Pension funds hold the key to unlocking SA’s trillion rand infrastructure investment opportunity

Vuyo Ntoi, Co-Managing Director of African Infrastructure Investment Managers (AIIM)

The South African investment community and pension funds, in particular, are sitting on the cusp of an infrastructure boom that provides an excellent opportunity for diversifying portfolios and supports the development of critical infrastructure for the country.

Pension funds should strongly consider the opportunity sparked by the South African government’s ambitious investment drive.

Under its Infrastructure SA (ISA) programme, the government is committed to raising more than a trillion rand over the next five years. However, the government is looking for more support from pension funds, which have been slow to invest in the country’s infrastructure compared to similar pension fund participation in Europe and the US.

According to the Organisation for Economic Co-operation and Development’s long-term investing of large pension funds and public pension reserve funds 2022 report, pension funds invested $211.8-billion in infrastructure in the preceding year. Investing in alternative assets, such as infrastructure, private equity, hedge funds, and real estate, can help diversify pension fund portfolios.

Currently, alternative assets comprise only 8% of pension fund investments in South Africa, compared to 18% in Europe and 24% in the US.

To make it easier for pension funds to invest, National Treasury has amended Regulation 28 of the Pension Funds Act. This amendment introduced a definition of infrastructure and set a limit of 45% for exposure in infrastructure investment. While the overall allocation limit for alternative assets is capped at 27.5% under Regulation 28, pension funds are free to invest in a range of asset types, including bonds and listed and unlisted entities.

Although there is no specific infrastructure sector instrument, pension funds can invest in a range of asset types to diversify their portfolios.

Such investment will not only help create jobs and stimulate economic growth, but it will also improve the country’s critical infrastructure, which will benefit all South Africans. The government seems committed to working with the private sector to achieve its infrastructure goals, which presents an incredible opportunity for investors.

The infrastructure backlog in South Africa is substantial, culminating in a number of infrastructure crises for the country.

The electricity crisis is the most visible to us because we experience it every day in our households and workplaces, but there are other problems. Issues around water delivery are linked to electricity problems, crumbling distribution infrastructure, and a backlog in the development of new bulk water sources across the country. 

Some of the country’s current infrastructure is not fit for purpose.

We see some key institutions in the logistics sector crumbling from an operational performance perspective, owing to poor maintenance of existing infrastructure and reduced or flawed investment in new capital stock. As a result, many businesses were not able to take full advantage of a commodity boom immediately before and after COVID-19.

Investment opportunities range from the development and construction of greenfield projects to investing in upgrades and refurbishing of brownfield projects. These assets are long-term good yield providers, and pension funds can participate either by buying debt through bank syndications, buying bonds that relate to a specific infrastructure project, by participating in private equity funds such as the ones managed by ourselves, publicly listed equity, as well as listed infrastructure equity funds.

Taking advantage of the infrastructure investment opportunity will hopefully drive a shift in current trends which have reflected a steady decline in investment in fixed capital by government and private businesses since 2012 when the National Development Plan set targets for this measure, which have not been met. 

The amendments of Regulation 28 and the investment power of pension funds are critical to reverse the funding decline that has in part led to the crises we currently face.