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Green power investing brightens returns in ailing South Africa

[JOHANNESBURG] A program that's making South Africa the top destination for green-power investments across the continent and the Middle East is not only easing an electricity crisis: returns are beating those in bonds and stocks.

The Renewable Energy Independent Power Producer Procurement Program secured about US$12.5 billion since 2011 and will attract another US$35 billion by 2020, according to data compiled by Bloomberg New Energy Finance. 

With state-guaranteed contracts to buy the power over the next decade - and annual returns of as much as 20 per cent - the project is a treasure trove for money managers and private equity companies seeking growth in an economy struggling to avoid a recession and the risk of a credit downgrade to junk.

An index of rand-denominated debt has lost 23 per cent over the past year in dollar terms, the biggest decline among 31 emerging markets tracked by Bloomberg.

"It's very hard to see getting stable returns like that in other asset classes where there's a lot of uncertainty and yields are relatively low," said Jean-Pierre du Plessis, a portfolio manager at Prescient Investment Management in Cape Town, whose 700 million-rand (S$61.5 million) renewable energy fund is up 14 per cent since it started in September.

"The majority is long-dated debt linked to inflation, so it suits the liabilities of pension funds and insurers."

In rand terms, local bonds have returned 0.3 per cent after a series of missteps by President Jacob Zuma, including the firing of his finance minister in December only to make another appointment days later, soured sentiment toward the continent's most industrialised country.

Stocks have returned about 7 per cent over the past year, while the rand has weakened almost 22 per cent.

The country is tapping into its solar and wind conditions to help plug electricity shortfalls after aging coal-fired power plants caused rolling blackouts.  Metier Ltd, a Johannesburg-based private equity firm, is targeting a return on investment of more than 20 per cent in the Engie SA-backed 11 billion-rand, 100 megawatt solar project on land owned by Anglo American Plc's Sishen Iron Ore, Mike Goldblatt, a fund manager at Metier, said in an interview.

Metier holds 12 per cent of the project, Engie owns 49 per cent and the Public Investment Corp, which manages the Government Employees Pension Fund's assets, has an 18 per cent stake, he said.

"There's huge demand for energy by industry and for yield by investors when there aren't many multibillion rand projects offering private equity stakes,'' Mr Goldblatt said. "Renewable energy is going to dwarf vanilla private equity options because of its capital intensive nature.'' The potential to leapfrog traditional coal-fired plants is encouraging Sanlam Ltd's money management unit, which oversees the equivalent of US$27 billion, to start a fund focused on power and renewable energy in Africa, Sanlam Africa Investment chief executive officer St John Bungey said in April.

Enel SpA, Italy's largest utility, Total SA and private equity firm Actis LLP, are among other companies that are investing in plants that will supply national utility Eskom Holdings SOC Ltd.

"South Africa is realising the benefit of a very well thought out competitive process, with really good efficiencies around project financing and supply chains as people have got more comfortable with the risk," Lucy Heintz, a partner at Actis in London, said by phone.

"That competitiveness has been delivered to the South African consumer in the form of lower tariffs."

Private financial institutions funded 91 billion rand, or 47 per cent of the program's investment so far, with foreign investors contributing 53 billion rand, according to government statistics.

The state invested almost 32 billion rand through the Industrial Development Corp, the Development Bank of Southern Africa Ltd and the Government Employees Pension Fund, the statistics showed.

Total, the French oil company, is spending US$177 million on a solar plant in the west of the country with Old Mutual Plc's Futuregrowth Asset Management and the Industrial Development Corp as part of the program's 92 projects so far.

They will increase power capacity by 6,327 MW, with a target of 17,800 MW in renewable sources by 2030. The country's generation capacity was 44,829 MW last year.

Enel's Green Power unit will spend about 1.5 billion euros (S$2.3 billion) by 2019 into installing 1,200 MW of wind and solar power generating capacity in South Africa, country manager, Lamberto Dai Pra, said by phone from Johannesburg.

The company is earning between 10 per cent and 20 per cent on its investment, he said, declining to be more specific.

"Even though margins have declined, South Africa is still attractive for investment because it's growing, though slowly, and needs energy and has very good sun and wind resources," Mr Dai Pra said.

"The regulation that set up the national tenders is an example for African and other countries."