9.1 FONSIS’s solar investments

BOX 9.1

FONSIS’s solar investments

The Scaling Solar Senegal project derived from the ambition of the Senegalese government, through its Ministry of Petroleum and Energy, to develop a new energy mix integrating clean and affordable energy, through programs aimed at adding capacity to the national electricity grid via independent power producers. The Ministry of Petroleum and Energy, through the Regulatory Commission of the Electricity Sector, engaged with the International Finance Corporation (IFC) in 2016 to structure the program through an international call for tender. IFC recommended the participation of FONSIS (Fonds Souverain d’Investissements Stratégiques, Sovereign Fund for Strategic Investments) in the program, aiming to replicate the structure of the IFC’s successful Scaling Solar program in Zambia, in which a national development fund played a key role as local institutional partner. As part of its mandate to hold the Senegalese state’s interests in the project, FONSIS actively participated in the project’s structuring, provided liaison with relevant government stakeholders, and was involved, as an investor, in negotiating the financing package.

The solar projects, located in Kael (Diourbel) and Kahone (Kaolack), were projected to have a cumulative nominal capacity of 60 megawatts and to represent 37 percent of the total installed solar capacity in Senegal when finalized in 2020. The cost for the two projects totaled €47.5 million. FONSIS contributed cash equity and some subordinated debt (in the form of quasi equity), and it holds a minority stake of 20 percent in both projects. A consortium composed of Meridiam, a global infrastructure fund based in Paris, and Engie Development, which was selected as the project’s private developer after tender adjudication, contributed the rest of the equity. A pool of lenders comprising French development finance institution Proparco, the IFC, and the European Investment Bank provided commercial loans. The projects will sell power to national utility company Senelec under a 25-year power purchase agreement. The projects also benefit from a government guarantee covering Senelec’s obligations under the power purchase agreement.

Previously, FONSIS invested in two solar projects, Senergy and Ten Merina, with a capacity of 30 megawatts each and operational at the time of this study. FONSIS holds a minority stake of 32 percent in Senergy and 10 percent in Ten Merina. Meridiam contributed the rest of the equity. The total cost for the two projects was €60 million. Of that total, €8 million was equity-funded, including about €1.5 million from FONSIS. The target equity internal rate of return is 12 percent. Proparco and the Belgian development finance institution BIO provided loans. These two projects also sell power to national utility Senelec under a power purchase agreement, with a government guarantee covering Senelec’s obligations.

representation as a necessary condition. FONSIS can invest directly or through a subfund. The minimum ticket size is €450,000, leading to equity stakes generally below 33 percent. Exit options include put option to project promoter, sale to a private sector company (preferably domestic), sale to a financial investor, and initial public offering, among others. Exits may be dictated by the need to redeploy liquidity in other more profitable investments, achievement of IRR targets, or any contractual terms agreed to at the time of investment. FONSIS is also reviewing a potential debt investment, but it had not made a decision at the time of writing.

FONSIS seeks a target financial IRR in its equity investments that under no circumstances can be lower than 12 percent. Above that threshold, depending on economic and development impact considerations, the target IRR of an investment can vary and FONSIS can also opt to contractually cap its returns.