The Eskom Pension and Provident Fund (EPPF) has welcomed proposed amendments to the Pension Funds Act regulation 28 that will allow funds to elect to invest in infrastructure projects, says EPPF chief investment officer Ndabe Mkhize.
The proposed amendments are aligned to the EPPF's investment objectives by providing risk-adjusted and inflation-sensitive returns, as well as supporting positive social and environmental impacts arising from investments in infrastructure.
"The proposed regulations set a maximum limit, not a target, and will allow pension and insurance investment funds to increase their allocation to infrastructure assets in the debt and equity sides of the capital structure. The volatility of the capital markets during the past year has again highlighted that investments in real assets provide stability and should be part of any balanced portfolio."
Infrastructure investments provide long-dated cash flows that are inflation-sensitive, making them an ideal match for long-term liability of pension funds, particularly for defined-benefit pension funds.
"These are much needed and we do not have many long-dated, inflation-linked bonds in South Africa, with most only extending to 2050, whereas the EPPF liabilities extend to
2090. Therefore, long-dated assets to match liability are very important and relevant, especially for the EPPF and similar funds," says Mkhize.
Infrastructure assets are more attractive than inflation-linked bonds and provide a higher rate of return, typically providing between 12% and 17% returns on a nominal basis for equity investments, whereas debt investments typically provide inflation plus 4.5% or 5% returns, he explains.
"Pension funds can benefit through exposure to asset classes that match their liabilities, which reduces the risk to its surplus - especially for defined-benefit pension funds - and enhances returns, as well as providing much needed diversification to the portfolio of assets of a pension fund."
All the EPPF's investments must be to the benefit of its members, but the Fund also has a portfolio that targets improving the beneficial impact of its investments to support economic development and job creation, especially in South Africa.
"Impact investments are aimed at deliberate and positive change to society and the environment. We seek through our investments, especially in the private market, to drive job creation and reduce unemployment, which is one of the United Nations Sustainable Development Goals."
The EPPF also seeks to drive transformation in the industry and ownership of assets. It seeks to encourage more women and previously disadvantaged individuals to invest and participate in the asset management industry.
"When you build infrastructure assets, you have the ability to generate a reasonable rate of return while catalysing local or regional growth in ways that most other investments cannot. Measuring the beneficial impact and effect on the local economy and job creation along the dimensions our strategy defines results in the deliberate, positive societal and environmental change arising from our investments," he says.
"We believe that investments in infrastructure and other real assets present a good opportunity to build back better in a way that ensures job-creating growth while dealing with the other challenges in our country, including transformation of the economy and reducing environmental impacts."
The EPPF is also looking at investing in real assets that span the whole gamut of renewable energy and energy infrastructure, telecommunications assets, toll roads, ports and airports, as well as direct property assets that have long-dated contractual cash flows.
There is also opportunity to refurbish government-tenanted buildings in exchange for very long-term leases of 15 to 20 years. These long-dated leases will enable the landlords to refurbish the buildings and upgrade utilities, such as elevators and solar panels, which will improve the attractiveness of these assets to investors while reducing the cost of occupation to government as well as driving positive impact.
Cash flows from these assets are also steady and long-dated investments will have a positive effect for all parties.
Additionally, such investments will also stimulate small and medium-sized real-economy enterprises in the local economy, such as builders, tilers, equipment and services companies and smaller civil engineering companies.
Investments in real assets - infrastructure and directly held property assets - can play a role in supporting the government's effort to restart the economy.
Mkhize adds that the EPPF has earmarked close to R1-billion to be invested in Africa, excluding South Africa, in infrastructure and real assets. About half of these real assets funds have been allocated to direct property assets, providing leeway to invest the remainder in quintessential infrastructure assets in the future.
"When we invest in infrastructure development in South Africa and Africa, we need to overcome the colonial and Apartheid spatial planning problems. These include misaligned transportation and utility infrastructure.
"Any future investments must aim to stimulate regional growth and potentially draw in population centres or regions that are excluded by existing infrastructure networks."
A benefit of new technologies is that they can provide sustainable economic activities for remote or excluded regions, and stimulate economic development.
An example is solar power plants that can be placed in remote areas or areas of limited economic activity, while renewable and alternative energy can provide the means for remote regions to participate more effectively and sustainably in regional economies, such as by establishing cold-chain supply chains to improve agriculture-based economies.
Similarly, providing telecommunications is also fundamental to include remote and poor communities, especially to ensure that development does not increase the gaps in education and opportunities present in Africa.
Mkhize emphasises that the planning required to identify such opportunities is crucial and that all stakeholders and governments must continue to ensure that new developments do not continue to exclude communities.
However, the EPPF is careful to ensure that all strategic and investment decisions taken are in the best interests of members, and governance and diligence are paramount for it to ensure it fulfils its mandate and can provide its members with their benefits upon retirement.
"We continue to invest in a range of asset classes to ensure we are suitably diversified, and we are careful to ensure we get the intended returns while achieving our goals to impact and stimulate societies and economies," Mkhize concludes.