Many hardware climate technology owners are falling for the trap to build their projects division under the same entity and the leadership.
More often that not it ends up being a step too far !
In the big scheme of things, hardware engineering based climate technologies are still in their nascency. To bring any technology to market requires deep understanding of both the engineering value-chain as well as the complexities of the market one is dealing with.
Off late technology companies are trying to do both and not being very good at it. The underlying issue is that developing the technology requires a very different skill set to commercialising it, and even more so when the commercialisation happens through Build-Own-Operate-Transfer (BOOT) projects which also requires strong asset management and project finance skills. Finding and then managing all those skills under one legal structure and management is easier said than done.
The following illustration depicts what a good optimum structure looks like and one that shows how to separate out the two functions: technology engineering, and project development.
Illustration:
There are many actors involved in the value chain, and although there is no hard-and-fast rule that actors cannot play multiple roles, it is imperative that they understand that the risks involved vary with the entity type.
Entities Involved or Different roles that need to be played
(1) Technology Licensing Company: One that licenses the technology to interested parties or its own subsidiary in various jurisdictions.
(2) In-Country Top-Co: The master licensee that licenses the technology from the Licensing Company.
(3) In-Country Systems Integrator: The entity that indigenises the local supply chain and shall guaranteed that all constituent parts of the system shall perform as per specification.
(4) EPC Contractor: The entity that will do the turnkey systems engineering, procurement and construction. The engineering design part is likely to be done in collaboration with the Systems Integrator.
(5) Project Owner Hold-Co: For projects that are to be developed under a concession such as Build-Own-Operate-Transfer (BOOT) model, it is suggested that the Technology Licensor sets up a separate projects ownership company.
(6) Global Investors: Are entities that wish to partake in the ownership of the entire projects portfolio.
(7) Local Investors: Are those that wish to participate either at the project SPV level, or may even want to be part of the global investment company.
(8) Local Lenders: Will typically only lend to special purpose vehicles (SPVs) and not necessarily to the global Hold-Co since the income generated in most-cases will be in local currency operations.
Why can't a company achieve all of the above under one set-up? Is it really important to establish such an elaborate structure?
The answer to that question is, that of course the entity can achieve the above under one set-up. Look at all the global utility companies, who have gotten there over decades of operations. But this is not an easy labyrinth to establish, let alone navigate. We explore this further:
Understanding performance guarantees: The Systems Integrator has to give a guarantee of the entire system to the EPC contractor, who in-turn has to give guarantee to the project sponsor (client) or project owner (in case of BOOT) projects. So if all functions were being performed under one roof, then in effect one is giving a guarantee to itself. And if the functions are separated, then the guarantees are to be provided to the next actor in the value chain. The value of the guarantee is limited to the role the actor is playing.
However, in case all the components sat under one roof, then the entire aggregate of guarantees has to sit on the balance sheet of the firm.
Accessing capital: If all functions were sitting under one structure, then it becomes difficult for investors to separate out the risks of IP, systems integration, EPC, operations and asset management functions. Separating the functions out, allows the company to invite separate set of investors for projects, who typically would be seeking to take the development and construction risk. Otherwise having a bundled set up makes it difficult for investors to separate out engineering services, IP and project risks.
Scaling Up: Separating the functions also allows the company to scale-up rapidly, as it can have different partners in different jurisdictions.
Talent: Finally, getting talent for specific functions under the same management is likely to be challenging. For instance, asset management professionals would want to have their own set-up as decision making for large capital investments requires a very different approach to that when running engineering services business.
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