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On January 14, Hungary's Prime Minister Viktor Orban signed a deal in Moscow for Rosatom to expand Hungary's only nuclear power plant. The deal includes a 30 year, $14 billion loan for Hungary's state owned power company MVM to pay for the work (link). French giant Areva (OTCPK:ARVCF) and Japanese-American company Westinghouse were both interested in putting in a bid. Hungary's government preferred to skip the bidding process and made a deal with the Russians instead.

The deal's main attraction was perhaps not that it was the most attractive in terms of technology, or in terms of price. It is hard to argue whether the deal would have been the most competitive from these perspectives either way given that no bidding process was held, thus competitors did not have a chance to propose their own deal. There was however one thing that helped beat out the competition and that is attractive pre-financing. Details are still vague but apparently, the 30-year loan was offered at a very attractive interest rate, below current market prices. In contrast, the Hungarian state-owned energy company might not have had a chance to secure the loan from other sources at all, never mind receiving a decent interest rate offer. If this will be the model for pursuing other similar contracts around the world going forward, the free enterprise business model may be in big trouble in this department.

The power of government backing:

Hungary's neighbor Romania tried to put together a market player led project to expand its nuclear power generation capacity in 2010. Romania's state-owned Nuclearelectrica initially attracted six partners CEZ, GDF Suez, RWE, Iberdrola, Enel and Archelormital. The almost $9 billion project never got off the ground, because all investors eventually pulled out, leaving Romania's state-owned company on its own to attract the financing for the project. Their hope now is that China will invest, thus making the project feasible.

With the $14 billion credit deal already signed, which should take care of 80% of all costs, Hungary does not need to worry about attracting investors. All it has to worry about is paying the loan back in the next 30 years, which should be all right given that supposedly it is a low-interest loan. If projects such as the one in Romania are to go ahead in the future, it will most likely involve a state backed entity, such as a Chinese company, which just like Russia's Rosatom can come in with pre-financed deals in hand.

Rosatom already pushing competition to the sideline (and possibly eventually into the grave):

In December, Rosatom signed a deal with Finland's Fennovoima to build the Hanhikivi 1 nuclear power plant, entering the EU market. As of the end of last year, after the Finnish deal was signed, Rosatom had deals for 20 nuclear power plants to be built outside of Russia. By comparison, competitor Areva has four such deals at the moment. The Rosatom deal portfolio was $74 billion as of the end of last year (link) and with the Hungary deal it will have over $90 billion worth of projects once the deal clears all the hurdles and is finalized.

Aside from many deals made in the developing world, such as in Bangladesh, Jordan, Vietnam, China and Iran, Rosatom is increasingly moving in on Western turf. Aside from the Finland and Hungary deals, Rosatom is hoping to build nuclear power plants in Britain. Even the few projects still available in the western world are increasingly being taken by Rosatom. In the developing world, there is no chance of private enterprise companies competing with Rosatom's capacity to offer financing for the work, if this is how they will continue to conduct themselves.

A company such as Bechtel, which brags about having been involved in the construction of half of all nuclear power plants in the United States, only has one ongoing project in Tennessee (link). GE-Hitachi (OTCPK:HTHIY) currently has four projects under construction and two planned projects (link). France's Areva has four projects. There are a total of 71 projects currently under construction worldwide, with a further 172 planned projects, most of which are happening outside the western world (link). While there are projects out there, it seems that increasingly Rosatom is in the driver's seat when it comes to winning contracts. At some point, companies such as Bechtel may give up on maintaining their capacity and know-how for nuclear power plant projects altogether. Companies such as Areva might just disappear altogether.

Mercantilism beating capitalists?

A few decades ago most people would have scoffed at the very notion, but it seems there are a few countries out there giving capitalist ventures a run for their money by employing mercantilist strategies. Mercantilist enterprises such as the Dutch East India company gained huge power in the seventeenth century, which was partly owed to its close relationship with the Dutch government, but the model was thought to be obsolete for a long time already. Yet here we are hundreds of years later and we have increasingly robust state-controlled companies from countries like China and Russia pushing the competition aside domestically as well as abroad.

This can only mean one thing and that is that the world is changing and our perceptions about the status quo no longer reflect reality. If this were not true, free enterprise based companies would not be losing out to state-backed competitors.

Source: Russia's Rosatom $18 Billion Hungary Nuclear Deal: Bad News For Competition