Panel summary:
The demand for infrastructure in South Africa has grown significantly due to population growth, but infrastructure spending has not kept pace with it. Sonja Saunderson, Chief Investment Officer of the Eskom Pension and Provident Fund, argues that pension fund members are pushing more and more for their investments to contribute to social and economic development. As such, they are increasingly looking for investments that have a positive social impact, particularly in infrastructure development, without sacrificing returns.
This sentiment is echoed by Sifiso Sibiya, Head of Investment, Government Employees Pension Fund (GEPF), in that infrastructure investing can address various challenges. Firstly, it can reduce the infrastructure backlog, which can unlock long-term economic growth. This in turn has a positive effect on savings and thus the pension fund industry’s assets, which further reinforces the economic growth effect. Secondly, from a climate change perspective, investing in renewables can help address the energy backlog while also decarbonising to achieve net-zero targets.
Recent regulatory changes for retirement funds now allow for investment in infrastructure across all asset categories at 45% domestically, and an additional 10% in respect of the rest of Africa. The allocation to infrastructure is thus expected to increase over time. Heleen Goussard, Head of Alternative Investments, RisCura, argues that the inclusion of infrastructure in Regulation 28 is similar to how private equity was added as an asset class, but there are issues still to be ironed out such as inclusions/exclusions. Furthermore, 99% of the opportunity for infrastructure is in unlisted assets, which raises concerns around lack of liquidity and portfolio construction. She also raises the importance of investing in the new age of sustainability/ESG, which is still ill-defined and lacks consensus. This complexity and lack of consensus/clarity also extends to infrastructure in terms of how to measure its impact.
Saunderson remains convinced that infrastructure is essential for the economic growth of any country, especially for African countries with limited government resources such as ours. She believes that infrastructure spending will address societal problems, lead to better financial returns, and that all stakeholders from government to asset owners have a role to play.
Nathaniel Micklem, who co-heads the SA & Africa Credit Team at Ninety One, highlights the importance of cooperation and knowledge-sharing among various stakeholders in the infrastructure development sector, emphasising that there is a lot of room for everyone to participate and that the focus should be on leveraging the knowledge base that exists within the industry.
Sibiya points out that the infrastructure asset class provides several commercial benefits for pension funds in South Africa, especially for liability-driven investing (LDI). The first benefit is the duration of the asset class, which matches long-dated liabilities. The second benefit is the inflation linkage, as the pricing mechanism of infrastructure projects has an explicit link to inflation, which matches the inflation-linked liabilities of pension funds. The third benefit is the low cash flow volatility, as the asset class has inelastic demand and resilience to economic shocks. Fourth, investment in infrastructure provides diversification, given that infrastructure has historically had a low correlation with traditional asset classes. Lastly, infrastructure provides cash flow yield, which is useful for pension funds that require cash on hand to pay pensions.
The issue of liquidity and access still persist. However, given Ninety One’s more than two decades of experience in managing private credit funds, Micklem believes up to 20% liquidity can be offered through a diverse pool of investments. In his view, the liquidity issue can be solved through collaboration with asset owners and banks to gain access to investment opportunities. This breakthrough moment in credit management is expected to unlock more opportunities for investing in infrastructure.
With a fragmented pension market such as South Africa, Goussard calls for ways to pool capital through mechanisms such as an infrastructure platform or other aggregation methods.
There are certain pockets of low-hanging fruit for investment in infrastructure, such as those provided by the Renewable Independent Power Producer Programme (REIPPP). However, there is a recognition that widespread infrastructure requires significant investment, which can be financed by either taxpayers or private businesses. While a blended finance approach is needed to supply infrastructure to everyone, the hope for such an approach may be overstated due to limited capital. Infrastructure investment presents a significant opportunity for investment and there is a need for more serious structuring conversations and enablement for the long run to ensure real impact.
