How to invest with confidence in Africa? A discussion with AIIM Trailblazing Head of Investments

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How to invest with confidence in Africa? A discussion with AIIM Trailblazing Head of Investments
How to invest with confidence in Africa? A discussion with AIIM Trailblazing Head of Investments

At the AEF 2019, we had great conversations with leaders of the industry, talking to Samaila Zubairu from AFC, Ricardo Machado from Aenergy and this time in this interview, we spoke to Romain Py, Head of Investments of AIIM. We discussed about:

  • Business Models they championed
  • Currency risks in the continent
  • Offgrid Solar and investments they have made
  • How to increase local capital markets participation

Want to listen to the Live Interview? Click HERE

Interview

RiA (Q1): Romain, it’s a great pleasure talking to you today. It’s the first time for Renewables in Africa and we are actually quite interested because you are one of the emblematic firms in Africa and you are going to tell us why. In a couple of minutes could you introduce yourself and your company?

RP (A1): I’m Romain Py. I’m the Head of Investments for African Infrastructure Investment Managers which is the largest infrastructure firm in Africa. It was established 19 years ago. We manage around $2.1 billion in 56 investments across 17 countries.

RiA (Q2): That’s quite impressive! I have been looking at your company and I know you are very much pioneers in some models. One of the models you pushed forward is clearly the IPP model. You’ve done it in South Africa, Nigeria and in other countries. Is it the only model that works in Africa?

RP(A2): No, it isn’t. We’ve pioneered other models. In early 2018, in conjunction with Helios Investment Partners, we invested into a Nigerian Energy Services company called StarSight Power Utility Ltd. StarSight is doing what we term “C&I”. So, commercials and industrials for large corporates like banks, petrol stations where they will take over the existing assets for generating power which are mostly gen-sets. These are replaced by hybrid power with solar PVs for a wholesome energy efficiency. We strongly believe in the “C&I” and we are closing in on our investment in South Africa. We’ve also tried to adapt to the technological evolution with the price of solar panels and batteries coming down. We’ve looked at the off-grid space and in January, we invested into BBOXX East African operation across DRC to Kenya. BBOXX is a provider of solar systems which is a fully decentralized power solutions which is fully efficient in areas where there is no grid or bad grid which is unreliable. We see that it is essential to increase the level of electrification across Africa, so we are seeing that both on-grid and off-grid are complementary and are not competitive to each other.

RiA (Q3): It is very good that you are sharing that message because to electrify Africa we need to be pushing the on-grid for the mass market and the off grid for the areas where the finance may not cover. You’ve invested $30 million into BBOXX if I’m correct, maybe more. Do you have an insight to all the companies that could benefit or would BBOXX be the only beneficiary from your current funding?

RP (A3): $31 million precisely. For the solar systems that is fully off-grid, that is currently the sole investment we are contemplating. I think we decided to back a company which has a very similar philosophy and mindset. We are not there to sell solar systems; we are there as a new generation utility. We are providing power as one of our services; it could be gas. It’s about building a long-term relationship with the customer which is very different to some of the others. I think we are invested in the East African operation because are hundred thousand customers and would want to scale up the business. We are not trying to do market penetration; we want to scale up and put debts which BBOXX successfully raised $8 million equivalent local currency debts from the OGEF and we are trying to put that in place together with proper governance, proper structure to make the off-grid move to a different stage in terms of evolution.

Romain PY from Linkedkin - How to invest with confidence in Africa? A discussion with AIIM Trailblazing Head of Investments
Figure 1 – Romain Py, Head of Investments for African Infrastructure Investment Managers

RiA (Q4): That’s brilliant! You’ve given me the perfect occasion to ask the next question which is focused on one of the key risks in the sector which is local currency. How do you deal with local currency risks as it is such an issue?

RP (A4): Well, it is, and it isn’t. So, if you are in most French-speaking countries in Africa like Guinea Conakry would benefit from a currency paired to Europe so the currency issue is not really there. In other countries, if you are in the thermal side, you will have dollarized PPA for the reason that the fuel is in USD, so it is easier to get contracted in USD. There is very little risk from that standpoint, but I think it is something to keep in mind when you are talking more about small enterprises or individuals. The ability to take the currency risk is more limited so that’s why it is important to raise local currency financing. Some DFIs are thinking about that but we see is the pool of capital in local currencies is not as deep as we would like outside of South Africa and Egypt. Maybe that is another failure from government regulators where you try to harness local capital to invest themselves in their own country rather than to buy US treasury or government bonds. I think its finding similar initiatives like NSIA, similar initiative in Kenya but I think in a lot of countries we need collaboration between DFIs, World Bank, IFC trying to get this local capital financing for local projects.

RiA (Q5): Thanks another very good point you’ve made. I can see the level of knowledge that AIIM has here. It is one of the few African firms that’s based in Africa with 5 offices. Could you name them?

RP (A5): Sure. In which order? A few years ago, Abidjan which was complimenting what we had already in Nairobi and in Lagos as well as the historic offices in Cape Town and Johannesburg.

RiA (Q6): That’s great! How do we encourage local capital to invest into the market because these are the people that know the market best? I know there are some but how do we get others like pension fund?

RP (A6): The biggest risk is regulatory. The regulator needs to allow them to invest in liquid assets and South Africa has been leading that. We have an infrastructure fund called IDEAS. It is 100% South African institutional capital. We don t have that deep pool of capital in the rest of Africa and that’s why I think we need to sensitize people. We need as a private sector to educate. The government also needs to do their part in some form of regulatory framework.

20190611 142958 1024x498 - How to invest with confidence in Africa? A discussion with AIIM Trailblazing Head of Investments
Figure 2 – AIIM Booth at AEF 2019 Lisbon – Romain in full discussion

RiA (Q7): So, that’s the way to go for the rest of Africa then?

RP (A7): It would help and it will take time. As a baby, you start crawling then you walk and run. We have to go through the same evolution. It will take time. We need to educate people and maybe for them the first place to start is not equity but debt. From the less risky part and slowly moving towards more risk.

RiA (Q8): You have such an extensive experience. You’ve been in the continent for 19 years and you’ve closed 56 transactions. Less than 10% of the projects that have been closed are actually financially viable. This is an issue because if we are talking about raising the electrification rate to reach universal standard by 2030, we need to rectify 60 million per year by making projects more sustainable. Do you have an idea how it could be done from an investment point of view?

RP (A8): There is a bit of a myth. People think there is a lack of bankable projects. You can look at the numbers quite differently. There are a few things that have changed. The first one I would say are technical changes. The range of projects between thermal to renewable, storage and others is much greater so there are more solutions that are much easily adaptable to the need. The second thing is that we are definitely seeing a change of mentality from a centralized power system on-grid energy to off-grid, mini-grid solutions, distributed powers and others. We are moving to something which is very generation and distribution mixed and increasing the range of possibilities. There is no THE solution but a range of solutions. Some may be more suitable to your needs than others. The last bit that is changing is the number of countries which have done and are becoming more knowledgeable about developing Independent Power Producers and projects is increasing and that is good. It means that the knowledge gap that we have is reducing especially between the public and private sector as there is more project closing and that is very good.

RiA (Q9): Okay! So last question for me. You are known to be a long-term investment firm. What’s wrong with the short-term?

RP (A9): Well, in average it takes 5 to 10 years to develop a project in Africa. if you are in short-term, you would not be able to close that many projects. The reason people say long-term is more important is because projects need to be more sustainable. So, short term is neither good for the country nor private sector. It needs to be fully integrated within the stakeholders, the population and society. Infrastructure is a long-term asset. If you buy a car, would you change it every month or 5 years? No, why? Because the cost would be greater so a similar logic would apply to infrastructure.

RiA (Q10): That’s a great analogy! On this note, I would like to say thank you very much for talking to us today and have a great conference. Thank you very much.

RP (A10): It’s a pleasure!

Listen to the interview HERE

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