Banking is no fun for non-banks

One of the signs of the long-troubled times in the equipment industry is the spectacle of equipment suppliers racing to finance their customers’ businesses. Troubled? Zurich and Stamford, Connecticut seethe. ABB Financial Services and GE Capital are no also-rans. Their insight into project finance of all types, and operations in far-flung markets where traditional bankers fear to tread, are essential parts of a modern energy equipment business. Their project partners are no wallflowers either, thank you. Try CMS, Edison, and Enron on for size.

So what? The idea that projects might need an equity boost from the turbine manufacturers is a dangerous one. Can the rest of this global market really be so dumb that it doesn’t cotton on to “opportunities” that the manufacturers take up? And if you invest in order to support your own business, fine, but at what price? Surely it is the case that your project team will not come up with the best industry deal list year in, year out, and there will inevitably be some mishaps. Such as a rather alarming one called Indonesia (GE, Rolls-Royce, Siemens).

Don’t expect fundamentalist shareholder value carping to have much effect, however. This particular game might be just getting started. Interestingly, Mitsubishi Corporation has taken a 25 per cent stake in BP’s Grangemouth, UK cogeneration project, joining 75 per cent sponsor IVO of Finland, and backing equipment supply from Mitsubishi Heavy. The top Japanese manufacturers have traditionally not been project investors, leaving that business to trading companies like Marubeni and Tomen. A bigger role for Mitsubishi is not impossible, despite all the well-known problems at home.

The Grangemouth deal is also interesting because it is a developed market deal. Many project finance arms were founded or expanded in the first half of the decade to meet emerging market requirements. Putting a project together in, say, Peru, can be a technical cakewalk these days, and a financial nightmare. Investment bankers lose patience, commercial bankers get cold feet, and development banks and export credit agencies try as hard as possible to screw things up with maddening conditions and bureaucracy. In steps the hardened equipment supplier, so used to calculating his or her own fund flows months and years after the project starts that arranging project finance for an ultimately “bankable” project is “easy”.

Well, there’s not much emerging market business going now, and those still so useful traditional bankers are harder to find than ever in some parts. Meanwhile there’s plenty to do in Europe and the US, where merchant operators and heavy industry have great ideas, but not a lot of free capital, and banks are being hidebound, something about a global crash, credit crunch, didn’t quite catch it. Off we go again.

If US or European wholesale trading prices crash in 2001, and those great idea projects blow up on the financiers’ spreadsheets, which is of course a much worse event than a real world plant explosion would be, maybe those guys in finance should do some soul-searching. But we are a bank, albeit a non-bank bank, and this is a business, and boy is it profitable, the likes of GE Capital might say. OK, let’s see you invest in a super-profitable ABB project.