In a Q and A with Africa Oil and Power – CEO of African Investment Managers (AIIM) – Jurie Swart says the continent has made huge strides in infrastructure investment.
AIIM, a member of Old Mutual Alternative Investments, has been investing in the African infrastructure sector since 2000 with a track record extending across seven African infrastructure funds. AIIM currently manages USD2.1 billion in assets covering the power, telecommunications and transport sectors with operations in 15 countries across East, West and Southern Africa
What have been African Infrastructure Investment Managers main contributions to the South African economy?
AIIM’s original business started life by financing toll roads in South Africa. From the experience of backing the construction of three major toll roads we have seen how essential new road infrastructure can be a major catalyst for economic development. Building new city-to-city roads effectively creates economic corridors which have had a hugely beneficial impact on the free movement of goods and people, facilitating new business.
In later years we started looking at the energy market in South Africa. One part of this market that has done particularly well in the last five or six years has been renewable energy. It’s been a remarkable growth story and with our latest new solar and wind farm projects we estimate that AIIM has been involved in around at least a quarter of all the new renewable energy schemes in South Africa.
We are of course aware that a very large number of people earn their keep on the back of the coal fields and in the power stations of Mpumalanga. They have relied on coal for a long time and we cannot be insensitive to that. However, in the long term we do not believe that coal is a sustainable energy source and it will make sense to replace it in due course with greener, cheaper and more sustainable forms of power generation.
Right now renewable energy as part of a mixed energy package with coal, hydro/pump storage and gas is a very sustainable play. On top, we want all our projects to contribute positively to local communities, and this means more than direct job creation. For example, some of our projects have funded the installation of solar street lighting.
And we’ve funded programmes that address local skills gaps such as the Hopefield Home Improvement Project, which enabled previously unemployed people to gain practical skills in plumbing, electrical or carpentry and then hired them to make improvements to more than 600 homes in Hopefield.
Of course we’re pleased that building new renewable energy facilities creates jobs, not just during construction, but in their operation and maintenance afterwards, which all adds to local economic development. Going forward, based on our experience and on the data we’ve been gathering, we’d be keen to play a role in developing more formal plans for the local manufacturing industry based around renewable energy plants.
Beyond generating sustainable returns to investors, an equally important goal is to give people more opportunities. An illustration of this is a bursary scheme we have started that contributes to the costs of university education of previously disadvantaged individuals, with a view to them working, after qualification, in the renewable energy sector. That is part of the legacy we are creating in South Africa and we would like to play the same role in the rest of Africa.
Why were Nigeria and Nairobi the chosen destinations for your business outside of South Africa?
The first destination outside of South Africa was Lagos. Nigeria is Africa’s largest economy and is by far the dominant force in West Africa. Nairobi plays a similar role with Kenya acting as a hub in East Africa. In addition, we found it easier to move into the territories where English was used as a language of business.
Our new presence in Abidjan serves as a gateway into Francophone Africa and, most importantly, its economy has been growing well above average for the last six or seven years with inflation under control. It is the hub of the West African currency and therefore our natural headquarters for Francophone Africa.
With that said, our strategy isn’t to develop projects in every single African country. We are currently looking at projects in amongst others Gabon, Cameroon, Benin, Tanzania, Kenya, Zambia, Mozambique, Namibia, Nigeria, Burkina Faso, Mali, Senegal and Ivory Coast.
What are the key challenges in funding South African infrastructure projects?
In South Africa, we believe we are now thankfully at the end of a period of policy uncertainty, especially in regard to the Renewable Energy programme and the Power sector generally. Without exception, uncertainty is the biggest killer of infrastructure projects because we need it for investors to commit to these long-term projects.
We are all hopeful that the Ramaphosa presidency marks a new beginning and that the new mood of optimism continues to flourish. We are off to a great start with round four of the government’s Renewable Energy Independent Power Producer Procurement programme (REIPPP) back in play and former Minister Radebe, during his short tenure being very involved and committed to making this industry work and grow.
When commitment to renewable energy first became a successful key government initiative in around 2012, many other investing institutions seemed to take little initial notice of the opportunities, so AIIM was almost on its own investing in this space. We have since seen a growing interest and we welcome the competition and the fact that a whole new renewable energy sector has now developed here.
We accept that there is always a challenge getting investors to risk their capital in new spaces and need to be patient while we assess risk and secure the permits that deliver the long term projects. All this takes time. We have taken our first steps into the distributed power sector where the “off-takers” are single premises or homes. Looking ahead, we think that Gas2Power may be the next sector and we think that it’s likely there will be more happening in the water provision and treatment space. We are looking at that too, but time will tell.
What factors are at the forefront as you are mitigating risk in South Africa?
If you are living and investing here, you most likely know what to expect. If you are investing from overseas, you will need to be reassured about the levels of risk and what we do to mitigate it. One issue that always arises is the currency in which you contract. It’s an issue that needs to be addressed for foreign investors, not just investing in South Africa, but in the rest of Africa as well and we address the currency risks in various ways. For example, hedging where necessary, especially when much equipment needs to be brought in at the start of a project; or contracting the off-take price with a hard currency basis.
A way of mitigating risk is only investing in projects where we are certain of or a high level of confidence in revenue security. We are willing to trade potential upside against minimised downside. We don’t work on the basis of backing the one big winner in the expectation of other projects falling over. We expect all our projects to succeed if we back them.
Having preliminary project approvals in place is important before we commit. We won’t work on anything that’s too early stage but we will often start small and scale up later on certain projects.
Equally, on the larger projects we’ll need to ensure that our tariffs are signed and sealed (to guarantee revenue) and that interest rate hedges are also in place at the beginning.
There are three other broad categories of risk mitigants that are extremely important to us. One is that we have a large diversified portfolio in the energy sector. We expect some projects to have delays or other issues, but we’d expect other projects to progress more smoothly, and these tend to even out. This is a clear benefit of diversification.
The second broad risk mitigant is being sure that our projects are based on long term sustainability. If a project seems too good to be true it almost always is, and it will unwind at some point. By working with the SA government’s IPP office we are able to take this risk out of the equation because they are extremely thorough and will only back solid projects.
A third means of controlling risk are public and proven commitments by our partners in the Environment, Social and Governance (ESG) arenas. ESG has admittedly become a bit of a buzzword in our industry in recent times but it has been fundamental to our thinking and practices for many years and it is well established in AIIM.
ESG is not a box ticking exercise. We believe it is essential to have the support of the local communities and contributing positively to the environment is fundamental to what we do.
All in all, the perceived risk of operating in South Africa and on the greater African Continent is undoubtedly higher than the real risk after mitigation measures have been implemented.
What role does the private sector play in covering the continent’s infrastructure needs and requirements?
The infrastructure needs on the continent are huge. The upwardly-revised estimate from the African Development Bank forecasts that Africa needs up to USD170bn a year spent on infrastructure for the next decade. The private sector alone cannot satisfy this need. But we can play an essential enabling role as long as we have stable and transparent regulatory regimes in place to guarantee project certainty.
Some projects are so large that they will naturally fall into the domain of governments, and will need to be supported by a combination of national and local funds. Other projects will never be commercially viable, but may well be required and also fall into the Government delivery domain.
Others projects are more suited to the private sector. These projects need to provide reliable returns over long terms in return for private equity investors to be willing to take a measured risk. For example, a new power facility might need to be in production for 20 years or more to pay back our investment and produce returns for investors.
Africa has made huge strides in infrastructure investment with robust projects and a very clear sense of direction and purpose. With careful project selection and management private equity can meet the needs of investors and provide vital new infrastructure that delivers benefits directly to local communities.
**Africa Oil & Power (AOP) – the continents premier platform for energy investment and policy is holding a conference and exhibition from October 9 – 11 at CTICC 1 in Cape Town.