Jesús Gonzalez Arellano
Advisory Partner, Corporate Government, Risk Management and Sustainability
KPMG
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View from the Top

Overcoming Financial Hurdles Wins Industry Growth

Wed, 02/24/2016 - 13:58

Q: Since the Energy Reform, what evolution have you seen in the risk profiles for renewable energy projects among commercial banks?

A: The Energy Reform has brought about many opportunities for renewable energy projects, yet this surge of projects that we see cannot be attributed only to the enactment of the Reform. When we think about the development of a renewable energy project, we must come to terms with the fact that it takes at least five years for it to fully develop. The Reform was not even in place when companies took the plunge and started to invest in Mexico.

We are working with several banks and measuring the different methods to attract investors. One of the trending topics we have identified is the creation of integrated packages that are comprised of financing, compliance, business strategy case, and even infrastructure. In the past, financing was a difficult barrier for renewables due to the fact that the business models for certain financial organizations are not designed for the peculiarities of renewable energy projects. For example, some projects have a ROI of 20 years and many financing models are conceived to generate an earlier return. Funds have more flexible deals in terms of what they look for in a project and the type of investments that can be made over the long term.

Q: How will the government incorporate new players to more easily meet climate change targets?

A: Mexico has done well in the disclosure and publicity of the Reform. We worked with several international enterprises in 2014 and they are excited to take advantage of the opportunities in the market. With a developed country, opportunities are usually thin on the ground. Here, there are plenty of chances to be creative and forge new markets to cater to the expanding needs. The government has been showcasing these opportunities abroad to potential foreign investors, but now it must guide these new investors into Mexico formally, clearly, and with transparency in order to help them successfully implement their projects.

Q: To what extent will the Mexican renewable energy market be a prime market for M&As?

A: If we think about M&As in the Mexican market, we see that they have developed considerably over the past ten years. Many Mexican companies have been acquired, and this is mainly due to globalization. Mexican companies are attempting to take advantage of the new opportunities, and we have seen SMEs come together to form strong groups. The current mindset is the acquisition of strength to consolidate market positioning or to become attractive to potential buyers in the near future. Local organizations can prove their expertise and business viability, which might be attractive to investors from more mature markets. Finally, Mexico has over 120 million potential consumers. There is definitely a market out there, and this is something investors always appreciate.

Q: On the fiscal side, how can development and commercial lenders come together to help the solar energy sector grow?

A: Investing in solar energy represents a significant commitment and a significant investment in terms of technology and infrastructure. Based on feedback, small companies do not see enough incentives in place to invest, and at the moment it is cheaper for them to remain as they are. Large corporations can carry out these types of investment decisions, but SMEs cannot afford to make an investment that will involve a return in ten years’ time. While there might be an accelerated depreciation in place, this is not enough to push the solar sector forward, especially when we think about the ROI.

Q: What role will KPMG play in helping the sector develop?

A: KMPG must quickly adapt to the changes seen not only in Mexico, but all over the world. The stock market, investors, and regulations are changing, and we must remain up to date. Through the in-depth research we carry out, we will be able to continue advising our clients on how to improve their business in terms of compliance, financing, efficiency, and operations. Our broad communication network in both the public and private sectors enables us to venture into the complexities of the Reforms. We have multidisciplinary teams focused on identifying opportunities and risks in the Reform, as well as in any other sustainability matter that can be of value to our clients and Mexican society.