At present, Regulation 28 of the Pension Funds Act doesn’t define infrastructure as a specific category, but is spread across a number of asset classes, such as equity, bonds, loans and private equity. However, in February 2021, National Treasury tabled draft amendments to Regulation 28 that would provide a more precise definition of infrastructure under these various asset classes currently available. Public comment on these draft amendments can be made until 29 March 2021.
The different types of infrastructure are probably best broken down according to whether their key focus is economic, social or environmental.
Investment in economic infrastructure: This is return-seeking capital investment in the construction, improvement, or replacement of the economic infrastructural framework of South Africa. In other words: the backbone of the country’s economy that allows it to run, grow, and become more competitive. This may include investments in energy infrastructure, the logistics network, water infrastructure, commuter transport infrastructure, the provision of liquid fuels, and broadband infrastructure. These systems tend to be capital-intensive and high-cost investments, and are vital to a country’s economic development and prosperity.
Also known as hard infrastructure, these make up the physical systems that make it possible to run a modern, industrialised nation. Examples include roads, highways, bridges, as well as the capital and assets needed to make them operational (transit buses, vehicles, oil rigs/refineries).
Investment in social infrastructure: This is return-seeking capital investment in the construction, improvement, or replacement of the social infrastructural framework. That is to say the physical infrastructure that helps to improve the lives and prospects of South African citizens. It includes investment in affordable housing, healthcare and education, as well as supporting enterprise development, broad-based black economic empowerment, (B-BBEE) and SMEs (small-, medium- and micro- enterprises) in the economy (including agriculture and agro-processing, construction and housing, tourism, business process outsourcing, and the green economy), and in B-BBEE transactions.
Also known as soft infrastructure, these types of infrastructure make up institutions that help maintain the economy. These usually require human capital and help deliver certain services to the population. Examples include the healthcare system, financial institutions, governmental systems, law enforcement, and education systems.
Environmental or green investments: This is return-seeking investment in firms, funds and projects that seek to improve environmental sustainability outcomes, to mitigate climate change, and to foster renewable energy, green buildings, energy efficiency, recycling, and clean technologies. Projects related to infrastructure development and improvements may be funded publicly, privately, or through public-private partnerships (PPPs).
Infrastructure as a public good
In economic terms, infrastructure often involves the production of public goods or production processes that support natural monopolies. Because infrastructure very often involves the production of either public goods or goods that lend themselves to production by natural monopolies, it is very typical to see public financing, control, supervision, or regulation of infrastructure. This usually takes the form of direct government production or production by a closely regulated, legally sanctioned, and often subsidised monopoly. An example of this monopoly would be Eskom, for power generation and distribution; and SANRAL, for South Africa’s national road network, including toll roads.
Infrastructure and the level of public access:
- Tolled infrastructure is defined as infrastructure for which a fee must be paid to access the infrastructure. For example: e-tolls and the Gautrain in Gauteng.
- Untolled infrastructure is defined as infrastructure for which either no fee is charged for access, or a subsidised fee is charged for access, such as South Africa’s national road network.
- Untolled, special access infrastructure will be defined as any infrastructure for which either no fee is charged for access, or a subsidised fee is charged for access and the infrastructure is only accessible to special disadvantaged or vulnerable groups. An example of this would be public hospitals in South Africa.
Assessing potential investment in infrastructure
South Africa’s levels of infrastructure investment are too low, with government funding for these projects becoming increasingly difficult in a post-COVID economic environment. Infrastructure investing could help South Africa break out of its low-growth trap, and private sector investment could assist with this. However, it is essential that the policy environment and potential risk-returns measure up, according to Futuregrowth.
“While businesses that are in the infrastructure development space can be exposed to some quite specific risks, the key for us is that the fundamentals should still hold and the returns generated for our clients’ funds must be commensurate with the risk taken on.”
Factors assessed when investing into an infrastructure fund, specifically include:
- historical financial performance;
- a forward-looking view of the infrastructure asset’s operations and its sustainability;
- the extent to which there is alignment of interests between all stakeholders of the infrastructure asset;
- management’s experience and track record;
- the composition of the board of directors, including their skills and experience;
- an assessment of the environmental, social and governance factors that could affect the risk profile of the infrastructure asset; and
- understanding the competitive environment and industry in which the infrastructure asset operates.
ASISA | GEPF | PICC | Genesis | Futuregrowth
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