Speaker 1 0:09

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.

Mini-Grid Electrification Wave Introduction

Financing Needs During Construction Phase

Speaker 2 0:36

Hi, this is Nico. Today's episode is about bridge financing for mini-grid construction. I'm joined by Fernando Valda from Energize Africa and Piyush Mathur from Odyssey Energy Solution. Fernando is CIO at Energize Africa, which has invested over $55 million in energy access across Africa. He leads deal sourcing, due diligence and debt structuring for mini-grid developers. Piyush is Managing Director of Odyssey, a platform connecting developers, financiers and suppliers to accelerate DRE growth. With a background in banking and private equity, he previously led Simpa Networks in India before co-founding Odyssey. Welcome Piyush, welcome Fernando. Thank you.

Speaker 3 1:26

Great to be here.

Speaker 2 1:27

Pleasure to be here, piyush. To just introduce the subject what are the financing needs for mini-grid developers during the construction phase?

Speaker 4 1:37

Sure, Nico. So mini-grids require substantial capital during the construction phase for procuring and installing generation equipment, creating local distribution network and installing meters in energy users premises to monitor consumption. Now this pre-construction cost can range anywhere between US dollars 400 to 800 per connection, depending on a few different factors. But whichever way you look at it, is quite substantial. Connection depending on a few different factors, but whichever way you look at it, it's quite substantial.

Speaker 4 2:06

Now, most of the time, mini-grids are deployed as critical social infrastructure in rural, remote, under-electrified regions of sub-Saharan Africa, Southeast Asia island communities. So there is a general recognition in the sector and the investor community that mini-grid projects need subsidy or grant capital to cover this high upfront capital cost. This CapEx subsidy or CapEx grant whichever way you want to call it can be provided to developers in a few different ways either at the start of the project or during the project, in a phased way. But, having learned from a few iterations in the sector in its early days, most mini grids today are built under what is called results-based financing programs, abbreviatedly called RBFs. Under these RBFs, these CapEx grants, are disbursed when the grid is built and the results are delivered and verified by the grantmaker.

Speaker 2 3:03

Why do grant funders and REAS and ministries of energy prefer the RBF program over other structures?

Results-Based Financing Explained

Speaker 4 3:13

Well, if you look at it from their standpoint, these RBF programs are great because they enhance accountability of public capital. So no grants get disbursed until the target results are achieved and results are often defined as connections to users completed. But this sort of creates another problem, which links it back to the original question that you asked. Rbfs shift the pressure points away from the donor to now the mini-grid developer, who are left with this task of now arranging this upfront investment to go and procure equipment, then complete construction, then submit evidence that they have completed connections, get them verified, before the results-based financing gets dispersed. So that's the big capital gap in the sector today. I think we have incrementally got to a point where we have sort of become wiser as a sector and solved many other financing gaps, but this is the current and present gap that every mini-grid developer is struggling with.

Speaker 2 4:11

Yeah, so it's. After all, it's quite easy for the donors and the rears to just say well, you get the money once you have delivered, and this means that financiers like you need to come in and fill the gap correct.

Speaker 4 4:27

That's absolutely right.

Speaker 3 4:28

Yeah, just to build on that, the RBF, as I've seen it, can cover anywhere from maybe 40 to sometimes up to 50% of the total capex. So it's actually a nice big chunk of the total capital cost that, as Piyush says, the developer has to fund to be able to build these quite capital-intensive assets. And it's that nice stack of capital that they can get access to as long as they deliver, and it can then give that confidence for other financiers to come in and help bridge the remainder of the gap. It's like an anchor investor. It gives that additional surety of a degree of capital to get the project funded.

Speaker 2 5:11

So what you're saying is that other investors may come in knowing that a professional investing company or financier has already looked at the project and provides them with comfort that this project is indeed worthwhile looking at in more detail. Is that what you're saying?

Speaker 3 5:31

Exactly, and also because the funding of the RBF itself, be it from a DFI or the World Bank, it's effectively AAA credit rated, so financiers can can come in and again have that assurance over repayment, Whereas you know perhaps in the past where you're relying on, let's say, the individual consumers of electricity having to repay debt or equity. This takes that burden completely off of the project, but it just enables it getting to that bankability stage, which is what we're about.

Speaker 2 6:06

Okay, Now we already said the REAs and the donors and the ministries, they're basically shifting risk from their own books to your books. Basically, Now, what are those risks that they are shifting? Fernando, do you want to comment on this?

Risk Management in Mini-Grid Financing

Speaker 3 6:25

Sure. So I mean as a financier. I mean, you know, typically when we're looking at our diligence, it's the financial risk, technical, legal to a degree, health and safety etc. And you know these are risks that as financiers, we know wouldn't say quite love. You know we're used to it, we have experience in in in managing those, understanding those and the grant makers. They have different skill sets, you know they do what they do best designing these programs and finding ways to encourage the private sector to bring as much private sector capital to the market as possible. And that's the other thing that RBFs can do as well. It's enabling private sector capital to come in, whereas perhaps in the past maybe a bit too much grant money was being used.

Speaker 2 7:13

Okay, so it's a first step, putting the risk on the desks of people who know how to handle risk after all, right.

Speaker 4 7:22

That's absolutely right. If I can come in for a moment, we at Odyssey were one of the early proponents of an RVF structure, so obviously I speak with some bias, if you may, but over the years we have also seen how this structure has enabled mobilization of over two and a half billion dollars of capital for the sector, which actually has flown through Odyssey as well, and that didn't happen before. So clearly the mechanism is working. But like all things, there are some positives and some considerations, and the question is that what are the considerations? Are people who can deal with certain risks are now being invited to deal with those risks at different stages of the project?

Speaker 2 8:05

All right understood. And the $2.5 billion that you just mentioned, that is not only for mini-grids, right? That is for a wider DRE sector, I guess.

Speaker 4 8:13

That's for the wider DRE sector, but still under the RBF format.

Speaker 2 8:16

yes, All RBF understood. All right, nice.

Speaker 3 8:20

Maybe just one thing to bring in finally, in terms of of, it does also introduce some new risks as well. So we have our standard financial, technical, legal, but also the moment you've got something which has got a target on it, a result, a connection, you know what that can do is maybe encourage developers to think like volume. So the more connections I go after, the more finance I can get. So there could be a risk that you have developers oversizing projects, you know, going for that prize of more and more RBF money. So for me as a financier, that's a new risk I need to look at and say, well, okay, I need to factor that into my decision making and how much do I really believe is the right level I should be financing?

Speaker 2 9:09

Yeah, let's talk about the risk of connections not materializing later. I would like to give both of you the opportunity to quickly introduce your organizations and the approaches that you take, and how this bridge financing works with the organizations and tools that you have developed. Who wants to start?

Financial Approaches of Odyssey and Energize Africa

Speaker 4 9:31

Sure I can go first. So put very simply, odyssey is a technology and financing platform for the distributed energy sector and, among other things, we provide, obviously, technology tools but then also have a procurement platform through which developers in the mini-grid sector can procure equipment through us at advantage terms. And over time we have also started stapling credit to the procurement that we do for these mini-grid developers, such that they now have an opportunity of not only buying equipment for these mini-grid developers, such that they now have an opportunity of not only buying equipment but buying equipment on credit which can last as long and ultimately get paid out of the results-based financing grants. So we have sort of retrofitted the trade finance structure to this temporary capital gap problem and tied it up with the procurement work that we do to combine the benefits of savings on procurement with the availability of credit so that it sort of works as an integrated whole. Let me just stop there and hand over to Fernando.

Speaker 3 10:34

Yeah, sure. So our capital is complementary to what's been described by Odyssey, but also we can be a little bit wider because we're whole of company financiers. So we will finance the entire capital cost or contribute to the entire capital cost of a mini grid, for example. So, as well as the equipment that can include the poles and wires that people need and also, to a degree, the people side as well in building these need, and also, to a degree, the people side as well in building these, and where we're an investment platform and we essentially provide a like a crowdsourcing approach, where we can bring, in our case, five or six thousand UK investors to help fund ultimately these kind of companies and as impact investors and that's that's a key part of our mission as long as it is high impact, then our investors will provide capital at levels or interest rates which are moderately concessional in nature. So that's probably a bit where our difference comes in.

Speaker 2 11:40

All right. Now, coming to this point of the main risk of connections that have been promised to the grant funder not materializing. How do you handle these risks? Usually you would probably use the RBF as some kind of collateral for the pre-financing. But if the connection after all, which this RBF is allocated to is not established, bf is allocated to is not established, then your client or your borrower would not be refunded for that connection and cannot repay your loan or cannot repay the assets that you provide Like. How do you handle that risk? How do you manage this?

Speaker 4 12:26

Well, I think it all starts when we start engaging with the developer first. So for us, it's very important to understand the track record of the developer who we are working with, and I emphasize track record, which is different from a financier's diligence, which would be understandably weighted towards capacity or balance sheet financial health. In our case, it's more operational. So we emphasize those aspects around. Well, what grids have you built which are similar to what you're expected to build now? How long did you take and what were the sort of delays? And what equipment do you use? Are you, like, e-list compliant? And ultimately, were you able to submit your connections and what was the verification rate? So we actually look at all those metrics very closely.

Speaker 4 13:15

Now you might find it interesting, but none of that is financial, and deliberately so, because we've learned over time that most of the time we're dealing with developers who have very weak balance sheets and they're all very young in their own evolution. So what exactly are we trying to do by doing a diligence on their balance sheets? And they're all very young in their own evolution. So what exactly are we trying to do by doing a diligence on their balance sheets and trying to assess borrowing capacity, which is why the approach that we have taken is serving us well. So yeah, point one, that we diligence their track records quite, I would say, clinically.

Speaker 4 13:47

At the next stage we also then make an allowance and how we are sizing our facility for them and sizing our credit for whatever sort of reductions might ultimately happen at the stage of submission of connections or even verification. So I suppose that's as far as you can go. But the third thing I would say is that in an RBF structure, in a programmatic format, everybody from the RBF sponsor, the grantmaker, the developer and financiers are all nicely aligned and converged on what the outcomes have to be. So, given that sharp focus, I think there is inherent sort of mitigation in the whole structure that those connections will be achieved. Now, if they're not achieved, then obviously there are reasons beyond everybody's control. But this structure provides more security on connections ultimately happening than any other structure.

Speaker 2 14:45

Yeah, fernando earlier mentioned that there may be a risk of the developer exaggerating the number of connections that could be made in a certain community, in a certain village. They said, okay, this village may have 500 connections. And then after all, oh no, 150 out of those 500 finally didn't connect, for different types of reasons Because they didn't want to pay the connection fee, they, they didn't manage to buy the light bulbs or they finally, like, went through a difficult economic situation. And then they say, okay, before I install this connection and pay money for that, or at least get tempted to pay more, because once you have electricity you want to use it and you want to use more after all. So therefore, some people may not connect. How do you address that, piyush?

Speaker 4 15:38

Yeah, I think the project has to stack up as a whole right. So it's not just that the developer has a motivation to beef up the revenue side of the income statement by overstating the number of connections. Correspondingly, they'll also have to increase the size of the grid to serve those connections. So it's not like that's a one-way street and a one-sided motivation to simply just overstate the number of connections that they will achieve. And there are metrics available in the industry for what should be the capital cost for connection for a certain type of a grid.

Speaker 4 16:13

Is the technical structure inert? What sort of processes do they have to actually ascertain in their local communities of how many people will sign up? And how has that expressed itself in the historical record? When we look at all that information we question that, hey, why did you only were able to get 84% of the connections verified? And what happened to the remaining 16%? So that begs a conversation and oftentimes there are sort of legitimate reasons. But wherever we find that there is still an inexplicable difference, we obviously normalize for that in the sizing of our credit inexplicable difference.

Speaker 2 16:53

We obviously normalize for that in the sizing of our credit. Well, this sounds like the whole process is coming with a whole range of technical due diligence after all. Right, how do you handle that piyush in in your organization? Do you do that in-house or do you hire external people to go to site and verify the numbers?

Technical Due Diligence Process

Speaker 4 17:09

Well, we handle it in-house. We don't always have to go to the site because we also lean quite heavily on the internal processes and documentation of the developer and general organizational maturity in dealing with these assumptions and inputs for their own financial modeling. But we do have technical people on the team who can very reliably establish that a certain mini-grid proposal is inert or certain mini-grid proposal is out of line. In fact, our platform has due diligence workflows and benchmark data so it itself can throw up exceptions.

Speaker 2 17:44

All right, fernando, I know that you have a different approach.

Speaker 3 17:49

Hmm.

Speaker 3 17:49

So in some ways at times we can be a bit more blunt in that we will say, okay, we may see, let's say it's a thousand connections.

Speaker 3 17:59

We may say, well, actually, for whatever reason it could be you know macroeconomic, microeconomic issues it could be perhaps this particular region, people are more challenging to get to that initial sign up, so there could be perhaps this particular region people are more challenging to get to that initial sign up, so there could be a slower level of connections.

Speaker 3 18:16

You might not mean that you won't get to the thousand, but it might be a lot slower. So what we typically do is we'll shave off a bit of the maximum amount that we can lend against. So we might say 80 percent or 90 percent of those connections that we feel that we can be comfortable at. And we may also require a developer to say, well, look, if it's slower than expected, then we'll expect you to, for example, waive your connection fee and have that within your model so that you can speed up connections. So these are some of the other things that we look to put in place, but also we'll look at other security arrangements around the loan as a whole to get comfortable that even if instead of 100% connections, it gets down to say 60 or 70. What happens in those scenarios as well, and what can we look to do from a lender perspective to protect ourselves?

Speaker 2 19:13

yeah, fernando. And then you uh like energize africa and inensis. We have developed a kind of standardized procedure for due diligences. Uh, fast-tracked, you call it cookie cutter due diligence, which is nice, I believe. And yeah, do you want to quickly explain where this is coming from?

Speaker 3 19:38

Yeah, so I mean, similar to Piyush, I've been financing renewable energy assets for the past almost 25 years or so and you can, typically diligence can be as long and as deep as you want it to be, but if you focus in on probably 80 percent or so of the the key risk areas for you as a financier, that can enable you to create a much more targeted diligence approach which is both faster but also, you know, probably better than 80 20 approach, it's probably 90 10 approach in terms of risk, and so in that sense, whilst we're debt providers, we take commercial views. Essentially, we're kind of a little bit similar to equity. In that way, we can take a commercial call and that enables us to maybe shorten the time of financing from. You know, sometimes in the past it's taken 12, 18 months, sometimes even longer, to get a financing away. One that we did in benin this year, end to end, took a bit under six months because of this kind of approach and those people that approach you, fernando, or those companies.

Speaker 2 20:46

They usually don't have the long-term finance ready, do they? Otherwise the long-term financials would probably already come in and provide the finance for the construction phase already, wouldn't they?

Speaker 3 20:56

Yeah, so I mean the companies that we're dealing with they have a degree of track record, but they don't have the depth of balance sheet, typically, that you could lend against, which is why the RBF provides that ability for us to consider them, and the way in which we then look at this is we can provide that bridge to the point where these companies have financed an asset and then with an eye to ensuring that a senior financier can then come in, probably with local currency financing, and provide a nice senior long-term loan.

Speaker 2 21:32

I see, I see. Does that mean that you even go beyond the RBF's tranche, or do you limit your engagement to the amount of money that they would recover through the RBF?

Speaker 3 21:43

So typically it's limited to the RBF, although we then will club together with other financiers, one of which we work with a lot called cei africa, who can then go beyond that rbf portion and even provide slightly longer term financing as well to support that company, maximize the the amount of of debt, because equity is so short, to get these projects financed.

Speaker 2 22:18

Okay, now, quickly talking about the due diligence once again. Do you share due diligence outputs with other financiers and investors and do you use the due diligence outputs that the authorities already provide or not provide, I don't know, but at least have available?

Speaker 3 22:32

So talking for us, we do, and it's part of the mantra that we approach the market is that we are open to sharing our diligence materials on a non-reliance basis, of course, with others, because clubbing together these different sources of finance again makes it quicker for everybody from a financier's perspective, from a developer's perspective too. They're not having to go through the same diligence process in detail as with others. I mean, these guys, you want them to focus on energy access rather than answering 100 or so questions in a diligence phase that they probably answered 80% of them already. So increasingly, we're finding more financiers that are open to our approach, and it's a quid pro quo. Sometimes we share, sometimes they share and yeah, it works.

Speaker 2 23:20

Is it usually that the long-term financier approaches you to provide the RBF bridge financing tranche, or is it the other way around?

Speaker 3 23:30

Do you know what? Everything and all in between. So sometimes we're being encouraged by equity to come in to provide the debt, sometimes it's the developers, sometimes it's the RBF providers. So it really is a multi-sourcing in terms of the way in which we get introduced to opportunities, and I think, again, that is the way the sector needs to be. It's different parties working together to find a way. It's not easy, this stuff, to get all of the pieces put together.

Speaker 2 24:01

Very true, yeah. And this means that approaching Energize Africa for an RBF pre-financing could then even be an access or a door to a network. Oh, 100%. So they could approach you and then you could link them up with other interested parties who may invest or finance.

Speaker 3 24:20

Absolutely.

Speaker 2 24:21

And Piyush, I understand that on your end it's a little bit more standalone, right? You have your structured processes, people go through. You have your structured processes, people go through, they use your platform and then basically they can order the equipment pre-financed until the equipment arrives on site, correct?

Speaker 4 24:38

That's right, although I think two things in our case. First, the developers are already on our platform because they are participating in some RWA for the other. So all the historical information and performance information on their sites is already available on the platform not accessible to us without their permission, but available. So, from a purely standpoint of convenience, they find it very easy to download or just share that information with us in a different account, obviously with their explicit permission, which just makes the diligence process easy and not duplicative in as much as it relates to us. The second thing is that we actually work in a different capacity with financiers like local banks, like international banks, who are investing in the sector to help them deploy their own capital. So they also run their programs through our platform and oftentimes we find ourselves conferring with other lenders, like Energize, or local banks like Sterling Bank in Nigeria, zenith Bank and so on and so forth, who are our clients and then work through us to discuss that.

Speaker 4 25:43

Okay, this is a specific situation. This is total financing that this mini-grid developer needs for the portfolio projects that they have. How much are you able to provide? How much are we able to provide, so that we find a sort of comprehensive solution for that particular portfolio of mini-grids. Now, all of that happens with complete transparency and involvement of the developer. So it's great for lenders to confer, but we do it with the mini-grid developer involved so that we are together working towards a joint solution and everybody is very clear on where we landed and why we landed there. So that's our process. We also then have a two-stage diligence process, so step one is more like a pre-qualification, so almost like entity due diligence, that we're deligencing your track record, your background, your institutional capacity to come to an answer that, yes, you are a mini-grid developer for whom we are very happy to provide construction credit or supply chain credit.

Speaker 4 26:48

Once you've done that process, then the second step is a specific transaction, where we would then have limited variables to work through, and that speeds up the process. But that also means that oftentimes we are seeing ourselves approving transactions in a week or two at the most, rather than having to make developers wait. This has all been defined, I would say, almost like a contrarian approach to the traditional financing that we have supported for years, going into the sector and learning from them that where are all the pitfalls? Like I said earlier, why are we looking at balance sheets if they don't reveal much? Why do we have to ask certain questions? What are the CPs really trying to achieve? How can we avoid integrator agreements? How can we avoid 200-page loan agreements and keep the whole transaction structure very straightforward and simple?

Speaker 2 27:42

Yeah, did you just say that the process may take one or two weeks from an application to not to disbursement probably contract signing right yes or to order of equipment, or what is that?

Speaker 4 27:54

one, two week cycle yes, well, once the developer has been pre-qualified, which can again take one to two weeks, maybe even longer if certain information is missing and we have to go back and forth but for the specific transaction, which in our world is stage two, we can actually go from start to disbursing or ordering equipment, which is equivalent to disbursing, in our case, in a week. Yeah, and we often do.

Speaker 2 28:20

Interesting Sounds good. Now what is the advantage of using equipment instead of, or purchasing and delivering equipment, instead of disbursing the funds and letting the mini-grid companies, developers, procure the equipment themselves?

Speaker 4 28:38

Yeah, well, let's look at the advantages first from the perspective of the mini-grid developer, right? So obviously there is the opportunity to benefit from procurement savings because we are buying much larger quantities than any individual mini-grid developer at any point will be buying. And we have these platform agreements with OEMs all the major OEMs for main equipment categories that you can think of, which we call most favored nation partnerships under which they offer us best terms, guarantees in return for us helping bring aggregated orders to them, so they benefit from procurement savings. Just simple, plain and simple economies of scale. Then they benefit from speed, because we're not having to go through complex loan agreements, then take time in delivering CPEs and then also do integrator agreements. So none of that is involved.

Speaker 4 29:35

Our transaction works very simply of quotation that we present to a developer. They accept that quotation by placing a 15% non-refundable deposit, which is their skin in the game, and make sure that there is no speculative ordering, and then we go away and buy the equipment on their behalf but in our name on our balance sheet, so that we remain the owners, deliver the equipment to site and ultimately get paid out of the project receivables, or RBF receivables, as the case may be. So simple paperwork, no legal costs in most cases, speed procurement, savings, which oftentimes totally offset cost of credit, are some of the benefits from their side. From our side, the biggest benefit is that we certainly believe it's a more secure structure than a lender's position because we own the equipment all through the period when we have an exposure and our money hasn't been fully paid back, which is obviously better than financially. But we also then escrow the grant receivables and take security on them to make sure that money first comes to us towards our repayment before any goes back to the developer.

Speaker 2 30:46

You just need to make sure that you know where the equipment is right Once you imported it into a country. Once it's on a truck, it can go anywhere.

Speaker 4 30:57

Yes, well, please don't forget that we are as much a supply chain business, with people on the ground and operational capabilities, as we are a technology and financing business. So it comes with the territory. We're obviously alert to those risks, but, yeah, we have ways in which we can monitor that.

Speaker 2 31:16

So yeah, Where's the point of handover? Is it at the harbour or is it delivered at site? Delivered at site oftentimes yeah, okay so you take care of the delivery to site, that's right, because it's our equipment.

Speaker 4 31:28

we handle the entire supply chain, all the way from ordering to shipping on high seas. Then custom clearance we organize custom clearance. We organize deliveries to site by arranging local transportation and warehousing. But yes, it's true that at one point we relinquish possession of the equipment to the developer because you obviously have to build the site. But for that 50% or 60% of the total chain, we remain in physical custody of the equipment in addition to also being the owners.

Speaker 2 31:59

And to site means usually the warehouse of the mini-grid company, or really the mini-grid site, and even the distribution to the different sites.

Speaker 4 32:08

It sort of varies. Sometimes it's a local warehouse that developer has set up in the province where they're building these sites, close to the actual locations. So it's literally site the warehouse on site. Other times it's a sort of consolidated warehouse somewhere in the nearest city. So it's sort of there are some variations but generally speaking we will deliver the equipment duty paid to them on site.

Speaker 3 32:35

One question I've got actually is thinking about this and it's a concern I have when I'm looking at financing as well is so, for yourself, you're clearly very focused on the equipment supply and, as you said, the security that you have there, and then you know it goes to a larger engineering design and construction of the mini grid and I'm just wondering about, because that's part of the chain I guess you have to rely on the developer to deliver, to get the rbf ultimately, as we do well, look, I think there is no shying away from the fact that when you are providing credit or when you are providing financing, you are taking risk.

Perspectives on IFC's Market Entry

Speaker 4 33:14

So you're not trying to eliminate risks from the chain, but what we are trying to do is mitigate them and find ways in which certain risks can be sort of brought into an acceptable zone. And nothing is perfect. I mean, our structure, I wouldn't say is perfect and, yes, we haven't seen losses. But that doesn't mean they won't come.

Speaker 4 33:35

But the point is that what's more efficient and what's more effective has, on balance sheet lending and traditional structures proven themselves to be effective in solving this problem and moving money at speed.

Speaker 4 33:46

We certainly are moving money at speed, so that's's for sure. We are able to achieve procurement savings, which is a source of value for the developers, which is why they come and work with us, even if they are applying for other sources of financing from local banks and elsewhere. But everything comes with its own pros and cons, right. So in our case, since our financing is attached only with equipment, unlike yourselves yourselves we can't really take a broader view and provide them financing beyond the cost of the equipment, and we know that there are costs involved in the project beyond the high value equipment. So in our case, it then becomes very necessary for us to also have assurance that, in addition to rbf, they do have access to other capital, either their own equity or some other debt funding, which they can use to meet the cost of other capex which is not being procured through us, or soft costs which they will have to bear out of their own funds.

Speaker 3 34:45

Yeah, because one of my concerns and I've heard this anecdotally, so I don't have the developer builds the mini-grid, TIC gets the RBF. So from your perspective, from my perspective, we're repaid. That all works. But if the total engineering design isn't at a standard for long-term asset value, you could run into the issue where people are just running for the RBFs and you end up with mini grids that maybe last maybe five to 10 years, when they should be lasting 10 to 20 years.

Speaker 3 35:26

And whilst that's not part of my financial concern as an impact investor, I'm concerned that these things are being built to the right standard, as I said earlier. That's why I want to make sure that once we're out of the capital stack, there's another senior lender that can come in and put a long term debt piece. So it is actually part of my diligence, even though it's not exactly part of my risk, if you understand. I just wonder what your perspective was on that, because you've had a longer track record in the market. So this is something I've heard a bit about. That happened maybe in the NEP, the previous version of Prioritaires but I'd be interested in your thoughts.

Speaker 4 36:06

Yes, I think that's a real challenge, right that once you've paid off the developer and the developer has recovered their cost of the equipment plus certain EPC margin, you've sort of disenfranchised them and disincentivize them from running the grid.

Speaker 4 36:23

Well Now REA itself, by the way, if you take the example of the DIRS program in Nigeria, has come up with a mechanism where they are now deferring up to 20% of the grants to be disbursed after a certain period of time when there is more enduring evidence of the connections. There are those mechanisms, but in our case we anyway need another long-term financier to come in and take a long-term view on the business to match the equipment financing that we are able to provide. So to that extent we are sort of leaning on each other's comfort when we are doing this financing. Like yourselves, we probably don't carry that financial exposure for the operational phase of the grids because we are usually out from the RBFs. But it's a very serious development risk if these grids do not perform for as long as they are intended to serious development risk if these grids do not perform for as long as they're intended to Piyush.

Speaker 2 37:22

How much personal interaction is there in the process that you run? Most of it is digitized, most of it is automated. All the data comes in, all the evaluation, I guess, is automated. But at what point is a physical person involved there? And is there a relationship that you built, a personal relationship that you built, with the mini-grid developer?

Speaker 4 37:48

Obviously there are others who are new on the platform, but at various points in time and their own development, they have received different support from Odyssey. Sometimes it's been using our design tools to design their grids better. Other times it's been our remote monitoring and control toolkit to do their smarter O&M. So most of the developers who we work with, or at least the bigger ones, have been connected to Odyssey for a while. Specifically, with regards to the supply chain credit that we provide, we have a process where we designate an account manager to each partner who we approve and pre-qualify, and those account managers are responsible for sort of managing the day-to-day relationship, monitoring the whole project progress, procurement progress and keeping an eye on even the ENS matters. We obviously have ENS specialists who support them from behind. So, yes, there is an account management structure, but there are also enduring relationships from early with many of the developers who we work with.

Speaker 2 38:55

All right, I understand that you focus on imported equipment like solar PV panels, batteries, inverters and these kind of things. Do you also pre-finance and handle and deliver poles and cables for distribution networks?

Speaker 4 39:12

Well, we have limited capacity for local procurement. Interesting that you mentioned poles and cables procurement. Interesting that you mentioned poles and cables. In the case of cables we have just come across situations where the sort of conventional belief has been that cables are available at competitive pricing locally. But we have actually found suppliers internationally who are offering and providing same grade of cables at lower prices. So that's again part of the value that we bring to the process, but it sort of makes it easier for us because that then also becomes imported equipment.

Speaker 4 39:45

We do have some capacity to support local procurement but I wouldn't say we are very well kitted out for that only because we provide our credit in US dollars, which has a very nice hedge natural hedge with the cost of the equipment, because the OEMs also want to be paid in USD and ultimately the grants now are also disbursed in USD. So that chain works very well. But I think for us to then finance local procurement in Naira becomes a bit of a sidestep, not to say that we can't do it, but it just involves three additional considerations, if you may. So what we typically tend to do is then work with one of our local banking partners to fill that part of the funding requirement because they can obviously lend in much more easily than we can.

Speaker 2 40:36

I see, I see. All right, fernando, now.

Speaker 3 41:11

I see, I see, all right, fernando. Now Piyush has introduced a fast-tracked process. There probably is a point for a developer maybe at times to do either or, but certainly not all of the time because we can finance a bit broader, slightly benefit, I think, from. I mean, I do think that our cost of funds is reasonably competitive, certainly to local financiers, but the impact funders that we have will typically accept in the order of an 8% interest rate annually. You know we have to clearly charge a degree of fees on top of that. We're not an investment fund but kind of an all-in interest rate can be anywhere from, say, 10% to 12% in hard currency terms, which is not too bad. And if you think that we can put that money to work within, we're targeting between probably the low end, three to four months if we're super quick and can benefit from others' diligence.

Speaker 4 42:03

So yeah, we'll always be a bit slower than odyssey, but I think we're part of the jigsaw to make it work well, you've probably learned over this podcast as well that we like to keep things simple, so our pricing model is also very simple. It's basically 1.25 to 1. A month, but developers only pay for the number of days they actually use the credit, so it would be wrong to express it as an annual percentage. So, no prepayment penalties. We agree a certain point of time, which is the sort of most expected timeline, and we build in some tolerance for delays.

Speaker 4 42:39

But if things happen quicker, which sometimes do, you can actually pay us off early and we will not charge you for that period. So, yeah, so developers find that attractive because it's sort of directly proportional to what they're using. But then, as I mentioned earlier, we are also able to offer them procurement savings when they procure through us. So oftentimes the landed cost of equipment is actually only marginally higher than it would be if they were to procure directly, albeit with a six to nine month credit period now, which is providing them good coverage to complete their projects and collect their RBFs projects and collected rbs.

Speaker 2 43:27

All right, good. Now what I heard is that the ifc is also entering the space and, fernando, already you told me earlier that you have some insight into what ifc does. Do you want to share what you know about it? Sure?

Speaker 3 43:39

sure, I sure. I mean, as everyone knows, typically IFC, you know, doesn't get out of bed unless it's probably 20 million plus kind of finances and all the rest they're normally in the big end of town. But with the advent of RBFs they've created an initial structure which is essentially RBF bridge financing. I believe they're doing it for certainly for financing. I believe they're doing it for certainly for Nigeria, I think they'll do it for other markets as well, and they blend a bit of IFC money along with some concessional funds, so cheaper money, to then come up with a blend which I don't know the exact rates, but I'd imagine it's still pretty decent. I know they've done one transaction with Husk and I think there's a number of others that may come to the market in the second half of this year.

Speaker 2 44:27

And the approach is similar to the one that you chose.

Speaker 3 44:31

Fernando, yeah, so it's all CapEx effectively. Yeah, for the sites. So, yeah, I guess they've seen that it's as both Odyssey and Energize Africa have seen. This is an important bridge financing period that some additional capital coming into the market can really hopefully accelerate energy access, which is what we're all about. So I'm really pleased For large ticket sizes, as you said.

Speaker 3 44:55

Well, no, no, they can go down to, I think, probably somewhere between two and a half and five million, so much smaller than typically the ifc has done in the past. So we actually see means where we can potentially collaborate and work together with them. So that's one thing that we're exploring. All right sounds good.

Speaker 4 45:13

well, we can only welcome we can only welcome ifFC and any more financiers who want to come into the sector, right, so it's a $750 million RV program in Nigeria alone, and if you add up the whole of Africa, not to talk of Southeast Asia, it will be a lot more. So we need a lot more capital coming into the sector. I think you were alluding earlier and trying to provoke Fernando and me on getting competitive. Well, it's hard to get competitive in a sector where capital has been in such short supply historically. So I think we can only take a welcoming view to any type of financing that's coming to the sector, because if the sector grows, all of us have more to do.

Speaker 2 45:56

sector grows, all of us have more to do True, and that probably also holds true for the equity that needs to come into the sector and where we see a big gap still Now. Where there is no equity, there will be no projects, and then there are no projects to pre-finance with RBF bridge funding. So what is your experience here? Is equity financing? Is it picking up or will it remain at the level as it is right now?

Speaker 4 46:27

Well, I can talk from my experience and what we see. Oftentimes developers ask us that hey, if you provide us your sanctioned letters, we can go away and stitch up our equity rather quickly. So it seems to me that, other than just the general availability problem, there is also that sort of commitment problem which is so typical like it's like the who blinks first problem. So in these situations we're actually very happy to help developers and even speak with their equity providers to give them some comfort that yes, we're looking at it and we would be able to provide financing or credit under these conditions.

Speaker 4 47:07

In terms of the general availability of capital, I think mini-grids have sort of generally been regarded as sub-commercial, so it's not a sector which pure equity providers or commercial equity providers are sort of prioritizing to begin with. But there is still capital available from selective sources. Again, there are local investors and family offices who provide capital for projects like these, who have affinity with the projects and the broader social cause, and there are some larger investors or sort of concession capital providers, institutional capital providers, who we have seen have funded these type of projects. But generally speaking, I think your observation is right that equity is scarce and whatever equity is available is also slow to proceed, so obviously a lot more is necessary.

Speaker 3 48:05

Yeah, although I'm hopeful that with the IFC or World Bank I'm not quite sure the Zafiri fund that is being linked with, I guess the advent of Mission 300 may bring more equity to the table. We'll see. I'm a bit concerned they may focus on the bigger companies to begin with, who will always, I guess, get the the first access to this capital. But at least it is potentially some new sources of equity coming in. But we're seeing a few others. I mean, you know acumen's hardest to reach fund has got a bit of equity, I think sometimes even debt financiers are providing some quasi equity. So the Rep2, which is managed by Camco, I'm told some quasi debt stroke equity coming in. So we'll see.

Speaker 3 48:55

It certainly slows everything down. Puyo should make it as quick as we like everything down. You know peuch and me can be as quick as we as we like, but if the equity isn't there, that's always going to be a cp before we distribute our funds. And I found recently we're ready and we thought the equity be ready and the equity is now one month, two months, three months down the track and you're like we've done all this but we're still. You know, you're always held up by the slowest mover and that's the challenge yeah of course that's right.

Future Outlook and Contact Information

Speaker 4 49:23

I mean in our case, because we are not lending on the balance sheet and don't have to adhere to certain conventional debt equity structures, we are more flexible in how we look for we call it matching funding to complete the project. So that could be debt, that could be equity, but just show us that you have that balance capital available to ultimately complete the project. And then this was the grant. As long as you have that, we are flexible in whether you call it equity or debt or quasi-equity.

Speaker 2 49:53

Fernando, could the offer of bridge financing RBFs be a stepping stone for you to enter into longer term debt?

Speaker 3 50:04

provision, I think only if we were to go down the route of creating a debt fund or something of that ilk, because I think longer term debt provision, in my mind, has got to be local currency because ultimately you've got to match with where the money is coming from, which is going to be individuals within country. So if you wanted to be longer term debt providers in Nigeria, then I think you need to provide Naira debt and at this time we're not in that position. But yeah, we will see how the market evolves.

Speaker 2 50:38

All right. Now. Another development we've seen is that the basically donor funding for the sector, the ODA, is reducing. The USA have drastically reduced their contributions. Some others may step in, but they will not make up for the large amounts that are missing now. Now how is that affecting the sector?

Speaker 3 51:03

I can talk about how we're beginning to see it. I mean, it's everything from developers who may have been expecting either some direct funding, or some of these developers do pieces of work for the likes of USAID in the past and now are not going to be paid for that. So there's a bit of a gap there. But we're also seeing it affecting the individual's level. So, for example, in refugee camps, where sometimes some of the ODA is in the form of cash payments to individual households, if that money is not coming through, then how are they going to pay for electricity not coming through, then how are they going to pay for electricity ultimately? So we can see this cascading and creating more challenges. I've even seen one debt financier who was expecting a large amount of funding which they would then lend on. That's no longer there, so they then all of a sudden have got a gap in their capital structure. So it's quite pervasive across the market.

Speaker 2 52:02

Yeah, then let's come to a close of this session. Maybe each of you can tell me what is your current pipeline, what is the magnitude, the volume of transactions you're looking at, what are the ticket sizes you can support and, after all, whom should interested companies contact if they want to get finance or buy assets from you?

Speaker 4 52:26

Okay. So I would say that we have a qualified pipeline, and when I say qualified I mean developers who we have taken through the first stage, pre-qualification, and they have presented their portfolio projects to us. So that pipeline at this point in time for mini-grids stands close to around $125 million, and against that we probably only just committed about $20 million over the last, I would say, six months or so. So, yeah, there is sufficient depth in our pipeline. Our current capacity to support an individual developer is only up to $5 million. That's an internally set ceiling but obviously guided by the total capital liberty that we have and the diversification that we wish to achieve in the overall portfolio. But we're also looking to raise more capital because we are sort of in a capital constrained situation. We have a lot more demand than the supply of capital. So if any global lenders are listening into this podcast, I invite them to speak to us.

Speaker 4 53:35

So, yeah, I would welcome conversation and discuss how we can collaborate. But then also the developers. We're constantly sort of raising more capital and increasing our capacity to do more and more. So, yeah, hopefully shortly we should be able to go above that limit and provide more capital to developers. Anyone who wants to contact us can come through our website. We run a number of RBA programs, as I mentioned earlier. So if you go into the financing section, you will see a listing of all the RBA programs with their eligibility criterias, and you can then apply in whichever program you qualify for For supply chain credit. When you get to the point when you're ready to start thinking about procuring for that project again, there is a button available on our website that says supply chain credit. So if you click on that, you'll be taken to the right forms to express your interest and then one of us will promptly call you back to kick off the process.

Speaker 2 54:37

Cool, all right, fernando.

Speaker 3 54:40

Yeah certainly so. Um, I think, in terms of pipeline, I think we've got around around 25 million. That has been, um, let's say, to a degree, pre-qualified, with a further 10 15 behind that. I mean, we look at ourselves being, or targeting, financing around $15, $20 million per year in mini-grids, and the typical, I guess, sweet spot for us is probably $2 to $3 million, although we will then also club together with, in particular, cei Africa, who we have a framework agreement. So, for example, one project I'm doing in Benin and one in Kenya, we're providing two million dollars. Cei Africa is going to come in with another two million. So the total ticket size then is is a is a bit bigger, but I think probably for now we'll stick it around that level.

Speaker 3 55:42

We similarly look to raise additional capital. We have our own private investors, but the great thing that, in particular, institutional capital can do is it can blend with our money so it can be used to unlock our private capital, and that's what CEI Africa is very keen on. So we have a matched funding concept where that enables them to unlock additional private sector capital. So that's one thing that we're going to be doing more and more, so that 20 million we'll do per year. At one point we'll hope to get maybe 10 or so of that coming in the form of institutional capital. People can reach out to me directly or probably initially via the Energize Africa website and, similar to the PS. We have a pre-qualification type questionnaire which people can use and we can quite quickly get to a point where we say, look, yes, we'd be delighted to help you, or no, we can't, but maybe here's somebody else you could talk to.

Speaker 2 56:42

Sounds very good and sounds like you offer complimentary solutions for the market, each within his own niche. And yeah, with that, I just want to emphasize if you are looking for the links to the company's websites, you will find them in the show notes. And yeah, thanks a lot, piyush. Thanks a lot, fernando, it was a pleasure talking to you and yeah, keep on the good work and I'm looking forward to talking to you again.

Speaker 3 57:15

Thank you, nico and thank you Piyush. Thank you Nico.

Speaker 4 57:19

Thanks for having me over today. Bye-bye, thank you, nico, and thank you Piyush. Thank you, nico, thanks for having me over today.

Speaker 1 57:20

Bye-bye, thank you, bye-bye. This episode of the Mini Grid Business has been brought to you by Enensis, your one-stop shop for sustainable mini grids. For more information on how to make mini grids work, visit our website, enensiscom, or contact us through the links in the show notes. The mini-grid business Powered by Enensis.