Government and private sector must work together
Securing developmental investment funds from the private sector is likely to gain momentum over the coming years as the government slowly begins to put in place the mechanisms and regulations that should remove the bottlenecks that have stymied infrastructure projects in the past.
Previously, the challenge of securing private funding for infrastructure projects in Africa — including SA — were issues of regulatory uncertainty, corrupt tender processes and political risk. SA has addressed these to a certain extent through the government’s National Infrastructure Plan (NIP) launched in 2012, along with the formation of the Presidential Infrastructure Co-ordinating Commission (PICC) and more recently, passing the Infrastructure Development Act (2014). All of these serve to create an enabling environment for infrastructure projects to get on track.
The projected infrastructure investment mentioned in the PICC over the next 15 years is R4-trillion. While impressive on the surface, this is not close to historical emerging market averages, and probably will not have an effect on the key capital infrastructure economic indicator — gross capital formation as a percentage of gross domestic product (GDP). This is about 15% at present and needs to be closer to 30% to make a meaningful contribution in terms of GDP growth in future. But it’s a start.
The government is likely to contribute a portion of this through internally generated income on a state-owned enterprise (SOE) level and also through state revenue. There is some requirement for the private sector to play a role, but the amount is unquantifiable at this stage and will be more evident as the needs arise.
State-owned enterprises have traditionally raised a portion of their funding through the listed bond market on the JSE and are likely to continue to do so, but bigger and more sophisticated projects are likely to call on the banks and specialist asset managers to fund these projects as they have done so in the past.
Changes to retirement funds’ private equity allocation as a result of regulation 28 of the Pension Funds Act offer greater access to these investments, which are usually of an unlisted nature. For a typical pension fund, with long-term liabilities, infrastructure assets, which are long term in nature, are a perfect match for these investors. However, whether they are equity or debt in nature, they must still fit within a defined asset allocation strategy, offering returns on commercial terms that provide investors with sound risk/return characteristics.
The Department of Energy’s Renewable Energy Independent Power Producer Procurement Programme is a perfect example of how government and the private sector can work together for the greater good of society and the country. The programme has so far provided for the procurement of 3,725MW of renewable energy over five rounds. Future growth’s Power Debt Fund has, on behalf of its clients, committed debt and equity financing of more than R7bn for energy projects in wind, solar photovoltaic and concentrated solar thermal, and expects to provide more funding in further rounds and through the secondary market.
Asset managers need to look beyond the most obvious infrastructure requirements. For example, Future growth’s Infrastructure and Development Bond Fund has, since its inception, provided funding across various infrastructure and developmental assets. These include, but are not limited to, funding large-scale infrastructure such as roads, ports and rail, financing small to medium-sized enterprises, providing finance to taxi drivers, funding chicken farmers or developing affordable accommodation both to the emerging market and for students. The fund’s assets under management are more than R10bn and it has consistently outperformed its benchmark, the JSE All Bond index, over the past 15 years.
Infrastructure spend is an important driver of economic development and growth as well as job creation. The government has made a start in identifying the shortfalls and the issues to be addressed and has created the right forums to take things forward. The private sector is ready to take up its role and just needs government to continue its engagement and not allow the inculcation of incompetence and arrogance to harm the good work it has already done.
Source: Business Day Live