The overseas road of environmental protection companies is a tough battle

Under the guidance of the principle of “Going Global” and “Belt and Road” supported by the state’s support for private enterprises, more and more Chinese companies are participating in the competition in overseas markets, from the initial overseas EPC construction to the later BOT, PPP, and then to investment. Mergers and acquisitions all show the ambition and determination of companies wishing to go global.

The same goes for the environmental protection industry. With the national planning and international trends such as the “Belt and Road” “Environmental South-South Cooperation”, the environmental protection companies have been “going out” frequently. The most talked about is the value-added acquisition of the New Zealand TPI NZ nearly 5 billion yuan by the Capital Group. Since the beginning of this year, there have been announcements of mergers and acquisitions of overseas companies by environmental protection companies.

The risk of Chinese environmental protection companies investing overseas, including project investment and mergers and acquisitions, is self-evident. As can be seen from Figure 1, between 2013 and 2015, the difference between the domestic and overseas revenues of several listed environmental protection companies has basically changed near the zero line. The number of companies with overseas gross margins of overseas revenue above and below the gross revenue of domestic revenue over the past years is also roughly the same. Therefore, overseas markets are not foreign monks who are chanting the Scriptures. Enterprises need to consider more risk factors than domestic ones.

The first thing to consider is the political risk of the country. The first thing to do is political upheaval. There is no guarantee of safety. What needs to be noticed is the areas in which ISIS and the Boko Haram organization are located and their permeability areas, mainly in the Middle East and Africa. Figures 2 and 3 are political risk maps for the Middle East and Africa, respectively. The main high-risk areas are concentrated in these two major sectors.

Among political risks, apart from political riots, there is also government intervention and sovereign default. The risk of political intervention mainly lies in the economic and political fields, such as nationalization and land acquisition. The first two points are easily discernible, and sovereign breach of contract is an important issue that companies need to consider. In particular, today's PPP projects are hot, and it is extremely important to confirm the boundary conditions of investment areas and government funding guarantees. In countries and regions where the government has weak control power and unstable economic conditions, government defaults are sometimes not just factors of the government itself, but also the deterioration of the local financial environment and the shortage of foreign exchange reserves. In particular, for environmental protection investment projects, the project owners are generally local governments. Then the government's repayment ability, as well as the government's personnel changes, party disputes may directly affect the project's investment income, start date, operating period and so on.

Economic risk is mainly reflected in currency risk, which is the risk caused by fluctuations in currency exchange rates. Therefore, before investing, it is necessary to assess the risk of large-scale currency depreciation and foreign exchange control in the country. In overseas investment projects, it will inevitably involve settlement currency. In international projects, it is generally settled in U.S. dollars, but there are no shortages of project countries that demand settlement in their own currency for various reasons, such as capital controls or shortages of U.S. reserves. When there is exchange rate instability in domestic currency, the economy of the project The risk will increase. Many Latin American countries prefer this approach, and Venezuela needs special attention. East African countries have reduced their currency risk compared to previous periods due to lower energy and food expenditures, but this risk in Africa in Angola, Ghana, Nigeria and Zambia increased in 2016.

Business and legal risks. This risk is involved in corporate acquisitions, mergers and acquisitions and investment projects. For example, the degree of difficulty in the various procedures for setting up a project company in the local area, the level of efficiency, and the relevant qualifications all affect the progress of the project. For example, in Turkey, foreign environmental protection companies cannot participate in waste treatment projects without local waste acquisition, processing permits and related qualifications. An effective way to solve this problem is to find local strong intermediary agencies, or form joint JV bids with local companies. Another example is the Indian market. Unlike the Southeast Asian countries such as Indonesia, which have long implemented a complete set of standardized bidding systems in the West, their environmental protection market has great demand, but management is chaotic. Not only is there no perfect project operation system, even the most The basic industry standards are also lacking. However, they hope to directly “use the doctrines” and adopt the US and European standards for the preparation of bids. The government can work inefficiently and the standard is not uncommon. This will allow the investment companies to be technical, commercial and Manpower is costly.

Technical risks, in general, the industry standards used by different countries are different, and China's national standard GB is not recognized in many areas. For example, a large-scale Chinese-funded environmental protection enterprise participated in the bidding for a desulfurization and denitrification project for a coal-fired power plant in Eastern Europe. During the technical clarification stage, it was unable to answer the request of the owner's consulting unit to monitor the elimination of bubbles in the limestone slurry pool. Our technical staff was amazed at how to ask such simple questions. It would be nice to just open it and the other engineer would be surprised that we were just looking at it without any monitoring equipment. Such a strong comparison verifies the importance of managing and controlling technology risks.

Regional market risk. The basic raw material prices, import and export costs, and foreign labor costs in foreign markets are all aspects that overseas projects need to consider. Many Chinese companies have been guilty of "taking it for granted" in these respects, thinking that adding a coefficient directly to domestic costs will make things worse. For example, a certain large-scale environmental company in the country won the bid for a Middle East project. The contract price is calculated by multiplying the cost of the most expensive project in China by the coefficient, but only after the project is implemented can it be found that the value is far from the actual situation. The whole area is desert. Even the most basic infrastructure, such as roads, is not available. Not to mention the necessary raw materials for construction projects such as steel and cement. When these materials need to be imported, it is not a simple factor that can be enclosed. . Another example is the Indonesian water supply project of a Chinese-funded enterprise, which caused the project to be delayed due to inaccurate grasp of the local environment. We all know that the great workload of water supply projects lies in the laying of water supply pipelines. However, Indonesia is a country where land is privatized. The government cannot impose land acquisition, so the project department has to face not only the owners but the land along the entire line. owner. One can imagine how long the project will be a long process.

The overseas road of Chinese environmental protection companies is also a step by step approach. The earliest batch of companies has not yet reached a period of 10 years. The above risks are only a rare part of the entire risk system. Therefore, environmental protection companies must be prepared to fight a protracted war and fight tough battles when they go overseas.