The aef podcast: Navigating trends in African energy - with DLA Piper

The aef podcast: Navigating trends in African energy - with DLA Piper image

The aef podcast speaks with Dimitri Papefstratiou, Partner at DLA Piper, about the latest emerging trends in Africa's energy setor

Dimitri Papefstratiou:  The last few years have been years of enormous change in the energy landscape. Fundamentally, it used to be the case, at least in our experience, that you had every year, two or three major thermal projects reaching financial close, at least on the power side. You had a continuous base load of activity in the oil and gas space. Renewables were, of course, being developed, taking place as transactions reaching financial close, but there were fewer and further between. That trend has really reversed.

We're seeing a relative contraction of the bigger deals in the power space, the thermal deals in particular, not because necessarily there is any reticence in terms of fuel type or technology, but you might say that that is certainly true for coal.

For other thermal technologies, there continues to be a real trend pushing them forward. In fact, we closed a first phase financing for the bridge power project in Ghana, which is a 200‑megawatt deal, multifuel‑sourced, in fact. That was quite a success.

Damon Thompson:  What's driven that change?

Dimitri:  I think it's been a number of factors. Firstly, you've had challenges and contractions across a number of the major economies in Africa.

If you see difficulties in South Africa, in Nigeria, in Kenya, and in some of the other major developed economies, particularly in northern Africa, for example, Egypt, if that's the consistent pattern in the larger economies on the continent, you would expect to see that play out across the board. We now tend to see one, maybe two at max big deals.

Damon:  Big deals being 350, 400 megawatts plus?

Dimitri:  Absolutely, closing every year. Oil and gas has been affected, of course, because of the turbulence in terms of oil price, but also I think that space has been inevitably impacted by some of the questions that are being asked both in terms of climate change but also in terms of institutional funding that you will have seen recently the Norwegian sovereign wealth fund has been recalibrating its own criteria for investing in oil and gas companies and projects.

I think that's played out across the industry. We see change there. Probably, the biggest change has been in the volume of renewable energy transactions that are being generated and closed in relatively rapid timelines.

Damon:  Don't you think that South Africa has been the catalyst?

Dimitri:  I think so, but also, technological change has been a major factor. It used to be the case, if you remember, what is now the distant past of seven or eight years ago, that the majority view was that it was only possible to finance renewable energy projects with some form of state subsidy.

Now we've reached a moment in the technological landscape where, in fact, older, existing coal fire generation may be more expensive to fire than new solar installations. The fundamental change in that economic pattern has driven the development.

Damon:  Do you think this resistance to fossil fuels on a global scale has had a knock-on impact in South Africa? I know that Standard Bank have pulled out of funding a couple of major coal projects in South Africa.

Do you think that's a ripple effect influencing Africa? Is that then having an effect on the fact that there are now a lot more renewables projects in the pipeline?

Dimitri:  That is certainly one view. Largely, that is correct. Certainly, of course, as you know better than I do, most of the projects that are financed in Africa on a project financing basis, involve large components of ring-fence DFI financing one way or another.

Of course, the DFI community is extremely sensitive, rightly so, to environmental concerns. that has been one of the main factors in driving a great reduction in the number of new coal fire generation coming online.

Damon:  Just for our listeners who don't know what DFI is…

Dimitri:  That's a Development Finance Institution.

Damon:  Are they government‑funded?

Dimitri:  They are typically publicly or multilaterally‑funded institutions. They're very, very active in the African energy space, as you would expect institutions like the IFD umbrella in France and, in particular, Proparco which is very active. In Germany, you have the KfW group and its member, DEG, which is very active. Of course, we should not forget CDC and others.

Damon:  I'd quite like to move on to DLA now, in a way, or the role of a law firm within that power project value chain that we have. What role does, first of all, a law firm play in developing those power projects? Then, a little bit about why DLA have experienced some success over those years?

Dimitri:  Sure. What lawyers tend to do is not just focus on contractual details. I think that is a misconception that sometimes we encounter in the industry where legal participants, legal advisors in the transaction are thought of as being part of the execution and implementation phase of a project. Of course, we do do that. That is very much part of our bread and butter.

But really the role that we tend to play as experienced practitioners in what is now a global landscape, is being able to come in probably quite early on and assist with a number of strategic and market insights that will help our clients pick out those issues which might impact visibility or timeline.

Damon:  Bankability, I guess?

Dimitri:  Absolutely. Bankability is one part of that visibility spectrum. It's really identifying the blocks or the issues that investors will look at and go, "Hang on. There's a real issue here. We need to address it."

Damon:  You don't just bundle the documentation, then?

Dimitri: [laughs] No, no, we don't. Of course, most project finance deals are quite complex transactions which involve groups, spectrums of contracts working across different players.

In effect, project finance transaction is a number of different deals bundled into one. There's a government‑facing deal. There is a contractor‑facing deal in terms of EPC, which is the engineering procurement construction part, and ONM, which is operation maintenance. There is a financing component to the transaction. There will also be a planning licensing component as part of the development scale.

Our role is bundling all of that together and working out the best way of delivering the deal within that spectrum which satisfies our clients' requirements. That is what we do.

Damon:  Succinctly said. I'm going to move in a slightly different direction, now. I'm going to make you imagine that I'm a trainee lawyer, and I've come to see you for the day. I'm looking at perhaps joining your team and joining the energy sector in Africa. How would you sell that to me? What are the key points about enjoying working in the African energy sector?

Dimitri:  The major element which drives all of us in the industry is the impact that we have on the daily lives of people who live in the countries we work in. It's hard for us perhaps to envisage in this surrounding, but the reality for most people working and living their lives in sub‑Saharan Africa is a life where power supply is constrained, or expensive, and in many cases is not available at all.

These are highly intelligent, capable, skilled people in many cases. Not being able to utilize the tools that are part of modern daily existence is a real drawback in terms of developing the local economy, and in terms of reaching their own individual potential. Making that change, that concrete change in one person's life is worth it.

Damon:  Would you say that and the majority of projects that you've worked on, that local content has been a key factor in that?

Dimitri:  Either local content, or rather both local content, because of course, most major transactions of this kind will inevitably have a strong local partner participating in it. There is, of course, local involvement in local economic growth.

There is inevitably a part of capacity‑building in terms of local actors interacting with government and offtaker, often parastatal organizations in the offtaker utilities and working with them. Often, of course, these are very, very skilled practitioners, so no need to teach anyone anything.

Being able to sometimes call on experiences from other jurisdictions and being able to draw those competitors, I think is very positive and has a very positive developmental impact on the whole, as does of course, implementing transactions because we all learn from every single deal that we do.

Being able to participate in that realization of a government policy or a development objective in that one case is, in itself, a worthwhile thing.

Damon:  Impact is vital. We invested in a solar project at a school in a township in South Africa, in Johannesburg back in 2016. We were able to provide a product called a solar turtle which completely drove all the power for the school, which meant they didn't have to invest in kerosene or diesel.

The entire school, 2,500 pupils, run on solar. The looks on their faces, the impact that that investment had, that's absolutely crucial. I'm going to take you even further back now. We're going to look at when you were young, did you always want to be a lawyer? Did you have other aspirations?

Dimitri: [laughs] No. Despite the popularity of, if I remember, LA Law at the time. Do you remember that series?

Damon: [laughs] I do, yes.

Dimitri:  No. I didn't know what I wanted to do. I had a clear sense of what the component parts of maybe the area that would attract me might be. I knew from a pretty early age that I was interested in the body politic in society in issues that affected all of us.

Damon:  You could have been an MP.

Dimitri: [laughs] I've been saved from that particular fate, certainly, given what's going on at the moment.

Damon:  Yes, indeed.

Dimitri:  I knew that I would be interested perhaps more in policymaking than politics and the impact of how we organize ourselves as a society to serve our members.

When I was a trainee lawyer, one of the seats I did was in projects. Immediately, the area attracted me hugely. I could see the output of my work. Originally, I worked closely on a number of deals in Greece, which is also where I come from, as you may have noticed from my surname.

Damon: [laughs] From your surname. Yes.

Dimitri:  Those transactions involved some work toward the tail part of a deal in the Athens airport development and the Rion‑Antirion Bridge, and then a number of motorways.

Every time I fly into the new Athens airport, or cross the bridge, or drive from Athens to Patras, to then take the ferry boat to take me to Kefalonia, which is partly where I come from, I use bits of infrastructure kit that I was involved in creating. That sense of even tangential relationship is tremendously satisfying.

I was also very interested in the field of development from pretty early age. I felt a degree of connectivity with emerging markets in Africa in particular. Believe it or not, my father was a banker working in emerging markets in Africa in particular during the big commodities boom in the '70s. I remember him traveling to these places that, for me, sounded far‑flung and exotic.

Damon:  Extremely exotic.

Dimitri:  Absolutely. I thought, "You know what, when I grow up I want to do something like that." Maybe that's a part of it.

Damon:  That's very interesting. My father was a journalist. When I decided I wanted to be a journalist he said, "Don't be a journalist. If you can sell, then carry on selling because you'll make more money that way." In this case...

Dimitri:  Let me pick up on that. My dad was trained as an economist. He said, "Don't be an economist." I became a lawyer. There you go.

Damon: [laughs] I love that. That's brilliant. You've had a long and successful career so far. Long may that continue. I'm sure there was one particular project that you are particularly proud of. Can you tell us a little about that?

Dimitri:  Absolutely. In fact, I will tell you two. [laughs]

Damon:  OK. Great.

Dimitri:  Two instances which I think were fantastic. The first was my involvement in the Nigerian power privatization. You may recall this was the unbundling of the power‑holding company of Nigeria, PHCN, into a number of GENCOs, generation companies, and DISCOs, distribution companies.

The privatization of the power industry in Nigeria has been a long‑running story. The conclusion isn't necessarily a purely happy ending. What I will say is that I was immensely proud of the way that that process was handled.

You may recall that the bids for the generation companies were opened live on national television which was a huge move forward in terms of transparency in the sector. It was a first opportunity for Nigeria to open its power industry up in quite that way, such a brave way, to the international audience. I think that we will see great things come out of that in due course.

The second project is one which we completed recently which I mentioned earlier, which is the bridge power project in Ghana. Ghana has been having its challenges in terms of availability of power. We worked very closely with our fantastic client, the Mytilineos Group and put together a financing structure which is absolutely unique as far as I'm concerned.

It involved the construction contractor which is METKA, part of the Mytilineos Group.

Damon:  Yes. Greek company.

Dimitri:  Absolutely...providing a long‑term, limited recourse by project finance, vendor financing, with no cut‑off date. The theory is that the sponsors are able to now approach the banking market at their leisure and find the right partners who can come in as lenders to the project either before completion or after completion.

Damon:  Without pressure of time?

Dimitri:  Exactly, without pressure of time. In the meantime, you have a contractor who also has a significant financing stake in the project and is, therefore, strongly incentivized to deliver on time and to budget.

It is a new way of approaching financing and also de‑risking projects significantly so that when the banking market becomes involved, it can decide at which risk point in that continuum it can come in.

Damon:  Nice. I think that's an innovative approach. One of the things that marks Africa out as a whole is that they're always looking at finding different ways of solving particular problems. Thanks very much for sharing that, Dimitri.

Dimitri, I wanted to have a chat with you briefly about Mozambique. I know that when I joined the business seven years ago, they'd recently found gas off the coast there. It was a major factor in their belief of growing the energy ecosystem there. The gas hasn't been taken up. It's still there. Mozambique doesn't seem to have moved forward in that time. Perhaps you can give us your take on that.

Dimitri:  I'd say the following. We've been quite active in the gas space in Mozambique. It's a little bit difficult for me to discuss in detail what we've done. It's a space that we're familiar with.

You might see there are a number of references to the LNG project that are currently gestating in Mozambique in our global 2019 LNG report that we issued recently in association with "Petroleum Economist," which has a dedicated section on Africa and how African gas and LNG might be used to satisfy some of the increased demand we see in Asia. We've also been working on a number of power projects in Mozambique.

Damon:  Outside of gas, and more on the renewable space?

Dimitri:  Indeed, so we have two projects that we're working with clients on, but it's relatively early stages of development, but they, I think, are the next ones that we'll get done. One is wind, one is solar.

Damon:  Big ones? What's the megawatts on those?

Dimitri:  They're fairly significant. They are in the 50 to 100 megawatt spread, so quite a good size, certainly for the country.

Of course, the country itself has had real challenges recently, and I mention both the China bond issue, which has come to the boil, recently, but also from a natural disaster point of view, we should all be very sensitive to what has essentially been the destruction of the Beira part of the country. It has taken place as a result of the recent hurricane.

That's something that has been of a great concern to us and we have colleagues in Maputo, the Sal and Caldeira team, so we've been in close contact with them throughout. But Mozambique, inevitably, is a country that will only go one way. There is a huge development potential. There is a growing economic region and Mozambique is sitting on tremendous energy reserves.

Whatever the difficulties may be, they will be overcome. One thought I would have is that it is often the fate of countries that discover tremendous energy, or other natural sources of wealth, to then contract the so‑called Dutch disease.

[laughter]

Dimitri:  I don't think Mozambique has fallen into that trap. Not yet.

Damon:  No.

Dimitri:  But what they do need to do is to be less fearful of political considerations in terms of providing concessions to investors, and focus on making Mozambique an investor‑friendly jurisdiction. That is what will drive the realization of the energy potential.

Damon:  EDM, I'm assuming, are the offtaker of both the wind and the solar projects you're developing?

Dimitri:  All parts of the power generated. Yes, there are also some active private offtake in that mix.

Damon:  Moving on slightly now to the Africa Energy Forum in Lisbon in June. I have been involved with the Forum for seven years or so now, and I know that there are quite a few law firms who we've worked with, over the years. In fact, more and more are joining the Forum.

How does it work with the other law firms? Are you fierce competitors or do you have a more collaborative approach to working?

Dimitri:  Inevitably, there is an element of competition, but notwithstanding what you might see in programmes like Suits...

Damon: [laughs]

Dimitri:  ...but that is not the modus operandi of the industry. Certainly not in this part of the market, where we're looking to put together deals.

In order to put together deals that work, stand the test of time, in reality, people need to move away, and have largely moved away, from zero‑sum game approaches and winner‑takes‑all. The reality is that a good deal is typically one which everyone gets a little bit of what they want and take a little bit of pain.

Damon: [laughs] Right.

Dimitri: In order to get to that kind of result, you need people, on the other side of the table, who you can work with. You may recall that that was one of the biggest gripes in the industry, which was the absence of availability of funding for African governments to support their own counsel.

You then had the African Legal Services facility set up and re‑branded a couple of times, and so on, but really, as lawyers, we want to see counterparts on the other side, who we have a good relationship with, we can talk to, and get things done with. There's more collaboration than you might think, and in fact, I would say some of my closest friends are competitors in the industry.

Damon:  Refreshing to hear. I thought you were going to say, "No, I don't talk to them at all."

Dimitri: [laughs]

Damon:  Again, you're going to be meeting quite a few of them at aef in Lisbon in June. I hope you're going to be joining us. What for you is going to be your key takeaway from the Forum? What are you hoping to get out of the three or four days over there?

Dimitri:  It's a good opportunity to connect with people whom I've worked with over a number of years. Every time that happens, there is always something that comes up, whether it's an opportunity, whether it's a sense of where the market is moving and how, meeting new entrants, a sense of trends.

That connectivity and that energy, being together in the same place, for a finite period of time, to discuss and exchange information, there are always, always, always important things that come out. For us, as practitioners in this space, not to come to the Forum would be an issue.

Damon: [laughs] That's ideal. You mentioned everything being together. The Forum’s new branding and strap line is "Energy. In one place." That really works well, because we do feel that anybody who is anybody in the industry is there. I only hope that you don’t have back‑to‑back meetings and you have some time to go to some of the sessions and to listen to some content.

One of the big changes this year, with the Forum, is that every one of the 56 sessions will be chaired or moderated by a woman, because we've got a big drive on inclusion in diversity now. Are you seeing elements of that now in the work you're doing in Africa and through energy?

Dimitri:  It's been a longstanding history of very strong female professionals participating in leading the industry. That is not to turn a blind eye to the fact that we could all do better. Of course, we can, but there are also some notable themes that practitioners, certainly in our firm, in other firms, across the industry, the developers and banks, and some very, very strong personalities.

I wouldn't see this as a change, rather I would see this as a renewed focus on something that has always largely been there, but at times obscured from view. Certainly, that is very positive. It's also very positive that we have a different focus now. It used to be the case that this area, so Africa Energy Development, was very much an area dominated by certain players.

Those players tended to be the utilities and parastatals that were dominant in the industry in Africa and would typically utilize external bonding and consultants to implement their projects. It was very much a case of internal players reaching internationally the skills, and financing and using those to implement a project in the country.

That's changed a lot. One of the trends, which is that hard to miss, is that so much of internal development is being driven by internal players, putting together deals, lobbying government, working on licensing, approaching governments bilaterally, pushing governments to tender, working with government to implement projects.

That is a phenomenal trend. It is essentially what the sector was always aspiring to, which was driving domestic development to such an extent that it would then generate what the sector needs, which is deal flow.

Damon:  Also, as well, the Africa‑wide governments being a lot more open to FDI, to foreign direct investment, than they ever have been.

Dimitri:  Absolutely.

Damon:  There's more and more sovereign guarantees coming through now, which are helping that project development, but I wanted to switch over to technology, and what you feel are going to be the key trends going forward for Africa - which are going to bring electric benefits, obviously. What are the key trends?

Dimitri:  Interestingly, we had a straw poll between the partners in the energy sector and particularly those who have an Africa focus. There are a number of us in DLA, which is a testament to the strength and depth of our team. We asked that very question.

What do we think are hot topics for the next few years? We picked two out of a number. We thought larger‑scale, renewable‑energy projects, with the battery storage components used to develop a non‑grid dependent power solution, is going to be a key theme going forward.

The second area where we've seen a lot of activity currently...In fact, we are acting on two separate transactions in two completely different countries, unrelated participants in this space, is small‑to‑medium scale gas liquefaction and transportation through virtual pipelines, which is primarily road transport…

Damon:  Of LNG or LPG?

Dimitri:  Yes, different formats. One of our projects is pure LNG. One of them has got an optionality around compression, but that hasn't been worked through, yet, fully. The bridge power project that we did also has an LPG firing capability.

Damon:  Is that in a gas‑to‑power environment, then?

Dimitri:  It is. Or in a gas distribution for localized consumption, typically industrial consumption.

Damon:  Yes, I was going to say industrial consumption.

Dimitri:  Those are the two trends. Also, because the key economies in the region are beginning to recover, and certainly because finally, we have realized that Africa is not only a phenomenal continent with a number of different destinations which will [laughs] cover a number of our needs, including entertainment and travel and all that good stuff.

But certainly, the rest of the world has realized that you have a potential economic powerhouse, which is rumbling into view, with a large population which is very intelligent, very skilled, and extremely ambitious, and is looking now to develop. The question is what model of development is...In each country it will be different, but how will the continent develop and grow?

For countries like the UK, which is going through Brexit, but also groups like the EU, the nations like America, certainly historically for China, Africa has now become a conglomeration of extremely attractive markets. The economic importance of Africa will really be upgraded. The growth will continue, and my prediction - and lawyers should never predict anything because we're often wrong - but I will hazard one, which is we will see a further return of larger scale projects on the thermal side.

Damon:  As the demand for baseload capacity increases?

Dimitri:  Yeah.

Damon:  What are the key countries that you see now coming into play, that perhaps haven't done? We speak a lot about Kenya, and we're doing a conference, that's in Ethiopia next week, because the World Bank are investing heavily in their national electrification program.

What are the countries that you see as having the most growth potential from an electricity point of view over the next two to three years?

Dimitri:  Now, that is a challenging question. Every person, who's active in the industry, will have a slightly different view. It's often said that for a man with a hammer every problem looks like a nail.

Damon: [laughs]

Dimitri:  I will briefly acknowledge that Francophone Africa has tremendous potential. In fact, we see a number of deals that have taken place within Francophone Africa.

Damon:  I think DLA are particularly really strong in Morocco.

Dimitri:  Absolutely. We have an office in Morocco and very strong presence there. Also, we work very closely through our DLA Piper Africa Group, which I will come to, because I think that's...

Damon:  The affiliates, you mean?

Dimitri:  That's right. It's no longer correct to refer to them simply as affiliates. It used to be the case, you're absolutely right, that we worked closely with a number of firms who were affiliated with us, and in certain cases, were also cobranded and so on. Mainly, it was a framework relationship.

We've taken that relationship to a next level. The DLA Piper Africa Group firms are two offices which are already integrated financially with our business in Johannesburg and Casablanca. Also, the 18 other firms across the continent are now all institutionally integrated into DLA Piper itself.

Damon:  What does that mean?

Dimitri:  It means that our Swiss verein which owns the DLA Piper business across the Americas and the rest of the world, now owns a verein called the DLA Piper Africa verein, which in turn owns these 18 firms.

Damon:  What does that mean for the clients?

Dimitri:  It means that we are moving to the model where we can provide, as a single firm, legal services across a number of jurisdictions, including those 20 jurisdictions in Africa as DLA Piper with the same type of professional indemnity insurance, and the same quality assurance that you would expect from a major international law firm.

Damon:  Because they're in‑country, you're closer to the clients and closer to the market.

Dimitri:  That's absolutely right. It also means that we can provide a degree of local insight and assistance that previously would take some time to achieve. It also means that, in terms of focus, in terms of pulling together, in terms of being able to make accommodations for our clients' needs, which are many and very different, we now pull together institutionally as a team to a degree which I think is unique in the market.

Damon:  Interesting. Many thanks for speaking with the aef podcast, Dimitri.
 

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