Q&A: AIIM on Africa’s $100bn digital infra opportunity

‘There is a massive deficit in data centre capacity and terrestrial backhaul for fibre’, explains African Infrastructure Investment Managers investment director Ed Stumpf.

Where is Africa on its digital transformation journey?

Ed Stumpf, investment director, African Infrastructure Investment Managers

The growth of the mobile phone industry in Africa has been spectacular. There are now over one billion subscribers in the market. But from a digital maturity perspective, most parts of the value chain are still at a relatively early stage. The continent is well served by subsea cable connectivity. But the bigger issue is the terrestrial landscape. There is a massive deficit in data centre capacity and terrestrial backhaul for fibre, particularly last-mile fibre connections to homes and towers.

Mobile broadband is dominant in Africa today, representing around 98 percent of broadband subscriptions. Mobile users have doubled in the last five years, and we expect a further 200 million new subscribers over the next five. Meanwhile, smartphone adoption is expected to hit 65 percent of devices in 2025, up from 44 percent today. And the first thing anyone does when they get a new device, of course, is switch on social media and start consuming content. The resulting explosion in data volume will necessitate significant investment in enabling infrastructure, particularly towers and fibre backhaul.

Fixed broadband is even more nascent. Fixed broadband subscribers per person sits at just over 0.5 percent, compared to well above 30 percent in most developed markets. Even in South Africa, only around 2.6 million homes have been passed with fibre, out of 16 million homes in the country. In places like Nigeria, the deficit is even more pronounced. There is currently around 54,000km of fibre, but the Nigerian Communications Commission believes that as much as 120,000km is required. Furthermore, only around 10 percent of the towers in Nigeria are served by fibre. From a data centre standpoint, the situation is similar. Benchmarked against the number of enterprises, volumes of IP traffic and GDP, most markets are still at a very early stage in data centre capacity.

“The first thing anyone does when they get a new device is switch on social media and start consuming content. The resulting explosion in data volume will necessitate significant investment in enabling infrastructure, particularly towers and fibre backhaul”

Ed Stumpf

What are they key drivers that make this an attractive market for you?

Affordability is key. Disposable income disparity in many markets is a challenge, but we are seeing affordability metrics moving in the right direction. Devices themselves have gotten considerably cheaper. Smartphones are now available at less than $100 and there is an active second-hand market, as well as fintech solutions for financing purchases. That supports the growth of smartphone penetration, which in turn drives data consumption.

Infrastructure sharing and open access business models are also becoming more prevalent. We have already seen that in the towers landscape. Independent towercos now own a substantial share of African mobile phone towers and we expect the same business model to continue to evolve in the fibre and data centre industries. That type of infrastructure sharing is crucial because it helps drive down end-user tariffs by creating more efficient usage.

What are the biggest challenges you would associate with investment in this sector?

Operating dynamics on the ground are probably the biggest challenge. Permitting, particularly rights of way, can be complex when dealing with local counterparties. That is also why it is difficult to export experience from different markets. The dynamics are very country specific when it comes to something like fibre roll-out. It requires both the right local partners and a boots-on-the-ground approach.

Power is another challenge. Many of the markets where we operate have unreliable, inefficient and sometimes very expensive grid-connected power supply. But it is increasingly possible to converge two of AIIM’s investment themes – digital infrastructure and the energy transition. Distributed and renewable energy solutions are becoming more and more efficient. We have already invested in a platform in West Africa called Starsight Energy, one of the region’s largest distributed commercial and industrial power providers. We see a great opportunity for players like that to provide power to support digital infrastructure growth.

The third challenge is how to bring cost effective infrastructure to both rural and low-income urban neighbourhoods, as urbanisation continues to be a huge theme in Africa. We have been heavily focused on driving down the cost of deployment and developing use cases to bring high-speed fibre connections to those communities in South Africa. We now hope to apply that to other markets to widen the net and help bridge the digital divide.

How is the digital transformation translating into specific investment opportunities for AIIM?

We focus on three sub-verticals within digital infrastructure. The first is terrestrial fibre, and particularly last-mile fibre. We recently completed an investment in a company called MetroFibre Networx in South Africa. We have been supporting an organic strategy for that business, with a plan to roll-out to 300,000 additional homes, while seeking to increase network efficiency through consolidating the South African fibre network market. In fact, we recently completed the acquisition of fibre-to-the-home assets from Link Africa, another network operator in the region. The key aim is to explore connectivity to lower income neighbourhoods and then leverage that experience in other markets. To that end, we have identified prospective investments in a number of West and East African countries.

On the data centre side, we have established a co-location platform called Onix Data Centres and we have completed our first acquisition of a facility in Ghana which will have a 2MW capacity when fully ramped up. We are seeing considerable demand from Onix clients to establish incremental greenfield capacity in neighbouring countries. I think a lot of that is being driven by forthcoming subsea cable connections 2Africa and Equiano. And, with regards to towers, we have just completed an investment in Eastcastle Infrastructure, which is focused on building towers for future densification. The platform is premised on creating infrastructure-sharing economics which should disrupt markets in DRC, Nigeria and the Ivory Coast, initially, helping to stimulate downstream demand over time.

The final area of opportunity stems from the distributed energy landscape. Starsight and other portfolio companies are already providing solar power to Amazon Web Services in South Africa, and our data centre in Ghana is powered by a co-located solar farm on-site.

How do the different markets within Africa compare when it comes to the opportunities on offer?

South Africa, Kenya and Nigeria receive a lot of focus from investors. And mobile subscriber growth is fairly concentrated, with around half of that growth stemming from Nigeria, Ethiopia, DRC, Tanzania and Kenya. Mobile internet growth is also concentrated, with around a third coming from Nigeria and Ethiopia alone. But we feel that opportunities run far more broadly than that, because most markets benefiting from subsea cable landings are currently in digital infrastructure deficit. We look at the main hubs, certainly, but we also look at smaller hubs where we see prospective demand.

Just how big do you believe the African digital transformation opportunity to be?

Some of the figures are quite staggering. The Broadband Commission for Sustainable Development, launched in 2010 by ITU and UNESCO, talks about at least 250,000 new 4G towers being needed and at least 250,000km of incremental fibre capacity, contributing to at least $100 billion of investment [through 2030], at a run rate of around $9 billion a year. These are very big numbers, and the impact potential is huge. Players like us have the opportunity to connect millions of people across Africa.

Ed Stumpf joined African Infrastructure Investment Managers in 2014 and is responsible for origination, structuring, execution and management of infrastructure investments for AIIM managed funds.