The Mini-Grid Business

The Mini-Grid Due Diligence One-Stop-Shop

• Nico Peterschmidt / INENSUS • Season 1 • Episode 21

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Mini-Grid Due Diligences are always complex and costly? - Wrong!

The Mini-Grid Due Diligence One-Stop-Shop established by INENSUS, DETAIL Solicitors and Steinbeis Consulting Impact Investing reduces complexities by providing one contact point for all parts of a mini-grid due diligence (demand, technical, commercial, legal, environmental, etc.). Efficiency and quality gains from this coordinated approach to mini-grid due diligences are the result and may even unlock financing for portfolios of projects that have so far been too small to run through a financing process.

Listen to the commercial lawyer Dolapo Kukoyi (DETAIL) and the impact investing expert Lothar Jakab (Steinbeis) as they discuss the benefits of the Due Diligence One-Stop-shop with their host Nico Peterschmidt (INENSUS).

Impact Investing (steinbeis.de)

Detail Solicitors | Nigeria's first commercial solicitor form specializing exclusively in non-courtroom practice

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Speaker 1

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 Inensys.

Speaker 2

Hello, this is Nico. Today, we're talking about an approach that can make due diligences in the mini-grid sector more efficient and more reliable the mini-grid due diligence one-stop shop. I'm discussing this subject with my guests, dolapo Kukoye from the law firm Detail Solicitors and Lothar Jakob from Steinbeiss Consulting Impact Investing. Dolapo is co-managing partner at Detail Commercial Solicitors, based out of Lagos, nigeria. She is a commercial lawyer with specialization in energy law, has supported various mini-grid related transactions as well as helped creating mini-grid legal frameworks. Lothar is the director of Steinbeiss Consulting Impact Investing. He has worked in strategic management, consulting and transaction management before diving into impact investing, especially in sub-Saharan Africa more than 10 years ago. He visited his first mini-grid in 2013. Welcome Dolapo, welcome Lothar.

Speaker 3

Thank you. Thank you, nico, great to be here.

Speaker 4

Thank you very much, Nico. Very exciting.

Speaker 2

Some months ago, we actually came together and said, well, let's change how the world looks at mini-grid due diligences and decided to create a team, a joint venture, so to say, not a company, but a collaboration, which is able to do that. And we said, well, due diligences and mini-grids are so expensive. Can we do it more efficient? Can we do it better and more reliable? And now the question is why are mini-grid due diligences so expensive?

Speaker 3

Due diligences would most often be treated the same way. Any transaction would be treated, or any big project would be treated. That's really the truth, irrespective of mini-grid sizes. And typically there would be technical, there would be commercial, there would be legal. In fact, there would be environmental. If you don't have environmental and technical going together, so that costs money and it's the same information that lenders and investors typically want to have. Why it is expensive? Is it expensive in relation to the size of the project itself? But it's expensive in relation to the project itself. So that's what I'd say initially on that point.

Speaker 2

Yeah, mini-grid projects are usually small and the cost of the due diligence doesn't scale with size, right? So therefore, if you go for small projects, these mini-grid due diligence has become almost unaffordable.

Speaker 4

Yes. So I wanted to add from the commercial perspective of the due diligence, we also have to acknowledge that mini-grids are a sophisticated business model in a sophisticated environment. We are talking about remote areas, we are talking about low population density, we are talking about, on average, low consumptions, which makes the business card very challenging and needs the digital provider fully to understand the business, the business environment and to also contribute to tweaking the business model towards increasing consumption, especially by means of productive use, or we can even call it rural industrialization. So fully understanding both the inherent business, the environment and the circumstances under which a mini-grid company operates makes it a very challenging or comprehensive sophisticated approach and that's why, by nature, it needs special perspective and attention.

Speaker 2

Yeah, I fully agree. Mini-grid business models are specifically complex and they involve well generation aspects, distribution aspects, sales aspects, demand projection, but also, as you said, productive use, rural industrialization, interrelations with government actors, authorities, licensing, environmental aspects and so on and so on. Yes, and that usually needs a team, but for now, investors and financiers are not hiring teams as such. They are hiring experts for the individual subjects, within due diligence, and I believe that this needs to change now.

Speaker 4

Traditional way of conducting the due diligence makes it very lengthy, it makes it not well connected, it's not continuous and in the end you have to put together pieces of a puzzle and we provide actually a game-changing approach.

Speaker 2

I think so too. So now we are actually changing this, we are reducing the effort and potentially also the cost of a due diligence, and we believe that sharing the data between the different partners, coordinating the points of views of legal, commercial, technical and potentially environmental or other components that may come in, actually reduces the efforts. There is less kind of overlap, less double work, less double evaluation of the same data, which I have seen many times. Like when you look into demand data, you look at the demand data from the commercial side as well as from the technical side, and in many cases this takes a lot of time and, after all, a lot of cost, and this can now be reduced by just doing it once and then coming to a conclusion yeah, so much more efficient and better results at the same time.

Speaker 3

This would help deepen the market where you see products like this, because you then see expertise that's been harnessed to actually hone in on the issues. The fact that we have a combination of these experiences would really help bring out results that will deepen the market, even for our clients, and the results from this and the data from this you can't imagine what you could potentially be able to create out of it. With respect to scaling mini-grids, I think it has a lot of potential.

Speaker 2

Yeah, I believe so too.

Speaker 4

It reminds me of my old times in strategic management consulting when working in silos. When you saw silos in companies, it was never efficient. You had to break the walls between the silos and connect things together, and then processes would become much more efficient and would provide much better results.

Speaker 2

Yeah, and that is the same here, exactly.

Speaker 4

We have to break up the silos here, the due diligence silos.

Speaker 2

Even though we're not in one company and we need to work across companies. The nice thing is that the three of us and our organizations, we know each other for a very long time already, right, and we have proven that we can work together in various occasions, so I believe that this challenge can easily be met.

Speaker 2

That's right clients may say well, if I hire one consortium, I don't get the different point of views on a certain critical aspect. If I hire individual consultants, they come in and write their individual reports and if I read all the reports I see how a commercial, how a legal, how a technical, how an environmental specialist looks at the same subject. Some people may say, yeah, but if I hire a consortium, this will not be the case. So now I believe we can overcome that, don't you think so?

Speaker 3

I think so. I think we can, because the way that our reports should be done should show that objectivity. So I hear you, because the reason for a due diligence really is to hear an expert's view. At the end of the day, what we are doing is synthesizing what typically the team who reports to the investment committee will typically do, because what they do is they gather all the reports, they look at them and they bring something which is synthesized. So what we will be doing is, even though it's a synthesized report, the individual and the objective views should show through, which means they should be very clear. Where there are points of maybe differentiation in some points in terms of opinion, they should show clearly so that that is seen. And of course, there would also be discussion. So it's not about just the reporting, it's also in the discussions, because you then see the different experiences and the different views.

Speaker 2

Yeah, and I believe we can even deliver more than a classic individual consultant setup here. We can definitely make sure that all these views are going to be represented in our due diligence reports and once we identified points of views that deviate from one another, we do have the opportunity to discuss, which the other consultants don't have, and we can come to conclusions. We are not going to present the conclusions, only we will present how we came to the conclusion and then the client can decide by her or himself on whether the conclusion we derived at actually makes sense to them. So I believe that we can provide an additional benefit, even though we started off with a doubt that a client may have.

Speaker 4

Yes, but also I wouldn't share this doubt. I think actually having a synchronized process will nurture the different views and perspectives and I even saw cases when, having separated the diligence process in silos, as we said before, some specific views or aspects were missing and in our collaboration we can make sure that we don't miss any out of these aspects of the necessary Boxes with lead to be ticked. True.

Speaker 2

All right Now. I believe our audience wants to learn more about who is in this consortium and what experience the respective organizations bring to the table. Who wants to start?

Speaker 3

I think my first encounter with mini-grids are detailed commercial solicitors. I think it was 2013 or 2014 when Nigeria had its first mini-grids at Detail Commercial Solicitors. I think it was 2013 or 2014,. When Nigeria had its first mini-grid regulations and I think that's one of the first times that I met Niko we were engaged by GIZ under its Nigeria Energy Support Program to review these mini-grid regulations and subsequently we also helped with the structuring and contractual framework for the first five mini-grids in Nigeria.

Speaker 3

It was a very interesting experience for me because I'd been used to doing more projects, finance and bigger infrastructure and energy projects and, you know, looking at these smaller projects, the impact being so great was really interesting. And from then on in the mini-grid space we've worked on different procurement programs. We've worked with institutional investors in actually raising bonds for mini-grids in Nigeria. We've worked with private developers, local and foreign, who have set up mini-grids in Nigeria as well, helping them to legal, regulatory to contractual through getting permits. And, more interestingly, these days we're even doing work out of Nigeria and working with GetTransform actually going about establishing mini-grid relations and drafting mini-grid regulations and contracts that will be applicable for African utility regulators. So it's been a very interesting ride for a number of years on mini-grid and it keeps evolving and it's indeed complex for such small projects.

Speaker 2

Yeah and Dolapo, I think the interesting part is that you're not only working on mini-grids, but you're also working on larger utilities, especially in Nigeria, and you're supporting them. So you know both worlds the large utilities world and the mini-grid world and work with interconnected mini-grids and everything that is in between those two worlds.

Speaker 3

That's right. What it does is that it gives you a broader view, because you then bring all that experience into seeing how we can make mini-grids viable and more stable.

Speaker 2

All right, lothar, do you want to go ahead?

Speaker 4

Our company is a business unit of a much larger consulting group which was established more than 50 years ago and has offices from Mexico to Seoul around the world and has a project track record in approximately 100 countries on this planet. We are the only business unit in the group which is focusing on facilitating direct impact investments, especially in emerging countries, and I myself have been working also, as I said before, as a strategic management consultant, for instance, in the utility industry. Before turning to Africa, I had already some, let's say, industry expertise, but definitely the setting and the environment for mini-grids, as I said, is something different and much more challenging which you properly need to understand. We usually work with investors to take them by the hand, so that's why we know these due diligence processes very well, and we have also attracted some new investors to the space. We have done even household surveys walking from door to door.

Speaker 2

Yes, to really understand the customer's needs or problems.

Speaker 4

So I think we have seen the market from the top. From the bottom, I think we can bring in different perspectives which can contribute to a good result.

Speaker 2

Yeah, yeah, thank you Lothar, thank you, dolapo. I can be very brief on Inensos. We are a consulting company with approximately 30 staff, based out of Germany, but with offices in Kenya, nairobi and at the moment also in Lomé, which is a project office. And well, we work on regulation drafting and setting up grant funding structures for the smaller and larger grant funding programs in the mini-grid space and, as Dolapo said, we have worked together very nicely, with details since 2014 in Nigeria and then across the African continent. Yeah, lothar, I think we have worked initially in when was it 2015 or so? And was it 2015 or so, 2016, 17, when you came to one of our mini-grid companies, the company Jumeme in Tanzania and supported us with developing an advanced strategy for the company? Yeah, and in the meantime, over the last 20 years, we have done a range of due diligences, mainly technical due diligence, partly commercial due diligences on company transactions in the mini-grid sector in various countries across the African continent, but also in Asia.

Speaker 4

I think here's the beauty of our combination, because we bring together different experiences, perspectives and skills. That's right, which makes it a perfect one-stop shopping.

Speaker 2

Yeah, indeed, indeed. So now, how do we coordinate and who would be the contact point? So we services is invited to contact Inensos, myself or my colleagues through the well-known contact details that are also presented in the show notes of this podcast. The coordination will then happen in a way that we at Inensos we will analyze what parts of the due diligence will be required and then we will prepare a proposal in collaboration with Steinbeiss and detail and make sure that all the client's expectations are met in this proposal and also in the services that we deliver.

Speaker 2

Yeah, so we will then operate a data room, usually that is set up by the clients. We will then share the data room between the technical, the commercial, the legal and the environmental experts and then make sure that the overlap is minimized and that the synergies between the different work streams can be harvested to the benefit of the client. After all, we then prepare reports, coordinate that also, so that you don't have different formats and repeating information. But everything will be nicely presented and the interrelations between the financing and the commercial, and the legal and the technical can clearly be seen in the reports. So now, I believe that should be quite an attractive offer that we have to make here. So now some clients may ask how do we assure the quality of our work results?

Speaker 4

We already pointed at it. We reduce gaps, we reduce redundancies, we provide a comprehensive overview. We are professionals. We've done this before. We provide a comprehensive overview. We are professionals, we've done this before. We nurture our findings and the client gets the maximum quality he can get out of the entire process of a joint effort exactly checks and balances.

Speaker 2

Each of the three partners will look into the work that the other partner provides, because we will anyway need to understand the whole mini great business case to do a proper assessment on the legal, on the commercial, on the technical side.

Speaker 3

So therefore we need to communicate and we can therefore also just have a look and comment on results that the other partner has provided yeah, and I think, I think efficiency of process would be very good for the client, because we understand how these work and we understand that they are similar product in any case, you know. So that's sufficient to really really enhance the process being efficient, enhance the quality as well, the quality of the service that the client gets that's a good point, and that also applies to the contractual arrangements between the client and our consortium.

Speaker 2

The consortium as such can be represented by Inensys, which then can sign the contract with the client, and therefore the procurement should be very much simplified One procurement instead of many, from a client's perspective. Now, dolapo, you mentioned earlier that some clients may be interested in how we handle conflicts of interest.

Speaker 3

Yeah, some clients may think oh, you've done so much work in this space, so what would happen if, for example, I hire you to do something and you are currently working with that client or with the person who I'm hiring you to do the ginseng?

Speaker 3

So there are a few approaches to this.

Speaker 3

With conflicts, we would typically disclose first that we have worked with this organization and there can be two options to it. Of course, the cooperation of the clients. One would be that you get the permission of the client to be able to conduct that due diligence, because it doesn't pose a conflict. In fact, it only makes it easier. It's whether the client considers that it will still be objective and there will be no interference. The other way that we do this is that we also have Chinese walls, so the particular resource that the client uses may not be involved at all, so that you have an objective process. And the other way could be that we could actually have another firm or another expert come in to deal with it at that point in time, if the client considers that it's a conflict, because we tend to work with a network of clients and this depends on what country we are looking at. So that would be the approach, but disclosure is very important and then ensuring that we have an arrangement that works between the clients tricky.

Speaker 2

And then we establish, as you just said, chinese walls within our organization. We actually organize processes in a way that data is secure and that secrets will never be shared with other members of the organization that work on competing or conflicting assignments. And then, on the other hand, of course well, inensos, as many of our audience know, is also a mini-grid operator. There may also be a conflict of interest, of course.

Speaker 2

Well, inensos, as many of our audience know, is also a mini grid operator. There may also be a conflict of interest, of course, but I think I explained several times already that the idea of this operation is to gain experience, and this is more like field laboratories for Inensos and whatever works we actually sell through the consulting arm. So, therefore, clients can rely on our experience actually having constructed, installed, operated mini grids, having gone through all the legal and administrative processes to establish a mini grid company. So we know what we're doing, but at the same time, we're not really in conflict with any other mini-grid company, and that so far has been accepted by the mini-grid sector very well and also by the financing institutions and investors in the space. Now one question of potential clients may be how can the due diligence one-stop shop operate in various countries, while the partners are in Germany and Nigeria. What about Francophone and Lusophone countries, for example?

Speaker 3

I work a lot with Nico. He's in Germany and in many other countries, and we still continue to work, because a lot of things are done virtually, you know, and when except when you need physical contact, I think it's the experience that's key. But then we also leverage our partnerships. So if we were going to be doing something, for example, that is in another country and we needed local law experience, we typically work with partners in different countries to get that local law experience. So that's how we typically work, yeah, and we all have a very extensive network in Africa, right.

Speaker 2

Inensos has worked in many African countries Francophone, anglophone, lusophone, all of them. We have Francophone native speakers in our team, we have Lusophone speakers in our team and therefore there is no issue at all about languages, about countries. And, on top, dolapo, as you just alluded to, not just detail but also Inensos, has a very extensive network of local consultants, and that, after all, also touches upon the point of environmental due diligence, because environmental due diligence really needs a lot of on-site engagement. Traveling to site. We would work with trusted partners in the respective countries that we usually, in most cases, have already worked with in the past, and then use our own expertise on the environmental side to upgrade and basically present to the clients the due diligence results. Lothar, do you want to?

Speaker 4

come in. I'd want to add that I mean, most of the due diligence work is paper-based and it doesn't matter where you sit to do this work. You know, especially AC after corona, we all got used to digital data rooms, but also one of our managers is based in Accra, so we have one presence in West Africa. We have a longstanding business partner in Nairobi and apart from that, I've worked myself in francophone countries and lusophone countries, but English has become like a standard across the continent and if there's a need for going to more rural areas or remote areas, of course you have to work with partners, which we have.

Speaker 2

Yeah, and I think, lothar, that especially holds true for the commercial due diligence site. On the technical side, as mentioned before, we may need to travel a little bit more, we may need to review more national language documents and probably on the legal side, this is the same. Yeah, okay, good, let's come to a close. To wrap up, how would you summarize why would investors trust the due diligence one-stop shop?

Speaker 3

Because it would be fast, it'd be efficient and you are getting a bundle of experience. You are getting project management expertise as well, because whilst you, as the client, be project managing different people, you actually give that to one person, so it's turnkey. You actually get due diligence, turnkey.

Speaker 2

That's a nice comparison. Turnkey is great.

Speaker 4

Lota and we have checks and balances. We have a harmonized process. We avoid any gaps. We avoid redundancies. It's more efficient. That client will save money because it will be much faster, which much less work on his side, and the results will improve compared to traditional approaches.

Speaker 2

All right.

Speaker 4

Thanks a lot and try it out.

Mini-Grid Sector Due Diligence Change

Speaker 2

Try it out, yeah exactly, and whoever wants to talk more about the due diligence one-stop shop is invited to come and meet us at the Energy Access Investment Forum, which is a conference and trade fair in Lagos from the 21st to the 23rd of May 2024. We will have a booth there as Inensos, with a big sign saying the mini-grid due diligence one-stop shop. Come and meet us there. We will also be represented in many of the sessions and contribute. Just get in touch, talk to us and I'm looking forward to exchanging further. Thanks a lot, dolapo. Thanks a lot, lothar. Let's hope that this will trigger a change in the way due diligence is done in the mini-grid sector. Thank you.

Speaker 3

Thank you, thank you, thank you.

Speaker 1

Nico in the mini-grid sector. Thank you, thank you. Thank you. Thank you, nico. 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 dot com. Or contact us through the links in the show notes. The mini grid business powered by Inensys.

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Nico Peterschmidt

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