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Infrastructure spend is an important driver of economic development and growth as well as job creation.
In China, their gross capital formation as a percentage of GDP has averaged around 48% for the last few years.
This is regarded as a high number (but not unobtainable), but it is important to note that when analysing the benefits particular attention is paid to the efficiencies of such investment and that there are no or minimal misallocated investments.
Assuming one is comfortable with the above concern; emerging economies usually benefit the most and do so in a relatively short space of time.
South Africa’s gross capital formation as a percentage of GDP has been a lot lower compared to emerging market standards at around 19% for the last few years.
Despite the investment milestones achieved, there is still a massive backlog that needs to be funded as well as continued investment roll-out.
As a result the South African government has targeted a required infrastructure investment of around R4trn over the next 15 years to address some of this.
It is debatable whether or not this enough given that this doesn’t massively impact this key capital infrastructure economic indicator or bring it close to emerging market standards, although it is a start in the right direction.
The government is expected to contribute around 60% of the envisaged funding amount so there is definite scope and need for private sector funders to play a role.
Overview of the National Infrastructure Plan
To address the need and create focus, the South African government adopted the National Infrastructure Plan (NIP) in 2012 together with the implementation of the Presidential Infrastructure Coordinating Commission (PICC), which fast tracks and creates an enabling environment for infrastructure projects to obtain the right focus and framework that they require.
The implementation and monitoring of these projects will be centrally driven through the PICC and will create the right level of responsibility and accountability.
There are 18 strategic integrated projects (SIPS), which focus on various general themes including: geographic, spatial, energy, social, knowledge and regional strategic integrated projects. Although broad in nature, these drill down and focus on specific projects such as transport corridors, renewal and revival of port and rail and other initiatives such as renewable energy. An infrastructure book has been compiled containing more than 645 projects across the country.
Given the funding shortfall as described above, there is definitely a space for the private sector to play a role, be it in the form of structuring and project finance skills and/or funding (from both banking institutions and/or retirement funds).
In the context of a retirement fund, these types of investment will typically form part of a retirement fund’s private equity allocation or through its allocation to bonds or debt. Recent changes to Regulation 28 of the Pension Funds Act have afforded investors wider limits to these types of investments and a large portion of these are of an unlisted nature.
It is important to note that investments in infrastructure assets are not to be seen as a different asset class as they need to fit within an already defined asset allocation strategy, be it debt or equity or property. These assets are typically long term in nature and act as a natural asset/liability match for retirement funds.
The returns afforded to retirement funds need to be on full commercial terms, therefore affording investors sound risk/return characteristics.
There is a role for subsidised financing to make some transactions bankable, but this can only be done through the so-called Development Finance Institutions (DFI).
In a low-return environment, these investments can offer a good alternative to traditional investments in a diversified portfolio but it is of utmost importance to choose an experienced investment manager who has the skills to both assess the risks and correctly price for it.
* Click here to find out more about Jason Lightfoot.
