The new credit guarantee vehicle the Treasury is setting up to derisk private investment into infrastructure is set to underwrite a first R10bn of investment into SA’s much-needed new transmission lines from July next year.
World Bank documents suggest the new vehicle, to be structured as a privately owned, nonlife insurance company, could mobilise as much as $10bn in private capital over the next several years to finance infrastructure projects, initially in transmission but later also in areas such as energy storage, freight rail and water.
Deputy finance minister David Masondo said on Wednesday that the Treasury was working on the vehicle with the World Bank and other multilateral institutions, which would set the right incentives for private capital to flow to infrastructure by reducing the risks associated with those infrastructure projects.
The Treasury would inject R2bn of equity into the new vehicle, with other development finance institutions putting in equity or debt in line with their risk appetite. The World Bank is partnering with SA on the credit guarantee vehicle.
The Treasury first revealed plans for the new scheme late last year, as it stepped up efforts to accelerate infrastructure investment without further burdening the state’s overstretched balance sheet.
🔑 Snapshot:
- Goal: Unlock R10bn in investment initially, and mobilise up to $10bn over time.
- Structure: Privately owned, licensed nonlife insurer, not a state-owned enterprise.
- Backed by: World Bank, DBSA, and other development finance institutions.
- Treasury equity injection: R2bn, with World Bank contributing $200m in lending.
- Total starting capital: $500m, with potential 4x leverage = $2bn in guarantees early on.
It is estimated more than R400bn will be needed over the next decade for the transmission infrastructure — the “wires” — needed to transport the new renewable energy SA is putting onto its national grid.
Most of that will have to come from the private sector, and the Treasury issued a request for proposals in June for new independent transmission projects to be rolled out by the National Transmission Company of SA.
But it no longer has the capacity to provide guarantees to enable investment in transmission — as it did when it guaranteed new private investors in the Renewable Energy Independent Power Producer Procurement programme, which added about R200bn of contingent liabilities to SA’s sovereign balance sheet.
Investors typically require protection against so-called offtake risk — the risk that Eskom or whoever is buying the power or the transmission capacity defaults on the contract.
“Through this credit guarantee scheme we said no, we are not taking that contingent liability onto the sovereign balance sheet. It has to be privatised, for lack of a better word. So we are establishing an insurance company which is privately owned. It’s not another SOE,” Masondo said.
A number of other jurisdictions had crowded private capital into infrastructure using similar instruments. “If it is successful we want to use it also for other infrastructure, including freight logistics and telecommunications,” he said.
Masondo was speaking at the announcement of the Development Bank of SA (DBSA) annual results, which showed the bank increased net profit by 14% to R5.3bn, with total assets increasing by just more than 2% to R121bn.
DBSA CFO Zodwa Mbele said the bank had expressed interest in investing equity into the new vehicle.
The new vehicle is structured as a licensed, independent nonlife insurer regulated by the Prudential Authority.
According to documents on the World Bank’s website, it will start with a capital structure of $500m, of which the World Bank’s lending arm, the International Bank for Reconstruction and Development, will finance $200m.
This will mobilise up to $2bn of private capital to finance infrastructure projects.
“Leverage of the CGV in its first years could allow the issuance of credit guarantees for a conservative estimate of four times the capital base, which will enable $2bn of credit guarantees... It is expected that the CGV after several years will be able to mobilise $10bn of private capital,” the documents say.
Experience in other middle-income countries suggests the vehicle could entice institutional investors who are discouraged by infrastructure-related risks to increase their portfolio allocation to the infrastructure assets, though this needed to be accompanied by real economy reforms to ensure the projects were sustainable.
The Treasury submitted a draft environmental and social management policy for the new vehicle to the World Bank at the beginning of August that outlined governance arrangements as well as commitments to sustainability and ESG.
The Treasury will establish a new Project Implementation Unit to serve as an oversight and co-ordination entity, and the unit will initially function as the interface between the CGV and the World Bank Group, which is government’s partner in the scheme.
The unit will not be involved in the day-to-day operations of the CGV but will provide strategic guidance and ensure accountability.
“The board of directors of the CGV will be comprised of independent members and shareholder-nominated directors, with representatives from development finance institutions,” Treasury’s submission says.
The World Bank has been a key supporter of SA’s renewable energy and infrastructure drives, most recently providing a new 16-year $1.5bn development programme loan to the government at attractive rates.
“The CGV in SA has been inspired by experiences from Nigeria, Indonesia and India, tailored to the SA context,” its documents say.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.