On the import-substitution premium.
Why positions that reduce import dependence earn a non-linear return that conventional IRR models do not observe.
Frontier energy systems price import substitution as a policy preference. The firm prices it as a structural asset. The difference matters because every unit of imported energy imports three exposures at once — currency, counterparty, and corridor — and every unit substituted reduces all three simultaneously.
The mechanics compound. A refined-products import line prices in a dollar-denominated cost of goods; a shipping route whose insurance, tariff, and bilateral access are political variables; and a concentration on a small number of counterparties whose supply terms are renegotiated whenever the balance of power shifts. A domestic substitution position does not solve any one of these perfectly — it releases exposure to all three at once. The return profile, measured honestly, is not the project’s own IRR. It is the IRR plus the avoided volatility of the imported alternative.
Kenya imports roughly 95% of its refined petroleum product. The same asymmetry holds, in varying degrees, across petrochemicals, fertilisers, and industrial gases. Every current-account shock of the last decade has been import-driven at its margin; every subsequent recovery has been disproportionately painful for downstream counterparties who could not hedge. Positions that reduce that exposure are priced by the market on their narrow project economics and priced by the firm on the avoided volatility they buy the country.
The premium has limits. A substitution position that cannot clear on economics — whose cash flows require subsidy, whose permits rest on political discretion, whose scale is too small to materially shift the national flow — earns none of the asymmetry we are describing. The principle is substitution at scale, not substitution as gesture.
A firm that underwrites on narrow project economics will systematically undervalue import-substitution positions relative to their actual contribution to national balance sheet. A firm that underwrites with the avoided volatility priced correctly will see opportunities in domains where capital is presently too expensive because it is priced without this premium in view.