ARM-Harith in Nigeria

What projects have you completed since establishing the company?

Since we closed the fund, we have invested equity in two major projects. One is in Nigeria, the Azura-Edo independent power plant (IPP), a 459-MW open cycle power generation plant constructed on the outskirts of Benin City in Edo State. The project went into commercial operation in May 2018, and has on average been contributing between 6% and 9% to the national grid since then. The second project is in Ghana, also in power generation. It is called the Amandi IPP, a 200-MW combined cycle power plant that we are currently constructing in Aboadze, in the country’s Western Region. That should supply power to Ghana in 2019. Also in Ghana, we are in the process of closing a port deal, which, when complete, will provide world-class ship and oil rig repair and maintenance facilities. It will be critical and value enhancing for ship operators, because today many vessels operating in West African waters are compelled go to Spain or South Africa for maintenance services owing to the lack of such facilities locally.

What geographical areas and sectors do you focus on?

Geographically, we focus on West Africa. In terms of sectors, we have three pillars: transportation, energy, and utilities. In transportation, we are interested in everything from toll roads and bridges to airports, sea ports, and railways. In energy, we have power generation assets and are also focused on processing gas-to-power. Utilities include water and wastewater treatment and management, and selected parts of telecoms and data traffic. We currently have projects in all those spaces in our pipeline.

How challenging is it to find local investors willing to invest in infrastructure?

Infrastructure as an asset class has been known for a long time to international investors; what they might struggle with is the risk profile of Nigeria and other countries in the Sub-region. Conversely, while local investors are familiar with the risk profile of the country, they often struggle to understand the complexities of the infrastructure legal and financing aspects. This is partly owing to the environment in which we operate in Nigeria; political and regulatory risk is an issue, and roads, power, water, healthcare, and every other strand of infrastructure is currently in poor condition and insufficient for Nigerians’ needs. Historically, it has been the privy of government to be the sole providers of infrastructure; and only recently, with us being among the pioneers, has private investment started to come into that space. The involvement of private investors sometimes leads to end user reluctance to pay if, for example, there is a belief that this would be lining private pockets, and in the extreme, may fuel corruption. But there have also been genuine concerns about whether value for money is being provided through such privately financed infrastructure projects. Without proper funding, including through people paying tax or paying directly through tariffs or tolls, the country’s infrastructure is bound to remain dilapidated. Another issue with local investors is that they do not want their funds to be tied down for a 25 or 30-year concession because of the short economic cycles historically driven by high inflation, high currency volatility, and political uncertainty. People are not fully accustomed yet to taking long-term investment exposure. We need an entire cultural transformation to get people to understand it can be done. Lastly, there is a lack of a maintenance culture. The entire ecosystem of someone providing, regulating, and maintaining it is essential for infrastructure to be sustainable.

In 2006, you built the first PPP toll road in Nigeria. Are you trying to replicate the model, and if so, in which sectors?

That was the first project not financed through the traditional bricks and mortar security route, which in itself was also a major mindset change. we prefer to think more about the PPP model, the concession model, and project financing, as a concept of delivering essential infrastructure and related services rather than just about tolls. Across the geographies in which we operate, we are looking at investing in all sorts of different segments. It is that model at the macro level that we are rolling out, which can apply to bridges, roads, airports, or sea ports as appropriate. Many people focus purely on economic returns; however, there is also risk, and different sectors have different levels of risk. There is a trade-off between risk and returns, which must always be carefully considered. If we look over an entire life cycle, one gets more steady returns from a low-risk investment, however, with a higher risk investment the returns are likely to be more volatile given that risk itself is an indication of volatility.

Where would you advise a risk-averse investor to put their money?

Infrastructure is a great asset class to invest in because roads, ports, power plants, and water treatment plants, among others, tend to have quasi-monopolistic characteristics. Unless one wants the inconvenience of bypassing something, then they will likely have to use that infrastructure. Also, infrastructure is not as susceptible to the influences of economic cycles. Regardless of shocks in demand or supply, one still needs roads, water, and electricity. Infrastructure also has an almost predictable income stream once it is built and put into operation. Moreover, international debt default reports show that infrastructure exhibits lower default rates than petrochemicals, manufacturing, telecoms, and other sectors. A key reason for this is that project finance is like a straightjacket, as financiers place more belts and braces on such projects when done in Africa than they might do in the developed world. This does not give much room for error while also providing strong protections for financing parties, especially debt providers. Once it is stabilized, and the asset begins to perform, it is fairly constant and predictable. With these contracts, there is typically index linking for inflation and currency movements, so there are risk-adjusted returns. That is why infrastructure is a great bet; for investors like a pension fund, insurance fund, or investment trust with an extremely long-term outlook, this is a good match.

What is your outlook for the company in 2019?

We always tend to maintain a positive outlook and believe in the impossible. At the same time, we can be reserved in our approach. Nigeria is a key barometer of sub-Saharan Africa and certainly West Africa. The economy has not been sufficiently deregulated and liberalized to truly empower the private sector, since too much money and resources still lie in the hands of the government. Efforts are being made by government in this direction nevertheless. Because of the dampening effect of the elections, there will likely be a lag in activity and investment until we know what the outcome of the elections is. Taking the 2015 election as an example, it took six or seven months for the new administration to appoint a new cabinet. I see that unfortunately clouding issues in Nigeria for a while; however, because our Fund has a regional focus, it will not prevent us from looking elsewhere in the meantime. Our strategy is to stay focused on Nigeria and look for opportunities there so that if the fundamentals are right, we can invest. Equally, we are looking at opportunities outside Nigeria. As we close more transactions, we will continue to demonstrate the case for infrastructure and hopefully attract more investors along the way.