Optimistic but selective: How investors view African towers

The African telecom tower infrastructure sector has become increasingly attractive to investors, particularly as the digital economy grows and the demand for digital infrastructure intensifies.

Several towercos have seen fresh capital and new investment over the past year, including Towerco of Africa, TRES Infrastructure and Pan African Tower to name a few.

During a panel discussion at TowerXchange Meetup Africa 2024, held last September in Nairobi, Kenya, experts examined the financial and operational dynamics of investing in this sector, highlighting the opportunities, risks, and strategies shaping the industry's future.

As the world focuses on the rise of the digital economy, telecom towers form the backbone of connectivity, and their importance is paramount in Africa, where there is still significant room for growth in terms of digital access.

“There is no such thing as a digital economy without proper digital infrastructure, it is critical for that foundation to be in place,” said Carlos Katsuya, Head of Operations & Portfolio Infrastructure, Africa at the International Finance Corporation (IFC).

Katsuya shared some findings from the World Bank that found for every 10% increase in digital access, a country's GDP rises by 1.5-2%, though this figure may understate the broader economic impact. Improved connectivity drives entrepreneurship, education, and innovation, creating a ripple effect that benefits all sectors of the economy.

To achieve this digital future, Africa will require significant capita into technology upgrades driven by MNOs, who in turn will need to free up capex and opex to accelerate access to digital services.

Ed Stumpf, Investment Director at Africa Infrastructure Investment Managers (AIIM) explained that “infrastructure sharing needs to become completely widespread as MNOs focus their capex on technology upgrades.”

For investors, this translates into a lucrative opportunity. The telecom tower sector in Africa offers strong business fundamentals, provided projects are well-structured and risks are appropriately managed.

Despite evolving risk profiles, the sector continues to demonstrate an attractive return on investment, especially in areas where digital infrastructure is still being developed.

Currency volatility has been one of the most significant issues over the past decade. Even when investments are made in local currencies, substantial dollar-denominated costs, particularly in the technology and equipment sectors, complicate operations.

“It’s not big secret that currency has been a killer for investors, it's a difficult animal to manage, even if you fund in local currency, you still have a US$ cost. It’s a fundamental issue” said Franklin Amoo, Managing Partner & CEO, Baylis Emerging Markets.

This adds layers of complexity to structuring deals and has impacted the profitability of several projects across the continent.

The rising cost of capital has also slowed expansion efforts. Over the past two years, global interest rates have surged, making access to affordable capital difficult. This is particularly critical for Africa, where infrastructure development requires significant upfront investment, and high borrowing costs can delay projects.

Investors are now weighing the affordability of data and connectivity, which will become a more prominent issue as the market matures. In the past, access to digital services was the primary concern, but now the challenge lies in ensuring that those services are affordable and widely available.

Without affordable smartphones, many potential users remain excluded from the digital economy. Innovative financing models, such as pay-as-you-go smartphone purchases or subsidised devices, may help overcome this barrier.

Despite these hurdles, the demand for digital infrastructure in Africa continues to grow, driven by rising consumption of digital content. Stumpf explained that “the supply / demand deficit is to some extent disconnected from broader macroeconomic environment that is driving demand for digital infrastructure.”

“We are seeing a rise in smart phone adoption and consumption of digital content regardless of the affordability challenges,” Stumpf continued. “There is a fundamental need for digital infrastructure, the question is where to focus this to achieve the best outcome.”

Even in challenging economic environments, people are using more digital services, from streaming video content to mobile banking. This creates an ongoing imperative to expand telecom tower networks, regardless of short-term market fluctuations.

One major obstacle that continues to impede progress is Africa’s unreliable energy infrastructure. Telecom towers rely heavily on electricity, and grid expansion has not kept pace with the growing need for power.

This is particularly problematic for rural and last-mile connectivity efforts, where grid access is scarce, and alternative energy solutions are often necessary but expensive. “The energy component is a huge risk and something that needs to be constantly managed” said Anthony Murungaru, Investment Officer – Energy & Infrastructure East Africa, Proparco.

Energy challenges also intersect with the financial difficulties associated with expanding rural connectivity. While it is clear that rural areas need telecom infrastructure, it is not always easy to justify the investment when potential users have low incomes and operate within an informal economy.

Here, innovation becomes key. MNOs can increase usage and boost average revenue per user (ARPU) is by linking data consumption to the “economic livelihood” of users. For example, when consumers can see a direct link between mobile connectivity and income generation, such as through mobile banking or small-scale entrepreneurship, they are more likely to invest in data plans.

For investors, a key consideration when evaluating telecom tower projects in Africa is the regulatory environment. Clear, stable regulatory frameworks are essential for attracting international capital.

Investors “need a clear regulatory framework, and while there is no certainty we want to see what the rules of the game are without constant changing,” said Katsuya. Many African markets still have significant government involvement in the telecom sector, which can lead to missed opportunities for private sector development.

Governments must create an environment that is conducive to private development, and importantly must avoid getting involved directly. “Governments are trying to play the role of the private sector, leading to wastage and mismanagement of scarce capital resources.”

The example of Myanmar was highlighted during the discussion as a model for how regulatory reform can spur rapid growth. Between 2012 and 2020, Myanmar liberalised its telecom sector by introducing new MNOs and enforcing infrastructure-sharing policies.

The result was a dramatic increase in mobile and internet penetration, driving economic growth. Africa’s telecom sector, particularly in countries with more restrictive regulatory frameworks, could benefit from similar reforms. “Any investor has a choice to make when allocating capital, this is something many governments need to realise; that investors have options,” explained Katsuya.

Murungaru linked the role of Government back to solving Africa’s energy challenge as well, with a need to provide more incentives for the development of reliable energy solutions, whether through public-private partnerships or subsidies for renewable energy technologies like solar.

Given the economic constraints in many African markets, investors are wary of speculative investments or “hope capex” as Stumpf put it; projects that are funded without a clear business case or immediate demand.

Instead, there is a need to focus on cost leadership strategies, particularly in terms of network density and economies of scale.

While the demand for digital infrastructure is strong, investors are becoming increasingly selective about where they deploy capital. Currency volatility and other macroeconomic risks mean that international capital pools are cautious.

“International capital pools are highly selective,” said Amoo, and international investors are looking for projects with “dollarised” cash flows to mitigate currency risk. This trend is likely to continue as investors seek safer, yield-generating opportunities.

This is especially important if the industry wants to mobilise capital from pension funds and other sources of private capital. Murungaru explained that “the challenge is to create a financial product that allows the pension funds to come into the sector quite easily. As non-operating investors it’s really about yield, so how can we better mobilise private capital?”

The African telecom tower infrastructure sector holds immense promise, with digital access closely linked to economic growth and development. While challenges such as currency volatility, energy access, and regulatory uncertainty persist, the sector continues to offer significant investment opportunities.

Through strategic investment, innovation in rural connectivity, and greater collaboration among telecom operators, Africa’s digital infrastructure is poised for continued expansion, driving economic progress across the continent.