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The CFO agenda: beware hidden costs in rapid-growth markets

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Opportunities for rapid-growth markets can be eroded by cost blowouts. Successful companies – such as South African utilities company Eskom – ensure the CFO is engaged throughout the investment process. Jonathan Blackmore reports.

Balance opportunity and risk

Results of our survey of 921 CFOs from 59 countries as part of our Master CFO Series made it clear that rapid-growth markets have become an essential part of many utilities companies’ growth strategy. Those wanting to expand are often looking beyond first-tier rapid-growth markets to Brazil, Turkey, India and, to a lesser extent, China.

While rapid-growth markets offer opportunities, the CFOs we surveyed noted many pitfalls, especially regarding budget and time. Utilities must consider long-term and near-term growth and avoid pushing into markets at any cost. The importance of building a strong investment rationale and structure highlights the CFO’s crucial role.

Mode of entry challenging

Our survey found 36% of utilities entering these markets found they spent more than intended on mode of entry costs, making this second only to financing as the biggest source of overspend.

Jonathan Blackmore said each mode of entry needs to be carefully considered because each market has specific circumstances. He said successful mode of entry can be achieved if companies aim for a ‘win win’ situation, like Eskom helping build Africa’s energy infrastructure. "You need to find a mode of entry that’s mutually beneficial for both parties."

CFO vigilance from concept to finalization

Paul O’Flaherty is Finance Director of Eskom Holdings, a power utility based in Johannesburg. Eskom has recently refocused its Africa strategy with greater emphasis on the Southern African Development Community, a loose trading block of nation states working towards economic prosperity. Eskom’s activities in the SADC focus on providing technical expertise in power generation and management of the power grid, and sharing best practices.

Mr O’Flaherty said the risks of new markets highlight the importance of the CFO role throughout the investment.

“The CFO needs to be involved right from the concept stage through to finalization,” he said.

Jonathan Blackmore, EMEIA Risk Leader within EY’s EMEIA Advisory team, has worked closely with Eskom throughout its expansion. He said Mr O’Flaherty’s hands-on approach and ability to stay engaged throughout the process has been an important part of its success.

Make regulation part of the process

Survey respondents also say the high cost of dealing with regulation and bureaucracy are a big issue when entering rapid-growth markets.

Some countries’ regulatory environments are still evolving while in others, such as Brazil, complex tax laws can add substantially to cost. CFOs said perhaps the key point when managing regulation is to build local teams to avoid unanticipated cost and delay.

“I think that commercial companies in emerging markets can do a lot more to really embed stakeholder relations into their business,” said Mr O’Flaherty of Eskom Holdings.

“They should set up proper regulatory or government departments, with a strong representation from finance, that have responsibility for building effective relationships with governments and regulators, and really understand the impact these stakeholders have on the company.”

Mike Kane, Partner for Advisory Services in South Africa said Eskom’s investment in building strong relationships has reaped rewards.

“They have a focused team investing a lot of time in building key relationships in the countries where they operate. A partner on the ground can help navigate the who’s who, and give you insights into what’s happening economically and politically.”

Political risks

Political risk is also a concern, especially because of bribery and corruption in some countries. CFOs, including Paul O’Flaherty, said that, in some cases, utilities should decide that the upsides of the market opportunity are outweighed by the risks.

“If, as a company, you subscribe to the highest levels of governance, you may find it is not possible to invest in a country where bribery is endemic. You need strong tone from the top and no tolerance. If someone is found guilty they are fired. It’s as simple as that.”

With regard to Africa, Jonathan Blackmore said, “A company can be taken by surprise. One day things can look very stable and politically ordered and within a couple of weeks things could be completely different.

“You have to acknowledge risk and manage it. Certain companies, like Eskom, operate in Africa very successfully because they do this well. Again it comes back to investing in stakeholder relationships.”

Understand complexities

As utilities such as Eskom have shown, successful investment in rapid-growth markets requires a delicate balance between opportunity and risk.

The CFO’s role is especially important in ensuring scrutiny throughout the process and that key stakeholder relationships are nurtured. Utilities must grasp the complexities of the process and carefully consider each investment’s risks and opportunities.

How we can help

Our Transaction Advisory Services team works with Power & Utilities clients throughout the lifecycle of rapid-growth market transactions, from early stage to execution, and post-deal activities. We can help you understand the risks and opportunities of new markets, identify the best modes of entry and support you with our local networks.

Our Tax and Human Capital services can help you navigate complex regulation and compliance procedures, and manage global talent in oversees markets.

As part of our Global Compliance and Reporting services, we also work with you to standardize, simplify and optimize controls to better manage risk.

Read our publication

What lies beneath? The hidden costs of entering rapid-growth markets What lies beneath? The hidden costs of entering rapid-growth markets

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Contact us

Jonathan Blackmore Jonathan Blackmore

As EMEIA Advisory Risk Leader, Jonathan leads our governance, risk and control advisory practice in Africa. He has over 10 years’ experience as a governance, risk and control subject matter specialist and has worked with a number of South African State Owned Enterprises to improve their risk and control environments. He also has extensive experience on both local and international internal audit, and risk and control transformations projects, and has directed large organisational change programmes.
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