Interview: Romain Py, African Infrastructure Investment Managers

BY RAZAK MUSAH BABA JULY/AUGUST 2020 (MAGAZINE)

AIIM has been investing for 20 years, but COVID-19 has increased the urgency for Africa to fill its funding gap, Romain Py tells Razak Musah Baba

After being established two decades ago, African Infrastructure Investment Managers (AIIM) is setting its sights on several opportunities in the northern portion of the world’s second-most populous continent.

The 1.3bn people who live in Africa account for 17% of the global population, and the United Nations predicts that more than half of global population growth between now and 2050 is expected to occur there.

According to the African Development Bank (AfDB) Group, infrastructure development across the continent is vital in enabling sustainable economic growth. It says: “Key challenges will be to supply the burgeoning population with reliable electricity, affordable housing and transport infrastructure, though these industries will also create new jobs.” 

AIIM believes the private sector has become even more important to Africa’s infrastructure development than it was in the past. Its head of investments, Romain Py (pictured above), says the value of the private sector had previously been to bring expertise and innovation, and ensuring assets were operated and maintained properly. “Debt levels are rising across the continent, which will only be exacerbated by the coronavirus pandemic, and government budgets will be constrained, reducing their ability to relaunch their economies,” Py says.

Because of this, he believes it is important to leverage as many sources of funding as possible and to treat the private sector as a catalyst for investment. In his view, COVID-19 is a wake-up call to find better ways to finance the continent’s infrastructure deficit, chief among them being access to reliable, cheap and clean energy.

Given global liquidity constraints, financing Africa’s energy transition and supporting industrialisation will require “mobilisation of domestic capital and building deep and liquid local debt markets”, Py adds.

AIIM, a member of Old Mutual Alternative Investments, manages $2.1bn (€1.9bn) in assets across the power, telecommunications and transport sectors, with operations in 19 countries across East, West and Southern Africa.

AfDB estimates that the continent’s infrastructure needs amount to $130-170bn a year, with a financing gap of $68-108bn.

Historically, money being invested into Africa has come mainly from development finance institutions (DFIs), such as CDC in the UK, African Development Bank and IFC, and this remains the main source of capital today, Py says. The second pool of capital has been from the South African investors – insurance, pension funds and asset managers. “We have also recently seen some capital come in from Europe, Asia and to a limited extent the US,” he says. 

Reforms have been enacted in some countries to encourage Africa-based investors to allocate capital to the asset class. But Py says more needs to be done – most notably, educating African pension funds on the benefits of investing in infrastructure and the opportunity it provides to contribute to their own growth. 

“I doubt there is any country in Africa that can claim they don’t need external financing to support local infrastructure development,” Py says. 

There are two factors that are vital to consider before an investment. First, the project must be commercially and economically viable. “In our experience, project assessment – often funded by the development community – are helpful but are often painting an over-optimistic narrative,” Py says.

Second, it must be investment-ready, with transaction advisers involved on the government side.

Some of the projects best-placed for this will have been through a recent tender process, such as Nairobi-Nakuru-Mau Summit highway PPP in Kenya and the Accra-Tema motorway in Ghana. 

Governments also need to think about how to allocate public resources across the types of infrastructure projects they consider, Py says.

AIIM has identified several ‘pockets’ of investment opportunity. “I forecast that West Africa is going to become a prime destination for capital, as well as North Africa,  namely Morocco and Egypt,” Py says. “Kenya and South Africa should also come into the mix, and I think there are some interesting prospects in countries like Angola or DRC [Democratic Republic of the Congo].”

Py says there are always challenges for investors, but the “perception of risk in Africa is not always an accurate one”. One of the main challenges historically has been currency risk. Compared with Asia, Africa is in a much better situation with, for example, the CFA franc, which is used widely in West and Central Africa, and which is pegged to the euro. Furthermore, most power and energy assets are linked to the US dollar. 

“What we are seeing in the infrastructure sector is that Africa has the means to leapfrog from the infrastructure 1.0 stage directly to infrastructure 3.0,” Py says. “This is especially visible in the off-grid and the distributed-power spaces, which are attractive to investors at the moment, as they’re particularly scalable and have a growing, relatively sophisticated target market who are used to leveraging technology, such as mobile-phone payments.”

For example, Py says AIIM invested in BBOXX, a next-generation utility platform that has developed pay-as-you-go, off-grid solar platforms, providing clean energy in Kenya, Rwanda and DRC that users can pay for via their mobile phone. 

Similarly, AIIM has invested in a platform called Starsight in Nigeria, which provides both cooling and solar-powered solutions, delivering clean energy to businesses, and reducing waste.

AIIM has teams in Lagos, Abidjan, Nairobi, Cape Town and Johannesburg, each with an understanding of their unique jurisdictions. Py says: “It is also more important to look beyond the macroeconomic indicators – that is, don’t get too distracted by the macro story and focus on execution risk and the practical challenges of implementing the business plan. And lastly, we need to be nimble and partner with local entrepreneurs and/or strategists.”

He says AIIM has been measuring the environmental and social impact of its projects for almost eight years, and environmental, social and governance (ESG) requirements are embedded in the firm’s investment approach across all its portfolios.

In a sense, all investment in Africa over the past 10 years can be described as impact investing, he says, as the socio-economic impact or ESG has always been high on the agendas of investors in funds, notably DFIs. 

Transparency around the impact of infrastructure investments is becoming increasingly important to investors and “we have been getting positive feedback from our own investors about the quality of data that we provide”, Py adds. 

Impact investing is nothing new in Africa. Py says: “People may try to dress it up differently to attract a certain pool of capital. But in terms of infrastructure, each project on the continent has a measurable positive impact.”

Since the start of the COVID-19 pandemic, AIIM has made two investments and Py says “we are looking to do more”. He explains: “Everyone is trying to grasp the potential impact of the pandemic on their portfolio companies’ business plans, and some businesses are slightly more insulated than others.” 

AIIM is looking at several new opportunities in North Africa. “Digital infrastructure is likely to be a bigger part of our strategy going forward.” 

Py expects the renewables (on and off-grid) and distributed power to “increase significantly, due to the decreasing cost of solar panels and battery storage, creating an opportunity for Africa to leapfrog in the power sector”.