This article is sponsored by AIIM
What makes Africa an attractive infrastructure investment proposition on a relative value basis?
The average historical annual spend on infrastructure as a percentage of the required annual spend, at 25 percent, is the lowest of any region globally. Infrastructure fundraising as a percentage of this deficit is also significantly behind other regions globally. We believe that investing behind select secular themes targeted at the most attractive areas of this structural, growing infrastructure deficit has the potential to generate attractive returns on a risk-adjusted basis.
We also believe that the ability to generate impact across our key themes of climate change, gender diversity, governance and access to decent work is incredibly interesting given the low baselines from which we are starting. For example, notwithstanding Africa’s negligible contribution to global emissions, the adverse impact of climate change is felt most acutely in Africa given the absence of resilient infrastructure, leaving critical urban centres vulnerable to changing weather patterns.
What challenges is Africa facing in terms of its energy networks, and what opportunities is that creating and in which regions?
Africa’s energy poverty (two-thirds of people in the world who currently don’t have access to electricity are based in Africa) has historically not necessarily translated into widespread investable opportunity due to inefficient energy value chains, as well as difficulties associated with generating scale.
However, in South Africa, we are witnessing a confluence of factors which we believe will generate particularly interesting opportunities in renewable energy, both from a return and scale perspective.
Firstly, South Africa is a top 10 emitter of carbon from power generation on a per capita basis, globally. It runs an ageing, inefficient coal fleet, much of which will be up for retirement over the next decade.
There is an urgent imperative to transition, and to do it quickly. Between 30 and 50GW of new renewable energy capacity is likely to be required over the next decade to hit 2050 Net Zero aspirations.
The urgency has been compounded by the performance of the state utility, Eskom – illustrated by the increasing regularity of load shedding. South Africans are getting less stable power supply at a higher price point.
We have seen government move quickly to enact developer-friendly policies, such as the proposed amendments to the Electricity Act to permit self-generation of up to 100MW, introducing enabling legislation around wheeling, and expediting bid rounds for utility-scale projects. We are also seeing the maturation of the market, and the emergence of high quality, local, integrated developer/operator teams. These factors are combining to create attractive opportunities across both the commercial and industrial and the utility scale space.
As a result, we expect to see South Africa quickly transformed into a market where developers find it easier to build both wind and solar plants and then contract on a wheeled, bilateral basis with customers, particularly for the mining and industrial base that the country is well known for.
We have historically been at the forefront of the renewable energy market as the largest equity investor, investing in 32 projects, representing over 1.9GW of solar and wind capacity as well as developing in-house over 1.3GW of closed and preferred bidder projects. So, we believe we are optimally positioned to take advantage of what we see as one of the biggest renewable energy stories in the global emerging market space, which is taking place in South Africa right now.
Demand for digital infrastructure is also booming in Africa. Why is internet connectivity key to economic prosperity in the region?
The digital economy has become essential to meet the requirements of the post-covid world. As is the case globally, the ‘fourth utility’ is central to Africa’s economic development, with the potential to generate substantial impact: the internet economy could contribute over $700 billion to Africa’s GDP by 2050, while increasing connectivity to 75 percent of the population could generate over 44 million new jobs.
On the demand side, we are seeing terrific tailwinds: data consumption per subscriber is growing faster than any other region globally, driven largely by the increased penetration of lower cost smartphone models. Global mega-trends characterising changing consumer and enterprise preferences (for example, flexible working, enterprise migration to the cloud and increased regulatory scrutiny around data sovereignty) are also occurring in our markets.
We believe there is a generational opportunity to build out the communications backbone of the continent, to support widespread economic growth. This will entail significant capacity additions across towers; fibre, including not only fibre-to-the-premises, but also metro and long-distance fibre, as well as, of course, data centres.
Are you also seeing interesting opportunities in the transport and logistics space?
Port capacity and inefficiency is currently a solvable bottleneck that would unlock development and investment opportunities across the continent. For example, covid-19 has exacerbated South Africa’s long-run port efficiency problems and the port of Cape Town now ranks 347th out of 351 in global container port performance: ships now wait up to 14 days for berth space in South Africa’s ports.
We are pursuing a number of specific strategies in this space: (i) focusing on expanding transport and handling ecosystems and platforms across diversified corridors and cargoes but building a specific expertise in providing pit-to-port solutions for certain key battery metals (eg, copper, cobalt and manganese) as evidenced in our recent acquisition of The Logistics Group; and (ii) developing a temperature controlled logistics platform underpinned by the acquisition of a portfolio of strategic assets, with a specific impact focus around food security.
What are some of the key challenges you would associate with investment in Africa and how can these be overcome?
Africa is a complex and heterogenous opportunity set. Successful infrastructure investing requires deep local insight combined with market-leading infrastructure expertise. We are fortunate in that we are able to draw from 21 years of institutional infrastructure investing across Africa, and apply several key lessons learned towards developing and refining our current thematic approach. We have learned a great deal, which largely informs how we see the space today.
Our current focus is to stay disciplined behind our themes; reduce our sovereign counterparty exposure to a handful of proven counterparties; actively construct portfolios with target parameters across currency, geography and risk profile; and importantly, orientate around growth capital into platforms capable of diversifying at the underlying asset level, with fewer pure-play greenfield or single-asset positions. Our learned experience is that this specific positioning reduces risk concentration, offers more levers for value creation and addresses marketability hurdles.
We are also sensitive to purchasing power in Africa and look to ensure the delivery of new infrastructure provides both a higher quality service together with a lower pricing point than is provided by incumbent service. Protecting the consumer wallet is key when we are talking about infrastructure that is sustainable and enduring.
The long-term supply/demand fundamentals in Africa are clearly compelling. But how is the region being impacted by the shorter-term inflation trends and supply-chain disruption that is being experienced around the globe?
The answer to that question will vary depending on where you are in the region. Certain commodity exporting countries have experienced a bit of a boon as a result of higher commodity prices, but the more widespread theme is that the combination of higher inflation, higher food and commodity prices and higher interest rates, is in general resulting in similar market volatility to the rest of the world. Infrastructure assets, however, tend to benefit from contractual pricing power and in certain assets, limited market risk, so on the whole, our portfolios are proving to be resilient.