MUSHTAK PARKER
CAPE TOWN - One of the more perspicacious decisions Nelson Mandela pulled off two years into the nascent South African democracy in 1996 was to convince a number of private financial institutions in the country to establish a fund to invest in infrastructure targeting the transport, clean energy and digital sectors.
That mandate fell to Standard Bank, which established the fund only to tender out its management soon after to a specialist infrastructure and private equity joint venture (JV) which teamed up the local Old Mutual Asset Managers and Australia’s Macquarie Bank, then the leading infrastructure investor in the world.
Macquarie exited the JV in 2015, which then became African Infrastructure Investment Managers (AIIM), a subsidiary of Old Mutual Alternative Investments (OMAI), a member of the Old Mutual Group and one of Africa’s largest alternative investment managers in private equity, impact investing and infrastructure funds.
AIIM, now in its 21st year of operations, like many other entities in post-apartheid South Africa has been an incubator of human capital, especially in business diversity in the crucial private sector which Madiba recognised would be essential for the young democracy.
For UCT and Oxford University-educated scion Vuyo Ntoi, the climb up the corporate ladder has been fairly swift.
After 18 years at AIIM, he was appointed co-managing director in August 2020 together with Olusola Lawson, who heads the fund’s Lagos office.
Ntoi is one of those new breed of self-confident young African executives on the rising continent, for whom the old order characterised by governance deficits, bureaucratic paralysis and self-interest is passe.
As a private equity and infrastructure specialist in renewables, toll roads and transport logistics, he is passionate about the role private investment can play especially in independent power projects (IPPs) and the contribution of the renewable energy sector to GDP and to the national grid to supplement the generation capacity of beleaguered state utility Eskom.
“We are investing across the infrastructure space through two pillars – an African pillar aimed at dollar funding into sub-Saharan African (SSA) projects, ex-South Africa. We can invest in the Maghreb as well. It’s just that we haven’t done any specific deals yet. The second pillar is a South African pillar which invests South African pension money into local and national, and SADC project opportunities,” explains Ntoi.
AIIM has over $2 billion in assets under management with about $1bn in each pillar.
Headquartered in Cape Town with an office in Johannesburg, it operates also in West Africa through its offices in Lagos and Abidjan and in East Africa through its office in Nairobi.
“We started with the suitcase banking approach,” he explains, “but soon found out that boots on the ground are essential. Knowledge of the markets in which we operate is vital.”
In September, OMAI acting through AIIM, in a JV with Augment Infrastructure Partners, launched Augment Infrastructure Managers LLC aimed at expanding OMAI’s reach into infrastructure equity investments in emerging markets outside of Africa, with an initial focus on Asia and Latin America.
Similarly, AIIM also acquired a significant stake in Sodigaz, an LPG distributor based in Burkina Faso and Benin, through AIIM’s flagship pan-African infrastructure fund, AIIF3.
In South Africa, both the ANC and President Cyril Ramaphosa have been putting pressure on banks, insurance companies and pension and social security funds to invest in infrastructure.
Ntoi dismisses any perception of ‘prescribed assets’ stressing that Pretoria, on the contrary, is “trying to get away from that. We must commend what the Ramaphosa government has done so far in setting the investment guidelines and infrastructure. I don’t think you can in any way call it prescribed assets in that there is no prescription. It is an encouragement to investment. It will eventually depend on the pension funds and their management whether they want to go ahead or not.”
AIIM takes a three-pronged approach to investing – digital infrastructure, energy transition and physical infrastructure – and these three areas feed into one another. The broad thrust of AIIM’s priorities in 2021 and beyond centres around the changing demographics on the continent.
People, says Ntoi, are moving into cities at an increasing pace which means certain utilities and services need to be provided to them on a sustainable basis.
Another priority is to be a key digital enabler for living in large metropolitan areas and aiding in communication. This means the provision of the infrastructure behind the applications – data centres, fibre networks, and towers for cellphones.
This year, AIIM increased its stake in MetroFibre Networxx, a high-growth player in South Africa’s Fibre-To-The-Home (FTTH) and Fibre-To-The-Business (FTTB) markets,; and also acquired Onix Accra 1, the only Tier IV data centre in Ghana.
“We believe that logistics will become even more important. We are looking to participate in logistics corridors either through investment in ports, storage and handling facilities associated with ports as well as the linkages between ports, terminals that are the arteries of trade. We are already one of the largest investors in the private road programme in South Africa. We have owned significant shareholdings in the largest private road – entry from Joburg to Durban, and the western linkages to Botswana and to Zimbabwe,” he adds.
AIIM has shareholdings in the N1 and N4 toll roads and is also a shareholder in N4 TRAC (Trans African Concessions) which links Pretoria to Maputo.
“The toll roads we are involved in have been around for the last 20 years as private concessions. We are very keen on participating in the arteries of trade.”
AIIM’s other priority is clean energy, which, according to Ntoi, “is very important for us. We are the largest investor in the renewable programme in South Africa which makes us one of the largest renewable investors on the continent.”
How are two strands of AIIM’s portfolio performance in the light of the Covid-19 pandemic and the current economic fundamentals of South Africa? After all even private equity (PE) investment to a certain extent is beholden to the economic and other fundamentals of a market.
“Very true,” says Ntoi, “the way we see ourselves is as a risk mitigator to entry to markets. The projects we invest in have contracted cash flows. The entity takes earnings from its revenues. The problems around Covid-19 – interest rates were reduced in response so the discounting and valuation of those assets were up while the revenue remained constant. We have actually seen our portfolios perform well during that period in infrastructure because of the low-risk nature.
“Obviously, there are toll roads with a level of macro-exposure, but Covid-affected truck traffic numbers quickly returned to pre-Covid levels. Heavy vehicles which make up the majority of the vehicles on the road are back to pre-Covid levels. In some instances, they are even higher as companies and organisations start rebuilding their inventories.”
AIIM for its IPPs has uptake agreements with Eskom. Given the current state of Eskom with its R401bn legacy debt, is AIIM’s relationship with Eskom ‘business as usual’? “Indeed,” says Ntoi.
“Eskom is a wonderful pair for us. Eskom has not missed a step, in terms of its payments to IPPs. The obligations of Eskom under those power purchases agreements are guaranteed by the government of South Africa. If Eskom were to renege on its obligations, our projects would be kept going through the fiscus. There is a little credit enhancement but it has not even entered the frame because Eskom is such a good player.”
He agrees that the utility’s balance sheet is under strain but stresses that Eskom is a fluid business in that it has paying customers and does not suffer from liquidity problems. It’s just that its balance sheet is not on the right side.
But what about Eskom’s legacy debt, debt servicing and the problem of delayed payments, including from municipalities and customers not meeting their obligations by paying their bills?
“That’s true. But if you look at Eskom’s entire revenue base. It was R108bn in 2020. If you look at the total municipal debt that has grown over the years, that's about R30bn at the moment and grew by R10bn over the last few years. Those municipality deficits in relation to total revenue are still relatively small. They are big in absolute terms. Operationally, Eskom remains cash-rich.”
Ntoi indeed makes a very good case for more IPPs in the energy sector. President Ramaphosa could have been far more ambitious when he amended the Energy Regulation Act in June to allow IPPs to generate 100MW of electricity instead of the earlier 1MW. His gut instinct is to liberalise the energy sector more. But he is obfuscated by some of the more radical factions within the ANC coalition to whom privatisation of the energy sector is anathema.
“I wouldn’t like to delve into the political aspects of it,” Ntoi stresses.
“There is evidence to suggest that if you hand projects to the private sector with the right incentives and oversight, the sector is very well placed to deliver. That is what has happened in the IPPs to date. There is a lot more capacity to fund new projects from the private sector – ourselves and other financial investors and lenders.”
He agrees that it is only a matter of time before Eskom gets its balance sheet sorted.
“We support that effort. There is also restructuring afoot to break down Eskom into its constituent parts so that there is more transparency and risks can be best managed. The government is moving towards that and we are a willing and enabling partner.”
Is there an acceptable ratio between Eskom and IPPs and their contribution to the national grid?
Eskom’s generating capacity, he agrees, is old and needs to be replaced over the next decade or so.
“As can be seen from the load shedding and outages, Eskom has rapidly-falling energy availability factors. Its balance sheet almost precludes it from procuring additional new generation,” he adds.
He is confident that the private sector can take on the capital risk and sell the electricity to Eskom.
Could the president have been more ambitious in terms of the 100MW cap, maybe to 200MW?
It is important to realise, he maintains, that it is a cap for licences. There are no restrictions against building very large power plants. It’s not a cap on IPPs - it’s a cap on IPPs requiring licences which is a bureaucratic process that takes time. The IPPs need this bureaucracy to drop.
“I was a board member of the South African Photovoltaic Industry Association (SAPVIA). We’ve been calling on the government to increase the capacity to 10MW about two years ago. As load shedding increased over the past year or so, the private sector called for the cap to increase to 50MW or even to 100MW.
“Going for the full 100MW was quite a bold move from the president in the sense that it was from the top end of what was being demanded by the industry. The reality is that 200MW projects are still possible from an IPP basis. IPPs have done projects with a bigger capacity than 200MW. The cap reduces bureaucratic hurdles to get such projects in place,” explains Ntoi.
South Africa is also becoming a magnet for foreign power companies, including ACWA Power from Saudi Arabia, whose shareholders include the Public Investment Fund, the Kingdom’s sovereign wealth fund (50%) and the World Bank’s private sector funding arm, International Finance Corporation.
ACWA is involved in two renewable energy IPP power projects in South Africa.
The first in 2012 when it was part of a consortium to build the 50MW Bokpoort Concentrated Solar Thermal Power (CSP) plant in the Northern Cape, in which ACWA has a 20.4% equity stake.
In May, ACWA closed its latest deal with Eskom for the R11.6bn 100MW Redstone CSP plant, also in the Northern Cape.
Of this, R7bn is in FDI, including a 45% equity stake by ACWA. The plant is set to be commissioned in Q4 2023.
Ntoi welcomes the participation of foreign IPPs in the South African and SSA market.
“We are a strong supporter of the involvement of foreign players. They bring in a level of expertise, innovation and FDI (foreign direct investment). IPPs have been a strong attractor of foreign direct investment into the sector. We see it as welcome competition. In some cases, we are partners in projects. It creates a vibrancy in the market. There is lots of skills transfer and innovation.
“A burgeoning market with many players and skill levels in terms of power generation and financing has increased significantly over the past decade. It only bodes well for the further development of the sector,” he maintains.
Parker is a writer and economist based in London
Cape Times