Tunisia, a nation of 11.5 million on North Africa’s Mediterranean has been a fascinating anomaly for centuries. A successful revolution overthrew a dictatorship in 2011 and provided a spark throughout North Africa and the Middle East referred to as the Arab Spring. Although the society has made many political strides in terms of establishing governance and personal freedoms, structural challenges continue to slow economic growth and drive high unemployment. The COVID-19 pandemic has only made these matters worse. A lowered sovereign credit rating, projections for national insolvency, reduced tourism revenues, and terrorism cells present along the Algerian border paint a bleak picture for Tunisia. However, the country’s entrepreneurial spirit cannot be denied. The recent deregulation of electricity production replaces its pre-existing monopoly with the Tunisian Company of Electricity and Gas (STEG). Tunisia has one of the most favorable geographies for renewable energy in the world and views renewable projects as an opportunity to decrease the country’s energy deficit while fostering economic development. Tunisia’s ambition to welcome foreign investment in sustainable energy solutions provides a gateway to the North Africa renewable energy market, and increased foreign partnerships will help contribute to increased stability.
What was the problem?
Apenco, a subsidiary of the Abdennadher Group, is a privately owned company seeking to capitalize on the recently deregulated renewable energy market in Tunisia. Given the Tunisian government’s goal for 30% domestic renewable electricity generation by 2030, Apenco hopes to capture value by developing solar energy projects. Apenco was experiencing a financial “cash gap” in the medium-voltage project space. The contracts in the solar space force companies to float cash from the original invoicing to clients as deposits which then cover the hard costs required by domestic and international suppliers. These cash gaps in medium sized projects are large enough to make them unfavorable from a profitability perspective and add additional cost and operational risk. This financial gap is critical to identify before the project starts so that cash collections and delaying payments can be used to mitigate the financial risk.
Apenco was also experiencing higher costs through a domestic supplier selection strategy. Based on our initial research, we believed Apenco could benefit from an international sourcing strategy. Lastly, Apenco’s lead time varied depending on the size and scope of their solar projects. We wanted to dig into the technical details on lead time and governmental requirements by project size and type to understand the problem better.
What did we do?
To better understand the financial “cash gap” created by these projects, our group modeled three of Apenco’s current projects, ranging in size from 23kW to 549kW. After incorporating accounts payable actuals for the existing projects, we found larger projects to be less profitable and required borrowing cash. This supported our initial hypothesis that the additional labor and lead time for larger projects did not support a healthy business at scale.
Our technical supply chain analysis found that an international procurement strategy was the most favorable for all materials except circuit breakers. We also found that profitability with an international strategy to be contingent on Apenco being able to schedule installation plans that avoided lengthy holding periods which, in turn, would increase costs.
During our lead time analysis, we found that projects over 249-kWs required special permitting and approval from the Ministry of Energy in Tunisia which added to the time horizon from initial proposal to breaking ground. We found that with smaller projects, Apenco’s operational schedule would be much more consistent and predictable. Apenco could apply efficiency measures to save costs in completing these low voltage projects. For medium projects, the less predictable governmental process leads to drawing up resources and making forecasting more difficult.
What was the turning point?
From our initial research and conversations with our partner it became apparent that Apenco had followed last year’s recommendation to operate within the auto-consumption space but was unsure what types of projects to be working on. Upon examination of project financials and issues with changing supplies cost it became apparent that project profitability, cash-gap analysis, and equipment sourcing / pricing were needed to evaluate the market. Our project operated in two phases: quantitative and then qualitative analysis. The major turning point for our project was the completion of financial cash-gap and supply chain analysis.
The cash-gap analysis and project profitability model told a very clear yet counterintuitive story. Apenco was more profitable when operating in the smaller project space than in the larger one. Due to their size, they were unable to purchase enough equipment to create economies of scale. This made the complexity of engineering, governmental requirements, and elongated timelines of larger projects not worth it from our quantitative models or the vantage of our team.
With respect to the qualitative analysis, we conducted in-depth research and analysis on several key go-to-market strategies and topics. We evaluated the market sizing of the Tunisian auto-consumption segment for FY 2021 to 2030 to acquire the potential of the market. Next, we conducted a competitor analysis of known active Tunisian solar Engineering, Procurement, and Construction (EPCs) companies. We then developed customer personas which helped us create an acquisition and pitching strategy. Lastly, we investigated potential financing options via non-traditional and PE/VC funding avenues pertaining to Apenco’s future development.
What was the recommendation?
Based on research, interviews, and technical analysis, we recommended that Apenco would benefit from operating specifically in the low-voltage project space (<250 kW) within the auto-consumption regime. Given their parent group’s history and connections, Apenco could seize this opportunity to acquire customers more efficiently than competitors. We also recommended that Apenco should explore cost savings opportunities through international sourcing. The combination of executing low-voltage projects with internationally procured materials would create the most effective way for Apenco to market itself as the local Solar EPC company of choice.