The emerging African ESCO market hits launch velocity

There are currently eight ESCO contracts signed in the African telecom sector, placing 5,580 towers under ESCO management in seven different countries. This figure is expected to increase exponentially in the next few years. TowerXchange examine the current status of the emerging telecom ESCO market in Africa.

One of the defining characteristics of the past 12 months in the sub-Saharan African tower market has been the emergence of ESCOs. At the start of 2017, discussions very much centred around whether the ESCO model had a place in the sector, by Q3 2018 seven ESCO contracts have been signed on the continent with a healthy pipeline of contracts expected to be announced in the next six months. 

All ESCO projects in the region have been signed with MNOs, with Airtel signing a contract with Energy Vision in Gabon, Millicom signed a contract with Camusat’s Aktivco in Chad and Orange having signed five ESCO contracts with GreenWish Partners (in the DRC), IPT PowerTech (in Guinea Conakry) and Aktivco (in Guinea and Burkina Faso). In addition, Zimbabwe’s leading MNO Econet has handed over management of power across its sites to its ESCO sister company, Distributed Power Africa.

It is safe to say that ‘launch’ velocity has been achieved by Africa’s ESCOs and many onlookers are drawing parallels between the ESCO deal landscape of today and the tower deal landscape of a 4-5 years ago. There is a feeling that as much as one third of sub-Saharan Africa’s towercos could end up under ESCO agreements and with just 5,380 of the sub-Saharan Africa’s 147,000 towers (4%) currently under ESCO agreements, we have a long way to go.

Leading the field in the assessment of the ESCO model is Orange, with five ESCO contracts signed and a further two ESCO RFPs in the public domain. Whilst the company has completed tower deals, selling their Ugandan towers to Eaton and entering into a management with license to lease arrangement with IHS in Cameroon and Cote d’Ivoire, the operator’s focus appears to have very much shifted away from tower sales and more towards partnerships with ESCOs in a bid to optimise their network opex. 

Speaking on their strategy during a panel at the 2017 Meetup Africa, Nat-Sy Missamou, who heads up the company’s infrastructure sharing strategy and who is driving Orange’s ESCO initiatives observed that ultimately the focus remained on lowering the cost of operations and the cost of expansion (read our interview with Nat-sy later in the special edition). There are a host of strategies which MNOs can use to achieve this, from passive to active sharing and from working with towercos to working with ESCOs.Whilst towerco activity has seen major growth across the region in the past five or so years, one limitation of working with them is that they may not always wish to invest in towers in certain regions. When there is little potential for securing additional tenants on sites, the towerco business model falls down and as such, towercos have shied away from acquiring or building sites in such regions. This can present a problem for operators who have outsourced much of their passive infrastructure to towercos. In selling their assets and leasing space on towerco towers, much of an MNO’s in-house capability to manage passive infrastructure, and energy generation, can be lost. Working with ESCOs presents a valuable alternative.

Other MNOs have echoed these sentiments, observing the fact that there may be tower portfolios that towercos may not wish to acquire or tower portfolios which MNOs may not wish to sell.

MTN have monetised their tower portfolios in just seven of their twenty markets, but these seven represent the majority of their most attractive markets to towercos. For their remaining, so called “tier three” markets, the ESCO model presents an attractive option to rid the company of the operational complexities of managing energy assets. In late 2017, MTN confirmed that it had begun to assess the ESCO model and whilst no RFPs or deals have emerged, as Africa’s largest MNO by subscribers, the company represents a very attractive counterpart for ESCOs looking to build their portfolios in the region.

Examining the major operators across the African market, one can see plenty of opportunities for ESCOs to step in and manage the costly energy component which can distract MNOs from their core business. The aforementioned Orange and MTN retain tower portfolios in a large number of their markets and are the kind of credit worthy counterparts which ESCOs (and their investors) would be happy to work with.

Airtel currently retains towers in five markets (having sold towers in ten) and recently signed an ESCO contract with Energy Vision in Gabon. On paper, the MNO represents a strong candidate for further ESCO agreements; in Tanzania the MNO has twice reached and then lost an agreement to sell their towers (first to Helios and more recently to American Tower); in Madagascar the MNO had reportedly reached an agreement with an ESCO only for the deal to be cancelled; plus their remaining markets of Chad, Malawi and the Seychelles do not appear to satisfy many towercos’ current investment thesis. In spite of this, Airtel has reportedly abandoned any future plans to work with ESCOs, instead choosing to revise its managed service contracts in markets where it retains towers.

Millicom, which has signed an ESCO agreement in Chad, has long been looking to exit the African market having sold their Senegalese opco to a consortium involving NJJ, Sofima and Teyliom Group, merged their Ghanaian operations with Airtel and more recently agreed the sale of their Rwandan opco to the former. The company is also looking to sell their operations in Chad and Tanzania having reportedly entered into discussions with Econet. Such an exit strategy suggests that ESCO agreements may not be top of the operator’s list but ESCO contracts structured to survive a change in ownership could still be on the cards.

Vodacom has historically shied away from the sale of their passive infrastructure, preferring instead to keep the assets on their own balance sheet meaning that there are a number of attractive tower portfolios for ESCOs to target. Whether or not Vodacom will be receptive to such proposals remains to be seen, there are individuals within the business who are advocates of the strategy but to date there has been no sign that the ESCO model is under serious consideration.

Beyond the major multi-country players, there are well over 50 further MNOs active across the region. Whilst amongst that number there are companies whose credit rating and anticipated longevity would make the signing of a bankable contract challenging, there are many which could represent attractive counterparts to ESCOs. For example, towercos have shied away from markets where the potential for infrastructure sharing is limited, markets such as Ethiopia with just MNO; the ESCO business model does not depend on co-location and so such markets could be attractive.

The closest that a towerco have come to the ESCO model in Africa is IHS’ “Big Five” initiative in Nigeria where the company outsourced the management of power on around 10-12,000 sites to five companies (TowerXchange understands that towers have since been redistributed between just four of the original companies). Whilst some have referred to the project as a sort of ESCO arrangement, the contract structure is however classed as a guaranteed savings model, with IHS making the capital investment in the energy equipment and the partner guaranteeing the energy cost. 

To date, Africa’s towercos remain unconvinced by the benefits the ESCO model says it can bring. Speaking to TowerXchange, Helios Towers’ CCO, Alex Leigh said that the towerco was keeping an open mind when it came to working with ESCOs but felt that they were yet to see a compelling argument. Managing power is a towerco’s core competency and something they have become particularly adept at, improving performance against SLAs and decreasing opex across the years. Should this responsibility be handed over to a third party, one of the towerco’s major value propositions is removed. What’s more, towercos have been fighting to keep the benefits of capex investment, improving margins on power delivery to MNOs by increasing energy efficiency; to hand over this benefit to a third party needs a compelling business case. Ultimately, ESCOs need to approach towercos with a golden spark, something that improves upon and doesn’t just replicate what towercos have been doing to date, perhaps a lower cost of capital or added shareability through microgrid projects, for example.

Another former executive of a major African towerco offered an alternative viewpoint, however, to TowerXchange in discussions. Whilst African towercos have come to see power as a major component of their business model, this has not always been the case with power structured as a pass through in the early days when the companies were more risk averse and less operationally experienced. What’s more in many markets, towercos continue to only structure contracts with power as a pass through. 

Ultimately towercos are aiming for the same multiples as the U.S. publics, multiples which are achievable by their uncluttered, real estate centric business models. Perhaps down the line the towerco perspective may change to align more closely with towercos in developed markets, moving from a tower + power business to a pure ‘steel and grass’ vertical real estate business. When you look at the US towercos, their operational headcount is much lower, perhaps in the future increasing pressure could be put upon their African counterparts to further outsource and reduce headcount per tower. Should towercos and the financial markets feel that more real estate focussed business models are more attractive, perhaps this carves out a niche for ESCOs in the towerco space.

An increasing number of companies are starting to offer an ESCO proposition.These businesses range from pureplay ESCOs, to traditional centralised energy companies, to O&M contractors and technology vendors. Each of the different players bring different strengths and in many cases, will look to partner with one another in order to strengthen their value proposition. 

O&M contractors possess the in-the-field experience of operating energy assets across multiple countries. TowerXchange counts approximately 10-15 multi-country managed service (aka ‘turnkey infrastructure’) providers who we would class as the most sophisticated players with the largest footprint who would bring credible operational expertise to an ESCO proposition. To what extent these different companies have the financial capabilities and expertise to manage ESCO projects is varied. In the case of Camusat, the company has carved out a new investment vehicle, Aktivco which becomes their dedicated ESCO unit, with Camusat managing the operational element. For ieng Group, they plan to finance ESCO projects themselves and have formed a subsidiary, CREI which is in discussions with several operators. In the case of Sagemcom they have partnered with an investor, GreenWish Partners, in their project with Orange in the DRC, and several other O&M players are understood to be examining a similar route. For an O&M contractor, ESCO contracts represent an attractive proposition. Traditionally O&M players will be awarded O&M contracts for a 2-3 year period; ESCO contracts are more likely to be in the 7-15 year range bringing longevity and certainty to their revenue streams.

For investors eyeing up the ESCO space, many will come from an energy or African background; investors with access to competitively priced finance which enable the ESCO to offer a competitive price point whilst also making a margin for themselves. Centralised energy producers, such as Mitsui, Voltalia and Total are other such entities with a good cost of capital in addition to strong purchasing power who could bring value to an ESCO model.

Several technology vendors are starting to offer an ESCO proposition, with IPT PowerTech one such company very much positioning itself to be a forerunner in the T-ESCO (or telecom-ESCO) space having signed a project with Orange in Guinea Conakry and Alfa in the Lebanon. Their proposition of offering a fully integrated service, they feel, not only offers a more competitive cost but also avoids the “blame game” that can ensue when multiple parties are involved. Whilst IPT PowerTech may have an appetite to take on an ESCO contract single handedly, other vendors prefer to just provide the technology whilst perhaps taking a minority stake in the new ESCO SPV formed. Flexenclosure is one such party with an appetite to explore this model.

Whilst IPT PowerTech sing the praises of a vertically integrated approach, pureplay ESCOs in the market, such as Energy Vision, argue that being vendor agnostic is key. Offering a choice of equipment and being nimble in sourcing can help to execute projects in compressed time frames, something that Energy Vision achieved in Gabon.

One unique ESCO model in the African market is Distributed Power Africa. Carved out of Econet Wireless, Distributed Power Africa is not only taking over management of power across Econet’s tower portfolio but is also targeting other commercial and industrial segments outside of telecoms. 

There is also a growing interest in ESCOs from development finance institutes whose cost of capital can help with ESCO economics. Additionally other social impact investors may express interest should the rural electrification and microgrid offerings be honed.

There is a mixed response from the industry about whether the potential exists to create microgrids around a tower power system in Africa. Whilst in India there have been successful examples of ESCOs connecting to and monetising microgrids (with one company understood to be generating 70% of its revenue from the local community versus the telecom operator), market conditions in Africa make the model harder. Telecom sites in Africa tend to be in more remote areas with fewer power users surrounding them and what’s more, participants felt there was a difference in culture between the two regions, with Africa ultimately harder to retrieve payments. The challenge of how you can collect payments from users of the microgrid remains a key one to solve, with established utility companies still grappling with the problem. 

In addition to the challenge of obtaining payments from microgrid users, one further challenge lies in the regulatory landscape. In many regions you require a generation license in order to sell power to the different consumers and the ease and cost of obtaining such a license can create a barrier. In some markets, participants at the ESCO roundtable explained that as long as the system was under 100kW you could get around the issue of requiring a license.

Whilst many people remain sceptical as to the possibility of successfully selling power to surrounding communities, all believe that unlocking this would bring new efficiencies to the ESCO model.

The ESCO model is as much, if not more, about financial engineering than it is about the ability to operate power systems. Structuring deals so that they best serve the balance sheet of the operator is a key skill than an ESCO requires and can serve as a strategic differentiator between them and their peers. 

Comparisons have been drawn between the towerco model of yesteryear and the ESCO model of today, with towercos cautioning against the mistakes that some of their predecessors had made. As with an Master Lease Agreement, the ESCO contract needs to be signed with a credit worthy offtaker and, given the M&A activity in the MNO sector, structured in such a way that it survives a change in opco ownership. Discipline should be exercised in structuring such arrangements, with the MNO discontent caused by elevated lease rates in return for high release of capital causing frictions in MNO-towerco relations. Additionally, well defined SLAs are critical in order to ensure effective operational governance of agreements.

With the vast majority of projects expected to involve hybrid systems, the operational scope of ESCOs managing sites will extend way beyond generator refuelling and maintenance, with IT skills being voiced as particularly important. Whilst the definition of an ESCO suggests the company will only be engaged in the provision of energy, in reality ESCOs are broadening their service offerings with one company at the roundtable explaining how their telecom client had requested they take on further maintenance tasks. Ultimately, operational efficiency is key to make sure that costs are controlled and uptime is maintained. Reducing the number of site visits by eliminating the large number of different contractors attending to a site helps to drive improvement in site management.

ESCOs report a healthy pipeline of potential projects with at least three ESCOs expecting to sign more than two new contracts before the year is out. TowerXchange look forward to welcoming such companies to the 2018 TowerXchange Meetup Africa, being held on 9-10 October in Johannesburg and are pleased to be able to share interviews with a number of key players in our Africa special edition journal.