Edition: September / November 2017
The next big thing
Investment in infrastructure is ideal for pension funds.
|Makhura . . . firm commitment|
|Azola Zuma . . . leverage capital|
Mashatile, who uses every opportunity to engage with pension funds, drove home the rationale when he opened this year’s Batseta winter conference: “We need to create a conducive environment that would allow institutional investors such as pension funds to invest directly in economic and social infrastructure. In essence, our view is that institutional investors can play a critical role in the advancement of meaningful transformation of the SA economy.”
A “conducive environment” means nothing if not an environment in which good governance, accountability and transparency are ground rules. It also means market-competitive returns relative to anticipated risk outside the asset classes conventionally favoured.
The commitment is underlined by two appointments. One is former deputy finance minister Jabu Moleketi, chairman of Vodacom and the Development Bank of Southern Africa, to chair the 14-member economic advisory panel set up by Gauteng premier David Makhura. The panel has been created to ensure that all economic and infrastructure plans are implemented with “rigour and the required discipline,” Makhura explained.
The other is John Oliphant, who now runs the emerging Third Way multi-disciplinary investment company, as a consultant on the mooted infrastructure projects. As erstwhile principal executive officer of the Government Employees Pension Fund, Oliphant knows a thing or two about drawing institutional investment.
“We need a pipeline of bankable projects,” he insists. “The challenges are how to de-risk the value chain, provide evidence of prioritisation and apply coordination. We must identify the right projects and find the right partners at the right times. We must not have long and complex procedures.”
The whole tone of Gauteng sets it apart from the Eskoms and other state-owned enterprises blighted by incompetent boards that defy institutional requirements. At the Gauteng infrastructure investment conference in July, for instance, Makhura emphasised to over a thousand enthusiasts the imperative for “investor-friendly ecosystems” guided by leadership that is “ethical, visionary and decisive”.
This is what Gauteng has in mind for optimal impact:
In all, these new post-apartheid cities promise to reshape Gauteng. The proviso is that, in financing them, the private sector comes to the party significantly through pension funds. Opportunities will necessarily be evaluated project by project.
There’s no need for introduction of prescribed assets, points out Adre Smit of ASISA: “Let’s have the projects. Our investment and savings institutions are willing and able partners.”
Sure thing. Returns will need to be attractive, and can be. Doug Thomson of Old Mutual Alternative Investments notes that the fund’s R53bn under management seeks (and presumably does) generate returns equating to the consumer price index plus 7% over rolling three-year periods. This is from investments and developments it actively manages in SA and SADC countries across economic, social and power infrastructure.
Regulation 28 of the Pension Funds Act allows for 15% of a retirement fund’s assets to be invested into alternatives such as private equity. Yet, believes Sanlam Investments chief executive Azola Zuma, most retirement funds are not even at 5%.
Because the assets of retirement funds alone (exclusive of savings in assurance policies) approximate R4,5 trillion, Zuma calculates that up to R675bn (as Reg 28 now stands) can be invested into unlisted companies falling within the range of smaller to medium-sized enterprises and into economic infrastructure.
She urges that the sources of long-term domestic capital be leveraged: “Around the world we operate in a low-return environment, so the bulk of assets that continue to be invested in traditional asset classes scramble to deliver good returns. Institutional investors such as retirement funds ought to be deploying their patient capital into alternatives. Not only does this diversify the opportunity set for the funds, but it helps to propel the SA economy into a healthy mode that creates employment and drives demand.”
Enough then of bemoaning and awaiting the Zuma government. There’s an abundance of opportunity, most prominently in Gauteng, to carry on regardless. With early involvements from the PIC, Futuregrowth and the French Development Agency already in place, there are green shoots of confidence too.
TT: Let’s begin, please, with a clarification of the various linkages. There’s the Gauteng Provincial Government (GPG), the Gauteng Partnership Fund (GPF) and the Gauteng Infrastructure Financing Agency (GIFA). Then, of course, there’s you not only as chair of the ANC Gauteng but also mainly involved here as the MEC for Cooperative Governance & Traditional Affairs (CoGTA) and Human Settlements. Who’s in charge?
Paul Mashatile: In 2014 the fifth GPG administration adopted the programme of Transformation, Modernisation & Reindustrialisation (TMR). It stems from 10 pillars (see box). In 2015, when opening the Gauteng infrastructure investment conference, GPG premier David Makhura announced that the province needed an injection of about R1,8 trillion to invest in social and economic infrastructure.
To accelerate economic growth through infrastructure investment, the GPG then introduced the infrastructure political steering committee, chaired by the premier, and the steering committee to eliminate red tape in government at both provincial and local levels, led by myself as the GPG member of the executive committee for CoGTA and Human Settlements.
In these capacities I’m also responsible for implementation of the mega-human settlements that can be described as post-apartheid cities. This work is being carried out by the GPF with other government agencies including the GIFA.
We’re talking about a huge vision. How would you define it? What’s the philosophy that inspired it?
The vision is to build a globally competitive Gauteng City Region. It requires that we implement seamless programmes in all Gauteng municipalities across the five development corridors:
Implementation is aligned to the ‘National Development Plan: Vision 2030’. Rollout of the mega projects is informed by this approach. We will endeavour to build compact cities in all these development areas as our new post-apartheid cities.
So it’s not only a grand vision but also a grand plan. Can you identify the factors that make you confident the plan is capable of implementation, particularly to allay the sceptics who’ve become disillusioned by government plans that gather dust?
Mega projects must be seen against the backdrop of our TMR programme. The plans are being implemented as we speak.
After the infrastructure investment summit we held in May, the GPF appointed a fund manager led by John Oliphant to kick off our capital-raising campaign. Now the GPF is working with key pension-fund stakeholders, including the Public Investment Corporation, to produce appropriate investment models. An infrastructure bond might be amongst them. Also, the GPG has budgeted R49bn for infrastructure investment during the current Medium-Term Expenditure Framework period.
|Mashatile . . . ducks in a row|
What are the plan’s major features in terms of projects, timelines and budgets?
There are 31 mega human-settlement projects. Some have already attained all necessary approvals. Whilst the GPG does make funding available, we want the private sector to partner with us. About 10 projects will kick off during this financial year.
That we’re building new cities means a need to invest in more hospitals, smart schools, improved public transport, roads including new freeways and other critical infrastructure. We’ve planned for eight new hospitals and 20 schools within the next two years. In addition, a feasibility study for extension of the Gautrain system has been completed.
Although money has been made available for most of these projects, in some cases more funding is required particularly for bulk services. Again, there’ll be opportunities for the private sector to partner with us.
Are the terms “mega human settlements” and “post-apartheid cities” marketing jargon or a real promise with consequences, like being voted out of office, if they don’t materialise?
They’re already materialising. We’re creating these cities on the understanding that decent housing is a human right. It contributes to restoring the dignity of our people. Within GPG means, we must provide shelter for those who cannot afford to provide for themselves.
What is there to attract pension funds, not only as responsible investors but also in terms of hard long-term investment returns?
Investment opportunities presented through the mega projects should be attractive to long-term investors such as pension funds. Depending on the stage of a project, investors should be able to achieve returns consistent with the level of project risk.
These returns would obviously need to be competitive against other alternatives available in the marketplace. Mightn’t you perhaps be sparking a “price war” on rates against, say, SA government and government-backed bonds in which retirement funds invest under Regulation 28 of the Pension Funds Act?
We have engaged with various pension-fund industry bodies and the savings industry at large. There is appetite to invest directly into infrastructure projects. Through the GPF we will put forward investment instruments that allow investors to invest directly into projects.
When institutions are called to invest directly into infrastructure projects, rather than indirectly through bonds, what would be the relative advantages for them to decide on the former?
Typical capital structures will apply. Investors would have an opportunity either to be equity partners, lenders or both. The only difference is that the cash flows generated by the projects would have to sustain the capital structures.
A provincial government does not have the ability to borrow. Thus our role is limited to creating a supportive policy environment that facilitates the flow of funds from investors directly into projects. However, working with such institutions as the PIC, we should be able to raise an infrastructure bond that will invest in some of our projects.
Tell us how you envisage that the public-private partnerships will work. For example, will targeted investors be canvassed at the outset on their appetite for particular projects? Will you cooperate with them in agreeing on acceptable returns? Will they have direct lines of sight into the projects, not only on sticking to budgets but also on adherence to acceptable governance standards, from beginning to end?
In 2002 we established the GPF with the specific mandate to facilitate implementation of social housing and create a platform for private-sector investors to participate, as partners with the GPG, in the affordable-housing space. To date the GPF has attracted funding partners such as the PIC, Futuregrowth and National Housing Finance Corporation into funding of affordable housing as an asset class.
With this success, we have expanded the GPF mandate for inclusion of mega-project funding to fast-track big cities. Our vision of big cities is integrated human settlements characterised by self-sufficiency in the provision of housing, social amenities, quality infrastructure and employment opportunities through small industries.
The GPF is the vehicle for mobilisation of the required capital to build strategic and sustainable partnerships with the private sector, donor community and development-finance institutions.
Would investors be able to exit prior to a project’s completion? If so, how and under what circumstances?
We’re looking for long-term partners. Pension funds are identified because of their need to match assets with long-term liabilities. GPF is exploring the possibility of listing a mega-projects bond. It will go a long way to offer liquidity for investors who require it.
Where will you find the land for all these projects? Does the GPG own tracts that it can release? Are you expecting that the national government will assist by releasing some tracts, unoccupied or unproductive, that it owns?
Implementation of mega projects is being executed through a partnership between all spheres of government. As the GPG we’re engaging with national government and municipalities, for them to avail land in their ownership for us to make the creation of post-apartheid cities a reality. We are also negotiating with some private owners for land purchases.
Is expropriation without compensation a prospect?
Where there is a need to expropriate land for development of mega projects, it will be done within the prescripts of relevant legislation and the SA Constitution.
You appear to be moving a lot faster, a lot more ambitiously and in a much more investor-friendly manner, than the Zuma government. It seems further to differentiate the GPG under the ANC Gauteng. Would you see it similarly?
Our approach to human settlements is aligned to the national government’s vision on the creation of integrated mega-human settlements. What we’re doing should be viewed as part of a national effort to help create jobs, encourage smaller businesses and restore the dignity of our people through the provision of decent shelter.