The aef podcast: Getting projects moving - with Fieldstone Africa

The aef podcast: Getting projects moving - with Fieldstone Africa image

We welcome Brian van Oerle to the aef podcast, Chief Executive Officer of Fieldstone Africa Investment Resources (FAIR)

Damon Thompson: Brian, welcome to the podcast- it's great to get the chance to speak with you. Could you start by telling our listeners a little bit about the growth you've witnessed in the sector over the last few years?

Brian van Oerle: I would say over the last three or four years, growth in Africa’s energy sector has probably been a lot slower. There's been a lot less development than everyone would like to see. The number of deal‑closings that we're seeing are far below what the potential is.

The market is moving as well. The large‑scale gas and coal plants are becoming less and less dominant. We're seeing a big shift towards far more renewables, being predominantly solar, some wind, and quite a lot of small hydro.

The movement in the pricing and the ease and the acceptance of renewables is certainly changing the market. We're seeing a much more decentralized approach to developing the power market, which obviously has a number of advantages.

There should, therefore, be less need for more transmission and distribution infrastructure as we have more decentralized power, which is a good thing. The absolute number of megawatts coming online every year has been lower than it should be and certainly far lower than it needs to be. Obviously, there's other areas that are growing, like off‑grids, solar home systems, mini‑grids.

Those address a certain part of the market, and we've seen a lot of growth in those industries as well. It's a small chip in the overall picture.

Damon:  What role has Fieldstone played in that growth and that development over that three‑ or four‑year period? Then second, talk to us as well about the FAIR Initiative. I know you and I were having a chat about this a couple of days ago, but if you could enlighten our listeners to the podcast on that as well.

Brian:  The main Fieldstone advisory business has been involved in a lot of the bigger transactions. You've got Amandi and Azura and big transactions like that in West Africa.

Damon:  When you say "involved," is that as an investor?

Brian:  As advisor, as financial advisor on those.

Damon:  Advisor.

Brian:  Lead advisor on those projects. We've done a lot of work across Africa. Fieldstone continues to work predominantly in Africa. I think with the reprogram in South Africa, it became 50/50 in terms of work split between the rest of Africa and South Africa.

Normally, it's about 80 percent of Fieldstone's work is outside of South Africa. That's the case, again, now that the reprogram has slowed down quite a lot. The advisory business has been involved in a lot of the big projects and certainly getting far more involved in a lot of the smaller renewables projects now as well.

FAIR was set up to target these smaller projects and to work with developers who are focusing on smaller renewables projects. We're seeing thousands and thousands, in fact, billions and billions of dollars of funding available, debt and equity, in the market.

We're seeing thousands of projects developed every year, but very few closing. There's many, many reasons for that, but one of the main reasons is that projects just aren't developed in a way that is attractive to financiers and in a bankable way, to use an overused term.

The market that's changing, solar, small hydro, we're seeing much smaller projects that are developed by in‑country developers who are doing it for the first time or slightly less experienced developers. They need a lot more help than just financial advising.

Whereas Fieldstone Advisor business will advise the big, international developers, sponsors, and IPPs, we have set up FAIR to partner with smaller project developers and do far more detailed development work. Roll up our sleeves and really get into the trenches with the developers to help them get those projects structured in a way that allows them to be able to go and raise then the finance.

We will raise the finance and closeout those projects. The whole idea being that we aim to be bringing more projects to market by focusing on those, say, below 50 megawatts. We don't have a hard limit, but we're aiming to serve another part of the market that we believe needs a lot of assistance and helps get more electrons on the bars at the end of the day.

Damon:  Do you anticipate Eskom being the off‑taker of that or do you also see more captive power market applications as well for that?

Brian:  Most of our work is outside of South Africa. Where we are involved in South Africa, it would be largely captive. In some cases, working on the reprogram, that's something where FAIR wouldn't really get involved because it's a well‑established industry with big international players. They don't necessarily need the assistance that FAIR can bring to projects. Those guys know how to do it themselves.

Whereas, in the rest of Africa, there's less‑experienced developers, people not having the skill or the experience to take the projects through. Most of the projects we're working on would be utility off‑takers. Certainly, the whole private off‑take market is growing a lot.

We're seeing movement from the lenders to extend tenure, which has always been a limiting factor for private off‑takers. Previously, you would not be able to get debt beyond five or seven years. We're seeing some innovative stuff happening from the lenders as long as you get the right credit structure around them.

That is an area that certainly is booming a lot, but at the moment, still most of our projects are utility off‑takers, just purely from a finance-ability point of view.

Damon:  What sort of impact has the fact that there's such a lack of transmission infrastructure throughout the continent? How has that affected the growth and development of the market of the power sector?

Brian:  There's a lot of generation that can be brought on the bars before that becomes a problem. A good example is Uganda. Uganda ran the GET FiT scheme which has been really successful, about 17 small projects that came online. A wonderful programme - very successful.

What's happened now is they're at a situation where they've maxed out the transmission capacity of the grid where as much generation has been built that the grid can actually take. The next step now is to expand the grid, transmission and distribution, and obviously, to further stimulate demand.

In most other countries, if you've got a well‑conceived project and you locate it in the right place with the right technology, you can support the grid. In many cases, these can alleviate grid constraints rather than see it as a problem for the project.

Damon:  I'd like to find out a little bit more about yourself. How many years have you been in the industry now?

Brian:  I've been in the industry about 12, 13 years. I worked for the first few years predominantly in South Africa. Over the last four or five years, been working largely in the rest of Africa.

Damon:  Of all the projects that you've worked on, is there one which you are particularly proud of, one that really stands out in your memory?

Brian:  I'll give you a recent example. When we've set up FAIR around about three years ago., one of the first projects that we got involved with, that we helped to get over the line, was a small hardware project in Uganda. It's called the Sindila Project. It's only 5.2 megawatts, very small.

The project was stuck. It was in a distress situation. The strategic equity player left the project for their own strategic reasons. The project was under severe time constraints and was about to lose its generation license, its PPA, etc.

We managed to step in, push out the timelines by having sensible discussions with government, and KFW, and other stakeholders in Uganda, and then work closely with the remaining sponsors to drive that project through to financial close in a reasonably short period of time.

Damon:  How did that impact the local people? How many people did it provide electricity for?

Brian:  I don't have the number of people. It's a project in a very remote part of Uganda right near the DRC border on the west of the Rwenzori Mountains. It's only about five Ks from the DRC. The impact on the local people has been fantastic. We had to build an entire road up the hill to get access.

That road is being used by the local community now. It helps them to get into town a lot quicker. If there was someone sick, it would take them a day to go down by bicycle or walk down the hill and then get to town, whereas now they can jump on the back of a boda‑boda or a pickup truck, for example. It's half an hour now.

The impact, they can get their crops to market a lot quicker. There's a lot of coffee and cacao being grown up there. The impact from the access road on its own has been phenomenal on the local community. There's been great local support.

Damon:  Is that one of the reasons why you're in the energy sector? What is the driver for you? Is it having that impact? Is it a combination of factors for you?

Brian:  That is certainly a factor. The main reason why I got into it and why I remain interested is the environmental impacts of clean energy and renewable energy. That's something that I've been passionate about for a really long time. That's why we focus generally on renewables. I've spent a lot of time looking at energy recovery projects and energy efficiency projects as well.

For me, it's about trying to help in whatever way possible with the whole issues we're having around climate change. The other positive impact that you have, especially in the rest of Africa outside of South Africa, is the social impacts. It's quite satisfying sometimes to see the impact that you can have on the average person's life.

Damon:  Very much so. You were talking about the fact that 80 percent of your business is outside of South Africa. You work across a number of countries. How do you as a business adapt your approach to those different countries? I guess they must be different culturally as well.

Brian:  Yeah. Every country is completely different. Fieldstone's worked in 48 countries in Africa. We understand the differences. Obviously, some of them are a lot more detailed work than others.

It's really important to get a good local partner on any projects. They understand the local environment, they understand the sensitivities, they understand the needs and most of we know, local advisers and people in the country, but the approach is different.

Some countries have very rigid ways of dealing with governments. Some prefer far more interaction, conversation on top of approaches and getting concessions rather than formal procurement programs.

In dealing with social environmental aspects, you also need to bring in experts who understand these things in each specific country. Very much, it's necessary to work with local [indecipherable 11:17] and local partners who can guide that process.

Damon:  Yeah. One of the words that comes up a lot in the seven years I've been with energy, that is patience.

[laughter]

Damon:  Clearly, some of these projects take a little bit longer to get to that stage where you can get to the financial close. Would you agree with that? What are the main reasons for that?

Brian:  Yeah, absolutely. Every energy project from conceptualization until close can take anywhere between three and eight years. It really does take a long time. You have to be incredibly patient. Often, the timelines can be shortened by doing things differently. Doing the right tasks at the right time is one of the key aspects.

Very often, we're seeing people, for example, go and do an EIA. That is compliance to local regulation and they can get the environmental certificate, but then they're not considering what the lenders are looking for. Then the lenders come in, that's not IUC compliant, so one has to go back and do gap analysis and redo most of that work. That could cause a year or 18 months’ delay.

There's a lot of self‑inflicted delay, but obviously, there's a lot of delay just dealing with governments. Governments move slowly. Getting decisions out of governments can take a long time. One of our key focus here is to focus on slightly smaller projects because smaller projects happen quicker.

Governments love headlines of 1,000‑megawatt projects and that sort of thing because it looks good and it sounds good, but in actual fact, to close those projects is really hard. The impact that it has just goes on and on, on government balance sheets, etc. Just makes them really a lot harder to close and a lot harder to get all the necessary support that you need. Smaller projects can happen quicker.

Damon:  Good. I just want to chat a little bit now about the Africa Energy Forum. I know that Fieldstone have been consistent supporters of the Forum over the years. We would be hosting it for the first time in Lisbon in June.

One of the new initiatives that we brought in as part of our inclusion in diversity drive is that every one of the 56 sessions that we have will be moderated by a woman. Your thoughts on that, and then also what you're looking to get out of it, both personally and from a business perspective as well?

Brian:  Sure. As you say, Fieldstone has been a strong supporter of the Forum. It's really a fantastic conference and very, very well attended. Getting the government ministers is key because once you got the ministers there, you get everyone else.

Damon:  Yes, right. The catalysts.

Brian:  Trying to catch them, trying to have a meeting with them, you either catch them after a panel or set up formal meetings. That is a huge catalyst. Everyone goes because everyone goes. You can get a couple of weeks’ work done in a couple of days by just meeting the right people all in the same place. For us, it's a great conference.

What do we want to get out of it? Obviously, we'd like to find more projects that we can work with people on, meet developers, meet sponsors and just keep in touch with all the financers, with the lenders and the investors.

We would obviously have a lot of project‑specific meetings to drive projects forward. It's about seeing where the market is, chatting to people, getting people's opinions on one, what's happening, which areas are looking like they're about to boom and just getting sense of what's happening in the market and obviously making your contacts.

It's just a lot of people there. There's a lot of opportunity to drum up some new business.

Damon:  OK, Brian, we were talking earlier about patience in the market. What is it that can cause the projects to get stuck and how do you get out of that, in a way?

Brian:  Sure. There's a lot that I could talk about for hours.

[laughter]

Brian:  Or weeks, maybe. I would say just to go through it fairly quickly, one of the first things that I would always suggest is that your project needs to align with a market.

We see so many developers coming to us and saying, "I've got 100 or 1000‑megawatt solar project that I want to do. I'm going to put it in this part of the country. I'm just going to get it done. It's going to be cheap and everything's going to be great." So often, people choose the wrong size, they choose the wrong technology and the wrong location for projects.

If you developed your project in a way that's good for the country from the start, that really helps it to get done a lot quicker. In a country that's full of hydro, they probably don't need more hydro power, they probably need base load power. They're probably needed in area that'll strengthen the grid rather than adding further stress to the grid. Smaller projects happen more easily.

Also, meeting the market used to be appealing to investors and lenders as well. They need to be the right kind of projects for a start.

Secondly, you got to get the timing right and link to that. You got to focus on hard items up front.

Very often, people will spend a lot of time, money and effort doing detailed technical studies on projects and really trying to develop them to the most perfect technical solution without paying attention to the hard things like what does the government support looks like for the project? What are the terms of the PPA? Can we get the right credit enhancement behind government?

Those are things that often left alone in the hope that they'll sort themselves out. If you don't address those problems up front, you're not going to get up close to a project at the end. You're going to have the most perfect technical project in the world, but you'll never be able to actually get the financing for it.

A couple other points - I would say both in the requirements of the lenders, early project finance is rigorous. 99 percent is often not good enough for project finance. Either the lenders got security on their asset or they don't.

Working on projects, in a way that you know you're going to meet the requirements of the lenders at the end, it's really important. So many people get that wrong. You end up redoing work, lease agreements etc.

Our strength at Fieldstone is that with all of our experience, we'd look at projects through the eyes of the lenders from day one and we make sure that we're working towards our goal at the end of the day that is really something that can attract finance.

The last global point would be, have realistic expectations. So many times, developers come to us and they’ll say, "I've got this great project. It's well‑developed. You must pay me a million dollars up front for the project."

[laughter]

Brian:  That doesn't work, or "I want a 51 percent free‑carry in the project." East Africa is famous for that. We see so many projects stranded just because the developers don't have realistic expectations.

Damon:  Let’s come onto you now. I don't know whether you always wanted to be in this sector. You say it's been 12, 13 years. What did you want to be when you were growing up, Brian?

Brian:  A game ranger. [laughs]

Damon:  A game ranger? I'm liking that. [laughs]

Brian:  When I was very young. I come from a family of engineers. I am an engineer. I spent a lot of time working in various parts of the world as a consulting engineer, in South Africa for a long time and then abroad in Dubai and the Philippines.

I did a few other things. I was a management consultant for a while. I, also, 12, 13 years ago decided that one has to pick something that you want to do, that you want to be good at, and you want to make an impact on. For me, that was clean energy.

That's when I got into the clean energy sector in South Africa. It was very early days for South Africa, long before the REIPPP Programme, and we tried to get cogeneration and other energy efficiency programs off the ground.

It was a very, very hard slog for many years. That was the lead‑in to what I'm doing now. This is where I'm happy. It's great. It's very satisfying when you eventually do get projects done after those many years. [laughs]

Damon:  Indeed. Imagine, if you will then, that I've come and sat myself in front of you for the first time. I've had no experience whatsoever with energy. How would you sell it to me? How would you sell me the market?

Brian:  The market is what attracts a lot of people. The market is huge. We know that the electrification rate in Southern and East Africa is 25 percent. In other parts of Africa, it's a little bit higher. When you look at it at a global level, there's this massive need.

There's this massive need to electrify Africa. With renewables, it's now the right time. The pricing of solar and the proliferation of other forms of renewables has meant that the prices come down. You've got this need. You've got the way to meet that need.

Conceptually, it seems to me like the obvious place to be, but getting projects done is not easy. It seems like it should be easy. A lot of people think that just because Africa needs energy, if you develop a project, it'll happen. [laughs] It won't.

I find it exciting. I find being able to electrify and to do it in a responsible way with renewable energy is obviously something that's personally very satisfying.

Damon:  Are you genuinely excited about where the market's heading? Is there an air of optimism throughout not just South Africa, but the continent, do you think, for developing these projects?

Brian:  There's an air of optimism. There's a lot of burned people on the continent as well. The continent is scattered with broken dreams, if I can put it that way.

Damon: [laughs] Nice phrase.

Brian:  Many people have tried. I've seen people bond their houses trying to get projects done. Then the projects don't get done. It's not easy. The rigor of project finance is unforgivable. It's really hard. Getting the projects done is not the easiest thing in the world.

The potential is huge. We are seeing structures coming through now that are hopefully going to make getting debt and getting projects done easier than it has been in the past.

Damon: Brian, it’s been great talking to you today, really appreciate it. Thanks for making the time.
 

Transcription by CastingWords