Vuyo Ntoi, Co-Managing Director of the African Infrastructure Investment Managers (AIIM), describes the status of the African investment landscape and what international investors need to keep in mind when they consider investing in the African energy transition.
Can you describe the challenges and opportunities of Africa’s investment landscape?
Africa is an underserved market.
It’s underserved from the perspective of industrial production of goods, and from an infrastructure perspective. This means there is a lot of opportunity to fill the existing gaps.
The macroeconomic forecasts for the continent, in terms of both population growth and improved wealth, mean it’s increasingly a market that shouldn’t be ignored, and I believe that investors who are in that market sooner rather than later will be the ones who reap the best rewards.
Demographically, it’s where most of the young people in the world will be in the next 20 to 30 years, which presents a vast opportunity if this is a market that a product or service is targeting.
However, one of the challenges is that Africa is disjointed. The continent comprises many small countries which operate different policy frameworks, requiring investors to work their way around these country differences. This reduces the continent’s scale benefits.
Another key challenge is that governments’ planning horizons are not fit for purpose and tend to be short-term, targeting election cycles. There are some exceptions like Rwanda where longer-term planning is in place in some sectors.
Long-term planning, particularly from an infrastructure and development perspective, allows entities such as ours to establish themselves in the market and grow development and investment businesses. The ability to establish long-term investment businesses also allows us to invest in the resources to navigate and understand the disjointed nature of the continent by having teams on the ground in key countries.
Ultimately, the investment climate is positive in the sense that the demographics and macros show that it’s a market for the future, with significant opportunity, if you are pursuing it through an experienced African investor lens.
Will we see greater efforts to create a more unified landscape with greater collaboration?
Yes. We already see examples such as the African Free Trade Agreement, which is currently being implemented. The hope is that such agreements will lead to Africa becoming more of a common market without the disjoints I mentioned earlier. It will mean you can trade with the continent as a block and not face multiple entry points when looking to trade or invest in the continent.
That will take time; however, various countries are in the process of ratifying the treaty that establishes the free trade area.
To ease the investment landscape, there are several smaller regional bodies that operate with common legal, accounting and tax codes. This to some extent removes the burden of having to learn different codes for different countries making trade and investment more seamless for outsiders. In addition, some of these regional bodies already incorporate free trade areas, which add some offsetting scale benefits.
Do you think that international investors are seeing the opportunities in Africa?
We believe that Africa remains a mystery for many international investors. This lack of knowledge coupled with the relatively small scale of the continental economy is a challenge for international investors. Therefore, international investors are not actively seeking investments on the continent, with the vigour that the opportunity set deserves.
We believe that the above provides an opportunity for those investors who are looking at opportunities on the continent to make compelling investment returns. The less competitive environment coupled with the demographic dividend we discussed earlier provide an attractive playground for those who chose to focus on the continent.
What changes are needed to market design to foster infrastructure investment?
One important change is the need for cost-reflective tariffs. Of all the electric utilities operating on the continent, only one or two have cost-reflective tariffs.
That means almost all electricity utilities across the continent aren’t financially feasible on a standalone basis, limiting their ability to enter transactions and deals.
In the absence of sovereign guarantees, it becomes impossible to establish a vibrant power market where utilities can purchase power from independent power producers without support.
Another key change required is planning.
The ability of entities to plan and establish businesses is hindered when you don’t have long-term plans at scale.
The ability for businesses like ours to go into a country and establish a business, is driven by long term government planning and a strong pipeline of investment opportunities over time.
There is a lot of international funding available to Africa to support its energy transition. What needs to be done to access this funding?
It all goes back to planning; you need to have a credible plan that incorporates the use of these funds.
In South Africa, for example, we have made a lot of progress. For instance, a task group was established to consult with the market and develop a plan around the Just Energy Transition.
Very little can be done without a credible plan.
It’s all about capacitating governments to develop the required plans and then taking advantage of the funding that’s available.
Where is AIIM focusing its attention in the investment landscape?
We are doing a lot in the Commercial and Industrial (C&I) power space in South Africa. We believe that this commercial space is going to unlock the bulk of the new generation capacity for the continent in the future.
We recently launched a platform called Net zerO Africa (NOA), an integrated renewable energy platform targeting large-scale C&I distributed power solutions and energy efficiency applications. We believe the business will become a significant player in the sector. The investment strengthens AIIM’s position as one of the leading investors in South Africa’s renewable energy landscape with projects representing over 1.9GW of solar and wind generation capacity. It also supports the imperative to deliver new renewable energy capacity to address energy sector deficits and accelerate the energy transition.
We have also backed a pan-African commercial and industrial power player called Starsight. It recently merged with Solarafrica and we believe it’s a continental champion with a footprint in West Africa, East Africa, and now South Africa.
In your opinion, what will Africa’s future grid look like?
I think we’re headed to a more decentralized and unbundled power system, and to some extent, it’s not necessarily by design. It’s driven by the challenges we face.
I believe the transmission network will largely remain in government hands.
However, generation will be much more decentralized with corporate self-generation becoming more popular. I believe that a robust feed-in market will establish itself on the back of that.
It is also likely that power trading will take off in a market like South Africa.
As the power shortfalls impact further, private power sales will continue to replace government supplied power.
What do you find most rewarding about the work you do at AIIM?
It’s interesting and challenging work, but more than that, it has an impact. You can see the impact of the work you do on the environment.
Yes, it’s challenging at a theory and numbers level, but there’s an actual impact on the ground when the projects are implemented.
It’s very energizing.
