An urgent need for Gorvenments around the world: Capacity-building to design, negotiate and implement Private-Public Partnerships

As the world is facing enormous financial challenges, it has become clear that most large projects can only be implemented through joint sector partnerships, commonly referred to as PPPs (Private-Public Partnerships); even when projects are not classified as PPPs, often they are joint sector initiatives. For example, exploration for natural resources and concessions in general are joint sector activities. However, there is a problem: in most cases, the public sector is not prepared to play the role of the equal partner. Lack of expertise or (even worse) lack of understanding and appreciation for the expertise needed puts the public sector at a serious disadvantage and results in a deal which favors (unfairly) the private partner. A similar result is reached when corruption is involved, which is common in many countries.


One-sided PPPs are not sustainable, as it is a matter of time for their biases to become known to the public, a public which becomes more an more active against incompetent governments and unfair situations. An effort is needed worldwide to strengthen the capacity of public organizations to design, negotiate and implement PPPs, which are fair for both sides and protect the interests of the public. Such capacity is essential in Governments of countries, as well as local governments. Similar expertise is needed in Topeka (Kansas, USA), Athens (Greece) and Rangoon (Myanmar).

Holograms to reduce energy use substantially

I read that Forever 21's Hologram Fashion Show Comes to the U.S. This is a show which replaced live models with holograms. It was first presented in Vienna (Austria) in May and then in Brussels and London. Think about the energy which can be saved if 20-30% of the business trips around the world are replaced with holograms. Meeting my Chinese business colleagues could be done initially in a conference room which makes us all feel that we are in this same room, independently if some of the participants are being represented by their holograms. In the future, the technology could be improved and the same could done in the personal computer.

The problem of the West in implementing strategic projects

I read that Mr. Alexei Miller, the Managing Director of Gazprom, declared that “the South Stream pipeline will be operational by December 2015”. Whether this actually happens or not is debatable. However, the important observation which needs to be made relates to how various countries decide and implement projects of strategic importance. When it comes to countries like Russia and China, economics play an important role, but strategic investments are being pursued even if the economics are uncertain or they are not economically viable. Strategy always wins over economics.

In the West, whether a project is recognized as strategic or not, it has to be implemented by the private sector, which needs to be convinced that the project is economically and financially viable. Strategic considerations are not reflected in the balance sheet of the company. Hence, we have important projects which are stuck in the planning stage and may never be implemented. This is a major problem. Public sector participation is essential. Private Public Partnerships (PPP) is one option.

Apple Inc, as a model for western economies

A few days ago (August 24, 2011), Steve Jobs announced his resignation from the position of Apple's Chief Executive. Steve is probably the most legendary business leader of our times often compared to Thomas Edison. He has introduced products which created new industries and literally changed our lives. Most of people associate him with his recent successes (iPad and iPhone), but some of us who have used all his products remember him too for creating the personal computer industry with Apple II and the Macintosh in the early 1980s, setting the stage for future Apple products by developing creative software (through NeXT, Inc.), integrating music-computer-phone with iTunes and revolutionizing film production with Pixar Animation Studios.

In this write-up though, I want to focus on Apple, the organization, rather than Steve Jobs, the business genius. As western economies are struggling to deal with huge deficits and high unemployment, we can learn a lot from Apple as a model for economic revitalization. Let's see some of Apple's characteristics.

Apple has achieved sustainable and often explosive growth through innovation, which propelled it and kept it far ahead of its competitors. In a globalized and highly interconnected world, this is the only way western economies can stay ahead of the emerging economies, which recently have become strong competitors.

Another Apple trademark is its proprietary software/hardware and secrecy culture. While this may sound selfish and undemocratic, close control of Intellectual Property (IP) is an essential element for success. Look what is happening in renewable energy technologies. Venture capital in Silicon Valley is having second thoughts about investing in new technologies after witnessing their inventions fly so quickly to China and other countries.

However, Apple leaders are pragmatists too. The company realizes that you can not compete with low-cost manufacturing countries. So, if you look at the components of the iPhone, you see that Apple’s contribution is the product design, proprietary software, integration of the innovations of others and marketing. Other components are manufactured through an extensive network of suppliers; examples: the screen is mostly from Japan, the flash memory from South Korea, and the final product is assembled in China. So, one could protect certain strategic elements of the product, but needs to accept that we live in a globalized world and we need to have a global strategy.

Above all though, Apple has empowered the individual and put in his/her hands an amazing amount of power, access to information, ability to communicate with others easily and inexpensively, ability to establish and operate businesses with minimal costs, and in general encourage the individual to innovate. Countries need to unleash the creativity of their citizens, too. Empowered individuals will revitalize the lagging economies and create a sustainable growth with opportunities for all.

Finally, somebody with ...the courage to propose carbon tax!

"The European Commission is planning to propose an EU-wide carbon tax the first half of 2011"! This is a brave initiative which makes a lot of sense. Carbon taxes are easier to implement and monitor, and the only obstacle has been the bias against taxes in general and in favor of cap-and-trade, as if cap-and-trade is not eventually a carbon tax!


Finally, many industry experts and policy-makers are admitting that cap-and-trade has serious issues. The most recent confirmation comes from an analysis carried out by Resources for the Future (RFF), an environmental think tank; the findings of their analysis are documented in the report "Banking on Allowances: EPA's mixed record in managing emissions market transitions" which was published a few weeks ago. Key conclusions include:

• Regulatory changes (e.g., administrative rules, court decisions and new emission rules) have wiped out $3 billion in the value of utility-held emission allowances.
• Cap-and-trade programs have suffered from declining credibility and market support.

Not included in this report is the fact that potential efficiencies of cap-and-trade programs benefit only the emission traders, not the energy consumer.


So, my hope is that Europe follows through and adopts the carbon tax option. Others may follow.

A letter to Troika about the liberalization of Greece's energy market

No doubt the Greek energy market needs reform; however, let's avoid rushing to implement reforms which could lead to further economic havoc.

I should start by stating the obvious that Greece should had liberalized its market long time ago following EU Directives. However, the past can not be changed, so, let's look at the future. Also, let's take into account lessons learned from other countries which have liberalized their energy sectors.

Liberalized energy markets do not work well under tight energy supply conditions. Presently and for the next five years, electricity supply in the Balkans is expected to be inadequate to satisfy peak demand. Delays in the implementation of key projects such as Belene (in Bulgaria) and Kosovo have changed the situation from supply-rich to supply-constrained, and the situation is not expected to change overnight, as you can not build power plants in a few months. Under the circumstances, prices have the potential to increase substantially, as it was the case with California in 2000-2001 when wholesale prices increased by more than 800%. Also, we should remember that energy supply is easy to manipulate (who is going to challenge a power plant owner who claims that his/her plant is not available for technical reasons?); and if market manipulation was easy to happen in California (a State famous for its technological competency, law-abiding institutions and sophisticated financial system), imagine what is possible in the Balkans! So, Greece's market liberalization should take into account the energy supply-demand situation in the region, the liberalization of the markets in neighboring countries and the institutional capacity of the country. Right now, it is not time for experiments.

Under the present circumstances, risk management considerations favor energy sector regulation. Risks (of all types) find their way into electricity prices eventually paid by the consumers. So, how the various risks are managed is essential. The country's risk profile (reflecting Byzantine bureaucracy, corruption, limited ability of consumers to pay, weakness of legal, financial and regulatory institutions, etc.), as well as the project-specific risks are all factored into a minimum acceptable return on investment (ROI), which is established by each investor. Shifting risks to market players who are not in the best position to control them increases further the minimum acceptable ROI. My estimate is that presently private investors will not accept ROIs less than 20-30% in Greece. This does not compare favorably with the typical 3-5% return on assets which is expected in a well-regulated public power market. So, a liberalized market will have much higher risk premium in the tariff than a regulated market.

I am not advocating continuing involvement only of public sector enterprises; in fact, it is very obvious that the private sector needs to participate. However, the transition from vertically integrated public sector to a more liberalized market should follow rational steps. In designing a well-functioning energy market, we need to build up first adequate supply, improve the risk profile of the country and limit political interference on RAE and PPC operations. On the latter:

The regulator (RAE) should be free of any political interference, should employ well-qualified experts and be responsible for tariff-setting. Changing RAE staff by each newly appointed government does not send the right signal to the market and needs to be avoided. Also, tariff-setting should be the responsibility of RAE. The Ministry's role should be policy-setting (including approval of tariff methodology), but not tariff-setting. Long-term, this will be much better for politicians too, as they will not be blamed for increasing energy prices, something they can not control anyway.

PPC should be free of political interference, be managed by a competent team and strive to improve its cost-effectiveness. While every Government would claim that it does not interfere with PPC, there are numerous examples (ranging from personnel appointments to implementation of specific projects) suggesting the opposite. Often, Government-appointed management is not really qualified to manage PPC as a modern power company; also, staff appointments are driven by favoritism. As a result, PPC employs many more people than it needs, not to mention that there is a lot of dead wood, too. A benchmarking comparing PPC to other similar power companies around the world will be most revealing. [A few months ago, I participated in benchmarking a power company of another country in which we included PPC; did not look good!]. So, PPC could improve significantly its cost-effectiveness and competitiveness, if politicians do not interfere in its operation and a world class management team leads the organization.

A few more words on PPC: PPC is a very important institution in Greece, which is worth strengthening, not demolishing. With all its imperfections, it has contributed significantly to the country's economic development, it provides cheap electricity and with some improvements, it could and should play a very important role in the regional energy market.

So, let's address first the key issues facing the energy market right now before rushing to full unbundling and privatization. Let's take important steps in the right direction by building-up energy supply, improving the country's risk profile and reforming the key institutions to play the appropriate role in a well-structured and well-functioning energy market. Such actions will make it easier to transition to a fully competitive (regional) market and will contribute to Greece's long-term economic recovery. The slowly developing regional market (in the Balkans) gives Greece some breathing room to prepare better.


Disclaimers:
A. References to competent staff/management for RAE and PPC is not meant to reflect my opinion about the present staff of these organizations. My intent is to emphasize the need for competency in general and always, independently of who is in government each time.

B. This article reflects strictly my personal views and not the organizations I work for.

Why not natural gas for the transport sector?

The message is coming from many reliable sources that we are in the middle of a natural gas glut. The International Energy Agency's (IEA) Annual World Energy Outlook (just released) says that the question is no longer whether a gas supply glut is coming, but how long it will last. This is particularly relevant for North America where 20 years' worth of technology development resulted in substantial addition of gas reserves from oil shale formations. The Henry Hub spot price in October (2010) averaged at 3.45 $/MMBtu and the US DOE Energy Information Administration has just lowered the average gas price for next year to 4.31 $/MMBtu due to upward revisions of production and inventories.

Under these circumstances, it is rational for the electric power industry to look at natural gas as the fuel of choice, but it is puzzling why this fuel is not being utilized more in the transport sector too; electricity could be produced by many other energy resources, but transport is linked exclusively to oil. It would be strategically importance for transport to have a second dominant fuel to rely on.

Natural gas (in transport) can be used in various forms:

1. All grades of liquid fuels (gasoline, diesel, etc.) can be produced from gas through what is called Gas-To-Liquids (GTL) processes. While GTL products may be more expensive, they are certainly less polluting as natural gas has no sulfur and other pollutants. The economics improve when the price differential between oil and gas is high, as it is the case right now. Also, the economics are expected to improve as more GTL facilities are built (economies of scale and learning curve). Another very attractive consideration for GTLs is that they can utilize the same infrastructure to be transported and distributed as the oil-derived liquid fuels; so there is no need for new infrastructure, as it is the case with CNG and LNG (see below).

2. Compressed Natural Gas (CNG) is being used already in buses and taxis in many countries. This choice could be expanded further to private cars.

3. Finally, there are developments to use natural gas in liquid form. This is more challenging (technologically and financially), but it is another choice nevertheless, especially if our planning horizon is more than 10 years.

So, why governments and the industry are not pursuing these options in a much more aggressive way?