In last week’s article “How do You Provide Banks with Enough Courage to Lend Money to OWP Companies?”, we talked about how local banks can learn the project finance from foreign banks and join hands with them to handle OWP project finance cases. This sounds like the makings for a happily-ever-after scenario.
However, judging from current situations today, local and foreign banks are on opposite side of the spectrum when it comes to lending strategies. There are huge differences between the two sides involving factors such as cultural difference, market practices, lending philosophy, credit and loan assessment methodology, financing structure, loan pricing, risk evaluation, loan documentation, legal compliance and corporate governance standards, post-facto loan management, efficiency, speed, etc.
Here are 3 examples which will allow you to quickly notice the differences:
- Business Model On The Opposite Side Of The Spectrum
Confucianism is the foundation of the Chinese culture. We live in a society which emphasizes human relationship. When applied to business management, this is called the rule of man. When applied to recruitment strategy and external dealings, this is called “Guanxi” (aka. Connections). Local banks emphasize the rule of man, and the major shareholders of many banks do not respect professionalism and conduct decision-making based on personal preferences. This results in decisions that appear to be ridiculous and illogical. As a remedy, they would come up with magnificent reasons to clean up the mess and create the “cosmetic compliance” on the surface. On the other hand, government-owned banks’ propaganda is they emphasize the rule of law, but are in fact under very rigid rules which could easily be manipulated by government policies or local parliament members. Obvious examples include loan scandal between Bank SinoPac and Sunpower Development Group, and Ching Fu mine sweeper procurement scandal.
Of course, Europeans also places an emphasis on human relationships. However, historically the change of political regimes in Europe takes place fairly frequently, so a heavy emphasis on system and rules is necessary to assuage people’s strong sense of insecurity. When applied to business management, foreign banks stress the importance of management by policies and rules, and delegation of authority. With clear evidences together with strong rationales, employees are allowed to make constructive suggestions which may be different from the superior’s views. The final decision, of course, is still rested with business leader. With regard to the recruitment strategy and external dealings, foreign banks do not pay attention to relationships or people connections. The success of business development hinge heavily on the professionalism and capability, rather than on drinking or golfing. Employment and promotion is based on one’s business capability and job performances, and is seldom interrupted or influenced by superior officer or government officials.
- Operation Flow On The Opposite Side Of The Spectrum
Local banks enjoy having meeting, but these often turn out to be “meeting without discussion, discussion without decision, and decision without implementation.” They often lack efficiency and innovation. Foreign banks place more emphasis on efficiency. In general, things are conducted based on SOPs, but in cases which takes into account sentiments and the law, people can still voice their constructive suggestions to challenge unreasonable policies or rules.
- Perfection Of Security Interest On The Opposite Side Of The Spectrum
Local banks pay closest attention to the collaterals and less attention to cash flow. Their credit evaluation system is outdated. In addition, bosses frequently tend to influence lending decisions via written notes or phone instructions, which makes it hard to establish a system based on “risk-based loan pricing”. This resulted in lower profit margins and easier to end up with bad debts. Looking from another angle, foreign banks have a system of risk assessment which has been verified over the years, emphasizing aspects such as cash flow, business owner’s integrity and credibility, and collaterals protection. Working in foreign bank, the only thing required is to stick to high level of professionalism. Your lending decision will not be interrupted or influenced by people connections or an instruction from superior officers. This has greatly reduced the probability of incurring bad debts.
Using Core Financial Tools of Green Infrastructure as the Touchstone to Secure “Admission Ticket to Asian Market”
The concept of learning from what other people are good at to supplement one’s own weakness is a great motivation for self-improvement. Once have mastered the skills, local banks will have chance to become one of few banks in Asian countries to obtain practical experience in OWP development. Even though banks in mainland China have already accumulated significant experience in OWP industry, their banks still lag behind many competitors in terms of internationalization. Furthermore, they are only interested in domestic affairs and have no interest to teach others. Through International investment, Japanese banks have already accumulated some experience in project finance but have yet to reach the level of European banks.
If you think about it, there will be significant demand in Taiwan and other Asian countries regarding large-scale green infrastructure constructions. Examples such as massive energy storage system and integration needs with the transition in energy sources, the revolution in transportation brought by the introduction of electric cars and autonomous vehicles, the infrastructure construction of smart city, and projects related to the building of a “sponge city”. For local banks who have the motivation but lack of niche products, wouldn’t this area serve as a kind of proving ground to prepare them for entry into the Asian market?
Now let us look at the issue from a different perspective, to see how developers (aka. The green startup “A”) will react.
OWP developers are regularly exploring potential wind fields across the world to identify potential sites for the company to build more wind turbines in the interest of maximizing the economy of scale. Each project site will require a lot of cash, so to fully utilize capital, strategy-wise the company will aim to maximize the leverage ratio for each investment project. In other words, maximizing the amount of cash you can get (from the banks) to build as many wind turbines as possible for each cent the company spends/invests.
In addition to maximizing leverages, the developers also want to find “cheaper” cash. In other words, for the same amount of money, they might have to spend NT$1.0 for financing in the European or American market, while they would be actually spending NT$0.6 if the funds are obtained through financing in Taiwan.
Does this kind of money exist?
You bet they do! I will not be ashamed to tell you that this kind of cheap money can be found sitting in Taiwan, having nothing to do than sitting around.
Due to the excessive amount of unused funds in the banks and cut-throat competition among each other, Taiwan’s cash is cheap to the point of achieving world-wide fame. For developers, they see the local banks as nouveau riche who owns tons of jewelry without knowing the actual value. So, they would approach these banks and offer them NT$0.6 for excessive funds, which these banks usually receive NT$0.3 - 0.4 only through standard corporate loans. The developers are trying to convince these banks to offer financing by arguing that many OWP development projects in the West already use non-recourse project financing. Therefore, the developers claimed non-recourse project financings bear low risk with successful track records.
Wow, you would think it is actually kind of cool and once these nouveau riches master the technique, they can use the idle cash to earn tons of “green gold”! And why not? Nouveau riche might even complain that wearing jewelries all day long can get a bit too cumbersome.
From the developer’s perspective, if all the non-recourse project financings can be provided by Taiwanese banks, they will enjoy advantages such as less covenants restrictions from bank groups, fewer undertakings requirement from the developers, cheaper financing cost, higher leverage ratio and more flexibility during ownership transfer in the future. However, the list of disadvantages includes Taiwanese banks’ bureaucratic and rigid system, lack of professionalism, excessive time needed for communication, etc., which cause successfully raise sufficient project financings not easy at current stage.
On the other hand, if foreign ECA or foreign banks could take the lead and participate in project finance cases, there will be considerable advantages such as stronger expertise, higher project financeability, increase local banks’ willingness to lend money and better chance to raise enough funds for project financing. However, it may also come with disadvantages such as higher financing cost, longer evaluation periods conducted by foreign ECA and foreign banks, tougher covenants restrictions and more undertakings as required from the developers.
Now you can see the key factors for decision-making for both developers and bank groups, where each of them has to find a balance between advantages and disadvantages. They feel they might need a bit of extra help at this point, so they hire foreign banks, investment bank boutique, or global accounting firms as financial consultants to facilitate smooth progress of the project financing.
These global accounting firms have rich experience in project finance cases in the West, sure they also have branch offices in Taiwan, and however, the local divisions have no experiences in project finance. Neither do they understand and familiarize with local rules of game, application of local laws and regulations, timing for securing government permits, and how to work with local governments in collaborative manner. Even if the headquarter dispatches a task force to join its local team, the elites from the headquarters, even they have no clue about local rules, they would tend to follow how they do things in the west. The result is often two groups of laymen working together to get nothing done.
Even more troublesome is that while foreign advisors themselves have a fair amount of understanding the lending philosophy, priorities and risk appetite of foreign ECA and foreign banks, they do not understand the “norms” of Taiwanese market and the “unique characteristics” of local banks. They have little clues on how to assist local and foreign banks to reach common ground of understanding when both sides operate under different workflow, risk evaluation methodology and internal system. Therefore, companies which presume they could easily secure project financing, based on its expertise in engineering and technology, solid financial position, good credit rating, a nicely-prepared optimal financial projections, higher interest rate and fees, may still end up with big disappointment in Taiwan.
For Those Aiming to Succeed, a Click-and-Mortar Strategy is Necessary
Over the past two years, a lot of the talks in the IoT circle has been about click-and-mortar models and new retail. Today, we will take these strategies and apply them to the OWP industry. We need experience ground troops which fought similar battles before that both understands the thinking and strategy of western financial institutions as well as the game rules and language of the local environment to help everyone to win the campaign.
Our suggestion is to form a third-party platform, it can be initiated by developers or banks, to which involves a local think tank with core capabilities covering the aspects of finance, law, and integration – aka. The “ground troops.” The issue of trust in transaction can be resolved through this third-party platform by building the two tranches structure as we mentioned before through communication and negotiations; harmonizing differences in credit risks and workflows between local and Western banks; and communicating and coordinating with government agencies to resolve issues related to engineering, technology, financing structure and environmental assessment.
In next article, we will discuss regulatory fluctuations risk which has repeatedly appeared throughout previous articles in the series – especially the kind of role the government should play in all these scenarios.