Benjamin Tait runs Prospex Research Ltd, a London-based consultancy specializing in analysis of strategic and financial issues for the international power business
Can the global power business afford to operate ethically? This is not an industry of diligent garage start-ups serving the pristine “knowledge economy”. It is not a small local operation, operating in isolation and which can easily claim the moral high ground from its island fastness. Global operations, with important offices in several booming but very repressive places are less capable of claiming the moral high ground. Nor can the power business be easily compared to Nike’s hated Asian “sweatshops”. Power investment is a basic and essential building block of development, not a questionable exploitation of ethics-free global options.
Ethical issues are especially difficult in the equipment sector. Project investors may pick and choose between several developed (and democratic) markets. But if you sell hydro, conventional thermal or nuclear equipment, then you will probably be spending a lot of time in places that the rest of the world can afford to look coldly down on. Manufacturing capacity must be utilised, or the big investments behind it and the fixed costs that sustain it will never be recovered. If traditional customers in Europe and North America don’t want your large steam and hydro turbines anymore, while Latin America dashes for gas, then emerging Asia beckons.
However, some commercial necessity and “power is different” arguments should not be taken to their illogical conclusions. Indonesia is an obvious example of imperatives becoming idiocies. China may yet prove to be another such case. Jiang Zemin may have been very pleased with his ‘Potemkinised’ British reception on his recent visit. So, perhaps, might much of British business. But have the Western “engagement” crowd, dazzled by China’s supposed potential like their forebears back to Marco Polo, really thought things through? I think that they haven’t, unless they have already discreetly booked some very expensive and some very comprehensive political insurance. China’s government is mercantilist and, by some accounts, thoroughly corrupt. In the long term, Beijing planners surely dream of a loss of US strategic interest and influence in the region, making China the only regional power of any consequence. Isolationists in the US Republican party may yet make this dream come true. This is a rotten background for signing long term contracts covering assets that obviously cannot be zapped in and out of the country at the click of a “knowledge economy” mouse.
Studying military balances is perhaps too much to ask of power players who have enough trouble in simply winning profitable projects and getting them done right, on time and within budget. China, however, is taking a strategic overview of all of its dealings, and is not merely taking a narrowly focused business view. In nuclear power, for example, the country appears to have had dealings with just about every foreign supplier in existence, even though its nuclear expansion plan never amounted to very much in the Chinese context, and is now in limbo. Yet everyone knows that the way to make civilian nuclear economics work is by ruthless standardisation and massive orders from a few superb suppliers.
Business should be wary. Police vans can be rushed in to block any view of those unpleasant reminders of repression and conflict, as they were recently in London during Jiang Zemin’s visit. A similar approach in business plans, though, would not be “realistic”, but monumentally mindless. Hopefully the risks are receiving proper assessment and any promises of near term rewards are being treated with the scepticism they deserve. For seductive “engagement” ideas are ultimately pointless without a moral dimension. Are we to fund and strengthen yet another human rights monstrosity and policy disaster, as many of us did in Afghanistan, Algeria, Chile, El Salvador, Indonesia, Iran, Iraq, Korea, the Philippines, Serbia, South Africa, or Vietnam?
High price, high ambition
The Italian utility Enel has finally been brought to market at a price of $4.5 per share, which puts the value of the group at an awesome $54.9 billion. This puts it at the very top of the quoted European utility league table. By way of comparison, Spain’s Endesa, the previous leader, is worth “only” $19.9 billion at the time of writing. Even the German big three (RWE, Veba and Viag) and the French private players (Vivendi and Suez Lyonnaise) are worth substantially less than Enel. They are, in any case, not fully comparable companies, since power is but one of their activities.
Has Enel been over-priced? The first day’s stock market trading was lacklustre, disappointing European investors who have grown accustomed to big first day gains in power privatisations.
In terms of valuation ratios, the stock does look pricey. Enel’s stock market value at flotation was 2.7 times its 1998 revenues, which was almost in line with Spanish Endesa’s 2.8 times value/sales ratio. But is Enel really as ready for competition and cost-cutting as Endesa? Moreover, is the high implied value of European utility operations and the low implied value put on the non-power operations of the Germans – Viag is trading at 0.5 times sales – not a strange anomaly? Enron President Jeffrey Skilling has said that power “will become one of the most brutally competitive markets, with all the unfavourable characteristics of commodity chemicals, and none of the positives”. Anyone familiar with chemicals, which includes Viag, must wonder whether European utilities are heading for the dustbin of investment history, just like other unloved commodity businesses.
Meanwhile, in 1998 cash flow terms (EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortisation), Enel’s stock was rated at 6.1 times. This is also in line with Endesa’s rating, but it is behind stars such as National Grid, which has soared in line with its quoted telecoms subsidiary, Energis. The trouble with this rating is that Enel is expecting to receive sharply lower profits in 2000 as regulatory tariff cuts bite. Things should look up after 2000, but by then the Italian power market may be much uglier and bloodier than it is today.
Ultimately, though, only time will tell whether the Enel sell-off was a great deal for investors or for Italian taxpayers. Enel’s own telecom venture, Wind, is swallowing money now, but it may be a stock market star in its own right some day. The core business, meanwhile, is already unrecognisable when compared to its hapless “public service” predecessor of the early 1990’s. If the authorities give Enel management a proper chance to perform, anything is possible.