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Infrastructure Investing: Delivering Economic Benefit for Future Generations

Allocators of capital have welcomed government’s recent proposal to open the way for local retirement funds to invest more in infrastructure in South Africa and the rest of Africa. The proposed relaxation coincides with a notable shift in domestic and international asset allocation strategies to accommodate environmental, social and governance (ESG) opportunities and impact/infrastructure investing.

“Infrastructure investing, when done sustainably, can deliver significant economic benefits to a country today and for generations to come,” says Ockert Doyer, Head of Credit at Sanlam Investments. He notes that the multi-decade lifecycle of assets delivered by big-ticket infrastructure projects is a perfect match for retirement funds’ investment time horizons. Doyer was commenting at the 2nd Annual Africa Impact Investing Summit, held in Cape Town recently.

National Treasury’s proposed amendments to Regulation 28 of the Pension Funds Act will allow local retirement funds to increase their exposure to hedge funds and private equity and upping their total infrastructure allocation to 45% of assets under management domestically and 55% when including the rest of Africa. This change will make it easier for retirement fund trustees to approve investments into infrastructure projects that deliver economic and social impact without compromising return.

“Fund managers have to take a holistic view to ensure that they make investments into sustainable infrastructure projects,” says Doyer.

To be successful and sustainable, infrastructure projects should:

  • Consider environmental sustainability – both from the perspective of the construction materials being used, but also the longer term impact that the project will have on the environment within which it will operate.
  • Strike a balance in sharing project benefits and profits between the local community, government and investors. The mere feeling of being short-changed or treated unfairly in commercial relationships can cause delays or cancellations, rendering a project unsustainable.
  • Complete extensive and transparent stakeholder engagement. “Projects are continuously assessed by society; if society deems a project to have a negative impact, it will quickly revoke the project’s social license to operate,” says Doyer.
  • Consider the long term funding model and economic sustainability. “This is crucial due to the long-term nature of infrastructure assets that often have 50-plus year lifespans,” says Doyer. Projects that offer clear economic benefits can still fail if the accompanying commercial or financial models are neglected.

South Africa boasts a number of impactful infrastructure projects. The 83km Orange-Fish Tunnel project was completed in 1975 and was, at the time, the longest continuous enclosed aqua duct in the southern hemisphere and the second-longest water supply tunnel in the world. “The Eastern Cape is the second-largest producer of citrus in South Africa today, largely as a result of infrastructure that was put in place in 1975. Half-a-century later, we are still reaping the benefits,” says Doyer.

The N3 Toll Road, completed between 1960 and 2001 and currently managed by the N3 Toll Concession, is acknowledged as one of the most successful public-private partnerships (PPPs) in South Africa. It is commercially sustainable and makes an economic contribution by carrying approximately 58 million tons of cargo annually and between 8500 and 13500 vehicles per day.

More recently, the Renewable Energy Independent Power Producer (REIPP) programme attracted around R210 billion in committed investment capital, including R41.8 billion from foreign funders. Projects under this banner hold many benefits for local communities, including bursaries, jobs and a share of project income. Once completed, existing projects will contribute up to 6400MW of electricity capacity to the national grid. 4600MW was online by September 2020.

Sanlam Investments is convinced that allocating capital to sustainable infrastructure projects will continue to result in great risk adjusted returns for investors, while having a big positive economic impact for the country - specifically as the economy is rebuilt after COVID-19.

The group is adding to its infrastructure commitment with the launch of the Sanlam Investments Sustainable Infrastructure Fund. The fund will invest in a wide range of economic- and social infrastructure projects and is built on a well-established foundation of investing in renewable and conventional energy projects, information and communication technology (ICT) providers, water supply and treatment facilities, hospitals, schools, transport infrastructure and more.

South Africa will have to channel billions more into infrastructure to achieve various 2030 UN Sustainable Development Goals as well as goal set out in the National Development Plan. The 2021/22 National Budget mentions more than R750 billion in infrastructure development opportunities that will be funded in part from a national Infrastructure Fund and delivered in partnership with the private sector. “Government is centralising the execution of many infrastructure projects at a senior level within the Presidency,” says Doyer. This centralisation is aimed at achieving more efficient roll-out of infrastructure projects across departments, provinces and State-Owned Enterprises (SOEs).

“South Africa has the capacity to deliver viable infrastructure assets; it is a matter of getting the government to put the correct framework in place and allowing the private sector to work in partnership with them towards sustainable outcomes,” concludes Doyer.

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