FMO INTERVIEW: “Our view is that having financing in local currency takes away a large part of the currency risk for the buyer of the electricity under the PPA.”

1.    Let’s start with some background on the FMO and your role there?
I work as an Energy Sector Specialist within the FMO Energy team. I started in 2002 with financing energy projects in Africa and I am still doing that. In 2002, I was the only person and now we have a team of around 50 people covering energy projects in developing counties, not only in Africa but also in Latin America and Caribbean, in South East Asia and what we call the circle of countries around Europe.

2.    What is the most exciting infrastructure or energy project you have worked on in Africa so far?
There have been so many. To name a few AES SONEL (Cameroon, 2003, now ENEO, refinanced in 2006), Copperbelt Energy Corp. (2005), Bujagali (Uganda, 2007), Rabai (Kenya, 2008), Olkaria III (Kenya, geothermal, 2009), Kribi and Dibamba (2011), Takoradi II (Ghana, 2013), Azura (Nigeria 2014), Gigawatt Solar Rwanda (Rwanda, 2014), Uganda GET FiT projects (2 solars, 9 small hydro’s 2016-2017), Senergy 2 (Senegal, 2017). Probably the most interesting one was KivuWatt (Rwanda, 2011), the project to extract gas from Lake Kivu on the border of Rwanda and the DRC with untested technology.

3.    What lessons were learnt from projects that did not do so well?
On all projects where I have negotiated financing, we have received all interest and repayments on all my projects. We have seen delays in construction, political unrest and non-cost reflective tariffs. But in all cases problems were solved and we have received all interest and repayments, although in several we had to amend the repayment profile.

4.    What in your view is the biggest misconception that people have about investing in Africa?
The marketing of aid organisations shows Africa as a very, very poor continent. Newspapers highlight problems like corruption and bad government management. But they do not show the cities where life is much better and services are much better. They also do not show the struggle in these countries to get things right.

5.    Which countries on the continent are doing the right things? Where are the opportunities?
There are a number of countries doing the right things in their energy sector, but if they see enough interest, they try to offer less in their PPAs and Implementation/Concession/Guarantee Agreements. That can give a stand-still or even a total stop on new investments in IPPs. Kenya was great, but has been in a stand-still for a few years. Uganda was great with the GET-FiT program, but that has now stopped. Ghana was great, but ran into financial difficulties. Cameroon was great, but has arrears as well. At the same time, the market is changing because of the rise of solar power.
 
6.    You are addressing the Finance & Investment conference at the upcoming African Utility Week on the topic of: A DFI’s perspective of mitigating currency risk. Can you give us a sneak preview of what your message will be at the event?
FMO’s view is that having financing in local currency takes away a large part of the currency risk for the buyer of the electricity under the PPA. However, the buyer under the PPA is usually more interested in a low tariff (in foreign currency) than a higher priced tariff (as the local currency base rate is higher) that takes away the currency risk. FMO is able to offer 18 year tenors in local currency and we have offered it on many projects, but it has never been used.

You now see with the bidding on tariffs for solar power projects that developers look at the tariff in their bids, based on the risks in the project, the PPA, the government guarantee and the execution of the project. For instance:
•    If the land is already selected, fenced and no resettlement obligations are left or whether the developer has to take a risk on the process of resettlement and obtaining a registered title to the land;
•    If the PPA and Government Guarantee and other Government agreements (interconnection, direct agreements) are already negotiated and of good quality;
•    Whether the PPA is backstopped by an off-taker L/C issued by a well rated bank and if that bank is backed by a PRG (AFDB or IDA) or the KfW/ATI Regional Liquiidity Facility;
•    If the off-taker has a good payment track record.
•    Whether financing is available, especially if documentation from earlier projects can be re-used.

The better these factors are arranged and form less of a risk to the developer and to the execution of the project, the lower the tariff can go.

7.    What is your vision for the energy sector on the continent?
I think that the shortage in energy production will disappear in a few years by very quickly adding solar energy production to the grid. Thereafter, the bottlenecks will move to demand growth, investment in the grid to increase reliability. From the other side, the off-grid sector will decrease the need for the grid to expand. End-user tariff should come down, after most of the investments that are made now are depreciated.

8.    What are you most looking forward to at the event?
Meeting people, clients as well as non-clients and as always hearing new ideas.

9.    Anything you would like to add?
Yes, I would like to add that one of the biggest issues at the moment is the availability of climate change funds. This is tax payers’ monies and used to decrease tariffs. That is a good message for distribution companies, but the competition on scaling solar projects is at the moment between financiers who have access to climate change funds and financiers who can offer substantially lower pricing than FMO.