New efforts under way to make SA a building site

The amendment to regulation 28 in 2023, which allowed pension funds and other investors to invest up to 45% of assets under management in infrastructure, has yet to deliver desired results, says Chris Axelson, head of tax and financial sector policy at the National Treasury.

Axelson told the Old Mutual Thought Leaders Forum held last week that asset allocators are complaining about the lack of bankable projects.

Regulation 28 amendments allow local retirement funds to increase their exposure to hedge funds and private equity, and to raise their total infrastructure allocation to 45% of assets under management domestically, and 55% when including the rest of Africa. This change was expected to make it easier for retirement fund trustees to approve investments in infrastructure projects that deliver economic and social impact without compromising returns.

“What is needed are feasible and bankable projects. Importantly, the ‘user pays’ principle needs to be supported through this process. Retirement fund members cannot be expected to provide capital to build infrastructure without a commensurate return,” said Neville Chester, senior portfolio manager at Coronation Fund Managers.

“The highly indebted position of the government at the moment also makes infrastructure funding a tougher ask, as they need to compete with the option of lending to the government (which should also be building infrastructure).

“Considering that the 2041 long-dated government bond yields in excess of 11%, any infrastructure investment needs to offer a more compelling return than that, otherwise investors would not be managing their fiduciary responsibility to the underlying fund members,” Chester said.

SA continues to underspend on infrastructure despite setting itself a target of at least 30% of GDP by 2030, resulting in the country lagging behind other faster-growing economies in infrastructure spending.

Minister of public works & infrastructure Dean Macpherson said over the past few weeks he has started to engage with a number of asset management and financial services organisations to see how “we can work closer together to expand the investment in infrastructure development”.

Public assets

Macpherson added that he had invited them to nominate experts within their fields to join “my two voluntary advisory panels on public asset management and infrastructure development to assist the state in using public assets for public good and turning the country into a construction site.

“It is indeed correct that pension funds and asset managers have not invested as was expected ... due to the lack of infrastructure projects in the country and the time that it often takes to reach financial close on them. We must get better at this.

“As a department, we are responsible for providing a pipeline of bankable projects and we will therefore be working together with Infrastructure SA to expand the number of projects pension funds and asset managers can invest in and to ensure the projects are completed on time and within budget.

“The department will be refocusing on these important issues through Infrastructure SA in the coming months. I am hopeful that in time to come we will be able to unveil a larger book of projects which both public and private agencies will be able to invest in to truly turn the country into a construction site.”

The auditor-general’s 2022/ 23 local government audit outcomes found that not only do local municipalities underspend infrastructure grants by R3.34bn, but that 61% of local government infrastructure projects experience delays and 24% have poor construction work.

The minister said this highlighted the urgent need to bring skills and expertise into construction projects to give the private sector the comfort that infrastructure projects would be executed sufficiently and would see good returns on investment.

“Since I was appointed as minister of public works & infrastructure roughly seven weeks ago, I have emphasised the need to increase the pool of bankable projects in SA by expanding the role of Infrastructure SA to co-ordinate and plan large-scale construction projects,” he said.

“I will be meeting with more financial and asset managers, including on the official state visit to China next week, to attract additional infrastructure investment, but so far the feedback has been clear that there is an appetite from the private sector to invest in infrastructure projects, but that there is a lack of opportunities to invest.

“This is why it is imperative that the department goes through a restructuring and that Infrastructure SA’s role is expanded to ensure that we have a large book of construction projects we can then invite both the private and public sectors to invest in.”

khumalok@businesslive.co.za