African pension funds urged to invest in their own ‘story’

-    Written by Liesl Peyper

The economic environment for private equity investments in Africa is much rosier than a few years ago when the global economy was in a downturn.

According to Romain Py, Investment Director and Head of Transactions at African Infrastructure Investment Managers (AIIM), the improved conditions bode well for infrastructure development on the continent.

“The improvements in economic conditions are encouraging and reflects Africa’s status as the world’s fastest urbanising continent,” Py says.

The rapid urbanisation is underpinned by a strong demand for infrastructure, which the African Development Bank (AfDB) estimates to be around $170bn a year for the next decade.

To ensure investments that deliver true value, however, African governments need to be educated on how to be attractive investment destinations.

On the other hand, investors need to be made aware of how to manage and mitigate perceived and actual risks.

Py points out that African-based institutional investors are in a much better position to understand risk perception on the continent. It is therefore crucial that Africa-based pension funds know about the benefits of investing in infrastructure projects on their own turf.

“African pension funds have a key role to play as an additional pool of capital. AIIM has been educating a number of African pension funds on the benefits of and great opportunity to invest in their own ‘story’,” Py says.

He believes unlocking African pension fund money to invest in infrastructure debt on the continent will deepen local capital markets.

“Bad news stories on the continent often cloud out the opportunities, but when African pension funds, which understand the investment risks, are coupled with limited partners for investment, it can lead to outsized returns for patient, long-term investors,” Py adds.

Bernhard van Meeteren, Energy Sector Specialist at Dutch Development Finance Company FMO, who has been involved in the facilitation of a number of financing deals on the continent, says although there had been delays in construction, political unrest and non-cost reflective tariffs, specifically with energy-related projects, all problems were eventually solved.

“On all the projects in which I have negotiated financing, we have received all interest and repayments, although the repayment profiles had to be amended in a number of instances.”

Power purchase agreements (PPAs) in Africa are still considered risky business for project finance providers who have to manage and mitigate the availability of debt financing, as well as interest rate and currency exchange risks.

Van Meeteren is of the view that financing in a particular country’s local currency removes a significant amount of currency risk for the buyer of electricity in PPAs.

“However, the buyer is usually more interested in a low tariff in foreign currency as opposed to a higher priced tariff.”

Higher tariffs in domestic currency remove the exchange rate risk to a large extent.

Van Meeteren says FMO is able to offer 18-year tenors in local currency to buyers under PPAs. “We have offered it on many projects, but it has never been used.”

However, developers are willing to bring down tariffs in the bidding process for solar power projects for example if the risks in a particular jurisdiction are lower.

They will for instance consider if the land on which the future project will be developed has been selected and fenced and whether any resettlement obligations have been settled.

In addition, developers will take a favourable view if the PPA and government guarantees are sound and properly negotiated and when the off-taker of the PPA has a good payment record.

“The better these factors are arranged, the lower the tariff can go,” Van Meeteren says.

AIIM’s Py alludes to the importance of well-structured and transparent procurement processes to attract developers. “But more importantly developers would want to see a programmatic development approach (the implantation of reforms and policies) which will allow them to drive prices down.”

Py says if Africa is to attract large-scale investment in its power sector it will require the implementation of reliable domestic policy frameworks and the right institutional capacity.

He cites South Africa’s Renewable Energy Independent Power Producer Procurement Programme (REIPPP) as a case in point where sound processes have attracted investors from all over the world, affording developers the opportunity to lower prices.

Marius Oosthuizen, lecturer in Strategic Foresight at the Gordon Institute of Business Science (GIBS), South Africa, emphasises the need for supportive policy and regulation in the public sector to not only unlock investment, but also to enable African utilities to adequately deal with challenges and a changing energy landscape in the coming decade.

“Organisational renewal will be a key challenge to remain relevant. A core challenge is the ability of the public sector to facilitate these developments with supportive policy and regulation, and whether it can change its posture from a monopoly player to a catalyst for investment and diversification,” Oosthuizen says.

- Romain Py and Bernhard van Meeteren are both featured speakers in the Finance & Investment Conference at the upcoming African Utility Week in Cape Town from 15-17 May. At the event, GIBS’s Marius Oosthuizen will also launch a Scenario Report based on a study specifically commissioned for the event, looking at the future of the power industry and Africa’s geopolitics, assisting energy leaders to predict the sector’s future and make effective decisions.