Dear Clients and Friends of Fieldstone,
I must admit to being a less than dutiful correspondent this year; it seems that the Fieldstone Newsletter will only be issued twice in 2018. Happily, this is not for any shortage of things to report, the year’s activities have been unusually varied and, frankly from my vantage, all consuming. Since the last newsletter in March and particularly since the Africa Energy Forum (AEF) in June, we have been fully occupied with assignments and a number of initiatives. So, now seems like an ideal time to catch everyone up with the state of play before the inevitable fourth quarter rush.
Fieldstone in Morocco and North Africa
At AEF, Fieldstone announced the planned opening of an office in Casablanca together with Hynd Bouhia and her Moroccan based team.
Morocco represents a vital market for Africa. It has been a leader in the continent in renewable energy generation, electrification and infrastructure projects. In addition, Moroccan entities have a nearly universal ambition to be active investors throughout Africa. Fieldstone will be positioned to lend assistance both in Morocco and with outward bound Moroccan business on the continent.
Hynd is a leader in finance and project work in Morocco and the MENA region. After receiving her doctorate from Harvard, she worked for many years with the World Bank, covering inter alia Latin America. For the past few years, she has been building her own advisory group in Morocco, Global Nexus, that has been mandated in Morocco by the Government, private companies and multi-laterals. She has also taken steps to establish her position in the management of funds in the region. Her team includes Amine Lahlou, who has worked in the private sector in renewables in Morocco as head of his own development company and for many years previously in Paris with a global advisory firm.
Kenya In Focus
Fieldstone was pleased to be part of the select group of UK and UK associated firms at the key business meeting during Prime Minister May’s recent visit to Kenya. Fieldstone has had an office in Kenya for the last three years and is represented in Nairobi by Catherine Adeya-Weya, a former senior official in the Kenyan government.
Having advised on and pursued several projects in Kenya, we note that the current anti-corruption drive appears to be a serious effort to root out a problem that has hindered development in energy and infrastructure over many years.
It is timely that the UK and other donor states help to advance and unlock a critical economy for East Africa and Africa as a whole after the long contested election has settled. Practical advice for the newly reconfigured government on how to streamline decision making, press forward with existing initiatives and engage (and to some extent win back) the confidence of private investors in the market will be key. Fieldstone will be working to assist in this process and Chairman Andrew Smith-Maxwell will be on site in the Nairobi office later this month.
Project Financial Support and Washington, DC Build Out for Fieldstone
Fieldstone through its subsidiary, Fieldstone Africa Investment Resources (FAIR) and US subsidiary Fieldstone Development Company, Inc. (or Fieldstone DC) played a key role in the application for and award of a United States Trade and Development Agency (USTDA) $ 1.2 million grant for the Nacala Solar Project in Mozambique. The award was made in Maputo at the end of August. Under the USTDA grant structure, FAIR is a subcontractor to HDR, a US based engineering firm that is completing crucial pre-construction work. FAIR is also advisor to WHN Solar, the project sponsor. FAIR anticipates that additional projects in Mozambique will be announced as the country is aiming to meet a goal of full electrification by 2030.
FAIR’s general remit is to extend assistance to developers of clean energy projects in Africa, especially for developers with projects that could benefit from assistance beyond financial advisory to reach closing. FAIR’s activities include assisting its development partners in sourcing development finance support for projects, especially in the pre-construction phase. This commitment has led us to redouble our presence and reach in Washington D.C. as the centre for US assistance and multilateral institutions relevant to financing Africa and Latin America. Ambassador Chris Dell has recently relocated to Washington from Maputo, where he joins Barney Rush, Senior Representative for Fieldstone.
The expanded Washington presence will provide Fieldstone and FAIR with greater direct contact with US and multilateral project funding sources, which support Fieldstone, FAIR and FAIR’s sister company Fieldstone Latin America Investment Resources (FLAIR). Barney Rush and I have joined the Board of FLAIR, a newly formed company which aims to fill a market need in Latin America similar to FAIR’s offering in Africa. FLAIR is a joint venture of Fieldstone and Pan American Finance, a regional finance advisory firm based in Miami. Pan American Finance’s two partners, Ben Moody and Ed Miller, also serve on the FLAIR board. FLAIR’s CEO is Jeff Safford, who has extensive experience in Latin America arising from his previous work with AES.
A Senior Group from Fieldstone and FAIR, including myself, will be visiting DC this month to touch base with our many contacts and assess the impact of the reorganisation of development support and funding programs in the US that is afoot. This proposed consolidation might create clarity and coordination in the way the Government approaches development and better prioritizes expenditures. The proposed move to allow OPIC to take equity stakes could also be key to getting US investors to look more aggressively at places like Africa where private appetite has been limited. The devil is in the details but the underlying ideas here holds great promise.
As indicated, there has been varied flow of assignments in the last year from Africa, Latin America and Europe. The industry awards received since I last wrote, illustrate the breadth of our practice:
Fieldstone Africa Renewable Index (FARI)
By popular demand, Gugu Ngwenya and the team will be updating FARI at the start of 2019. For those of you too young to remember, FARI was our status report on a country market comparative basis of the opportunities in renewables in Africa that we issued until last year. We ultimately abandoned the regular updating as we found that – as many things in sector where policy and business meet – things change slowly and seeing is believing (as opposed to merely passing on self-serving reports).
Nonetheless, a lot has happened, and it would be good to catch up. As a sampling, some of the issues we are following for the next FARI:
- The fate of renewables under the South African Energy Investment Resource Plan (IRP), which calls for renewables in the longer term but an apparent hiatus for the next several years. Will this stand or will pressure from the industry shorten or abolish the period of inactivity? We will know sometime after the sixty-day comment period and announcement around the end of the year.
- The IFC Scaling Solar is beloved by some and hated by others. Perhaps it is a matter of where it makes sense and where it disrupts the market. The Q1 FARI will stake out a position in this regard.
- Since state utility PPAs and government guarantees are finite – surely a limiting factor in the move to renewables – a lot of emphasis has been directed to purely private PPAs related to industrial led demand and the legal infrastructure needed to allow this. We will be including a review of the countries where private initiatives make sense (i.e., not just on paper, but actually show governmental and utility willingness to permit)
(As an interesting aside, we note that our European team is involved in private PPA formulation as well. In those markets, the driver is a desire of the offtakers to brand themselves as green and to avoid stranded cost issues of incumbent utilities.)
On Challenging Environments
Emerging markets are a key driver of Fieldstone’s international success and reputation. While we have done and continue to do substantial work in developed economies (see the Industry Awards section above) and have positions in money centers around the globe, Fieldstone differentiates itself by being able to operate in difficult credit and commercial infrastructure situations.
There are times when these markets are “hot” and at such times we encounter a range of potential investors and market participants some of whom have little or no experience outside their home base looking to play a role in “growth markets”. New entrants can tend toward over-exuberance (forgetting why structures are more carefully put together and thorough risk-reward trades occur in difficult places) or come with unrealistic expectations (“we are looking to invest $1 Billion with greater than 30% returns in the power sector”). In such moments, our job is to be sure that project risk/finance assumptions are realistic, attainable and sustainable and potential clients do not waste their time and resources hunting snipe.
At other junctures- like this very moment- we see contagions spread across emerging markets without reference to the very different drivers and fundamentals underlying diverse contexts. International investors reconsider their previous commitments and a certain low-level panic ensues. In our experience, these “risk off” moments yield some the best project structures and results (as well as the best price in terms of acquisition). Perhaps, the participants in engaged in the markets at such times are more sober in their assessments. Investing in the developing world has to be measured over a period of years.
We do not ever shy away from challenging markets at challenging moments, so I thought I would give examples of our recent successful engagement in two:
- In the Democratic Republic of Congo, the challenges are immense - only 9% of the population has electrification, national economic activity is anchored in a few areas of the country and the very scale of the country is daunting (almost as large as Western Europe). Recent political uncertainty has added to the challenge, but this now seems to have stabilized. Despite these impediments, there are committed professionals in Government from the power sector that are striving to achieve improvements for their country. There is also quite a bit of potential to generate more power out of existing available resources.
- Fieldstone has recently been engaged by the Ministry of Energy to advise and help structure existing projects and proposals, including a number that feature a substantial base component of industrial demand. The solution will call for private and international governmental sources to play a role and may well result in novel forms of cooperation. However, the future of the DRC is too important for the prosperity and stability of the region as a whole to not take up this challenge.
- Argentina has been in the headlines for the recent spike in interest rates and substantial loss in value of its currency leading the Government to seek a support package from the International Monetary Fund. The pressures related to its acceptance of this support package and its ability to enact the agreed reforms has not as yet placed a halt on the rates hike and the currency has fallen in value further – taking many other emerging market currencies with it. This is all happening at a time when the country is in the midst of an aggressive renewable program, which would seem likely to fall victim to the uncertainty.
In the midst of this, Fieldstone has been able to sell a project to an international consortium with interests in the region and is currently buying another project on behalf of a local group. The parties involved are focused on the underlying system need for new generation and the comparative pricing advantage of the project more than momentary swings in the currency.
The challenge of working in emerging and frontier markets has its own rewards. Generation constructed is always needed. Access to power enhances the quality of people’s lives. As noted previously, investors expect and usually receive a premium for their efforts. What is not widely understood is how this effects underlying project risk; the rate of default on African generation projects, for example, is as little as one third that of projects in North America. Or as Plato noted 2500 years ago, “Kalepa Ta Kala”, the fine things are difficult.
Chief Executive Officer