Renewables boom has revived investor interest in SA

SA’s renewable energy sector expanded rapidly in 2023 with exponential growth in small-scale embedded generation, such as solar panels installed by households and businesses, and also registration of large-scale generation projects.

Since its inception, the government-backed renewable energy independent power producer procurement programme has generated more than R200bn in investment. According to the Minerals Council of SA there were about 100 private offtake renewable projects worth R150bn in the pipeline in various industries.

Large-scale generation projects registered with the national energy regulator soared to about 4,500MW in 2023, up from 1,600MW worth of projects in 2022 and 2021.

High demand for renewable energy projects, driven by the energy crisis and moves by the government to liberalise the electricity trading market in SA, has resulted in a positive shift in private investor sentiment in SA.

Business Day spoke to Abi Mustapha-Maduakor (AMM), CEO of the African Private Capital Association, and Vivek Mittal (VM), CEO of the Africa Infrastructure Development Association, about these and other dynamics driving private investment in infrastructure in SA and other African regions.

What is driving investor interest in the infrastructure space?

AMM: We cover data from all private capital investors. They don’t just invest in infrastructure but across other classes as well.

I think there is a lot of awareness around the need to invest in infrastructure for energy and transportation across Africa, and when we look at our data one of the worthwhile things to note is that infrastructure attracted the largest value of deals that we saw in 2023.

When we dissect that further, we see that most investments in infrastructure are going to transport and utilities (water and electricity) and the second most popular is renewable energy. That is not surprising, given we are seeing a lot of countries now focusing more on just transition and netzero agendas.

How does the investment appetite for large infrastructure projects in SA compare with other regions in Africa?

AMM: If you had asked me this two years ago you would not have liked the answer because I would probably have said SA is not really that attractive. The country was really going through a down period, but what we saw in 2023 was a rebound not only for SA but for the whole Southern African region.

What we have seen, consistently for the past five years, was a downturn in investor interest in SA.

Five years ago, Southern Africa was the most popular region for investment across all the asset classes. Then investor interest shifted to West Africa, with Southern Africa in second or third place. But this changed in 2023 when we saw a rebound with SA actually getting the largest share of all the deals across all the asset classes for the first time in almost half a decade — leading Nigeria, Egypt and Kenya. The driver of this change has been investments in renewable energy. We saw two supersized deals in infrastructure ($100m and above) in SA last year. We are also seeing a lot of deals in SA in the transport-focused utilities sector.

What can SA do to keep this momentum going?

AMM: What we are hoping for in SA, is to see, as we have in other regions, that there will come a point where the government will start privatising some public assets to make them work a little better.

The private sector can play a critical role in improving some defunct and generally worndown and ill-maintained public assets. I think it would be a real turning point for SA to decide which public assets could actually benefit from private sector capital to just make them function a bit better.

SA has not had any loadshedding for a few weeks now but there is still an argument to be made around whether some of the assets managed by Eskom should be privatised for improved performance.

In the energy and just transition space SA has been criticised for not having a deep and mature enough project pipeline to rouse investor interest. Do you agree with this? Is this the case across Africa?

VM: We know from research by the African Development Bank that there is a gap of about $100bn-$110bn per year in infrastructure investment in Africa. We are seeing a shortfall across the continent, but there is also capital available that is not getting used well enough. The question is why, when there is $1-trillion going into infrastructure globally every year, why is Africa not getting a bigger share of this? Having a pipeline of projects is one thing, but another problem is that it takes too long to get projects through the development process from concept to financial flows. You need to develop a whole ecosystem of processes and services to allow for a project to come together.

Even for a relatively small project, there will be at least 15 agencies, from government to financial institutions and lawyers, who will have to get involved. These ecosystems that have to be either borrowed or built thrive on repetition and frequency of deal flow. Across Africa we see these ecosystems being built, but they then die away because replication and repeatability is not there.

AMM: From the investor perspective, private’ I don t think there is necessarily a shortfall of pipeline. We have 30 infrastructure fund managers that are operating in Africa of which about 15% are based in SA and invest in SA and other African regions.

When we talk about their project pipelines, they are either doing greenfield or brownfield investment, so we find a lot of them are developing infrastructure projects from scratch which takes time. As I have mentioned, investment in energy projects is one of the biggest areas for new project development, and we are seeing up to a third of all off-grid renewable energy investments going to SA, so in this space in particular I think there is enough pipeline.

There are also groups working specifically on building this pipeline, and the impression is not that there is a dearth — it is just when you compare what is happening in Africa to what is happening globally and especially in Asia, for example, it probably seems like the pipeline is a lot smaller on this continent than in other parts of the world.