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Infrastructure spend can be a big driver of economic development and growth in any country. Most emerging markets have understood the importance of this driver and have used it to their advantage in recent times.
South Africa, however is sadly lacking which is a frustrating situation to be as we have the skills, the capital available and the willingness from the private sector to support government in its efforts to rectify this glaring omission in our growth story.
Futuregrowth Asset Management has been running an Infrastructure and Development Bond Fund for the last twenty years which focuses especially on these projects. So it seems there is no one better to ask what the temperature is like out there to fund these projects and how you go about doing it. – Candice Paine
This special podcast is brought to you by Futuregrowth Asset Management and today, I’m talking to Jason Lightfoot who is the Portfolio Manager of the Infrastructure and Development Bond Fund. Specifically, what we’d like to talk about today is infrastructure spending in South Africa in the context of Retirement Funds. Jason, explain to us what infrastructure spending actually is.
Thanks, Candice. The government launched a National Infrastructure Plan back in 2012 where they set out various objectives in terms of what’s required to fund the Infrastructure Spend across the country over the next couple of years.
Those are things like toll roads, Rail & Port, ageing, and [inaudible 00:48] but obviously; the whole idea is that government can’t fund those objectives by themselves. The idea is that they need to bring the private sector on board as well.
In bringing the private sector on board, they’d obviously need to make these projects attractive enough from a return perspective, for private sector to actually want to put their funding anywhere near it.
Correct. Obviously, private sector can play two roles: by underwriting debts in the form of loans or actually, providing equity, primarily in the form of PPP’s etcetera.
What is PPP?
Public/private partnerships.
Great. Does the spending that Eskom requires, form part of the Infrastructure Spend, which is the government’s remit?
That’s correct. The likes of Transnet as well. The traditional ports of call where some of the entities raise their funding from would be in the form of Listed Bonds. Eskom and Transnet have a whole lot of Listed Bonds in terms of them being listed on the JSE where many Pension Funds purchase and tap into that debt requirement.
So, your role as Portfolio Manager is to look at these projects and decide whether the return is commensurate with what you require for your investors.
From a risk return point of view, it’s quite important that the underlying analyst who looks at a potential transaction is able to potentially price for the particular risks that are embedded in that particular transaction.
What would the risks typically be in a transaction? What are you looking for?
Obviously, the biggest risk in any transaction is the risk of non-payment. What’s the eventual probability of default on a particular transaction? Ultimately, that results in you assigning a particular credit rating to a particular deal, and that will feed back in terms of what that particular borrower needs to pay up from a rating point of view.
Most of the Infrastructure Spend is obviously unlisted. Does that make it more, or less risky?
Not really. A large amount is still tapped via the traditional avenues such as the listed market such as Transnet and Eskom for example, but the bigger picture… There are quite a lot that still rely on the unlisted markets.
Renewable energy is obviously at the forefront of everyone’s minds at the moment and the bulk of that is being tapped via the unlisted markets. For example, money through the banks, which then syndicates to asset managers like us.
In terms of Retirement Funds who are now able, through Regulation 28, to invest in some of these infrastructure spends; which part of the Retirement Fund does this cover? What kind of returns are we looking at?
As I mentioned earlier, there are probably two avenues: from your debt point of view and your traditional Bond Funds. Maybe not as traditional Bond Funds, but potentially in your private Equity Funds.
Again, it depends on your underlying level of risk or assumed level of appetite for risk from your particular Pension Fund, which will then obviously feed into what your expected return might be on a particular transaction or a particular portfolio of transactions.
The yields from these transactions: are they far superior to government debt?
Yes. In most instances, government debt is your base rate, really. You’re expecting to earn a rate above government for that additional risk that you’re taking. Government is deemed Triple-A in a South African context, so anything that you invest in below that would need to earn a rate above that, based on where you’re funding.
In the context of actual portfolio management, these are long-term projects. When you include them in your portfolio, how do you view them in the context of your asset allocation?
For a typical Pension Fund, typical infrastructure asset is quite long-term in nature and Pension Funds have rather long-term liabilities. In essence, it’s really a perfect match for those types of investors.
How do you deal with liquidity?
Liquidity in a fund like this… We manage the Infrastructure and Development Bond Funds, so we build in various measures of liquidity where we have to have a certain amount invested in liquid assets.
It might be a combination of listed government bonds or purely, money market assets, which are quite [inaudible 05:36], so you can actually ensure that there is a level of liquidity in the fund to meet withdrawals, etcetera.
If we take a step back, from a global perspective China must be the ‘pin-up’ child of infrastructure investing, whichever way you look at it. They have done large amounts of spending. How does that compare to what South Africa’s done, and how does South Africa compare to other emerging markets?
South Africa definitely hasn’t touched the tip of the iceberg. If you look at China as an example, that economy has grown seven times over the last couple of years and that’s primarily off the back of that massive injection of investment in infrastructure assets.
South Africa really isn’t quite where it should be. There’s a measure that we look at where it’s about 15% of GDP (if I remember correctly) so really, it probably needs to get up to 30% or so, to make type of impact in terms of growth and in terms of its impact on GDP, going forward.
Does the National Infrastructure Plan give you any comfort that the intention, or the appetite, is there from government’s perspective to increase to the levels needed?
I think it’s a good measure that was put in place because it’s identifying ‘these are the shortages and these are the issues that need to be addressed’ and they are creating the right forums in respect of the Presidential Infrastructure Coordinating Committee to take things forward and address the shortages within the country.
I guess it’s a dialogue that needs to be had with the private sector at the same time, to see where they can fit in and what assistance they can provide to these projects.
Is that dialogue open? Does government consult with private sector on these types of requirements?
It definitely does happen. It happens primarily through SEESA and obviously, we get our feedback through that organisation.
Jason, what you’re telling me is that the large majority of the fund that you run (the Infrastructure and Development Bond Fund) mainly invested in government infrastructure spending projects.
No. It’s actually across a lot of different projects as well. The fund’s been in existence for the last 15 years or so, funding various projects ranging from developmental-type assets such as funding SME businesses and providing finance to taxi drivers to, in fact, things like chicken farms and it’s been doing that for the last 15 years.
It’s currently about R10bn in terms of its assets under management and outperforming the benchmark of the All Bond Index by at least two-and-a-half percent over the last 15 years.
That’s a fantastic return on a huge size. Congratulations.
Great. Thank you.
I’ve been speaking to Jason Lightfoot who is the Portfolio Manager from Futuregrowth for the Infrastructure and Development Bond Fund. Jason, thanks so much for your time today.
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