Financing Options for Nuclear Plants

Understanding Vendor Financing - think of a car

A few people have asked me how nuclear power plants would work under a vendor financing system. They are rightfully concerned that South Africa is not a rich nation, and therefore cannot just take high risk with our pension fund money. Yet South Africa is in a difficult situation, where it desperately needs money and desperately lacks affordable electricity supply. Fortunately we are not alone in this, as many countries that the economists Charlie Robertson classified as “low fertility, middle income countries, but not the poorest” in his book titled: The Time Traveling Economists: How Literacy, Fertility and Electricity are the keys to escaping poverty. I had a conversation with Mr. Robertson about his book and decision matrix a few months ago.

As we saw in my previous post on “the cost of nuclear power”. It’s exactly what South Africa needs to do, given our current level of development. All low cost countries are building Nuclear Power Plants.

How to get costs under control.

The Civil Nuclear Engineers listened to industry experts so that they could get costs under control and the project right.

The Sharpes Ratio

In his 2008 address to the Carnegie Institute, the experienced Risk Manager consultant, Stephen Maloney showed the problems facing Nuclear Power Plant construction, in the United States in particular. His lecture carried lessons for all over the world. Investors’ first go to simplistic go to model for judging investment is a Sharpe’s Ratio, that basically compares the investment risk against a low risk return in he market.

The Sharpe ratio tells investors that for a project where they only get income back after 5-7 years, and breakeven after 15 years (period depends on the interest rate), the risk of investing elsewhere in the market is 7 times lower. But as we saw with Koeberg, high risk results in high return, with consequences that South Africa will have the most affordable electricity prices until the end of the century.

Vendor Financing.

Nuclear Power Plants are complicated machines, with lots of parts that perform different requirements, and they need to be properly inspected, maintained and audited. The tolerance for failure is very low. Other industries that face these type of challenge include aviation, and car industry. Because they impact human lives in such a profound way, the tolerance for error is zero.

Nuclear Civil Engineers started looking at plants through a different lens. As opposed to asking for money, we started saying to the client that we will get the financing ourselves and you only pay “when the juice starts flowing”. Therefore investors started asking for stricter forms of compliance and project managers in return were selected based on their competency and experience.

This advise in in line with the economist Thomas Sowell’s citation in his book “Knowledge and Decisions”.

“It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.”

Stop talking about Plant Performance

All the talk about plant performance is for engineers and tech savvy hobbyist. But in terms of being a person that buys a power plant, it makes little difference. If a particular plant doesn’t work or comply, the builder has to come and fix his problem under the contractual obligations.

If you think about this, it’s exactly how Toyota works. Cars are complicated machines, with lots of parts that can go wrong, but if Toyota does not perform, it’s Toyota’s problem - not the customer.

No Middlemen

The other issue that constantly faces construction is that money goes missing, middlemen and fly-by-night “tenderpreneurs” see large scale projects as an opportunity to rent-seek and “get in on the deal”. A vendor financing system cuts out all middlemen, because it’s generally government money that is being invested. As any auditor will tell you, government money is pension money and if that goes missing, it’s not VC cash where your friend is mad at you. No, it’s Criminal law that comes into play.

I hope that the Wind Farm advocates are listening here, because Siemens is in big trouble. Relying on Lazard, which is now shown to be unreliable, is not going to save you from the long arm of the law. If they listened to wise old engineers like Thomas Telford, they would have known what is coming. High entropy solutions always encounter fatigue.

The risks of investing in infrastructure are always high and therefore with a strong demand on a high level of compliance. But there is an additional level that makes Nuclear Power even more stringent- International Law.

International Relations Experts - we listened

Because of the risk of weapons proliferation, Nuclear Power Construction comes with the additional demand of the IAEA Protocols that is underwritten in International Law. South Africa was the first country in the world to willingly give up our Nuclear Weapons and come into compliance with the NPT. Ukraine is often cited as the second country, but that’s a bit more complicated as they never had the launch codes for the weapons to begin with.

Nuclear Experts listened to various experts and critiques of nuclear power and International Law like, Daniel Ellsberg and John Mearsheimer, Gareth Porter, Noam Chomsky and Steven Starr in particular. I have even had podcasts with the latter four. Although we don’t agree on everything, we do understand the nature of Atomic Energy, we are as concerned as anyone that criminal elements would have control over the bomb. That is why countries must work towards being NPT compliant and with South Korea now building Nuclear Power Stations, it’s completely possible to lockout the Great Powers from any transaction (although geopolitical risks are a consideration here as we do not want the National Endowment of Democracy to instigate another “coloured revolution” styled coup d'état if we decide of not going with Westinghouse).

Honesty

In his book “why leaders lie” John Mearsheimer showed that government to government transactions hardly involve any level of dishonesty, because the risks are simply too high.

Accountability

• Good examples of accountability in the Nuclear Industry include Westinghouse’sExecutive being charged with Fraud.

• South Korea’s last President going to jail over a bribe scandal.

• Imagine if Rosatom’s CEO has to go explain to the KGB why the power plant is late and the russian pension money is missing.

  Even dictators like Vladimir Putin and Xi Xinjping are honest when they gamble with the future of their children.

Not Expensive.

Nuclear Power is not expensive, it is only expensive in America, and to a lesser extent in France. For the simple reason that they do not manage risks properly. In a follow-up post as a Civil Nuclear Engineer, I will cite my reasons why the USA has a major challenge (hint: it probably has to do with nuclear weapons).

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Examples

Below are a few modern plants that were built under this system. In some cases that host country still carried part of the risk, but the principal stands that risk has to be on the builder.

Belarus Nuclear Deal (2 x VVER1200)

Also, in June 2009 the government announced that $9 billion Russian financing had been lined up, and Belarus also wanted the Russian loan to include provision for infrastructure. Belarus official cost estimate including infrastructure was $9.4 billion, with one third of this to be spent 2011-15. In November 2011 it was agreed that Russia would lend up to $10 billion for 25 years to finance 90% of the contract between Atomstroyexport and the Belarus Directorate for Nuclear Power Plant Construction (now the Belarus NPP state unitary enterprise). In February 2012 Russian state-owned Vnesheconombank (VEB) and Belarusian commercial bank Belvnesheconombank (BelVEB) signed an agreement needed to implement the Russian export credit facility. In May 2012 the parties said that the first instalment under the design contract would be $204 million, and that this would be followed by $285 million for pre-construction site works. This was confirmed with an agreement signed in May 2014.

Egyptian Nuclear Deal (4 x VVER1200 + large desalination plant)

On May 19, 2016, the Egyptian Official Gazette published Egyptian President Abdel Fattah El-Sisi's decision No. 484 of 2015, ratifying the agreement signed between Moscow and Cairo. This agreement granted Egypt a Russian government loan to construct the first nuclear power plant in Egypt — the Dabaa plant.

Under said agreement, Egypt will obtain a $25 billion loan from Russia to finance the works, services and shipments related to building and operating equipment for the power units at the Dabaa plant. {…..}

She further explained that under this agreement Egypt will use the loan to finance 85% of the total value of the building, construction, insurance and all other related works. Egypt would bear the remaining 15% in the form of installments. The loan is for 13 years at a 3% annual interest rate. If Egypt fails to repay any of the annual interest within 10 working days, it shall be subject to arrears of 150% of the interest rate calculated on a daily basis.

Bangladesh Nuclear Deal (2 x VVER1200)

The US$12.65 billion project will be constructed with Russian loan amounting US$11.38 billion and the rest will be financed by the Bangladesh government.

Pakistan Nuclear Deals (2 + 1 Hualong One)

He said under a difficult economic situation, Pakistan was getting an investment of USD 4.8 billion from China in this project, which “sends the message that Pakistan is a place where Chinese companies and investors continue to show their trust and faith”. (this is a loan for 100% of project cost)

Pakistan Previous deal (2 x Hulong One unit)

In July 2013 ECNEC approved two units of the Karachi Costal power project with net generation capacity of 2117 MWe. The total cost of this was estimated at PKR 959 billion ($9.116 billion), with $6.5 billion (68%) being vendor finance. PAEC also said that 82% of the total cost would be financed by China.

Hungarian Nuclear Deal (2 x VVER1200)

It extends an original contract between the two countries signed in 2016. The cost of the project is estimated at around $13.2bn (€12bn), $10.9bn (€10bn) of which will come from Russian loans, the Global Construction Review (GCR) reports.

Turkish Nuclear Deal (4 x VVER1200)

Financing is provided by Russian investors, with 93% from a Rosatom subsidiary. Up to 49% of shares may be sold later to other investors.