with them, before they enter your home market. In this era of globalization, it is only a matter of time before companies from neighbouring countries and beyond will enter your home market. There is no better way to prepare for competition intensifying on your home turf than learning to be competitive on their turf.

Venturing outside your borders is notwithout hazards. Let me turn the tables with a cautionary tale ofexpecting too much from foreign expansion. We recently represented aninvestor who was considering purchasing an internet company. Duringthe due diligence, the sellers gave us a business plan that reflectedthat this internet company, which had never ventured outside its ownborders, was planning to expand into five neighbouring countries inthe next three years. The expected valuation of the sellers wasgreatly inflated, reflecting the expectations of this internationalgrowth.

Naturally, there was great trepidationon the part of our client as to what value to ascribe to thisinternational expansion. There are great risks to internationalexpansion, which include:

(a) Cultural differences, which makeit easy to misread market trends, consumer behaviour and ways ofdoing business. Linguistic barriers are generally predictable; it isthe cultural differences that tend to create the surprises.

(b) Corporate governance must evolvegreatly when progressing from a single office/single countryoperation to a multi-office/multi-country operation. Failure to havethe proper systems in place will almost certainly result in failure.

(c) Human resource risks – willlocal staff be hired that is capable of delivering the growthexpectations?

There is many a slip between cup andlip, especially between theory and execution. Our client did not buythe story of foreign expansion, nor did they buy the internetcompany. What was lacking was a track record in foreign expansion.Had the target internet company at least developed somewhat of atrack record in foreign expansion, whether organic or viaacquisition, the story would have been more credible, and the companywould have had a higher projected growth rate and thereforevaluation.

The analogies clearly demonstrate thatit is worth developing beyond one’s borders, but in a way that isvery conscious of developing the necessary skills, local knowledge,and risk management. In certain cases, organic growth may provide theoptimal risk/cost/benefit ratio, and in others, acquisition.