Investing in renewable energy with DFIs: Watts the deal?
Africa is in dire need of access to energy. The failings of the current infrastructure to meet the demands of a rapidly growing population, coupled with a high level of economic growth means that billions of dollars’ worth of investment is needed in infrastructure – in particular energy – and quickly.
To some, investment in renewable energy is an obvious solution. Depending on the geographic location on the continent, solar plants in particular tap into a great natural resource. The projects usually have shorter construction periods, the technology is relatively straightforward – proven and cost effective - and it is much easier to house a 10MW solar PV plant near an established village than a large thermal plant.
KfW have encouraged developers to ‘GetFit’ in Uganda by helping the government to tender small-scale renewables projects with a suite of template project documentation as well as providing subsidies, while IFC aims to scale up solar power by eliminating obstacles which prevent the speedy procurement of solar at low tariffs with its Scaling Solar initiative (check out our blog on this initiative). DFID’s Energy Africa access campaign (which launched on 22 October 2015) also focuses on the development of the emerging solar market in Africa.
The list of benefits which DFIs bring to renewable energy investment in Africa is well-known, and without their involvement the number of projects successfully completed would be far smaller. Longer tenors, affordable debt, government access, different risk profiles and increasingly flexible financing structures including mezzanine-type debt are to name but a few benefits brought about by DFI presence. DFIs seem to be here to stay, so how do developers interested in investing in renewable energy in Africa keep themselves from getting their fingers burnt by what can often seem like a daunting list of their requirements?
Firstly, choose your projects wisely. If you are not able to show that the project has been properly tendered and that the funds already invested in the project are from legitimate sources, and that the individuals associated with the project are not involved in fraudulent or corrupt activities, then it is going to be challenging to convince a DFI to take it to their credit committees.
Be prepared to spend a long time considering the environmental and social aspects, and then be prepared to spend money on their implementation. The majority of – if not all – DFIs require compliance with the IFC performance standards, which are onerous and can often delay project construction as they take time to be put into effect. It is important not to forget to budget for on-going monitoring and disclosures too.
Patience is key. Whilst some DFIs are able to move quicker than others, the time periods for execution are generally longer than most sponsors will have been used to. That is partly due to the nature of Africa and partly due to the nature of DFIs and there is little to be done to speed things up other than ensuring you are proactive in giving the DFI in question the information it needs.
And finally, don’t underestimate the power of policy. Policy provisions are the price you pay for access to (usually) public funds being invested in a jurisdiction perceived by many to be high-risk and they will often not be up for much negotiation. Got more than one DFI financing the transaction? Bear in mind that each DFI is likely to have its own set of rules and so it is important to start the policy dialogue early in order to avoid loggerheads at the documentation stage.
It is fair to say that some sponsors do find the transition from dealing with their relationship commercial banks to liaising with DFIs a struggle at times. However, forward planning, early and transparent communication and an appreciation of the internal workings of the DFIs goes a long way to easing some of the potential challenges.