Speaker 1: 0:00

My name is Prospa Magali, one of the shareholders and founder of Enso Tanzania Limited. I've been running and managing mini-grid since 2015, and I've been trying to scale in Tanzania and other African countries, but the biggest hurdle has been to finance mini-grid, I think, as being a local or an African company. That is the number one challenge. As everyone is aware, none of the mini-grid companies is actually profitable.

Speaker 1: 0:41

Many of the investors and financing organizations would like to finance a profitable business. Since mini-grids are not yet profitable, then it is difficult to attract finance for mini-grids.

Speaker 2: 1:07

Solar mini-grids have turned from small pilots to an electrification wave. We were there when mini-grid regulation was established, when financial transactions were closed. We saw new technology thrive and companies fail. This is where we tell the stories. This is where we discuss the future the mini-grid business powered by Enensis.

Speaker 3: 1:33

Hello everyone. This is Nico, ceo of Enensis. Today I'm welcoming two of the most advanced experts in mini-grid investment and financing. Welcome, beatrice Mutoni from Infrako Africa and Humphrey Virreco from Cross Boundary Energy Access. Beatrice is a business development manager at Infrako Africa, part of PH Group that is mobilizing investments into sub-Saharan infrastructure projects. At Infrako, beatrice oversees investments and development of early-stage infrastructure projects in East and Southern Africa. She has over 15 years of experience in the infrastructure and renewable energy sector and has overseen the development and construction of several mini-grid projects.

Speaker 3: 2:21

Humphrey is a managing director at Cross Boundary Energy Access, cbea, a blended finance facility for mini-grids in Africa. Cbea is part of the Cross Boundary Group, an investment firm dedicated to leveraging private capital to make an impact and sustainable return in underserved markets. At CBEA, humphrey's duties include fundraising, investment management and general strategy. Prior to his five years at CBEA, humphrey worked at the Boston Consulting Group and the Public Utilities Commission of Ohio. He is based in Cross Boundary's Nairobi office. The subject of this episode is the financing jungle getting access to finance for infrastructure without having a profitable business. Beatrice Humphrey, you have heard Prosper's comment. Do you have any direct response?

Speaker 4: 3:14

Thank you, nicole. I will take it first. Thank you very much for having me in the podcast. I'm really excited for this conversation because this is something that we have been talking about over and over again.

Speaker 4: 3:25

So, in response to the comment about mini-grids being difficult to finance by Prosper, I definitely agree with him, but I'll just take one step back and say that mini-grids are essential infrastructure projects which require long-term patient capital with low return expectations. However, the perceived risk level of the sector is quite high compared to traditional grid-tied utilities and traditional hardcore infrastructure projects. So this creates a mismatch of sorts and makes it challenging for the mini-grid companies to attract capital, and I would say this is probably a temporary challenge. I think in the next three, four, five years this story will change. So, particularly at the growth stage, mini-grids really struggle to raise funding.

Speaker 4: 4:17

However, if we look at it as an infrastructure investment, you look at it from a different lens and in this situation, at this growth stage and this particular stage we are in in mini-grids, it would be critical for impact-driven financiers like Infrako Africa and concessional financiers, who are required to de-risk the sector to a certain level and support mobilization of further private companies, which is something that the PID Group and Infrako Africa does very well. My personal opinion, I would say, is that mini-grids is a very localised solution to the access challenge that we have, and it only makes sense if you involve the locals. It would be great if we can have local developers supported, so I would urge most financiers to consider applying more targeted approach. I think I'll stop there for now. Over to you, hanfre.

Speaker 5: 5:06

Yeah, first off, nico, thank you for having me on, very excited to be able to come on here and talk about mini-grids and the different approaches to financing.

Speaker 5: 5:14

I think for us, what we're seeing is that the lack of financing for mini-grids is exactly the gap that cross-boundary energy access has been set up to fill. We've been excited by what we've seen in the sector, the growth that we've seen in the sector in recent years and the opportunities there, and we also agree that a lot of the focus has been on international players. I would say that the key drivers for that likely are also tied to some of the things that infrastructure investors typically look for right Scale and track record, which is something you often don't find in the local players. That are often startups. But still, I think we are starting to see growth in those local players as well and we have been encouraged by the opportunities we've seen. And we are also exploring different mechanisms, trying to set up different types of financing to make sure that we can also reach local players and we actually have some strong ones in our pipeline in different countries as well.

Speaker 3: 6:07

All right, Thank you, Hanfre. Thank you, Beatrice Hanfre. I understand that the first transactions in the mini-grid space had a little bit of a venture capital characteristic. This allowed unprofitable mini-grid companies to acquire equity. However, mini-grid companies holding mini-infrastructure have little in common with tech startups. Do you still see venture capitalists being interested in mini-grids?

Speaker 5: 6:33

I largely see mini-grids as fundamentally infrastructure assets right. They provide a public good at scale. That means they need to be treated like infrastructure by all stakeholders. That includes the regulators, so having things that are regulatorally guaranteed, like customer exclusivity, the tariff that adjusts with FX and inflation. They need to be built like infrastructure, so they need to last for 20 years and, lastly, they need to be financed like infrastructure, so you need long-term low-cost capital and often subsidies as well. So we see a strong alignment between mini-grids and infrastructure capital, or essentially, project finance, and we'd also see a strong trend in this direction. There may also be a space for venture capital and mini-grids right, especially on technology platforms. You're seeing some of the tech platforms in the space raising VC type money R&D, sometimes on mini-grid operators as well, so there is still space for VC. I don't think I'm particularly well positioned to speak to that as focusing on mini-grids, but within the sector, I would say that there is definitely space for VC and we've seen it on some of the tech platforms.

Speaker 3: 7:39

Outside of the venture capital space. Other investors usually expect some profitability before they invest. How do mini-grids acquire investments then? Mini-grids have no proven profitability. Yet Transactions and mini-grids are still happening. Impact investors take the center stage for now, and Infrapgo is also very much impact driven. To what extent can impact replace profitability?

Speaker 4: 8:07

I will not say impact will replace the commercial aspect, the profitability of mini-grids, far from it. But when we evaluate mini-grids on its own, it has very clear impacts, contributions, and investors love it, and we love it as Infrapgo Africa, because mini-grids are generally transformative in nature, because they bring the first-time power to their consumers. They are replicable across different jurisdictions and they have quite a large impact on the people and on the communities generally that they are developed on. However, when you're looking at an investment case, over and above impact, then there are other things that we look out for and a path to profitability is one of the key assassinations that we evaluate projects against. So we know mini-grids are impactful.

Speaker 4: 8:56

However, when we're evaluating these projects and we look at the financial models on the business plans, we have to see a path to profitability. I think developers need to understand that if there is no path to profitability which I believe there is then it's very difficult to make a case for mini-grids. So we look at a combination of good commercials, high development, impact, but then we have to look at a path to profitability. A lot of times you get financial business cases or business models that are not making profits, say in the first couple of years, but then you can see, when they attain a certain level of skill, then they start making profits and that's what we are looking at. So we look through the assumptions made and all that such that at a certain scale they'll make profit. And I think that's the story we will sell because technically, even if you look at other infrastructure projects, even if it's a road, it takes a bit of time for the road to break even and start giving returns to investors. Impact and profitability are both important.

Speaker 5: 9:55

If I could just add a bit there, I'd say that I'd have to echo that and say that impact alone we know that won't solve the problem.

Speaker 5: 10:02

If you look around Africa, the continent is actually scattered with mini-grids that were funded only by donors and impact investors and they're there rusting now on the continent because there wasn't a true commercial model to make sure that they were operated profitably and sustainably as well.

Speaker 5: 10:20

So we know the impact won't solve this problem. That's why we use blended finance. We line up the impact investors along with the commercial investors who are looking for a commercial return. And so when you say it needs to be commercial and it needs to be viable as a business, it's not just for the investor, it's also for that company that's out there developing and building these mini-grids. They need it to be commercial too, and the EPC needs to make money as well as do that long-term operators of the mini-grids. So you do need a model that is commercial all the way around, and I think that's why we bring this blended finance approach. And then to beat a dead horse with an infrastructure investment, you're not going to be profitable in year one, year two, year three. This is a long-term investment that it makes its return over an extended period of time, and we do believe that that is something that you can do commercially and profitably with mini-grids.

Speaker 3: 11:15

The question is now how long-term can a positive outlook be? What I see in the sector in a higher frequency now than in a lower one is that financials approach the investors and say, hey, three years, five years down the line, seven years down the line, you're still not profitable. So what can we do? Please go for low-risk but profitable projects only. Look into CNI solar, look into EPC work in the solar sector. Well, however, if everybody did that, rural Africa would never be electrified. Are the current grant funding programs not doing a good job to fill the viability gap yet?

Speaker 4: 12:00

Well, chicken tongue, I think they are doing a great job, to be honest, but touch it in this sector a few years ago or many years ago, actually more than a decade ago. There's a specific number 600 million people do not have access to electricity and to date we still quote the same number. Sometimes it goes 590, sometimes it goes to 700 million people. So we still have an issue, and I think the issue is more in the rural areas. So who will electrify the rural Africa? Because then, if it's not profitable, somebody has to do it anyway. So RBF programs are doing great.

Speaker 4: 12:40

However, from the different deals that we have looked at, some of these programs are quite restrictive in terms of timelines and in terms of the requirements. So you find developers constantly fundraising to just say say, an RBF program says you need to get equity first of a certain level so that you can draw down into the RBF, or you have to hit certain milestones for you to actually draw down on the RBFs. This RBF is only open for six months. You know, many great projects, as with all other infrastructure projects, take a long period of time to actually develop. You have to negotiate with regulators. Most of the regulations in most countries are not up to date or there are no regulations in some countries, to be honest. So before the projects actually get to construction stage there's quite a lot of work to be done.

Speaker 4: 13:31

So when these grant programs give such stringent timelines and stringent conditions to developers, it makes it a bit difficult for developers. But we're seeing quite innovative grant programs. I'll quote one, the CEI model, where they have like grant program and then they have a construction debt arm and then they have also actually a pure RBF program. So the blend of it really makes it great for developers because then they can draw down on the grant and then they can use the construction debt for construction and then pay it back with the RBF. So it's quite a nice innovative way and more and more we are seeing such innovation in the space and more and more innovative financing programs that are working for the developers. So I would say the funding programs are great, but they need to work with the developers or with the countries or with the system so that they just make it easier for the developers to align with their conditions.

Speaker 3: 14:28

Even with all these subsidies, I saw and heard mini-grid companies and CEOs being really desperate about acquiring finance and they said even with all these barber shops and all the grain mills and saw mills and so on, we're still struggling to cover our OPEX. It is still a long way to actually amortizing assets. What I hear is that mini-grid CEOs are actually asking for new approaches. Specifically, I heard that mini-grid operators are calling on impact investors to be ready to lose money.

Speaker 5: 15:11

I wasn't part of that conversation where mini-grid CEOs were saying that investors need to be ready to lose money, but I think in general, if we zoom out again, investors always need to be ready to lose money In any sector. That's the very definition of risk, and so investors do need to be ready to lose money and it can happen. But I think maybe, if we reframe this a little bit, the question is that impact investors should be willing to take some more risk. I think that's a sentiment that I've heard before and would reframe it that way not just being able to lose money.

Speaker 4: 15:49

Asking impact investors to lose money. Well, I'm not sure if this would work. But, as we said from the beginning, these are really long-term investments. If an investor is looking to make their return in seven years, then this is not the sector for them. I wouldn't go to my IC and actually say, hey, look, guys, we're investing in this project, but be ready to lose 20% of your funding, of your money. No, I wouldn't. Nothing will actually pass through IC like that.

Speaker 4: 16:23

But then if I actually go and say these are assets and if we invest in these assets, this is the kind of returns that we are likely to see over across 25 years, across 30 years, because these assets will be there 30 years, 40 years plus. So the story should be is there a path to profitability? And I think that would be created more on a scale basis. So the developers need to have a scale-up plan. We've seen the countries that they're operating and we've seen developers actually who are cutting across multiple countries. But I would want to think that if you have a certain number of connections that are giving you a certain level of revenue in a certain country, then there could be a path to profitability.

Speaker 3: 17:09

Yeah, let me specify this question a little bit more. If we convinced governments, regulators, to issue licenses or concession agreements with a duration of 50 years, would Infrako, would CBEA, come on board and say, well, cool, then we can extend our tenor to, I don't know, 30 years, 40 years?

Speaker 5: 17:39

If you make it a 50-year concession, does it make it easier? Of course it makes it easier. That helps. Good tariff regulations help Grants help. Good long-term low-cost capital helps. Many good developers who are able to drive consumption help. And being able to build assets that are able to still be in the ground 50 years from now helps. All of those need to come together in order to make this happen.

Speaker 5: 18:05

Cross-boundary energy access I'd say that, yes, if you have that concession, we would look at it positively. But no single thing alone is going to make it easy. We need to get the whole package. You need to get the right financing, right regulations, good developers. Technology needs to continue to evolve, but I would probably echo, maybe the sentiment If it was that sentiment in the room those with development capital this is the place to put it and it is risky and you can get a return, but there has to be a willingness to take that risk. Or maybe on the flip side, then there would be a willingness to accept that half of Africa doesn't have electricity, but I don't know if it can be having the cake and eating it too.

Speaker 3: 18:52

Yeah, now, as you have talked about risk, there are guarantee programs out there that are either existing for quite some time or which are newly being developed, and partly even tailored specifically to the mini-grid sector or the off-grid sector in general. Are you aware of these types of guarantee programs?

Speaker 4: 19:18

As a PEACH group we have like Garantcom that actually offers guarantee to lenders. There's not a lot of guarantees out there for equity investors actually, but mainly to lenders. But I think the ticket required for this is a bit big.

Speaker 3: 19:35

What is the amount, Beatrice, that you would need to reach?

Speaker 4: 19:39

I think between top of 50 million, I think in debt or thereabouts.

Speaker 3: 19:45

Yeah, I see.

Speaker 4: 19:47

We have infra credit and that then does smaller guarantee or credit enhancement facilities, and we have actually seen quite a number of mini-grid developers in Nigeria drawing down to that. So I will speak about infra credits later. But there are other innovative mechanisms. You've seen, and I think I'll just mention like this, quite a number of aggregators in this phase. There are people who are doing aggregation of equipment, patches, procurement and logistics aggregation, and this makes it easier, especially for the small-scale developers to get, say, economies of scale in the deployment, because then, once this procurement process is aggregated, then you can have a voice in terms of pricing and all that when buying the equipment. So, equipment finance I think construction debt is readily available. But the question is a lot of that and again I go back to the CEI model where they have, like construction debt element but at the same time they have an RBF element.

Speaker 3: 20:53

Well, regarding these RBF-prefinancing debt instruments, I'm not that optimistic, to be honest. Why wouldn't you structure the RBF in a way that it actually can be dispersed partly up front? Why would anybody need to pay interest for something that will come in and as a grant later? I don't really understand that.

Speaker 4: 21:17

Well, I agree with you, Nikko, I totally agree with you. But I think in terms of risk, then of course, then it makes it less risky for the, for the, for the. Well, but I totally agree with you. There should be a way to structure it in such that you don't need that, that expense does not have to go to the developer.

Speaker 3: 21:39

Right develop, piloted and published this infrastructure financing model some call it asset co model, op co model for mini grids which has attracted quite some attention. Can you quickly explain how that model works? What is your experience with this model so far?

Speaker 5: 22:01

Yeah, maybe, first off, I mean, I really appreciate the attribution of credit there for developing and inventing this model, but really it's not truly that innovative, right, it's really just based on classic project finance and infrastructure finance. We just adjusted it specifically for mini grids and for these kind of rural distributed assets that we have. And so for us the idea was we knew that mini grids are the least cost way of bringing power to over 200 million people, but they haven't attracted capital to date. And so we essentially said we looked at the at why and we said, well, these are assets that are typically on developers balance sheets. They're not they're, they're small, as you mentioned earlier. Small mini grids might require, you know, a couple hundred thousand dollars in capex and you don't have long term PPAs like the CNI type customers you mentioned earlier. And so these are challenges that we need to now adapt the mini grid business model to address.

Speaker 5: 23:08

Right, so our approach is something we say we isolate, we allocate and we aggregate. Right, so we just essentially isolate the assets from the developers. Now we, so we just basically separate the developer from the asset. Now you have kind of a SPV that just has the hard assets poles, wires, solar panels, batteries, etc. As well as kind of you know, contracts, licenses and environmental permits. So now you've isolated the asset and then you need to allocate all of the risks and responsibilities over a very long period of time through very detailed project finance contracts, right? So now you allocate all of those risks. You say, okay, who does what when? And now it becomes very clear what the risks are, very clear, more clear for, let's say, a lender, what the cash flows might look like, what the costs are. And now you allocate all of that.

Speaker 5: 24:01

And then lastly and this is really key is you aggregate, right? You mentioned earlier, Nico, that you know small mini grids are struggling and so sometimes. So what we do is we say, look, we need to aggregate these. You need a portfolio, you need 20 mini grids or 30 mini grids together to create a bankable portfolio where maybe some perform better than others, but in aggregate, you know it performs to an average level that's required for the return. And then you create multiple portfolios like that and you aggregate them up at the platform level. And so for us, that eliminates or helps address some of the challenges that that's exist kind of in that gap between mini grids and infrastructure. So you use these, you isolate, you allocate and you aggregate to close that gap. And again, now, what you've essentially done is you've taken the mini grid investment and you've made it look, smell and feel like a classic infrastructure investment that can attract that infrastructure capital.

Speaker 5: 25:00

So that's essentially the approach, and so far I think we have I mean, we've been excited by the response to it. It's allowed us as an entity to scale. I think the reason we did the open source is we did want other people to do it, and we don't think we have a silver bullet, so we wanted people to iterate upon it, fix it, do do things differently, find innovations to make it work even better, and I think we're seeing that as well. But you know, right now we've determined that you know, with $150 million, we can bring power to 1 million people. Now we just mentioned that there are 600 million people that don't have power. So by open sourcing this, we're just saying, look, we found an approach that we think works, but we do need a lot of other people to do it in order to actually solve the problem, and we can't do it by ourselves, and so that's why we took that approach.

Speaker 3: 25:46

All right, and that brings us back to our initial question about venture capital. Right, the venture capital that could then come in to the operation company where the innovation happens, where new technologies being developed, maybe deployed, new business models are being developed and deployed, and I think that is where infrastructure, finance and short term venture capital could actually coexist. That's that co exist Exactly.

Speaker 5: 26:18

That's the idea right, because if we, if we take the assets right so now, that means that if you're a venture capital investor in an operating company, that means your capital is no longer sitting in these long term low cost assets that are generating kind of very low returns. Now you're with an operating company that has operating cash flows and also has you know things like R&D etc. And then you can actually put the two next to that, next to each other, and make them complimentary.

Speaker 3: 26:46

Sure, sure, but isn't there a mistake in the equation, like I understand that? Well, if you finance a large wind farm, if you finance large scale industrial solar main grid connected, you've got a PPA, you've got calculable and projectable revenues. If you build a road, you can probably project okay. Well, now that many cars are going this direction soon, we will earn that revenue. But in a mini grid you go into an area where electricity demand is not existing. You cannot project the demand easily and the development of the demand over time there is this demand risk. Like you, as the infrastructure investor always depends on the demand developing into a certain direction and to a certain level. Doesn't this contradict the idea of the infrastructure investment?

Speaker 5: 27:45

Mm-hmm, and so, yeah, a great, great question. I think there are a couple of layers here, right? One is there can be demand risk on infrastructure. If I look, I grew up in the United States. Now I live in Nairobi. I'm dialing in from a crowd where my family's run. But if I look at the utilities in the States, they also have a demand risk for their electricity right, and they also have thousands, if not millions, of individual customers paying for electricity and what's happened is their consumption of power has grown now over decades and there are enough of them aggregated that you can kind of project the consumption over time and then its growth.

Speaker 5: 28:24

It's true that when you go and you connect a rural community for the first time, their use of electricity is quite low. But that's why we spoke earlier about the importance of starting off and financing people who are using electricity to make money, or what we call productive uses, right. That focus on essentially growing people's use of electricity over time. But it's not the only infrastructure asset that requires growth of consumption. Another example would be a port, and so it's not unheard of, even though it's not typical, especially in electricity business. But that difference, that's the importance of having long term fixed contracts. It's different than, for example, a CNI or an IPP customer who has a PPA. That's a long term fixed contract there, where they have steady inflation linked cash flows from a credible offtaker. Here we don't have that. But we still use long term fixed contracts to kind of to give an idea of what the costs will be.

Speaker 5: 29:20

And then the demand risk. There is demand risk. It sits with the owner, but then it just means that you have to, and it's absolutely critical to the business model that you go out and you drive consumption. Right, you go to a community. If you bring them power, they don't have access to appliances. Appliances are the main uses of power. You need to solve that problem, and so the operators who are able to drive consumption have a track record of driving consumption. Those are the ones who are going to win this game in the long run. And so it is different. Right, you're right, it is difficult. I wouldn't quite call it an error in the equation, because this is an equation that has worked in other places in the world. Right, those big utilities, those big private utilities in the West, they exist and they have that same risk, and they had that same risk 50 years ago, when they were being built, and so I would say that I'd say that it's a challenge, but I think it's one that's addressable.

Speaker 4: 30:17

I would want to agree with Humphrey and maybe just add we are seeing more and more data, data-driven demand analysis. So lots of developers are now using data-driven demand analysis, demand focus, and for many grids I think specifically for many grids what they have over as an advantage when compared to, say, ipps is that you can modularize the installations. A lot of these systems, in terms of technology, are modular. So once you have a certain focus for, say, the first three years, and then you have an opportunity to add onto that capacity. Once the demand stimulation has happened and the demand is higher than the capacity, then you're able to actually add on more modules to the installations. So data is becoming more and more available as well, as it has taken years to actually get data for, say, utilities. So the same as for many grids, and I think this is very specific to specific areas in specific countries. So we're getting more and more data and I think that will really help in terms of demand focus, like using technology basically to focus the demand.

Speaker 3: 31:32

Yeah, well, now, as we're talking about business models, I'm currently seeing many mini-grid companies turning towards larger sites, to those sites with 5,000 inhabitants, 10,000 inhabitants and above, preferably 20, 30,000, which are very rare, which only exist in DRC and then really some countries where there is very, very little access to electricity yet. But soon we will have to deal with these smaller communities and I honestly don't see the energy or electricity only model being successful there. What I see, and what we see at the Nansos, is that we need to find the link to the agricultural sector, otherwise mini-grids will actually have a very hard life. We need to somehow make use of this energy agricultural nexus and while we develop this model called Rural Industrialization Model, what is your take on this? Do you think electricity only models may work in smaller mini grids?

Speaker 4: 32:45

I agree with you, nicole, electricity only models will not work. I like what GIP is doing in Ethiopia and I think they have these irrigation and the many grid nexus which they are piloting in Ethiopia, and I think we have several other people like those piloting different models, including developers who are piloting cost storage cottage industries in the mix of their many grids, and I think the people who will actually succeed in this business are those that will actually incorporate productive use within the many grids because naturally electricity alone will take many, many years to actually grow to profitable business. But then if you bring in the productive use earlier on in the usage, in the demand, the first year, second year, third year, then you see an astronomical growth curve over the first few years and that is encouraging even to investors, and to the developers themselves.

Speaker 5: 33:43

Over to you, hale. I mean, I think that there are a lot of different business models kind of coexisting together. So in the model that I just described, you have an asset owner that only owns electricity assets, and I think that is a business model that can work. The operator with which they're working, which should be determining different ways to drive consumption, they might need to leverage other things in order to, you know, non-electricity focused items like the nexus of agriculture, in order to drive consumption and so for them. That can be important.

Speaker 5: 34:19

Now, that difference you just made between you know, a large town with 30,000 people or a small mini grid with 100 people. I think, again, that's the importance of aggregation, right? You don't finance a mini grid in a vacuum. You aggregate them together, finance it all together as well, and so you may have some big ones, some smaller ones in that portfolio. Or if you happen to have a portfolio that's only very small mini grids, then yes, the operator there needs to be quite creative in how they stimulate demand and often it'll probably require that agricultural nexus, right?

Speaker 5: 34:53

The importance of agriculture in these sites I think undeniable. I for one, you know personally, and one who is not for kind of grand top-down plans where you say, okay, I'm gonna bring electricity and I'm also going to do the agriculture, I'm also going to finance, you know, three or four different businesses or sectors in one place, right? I am a fan of specialization. I think that if you bring the electricity and you do it well, you provide low-cost electricity, you provide consistent electricity that a business can rely upon. Others will innovate around you.

Speaker 5: 35:28

If I build a road or I build a highway, I don't have to also go and build the mall on one side. That attracts people and makes people use the road. Right, I just have to build the road. And so for us, right now, we're focusing on the electricity. I do think it's important that someone builds the mall or that someone builds, you know that someone uses the electricity well, creates the link with agriculture, et cetera. I think it's difficult for a single entity to do all of them because of the level of specialization required and the cost and the challenge.

Speaker 3: 35:59

Yeah, our experience shows that with larger places this is the case right when you have a market, where you have machines that produce something for a wider area. If you have many people trading with each other, growth can actually happen. But if you have a small place with just 100 buildings or so, say, 500 people or let it be a thousand people, usually it doesn't happen on its own. That's at least our experience, and this is where Inensis will soon present a little innovation. Give us a teaser. According to our calculations and experiments, only synergies between the mini-grid business and the local agri-processing can make rural industrialization profitable. So far, we have promoted the idea of mini-grid companies also working on the agricultural side to harvest these synergies. However, many people believe in focus and specialization, just as you do, humphrey. Recently conducted research shows that with some digital integration and some well-defined, close cooperation between the mini-grid company and external professional agricultural processors, similar synergies can actually be generated, and we will demonstrate this collaboration model in Nigeria soon.

Speaker 3: 37:26

But now let's talk about a subject closer to today's topic. Let us briefly look into the processes behind acquiring finance. Grant providers ask for proof that co-financing is in place before awarding the grant. Equity investors, on the other hand, do not commit until the grant making the investment viable is actually secured. Most financiers will not even prepare a term sheet before grant and equity are in place. Especially domestic mini-grid companies run from one to the other to untie the knots. The effort for that is extremely high, increasing opportunity cost. Can this process be simplified and fast-tracked?

Speaker 4: 38:13

Well, good question.

Speaker 4: 38:16

I think in order of hierarchy, if you ask the way to, should be grant, equity and then debt, Mainly because when you look at most of the financial models, they do not make profit or they do not have a positive profitability without the grants.

Speaker 4: 38:32

So we ask that the developers have signed grants and even if it's not signed, at least there's a path to signing of the grant contract. But a lot of times equity will come in once the grant have been signed, because in the pecking order then grants are perceived as more risk takers than equity. And then a lot of times debt will only come in once there's an equity investment and a lot of times the grants require demand that the developers get actually matching equity or matching financing in whichever form. Sometimes it's equity, sometimes it's debt, but generally what I would say is like efficiency of the investment process can be probably improved if we can standardize and collaborate between financiers. These might make it more efficient for the developers. However, I must say I think grant providers need to be a bit easy, because I think grant is supposed to really assist the developers to get off the ground a lot of the times, and so in terms of conditions and conditions for disbursement. They should be easier than, of course, from where I see equity and debt.

Speaker 3: 39:41

Yeah, I fully agree that there is a high demand for coordination between investors and financiers. You couldn't believe how many times we, as Enenzos, have actually conducted due diligence for a project and then, a few weeks later, we've been approached by another investor asking for another due diligence on the same project. I said, hey, can't you just talk to each other and then share the documents? No, this is not possible. We have to have our own view and we have our own questions, and then we walk out again and do the same thing or very similar things again, and this is, of course, money lost for the mini-grid developer and money lost, after all, also for the investor and time.

Speaker 4: 40:24

And there's a lot of time lost as well, and time, yes, exactly, and time.

Speaker 3: 40:28

there's a lot of time that's going into due diligence processes.

Speaker 5: 40:31

But I think that the natural kind of solution to this chicken and egg problem is the grant provider, and I think a really good example of that would be these results-based financing programs where they say look, we have the grant and it's here, it's not dependent on equity and the rest, and it's there for a period of time, of course, and that's limited, but if you can just simply build it and show me that it's been built, then you get the grant and you have that results-based financing. And those have a track record of being successful. And again circling back to the one that's operating now in Nigeria, funded by the World Bank, yeah, that's been one of the more successful grant programs, and so I think that is a model that others can look to and follow.

Speaker 3: 41:22

We don't always have to reinvent the wheel, and so if it ain't broke, as they say, yeah, it's always easy as a financial and investor to say the grant providers have to be more flexible. When we were working for Rayah Nigeria and the World Bank in Nigeria to support the development of the NEP program, we learned that World Bank programs can never be longer than five years, right? So? And if you need some two, three years to develop the program, then you just have two to three years left to implement. Then there is so little time. And that goes back to Beatrice, to your first question, or like comment, that grant provider should be more patient.

Speaker 3: 42:04

It's sometimes it's not possible, it's just a rule and you cannot easily change that rule. And then, on the other hand, if you just have that short time line right as rare, what would you say? Like, well, everybody can come. If you've got equity or not, we don't care, just come register, we'll all sign you up and then whoever comes first can can do the job. Yeah, but you only want to work with those who are serious and that's why you ask for equity being in place. There are always two sides to the story.

Speaker 4: 42:41

But you can, and that story, yeah, exactly.

Speaker 5: 42:44

And that ties back to the comment with which you started this right. You, just as you just said, you only want to deal with folks who are serious, and typically that makes it more difficult for you know the local startup to get their foot in the door right, and so it is kind of all it all comes full circle.

Speaker 3: 43:01

Yeah, yeah, and this is a. This is a problem that we have to actually work on. This is a not we have to crack, otherwise we will not succeed in the sector. Good, all right, and now. Another challenge for minigrid companies, and also for the investors and financiers, is the currency risk. Most of the capital provided by financiers comes in hard currency like US dollars or euros. Any kind of hedges are usually very expensive. Is there any solution to this? I know there's no silver bullet, but like are there approaches?

Speaker 5: 43:39

to solve this? There are, but maybe, when it comes to defining this problem, first we should be clear that it's not a minigrid financing issue, right, this is an infrastructure in Africa financing challenge, because a lot of that is financed in hard currency, that earns revenues in local currency that then has to be repaid. So this is not a minigrid specific risk, right. And so the the bucket of solutions to that problem also aren't really minigrid specific right. One is local currency financing, specifically local currency debt very much helps reduce that risk. If you can just pay back a portion of your costs in the same revenue that you earn, then of course the effects risk is largely reduced. Number two is the regulatory link right.

Speaker 5: 44:29

So, for minigrid, specifically, the idea that I can update my tariff periodically and hopefully often in line with changes in effects and inflation, having that regulatory guarantee and having a smooth and efficient structure that automatically allows me to do that, that also helps me offset that effects risk. Now, obviously, you can have that on paper. Implementation can be a whole different challenge, but that guarantee is something that helps. And then, lastly, is again back to that idea of aggregation that I mentioned, having portfolios in multiple countries, right. So then, if you have the portfolio approach, if you have minigrids in Nigeria and Sierra Leone and DRC Togo and Madagascar and Lesotho, then what you've done is you've created a bit of a basket there and you haven't kind of overexposed yourself in any of the countries and you have that portfolio again. And so, like you said, no silver bullet. But those are three kind of approaches you can use and collectively they help.

Speaker 3: 45:29

Yeah, whereas I believe that the regulatory approach may be a false friend. Here I'm free, like you, did the research and we also did some research on this on price elasticity in minigrids, especially when it comes to household residential customers. Like, residential customers usually have a fixed budget per week or so and they don't deviate from that. So if you increase the tariff with the aim to make more revenue, your revenue will stay constant, but your electricity demand will decrease. So therefore, the lever that regulators have is quite limited and it's limited to the productive users. The productive users sell as much as they can and they pay as much for the electricity as they need to. If you increase that, their demand will probably stay constant and that is where you can increase your revenue. But on the residential side, which in especially smaller villages and that is where the challenge lies right, we have discussed that before especially in smaller villages where you have a lot of revenue from residential customers, the regulators lever is very, very short. It doesn't really help much to increase or decrease tariffs there.

Speaker 5: 46:44

But if we circle back to that, if we circle back to that link, right, if you are in an inflationary environment and your currency is depreciating, the cost of everything is going up. Right, the cost of bread is increasing, the cost of water, the cost of fuel. It is only natural that the cost of electricity should also be able to go up.

Speaker 3: 47:01

And just a quick comment on your last option of the portfolio that you mentioned, where you distribute your investments across various African countries. When I heard that, I thought, well, but all of these African countries have got devaluation of their currency against the US dollar, so where is the mitigation effect, beatrice? Now we are at local currency debt and you already mentioned infra credits in Nigeria, and I think they have got an amazing model. Do you want to talk more about this?

Speaker 4: 47:38

So infra credits specifically, I think is a very innovative tool in the infrastructure space because it provides local currency guarantees and then it reduces. Something that is very interesting and I think it sort of stalks to the previous topic introduces a local currency financing. These instruments are actually encouraging those pension schemes, local banks, insurance companies to invest in the infrastructure space and because these investments are in local currency then of course the currency risk sort of reduces a little bit for the projects that they are financing. So infra credit is specific for Nigeria, but very soon we'll have something very similar to infra credit specifically for the East Africa region and if that works we can roll it out.

Speaker 5: 48:21

Most of the other guarantee program are really large ones and I would say a bit pricey, but if a credit comes to solve like medium term and small scale guarantee needs for business, like the mini grid space, If I could just piggyback on that for one second, I would say that the additional benefit that infrared it brings to the marketplace is that not only is it local currency financing, but they also have a fixed interest rate. So often when you say, okay, I want to go and get local currency debt, the interest rates are quite high, and so what you really trade is you remove some of the FX risk, but then you expose yourself to an interest rate risk with a floating interest rate, and so with infrared it, that fixed interest rate actually makes it extremely attractive.

Speaker 3: 49:09

Yeah, from my perspective, they provide exactly the guarantee that the insurance companies and the pension funds need to finally pull money into the mini grid sector. Beatrice Infrako, africa is active in various African countries. Some of these countries have legislation which makes it difficult to repatriate investments and fines. I understand that with debt it is easier than with equity. How do you go about the repatriation issue?

Speaker 4: 49:39

So some of the ways that we meet to get some of these riskings in terms of the structuring of the deals, where we could structure the deal so that the local entity in country is financed via, say, shareholders loans from an entity that is, say, offshore, that is easier to basically work repatriation issues on. However, a lot of times we work with governments and regulators basically to understand other investors and other investments how they have done this before. Currently, I think several African countries and I would mention Malawi specifically are facing a real repatriation issue where they do not actually have the actual dollars. Although to a less extent we can get, like World Bank or AFDP or ATI, there are quite a number of people who actually backstop our investments. I can mention several investments that we have made and we have, say, reach in the local currency but then we cannot repatriate that money out in dollars because there's just not enough dollars in the country.

Speaker 3: 50:44

True, and there's not just Malawi right. Think of Ethiopia, which is restricting US dollar outflow of the country. Even Nigeria, some years back, restricted US dollar transactions. Almost all the countries have these kind of restrictions, like many of them at least.

Speaker 5: 51:02

But again I'd say this is not a mini grid specific risk, this is not an infrastructure specific risk.

Speaker 3: 51:07

This is anybody investing in these countries, true, but that doesn't mean that it makes it easier for mini grids if everybody has a thing.

Speaker 5: 51:15

These are mini grids. Nothing makes it easier.

Speaker 2: 51:19

No, nothing makes it easier.

Speaker 3: 51:21

Not at all.

Speaker 5: 51:22

But yeah.

Speaker 3: 51:22

All right. Okay, let's come to the end of our exciting session. I would like to ask both of you to talk a little bit about, like your pipeline in the sector, what you see in the future for mini grid finance and maybe some numbers, even who wants to start.

Speaker 5: 51:42

I'll start on this one, but I will kind of deviate a little bit from your question, because so far I would say that we have been drawing a relatively pessimistic picture of mini grid profitability, and I would say that I am probably more optimistic and, I think, for good reason. So if we zoom out at cross boundary energy access, I would say we work with governments who want to use private capital and the private sector to bring power to their citizens, and so we go to markets where there's government support, and that means basically a stable regulatory environment and a subsidy scheme that helps keep tariffs low. And so the reason you see so much activity in a place like Nigeria is there you have a government that is providing that type of support and you have the World Bank loan. So if the question is, are rural mini grids profitable without government support? I think the short answer there is no, but mini grids or infrastructure, and almost every kind of infrastructure needs some type of government support. So, for example, if you go back to the early 2000s and you're a large scale solar developer, at that stage in the sector, it was also only profitable with government support.

Speaker 5: 52:47

So you go to a place like Germany that has that government support and really incentivizes the large scale solar sector. And then, as other governments followed you've got the UK, you've got the US, you've got France the sector also scaled and followed those places until all the countries opened up. You know, india, brazil, et cetera. We see mini grids as basically following the same trajectory right. So we go to those markets that have the support, countries like Zambia, benin, sierra Leone they're all doing it at a small scale, but Nigeria is basically the Germany in this analogy right, and we're very excited about what we're seeing, you know, from funders like the World Bank, about plans to basically do other large scale projects in East Africa and DRC and so in markets like it, for example in Germany, and coming back to the pipeline, where we see that government support, private sector capital can come in.

Speaker 5: 53:37

So for us, we've announced a transaction with Anji to finance $60 million of mini grids in Nigeria. We've also announced with PowerGen Renewable Energy another $10 plus million deal for mini grids in Nigeria. Again with that isolate, allocate and aggregate approach, our pipeline, I'd say, is essentially targeting those places where you have the government support. You know we have pipeline in West East and Southern Africa, all of them, you know, alongside the subsidy programs and I do want to emphasize, to bring it back full circle, that we do have some local companies in our pipeline as well we really are working hard to finance not just the large energies of power to the world, but also local companies, and so we're excited about what we're seeing in the sector. We're excited about the number of companies, the caliber of the companies, the locations as well, and I think you'll be hearing a lot from us.

Speaker 4: 54:28

Well, I would want to share the optimism with Hanfre because I think the space is looking up. We started this journey with our first mini grid project in Uganda. It's called the Kalangala Project, is an island where we have 5000 operational connections. We have also invested in Sierra Leone through PowerGen. We have, I think, around 14,000 connections and operations. I think that project was also backed by UNOPs.

Speaker 3: 54:54

Yes, and cost-structured by UNENSUS, by the way.

Speaker 4: 54:56

Yes, they are good, Absolutely. Then our. That was our second investment. Our third investment was RVESo in their Kudirapower project in Kenya, where we anticipate approximately 28 mini grids with around 6000 connections. That will bring the total number of connections for Kudirapower in Kenya to more than 10,000, which is like a good quantum. And lastly, I think early this year we closed with Equatorial Power for the DRC mini grids 11 mini grids and approximately 6000 connections as well.

Speaker 4: 55:31

Going south of Africa, I think we have Zambia that has several EU grant programs running and I think there will be of interest Madagascar, mozambique those are countries that we think are quite interesting and as well in the West, we have seen Benin and several other countries in the West that have actually a very supportive environment, especially from a grant perspective, and the regulation is coming up.

Speaker 4: 55:55

And maybe just to speak a little bit on regulation, I think if you look back seven years, then the regulation for mini grid was really almost nonexistent. But what we are seeing now and I think Nigeria is definitely leading the way we have really not I wouldn't say excellent regulations, but I think they have really evolved to a point where the sector is really looking like it would take off and it's painting a really optimistic picture, especially from a regulatory perspective. In addition, as an Africa Africa team, we really focus on the operations of these assets because these are long term assets and the only way to realize the projected numbers or the projected scenarios is only through operations. The optimistic Infra-Africa and the PID group are fully supportive of the sector. We'll be here for some time. We'll probably work around several models before we probably settle down on a model that works, and if what Hamfre is doing is what eventually will work, well, we are fully supportive.

Speaker 3: 56:56

Sounds great. Thank you, Beatrice. Thanks, Hamfre. This was really exciting and very insightful. Looking forward to talking to you again sometime in the future in this podcast. Thank you.

Speaker 5: 57:07

Thanks for having me on. Thanks for having me on, nico. I mean it's always great for me At least. I love coming on talking about mini-grids. It's definitely a complicated and nuanced space when you talk about finance and profitability in this sector and it's good to kind of get into the details and into the weeds on some of this so hopefully helpful conversation, but I definitely enjoyed it.

Speaker 4: 57:25

Yeah, same here. Thanks for having me and definitely an interesting conversation.

Speaker 6: 57:29

Hello, I'm Max rule electrification expert from Inensis. In this episode, we explored the challenges faced by African mini-grid developers and securing private investment. Mini-grid companies are not high risk, high return tech startups. Instead, these companies are vital infrastructure developers requiring patient capital with low return expectations. However, with a crucial difference that mini-grids require demand stimulation rather than the basing of existing demand.

Speaker 6: 57:58

Finance acquisitions are complex. One key issue is that of currency risk, requiring mitigation strategies like local currency, debt financing, the role of guarantee programs exemplified by info credit, which pire a nearing access to local currency, and low interest rate debt from insurance companies and, potentially, pension funds. Risks can also be reduced through solid policy and regulatory frameworks anchored in long term concession agreements or license agreements between the government and the private mini-grid company. While social and environmental impact are important, private financing for mini-grid developers necessitates a clear path to financial profitability. The guests stress the critical role of innovative business models in shaping the future of mini-grids. At Inensis, we've been exploring synergies with adjacent sectors to enable mini-grid developers to stimulate electricity demand and generate additional revenue streams. Our upcoming episode will delve deeper into these innovative business models and sectoral synergies, offering strategies for creating sustainable and profitable mini-grid projects in Africa.

Speaker 2: 59:05

This episode of the mini-grid business has been brought to you by Inensis, your one stop shop for sustainable mini-grids. For more information on how to make mini-grids work, visit our website, inensiscom, or contact us through the links in the show notes. The mini-grid business powered by Inensis.