Rob Moody, Deloitte associate director of Debt Advisory, says that investment mandates for socially responsible investments (SRI) account for a mere 1% of the R4tn, demonstrating considerable capacity for growth.
Increasing this percentage would present South Africa with the easiest means of unlocking the development of infrastructure through bond issuance, he says.
According to JP Labuschagne, associate director at Deloitte, South Africa’s infrastructure and capital projects are primed for infrastructure investment products which would enable the asset management industry to increase this percentage. “New products focused on the socially responsible side of infrastructure development have to come to the fore, and I believe it is already happening. Asset managers have clearly stated they are ready to invest directly into infrastructure projects and are actively at the moment gearing up their in-house skills and capacity to do so.”
However, Moody says the biggest hurdle they encounter is that the fund mandates that govern their investments are quite restrictive and don’t always allow for SRI investments, especially if they do not offer the economic return required or investment hurdle rate. “Naturally, these investors manage third-party money and try to extract the best return possible, given the risk associated with the investment.”
Moody says the first fledgling steps by institutions would necessarily take both the courage to relax investment mandates, as well as active participation by foreign investors to drive investment in SRI and ‘green bonds’ - but he points out that this may take time given that foreign investment is currently pouring out rather than into the country.
“Given the scale of the infrastructure challenge facing South Africa, our investment institutions should consider giving a percentage of their time and assets to make this work. From conversations with many asset managers, we know they are keen to invest both from an economic and a social perspective, alongside their move into alternative investments,” says Moody.
“Long-duration investments - such as those required for infrastructure projects - are ideally suited to pension funds that are aiming to match long-dated pension liabilities, as they provide a bullet repayment profile and a natural inflation hedge,” he adds. Such investments cover a wide spectrum of projects - from economic infrastructure such as transport, to social projects such as hospitals.
The funding debate concerns whether the government, which is the largest issuer of bonds at the optimal pricing, continue to fund these projects or should the project rather be funded on a ring-fenced standalone basis.
“The problem we encounter,” says Labuschagne, “is that often the state owned company (SOC), which normally would be responsible for the infrastructure project, is not always well run. Investors would therefore want to charge an additional risk premium for the funding, unless guaranteed by government and thereby defeating the object. So ideally the SOC should instil enough confidence that they will be able to manage the project optimally. There are cases where this has been the case, such as Trans Caledon Tunnel Authority project.”
Labuschagne admits to some prior reluctance by institutions to invest in the SRI asset class, given it requires a specific set of project management skills which they did not possess. However, this disinclination was universal to institutions worldwide.
The first crack in this reluctance was demonstrated in South Africa’s successful REIPPP Renewable Energy Independent Power Producer Procurement Programme (REIPPP). The government established the process and the market embraced the investment. This is an important and successful governmental initiative to source renewable sources of energy and a perfect example of how private public partnerships should work. Under this programme, one of the bidders used an infrastructure project bond to finance its renewable power project, thereby tapping into a new market directly, and circumventing the traditional financiers of projects.
However, most complex project-specific funding is usually being funded in the unlisted space by the banks as well as specialist asset managers where a higher degree of skill has to be applied in order to assess and quantify the risks involved.
Moody says: “The government recognises that it cannot fund infrastructure initiatives entirely by itself and wishes to bring the private sector on board. The challenge is that you cannot simply appeal to the social investment argument, but have to make the offering economically attractive to the private sector both through risk mitigation and adequate compensation for the risk taken.”
A number of funds already exist that have played an integral part in infrastructure funding since their launch. These have provided pension funds with access to sustainable vehicles to fund these initiatives in infrastructure and development sectors such as power, transport-corridors, healthcare, transport, education, and housing.
Labuschagne concludes that to expand on this trend would require changing pension funds’ mandates and providing more direct investment products, especially project bonds, and also reviewing ways projects are procured so as to allow for this additional source of funding.
