By Ndabe Mkhize
Chief Investment Officer, Eskom Pension and Provident Fund
Infrastructure development is at the centre of government’s agenda for inclusive economic growth and job creation, President Cyril Ramaphosa said in his latest State of the Nation Address (SONA).
He makes an important point. Without both economic infrastructure development (such as roads, rail, ports and energy) and social infrastructure development (for example, housing, student accommodation, schools, hospitals and courts), South Africa stands little chance of successfully addressing its many pressing challenges: economic growth, unemployment, energy provision, education, health, housing provision, and social and economic inequality.
The president spoke at SONA about his Infrastructure Fund, first announced in 2019, saying that it has a project pipeline of potential investments worth R700-billion – by government and the private sector – over the next decade. This is to be welcomed, clearly, but it’s not the only infrastructure development avenue to explore.
For asset owners such as pension funds, which have assets under management of an estimated R4.4-trillion, infrastructure development offers a very attractive investment option: it satisfies a market demand, it offers strong and predictable returns over time, risk can be mitigated in various ways, and it provides a way for investors to meet important environmental, social and governance (ESG) and impact investing goals.
Plus, of course, with the provision of much-needed infrastructure, our country’s prospects for economic growth and social upliftment are significantly boosted. Things will work: roads will flow, students will be educated, lights will work, business will be done.
Infrastructure development currently makes up a relatively small part of pension funds’ investment strategies. And smaller funds face greater barriers to entry than larger ones. So how can funds unlock the great potential that lies in infrastructure development – to the benefit of their members, and South African society as a whole?
The answer lies in collaborative action, involving pension funds, asset consultants and international players. So, for example, the Eskom Pension and Provident Fund is part of the nascent Asset Owners’ Forum, a roundtable body or coalition of the willing, set up under the auspices of Batseta, the non-profit body for South African retirement fund principal officers, trustees and fund fiduciaries.
Members of the forum include various leading pension funds, financial institutions, asset consultancies. There is also close collaboration with international bodies such as the MiDA (initiative of the USAID) and the World Bank that are interested in mobilising institutional investors to develop Africa’s infrastructure and real assets.
By pooling expertise and knowledge, sharing the costs of due diligence, spreading risk and consolidating bargaining power – but still retaining individual decision-making around making investments – bodies such as the Asset Owners’ Forum can collectively take on large-scale, longer-term infrastructure development investments. And smaller players are also able to come to the table and participate meaningfully.
A vital aspect of infrastructure development – invariably a capital-intensive, longer-term investment – is accessing international support and funding. It stands to reason, however, that foreign investors will take a dim view of investments if South African investors are absent.
But if South African pension funds bring their massive collective clout to bear on developing infrastructure, we can expect that foreign investors will be more inclined to get involved, too. And there are several foreign development finance institutions.
A feasible return on infrastructure equity investment will be in the region of 12% to 16%, depending on factors such as gearing and risk. But what’s especially attractive about such returns is that they tend to be dependable and predictable over the long term – essentially, annuity income that can be relied upon to materialise. Furthermore, the cash flows from these investments are a better match for the liabilities of a pension fund because they are long-dated and inflation-sensitive.
So, for example, when financing a toll road one could accurately calculate the traffic it will bear, and thus work out income from toll fees and concessions over a set period of time. An investment in student accommodation could similarly provide very accurate returns, based on fixed numbers of occupants and the rentals they will pay. Renewable energy producers could sell power to Eskom on a take-or-pay basis, at a known tariff.
For fora such as the Asset Owners’ Forum, greater clarity around investment limits in the context of infrastructure development is an important consideration. Regulation 28, issued under the Pension Funds Act (Act 24 of 1956, as amended), limits the extent to which pension funds may invest in particular assets, asset classes and unlisted assets; this is to protect fund members against the effects of poorly diversified portfolios and risky investments.
But it’s unclear how Regulation 28’s limits on unlisted investments will relate to infrastructure development, which some believe is an asset class in its own right and others feel is a sub-asset class. This uncertainty needs to be interrogated, and consideration possibly given to increasing the limit on unlisted investments, to give retirement funds greater opportunities to invest in infrastructure development.
It’s a given that pension funds need to invest responsibly on behalf of their members and must generate sufficient returns to allow them to live comfortably post-retirement. It is why pension funds are tightly regulated, so that they can safely fulfil their mandate in perpetuity.
It’s just as much of a given that South Africa desperately needs infrastructure investment. One need only look at our potholed roads, our crumbling schools and our ill-equipped hospitals, our innumerable informal settlements, our students without a roof over their heads and, of course, our dire energy situation to appreciate that. Our economy will falter, and our population be ever more unequal, if something is not done – and soon.
We don’t have the luxuries of time and bottomless government funding (and private equity) to build the things our country needs, and that sooner rather than later. But what we do have are retirement funds that are cash-flush, imbued with great investment expertise – not to mention institutionalised fiduciary responsibility – and in a position to make safe, profitable investments that will benefit us all in the longer term.
The question, then, is not why a South African pension fund would want to devote a bigger portion of its investment capability to infrastructure development. It’s why not.
