Issue: June 2012 / August 2012
Expert Opinion

GEPF steps up infrastructure investment

The Government Employees Pension Fund (GEPF), Africa’s largest, is to play a key role in SA’s multibillion rand infrastructure investment plans.

President Zuma has invited all South Africans to join government in a massive infrastructure development drive that will enable the economy to grow more rapidly, reducing poverty and joblessness. Arthur Moloto, who chairs the GEPF board of trustees, welcomes this invitation.

The GEPF believes infrastructure is a sustainable long-term investment that offers low risk in comparison with equity markets. Accordingly, Moloto notes, the fund has set aside about 5% of its total R1 trillion in assets for its developmental investment framework which targets infrastructure projects and other developmental initiatives.

John Oliphant, head of investment and actuarial at the GEPF, elaborates: “Our framework aims to target economic growth areas that will result in improved infrastructure and job creation.”

As SA grows, so does the GEPF

Investment areas targeted are economic infrastructure (e.g. roads and bridges); social infrastructure (e.g. hospitals and housing); green economy projects, small enterprise development and black economic empowerment initiatives.

The fund’s asset allocation strategy supports investment in road and air transport, logistics and telecommunications, and water provision. Domestic bond holdings are capped at 36% of the total portfolio.

Infrastructure-related bond holdings total about R114bn. SA’s infrastructure backlog has been estimated at R1,5 trillion. The GEPF sees this as an opportunity to grow its portfolio.
“As the largest investor in SA, with interests across the economy, it is in our interest to partner with government, investors and others in getting SA into a higher economic growth trajectory,” says Moloto. “In order to grow our members’ assets, we aim to help ensure that SA’s economy grows.”

Sustainable investment

The global financial crisis, which began in 2008, was the catalyst for the GEPF to review its investment strategy. Pension funds, especially those in developed markets, were highly exposed to the collapse in equities’ prices and a simultaneous drop in long-term yields. This led to lower pension asset values and rising actuarial liabilities for many funds, resulting in substantial funding and solvency problems.

These issues, coupled with lower expected real returns from equities and other traditional growth assets, necessitated a review of investment strategies. The GEPF began to seek opportunities for improved portfolio diversification and higher long-term returns.

But not only returns. The fund sought to structure its portfolio to play a greater and more direct role in investing in SA’s long-term economic development and social upliftment without compromising the board’s fiduciary responsibilities.

The result – following a year of consultations with National Treasury, the Public Investment Corporation (PIC), public-sector trade unions, the investment industry and academia – was the developmental investment framework. Because of its size, the GEPF sets an example for other institutional investors in leveraging its investments to the benefit of SA.

The fund’s initiative is in accord with international trends. Research by the OECD shows that many funds globally are increasing investment in infrastructure because this asset class provides both diversification benefits and excellent long-term returns.

Significant national player

On average, the GEPF owns 10% of most JSE-listed companies and about half of the government inflation-linked bond portfolio. On this basis, Moloto points out, it is logical that the fund should play an active role in furthering the national agenda. “Rather than rely on direct foreign inflows, experience from Asian countries has shown that high rates of domestic savings, linked to local investment, lead to sustained long-term growth, which is in the direct interest of all long-term savers, including GEPF members.”

The GEPF board believes that large-scale long-term infrastructure investment opportunities are well suited to the needs of the fund, a large investor with long-term liabilities.

Infrastructure investments can generate impressive returns that don’t depend on volatile market movements. These investments -- made by the GEPF through the PIC and its Isibaya Fund -- have not typically been correlated with listed assets. They provide an excellent way to diversity the GEPF’s portfolio.

Moreover, setting aside 5% of the portfolio means that GEPF members will contribute for example to SA’s energy supply, communities’ access to clean water and improvements in the national road network.

Infrastructure spread

The GEPF owns 19% of RSA Government Vanilla Bonds and 32% of inflation-linked bonds. This is a 21% share of the bond market worth R160bn. These include bonds of Eskom, Transnet, Telkom, Airports Company, Development Bank, Trans-Caledon Tunnel and the Development Bank as well investments in national roads.

Developmental principles

For the GEPF, they incorporate:

  • Impartiality: investments that make sense, have good risk-adjusted returns and high developmental impact, whether in the public or private sectors;
  • Diversification: a wide range of investment classes are identified;
  • Transparency: members, pensioners and other stakeholders need to know how and why the fund makes each investment, free of personal or political interest;
  • Environmental, social and governance considerations: all investments, public and private, are held to strict ESG standards;
  • Acceptable returns: the fund seeks to earn a blended real return of at least 3% annually in line with its belief that a developmental approach should not compromise returns.


Energy: The GEPF invests in the generation and distribution of electricity from traditional fuel sources from both the state as supplier and independent power producers.

SA ’s economy will not develop without a secure electricity supply. “The country needs to double its generation capacity by 2026. While the GEPF is concerned about the environmental sustainability of coal-fired power, it does understand that the first developmental goal is to keep power flowing,” says Oliphant.

The GEPF will invest in coal-fired power generation to meet short- to medium-term demand, while simultaneously investing in renewable energy for substitution in the medium to long term.

Commuter transport: The fund invests in urban commuter transport systems such as the bus rapid transport system, the Gautrain and the Passenger Rail Agency. It also funds taxi companies, private urban commuter bus companies and municipal transport infrastructure development.

While bus rapid transport systems in Johannesburg and Cape Town are already operational, those in Pretoria, Durban and Port Elizabeth will continue to require significant funding.

The state-owned Passenger Rail Agency will need funding to bolster the efficiency and safety of commuter rail transport. As efforts to improve transport by taxi and privately owned buses gather pace, the fund will invest in expanding and upgrading their vehicle stock. Safer vehicles will contribute to fewer accidents and reduce loss of life on the roads.

Broadband infrastructure: Investments in broadband networks and undersea cable projects strengthen SA’s links to the world economy. The GEPF is looking to fund construction of broadband networks, whether land-based or wireless, private or public.

Water infrastructure: SA confronts a host of water-related concerns, including the need to provide all citizens with clean, potable water; acid mine drainage in Gauteng; and the condition of water and sewage treatment infrastructure.

Possible future investments in water agencies across the country have been identified, along with the purchase of municipal bonds for water and sanitation infrastructure and maintenance.

Liquid fuels: SA needs to increase its crude oil refining capacity and expand synthetic fuel production. Through its bond purchases, the GEPF has contributed to the construction of a new liquid fuel pipeline between Durban and Gauteng, as well as the upgrade of the Gauteng fuel pipeline network.

The fund is considering public-private partnerships -- project or bond finance -- to expand or build new crude oil refineries or pipelines, and to finance new and expanded coal-to-liquid plants.

Logistics infrastructure: Through its investments in rail, roads, ports and airports, the GEPF helps to ensure that SA is globally competitive and that its transport systems are efficient. “Expensive logistics act as a tax on both exports and imported intermediate goods used in the tradable sector, inhibiting economic growth,” says Oliphant.

Possible fields for the future include bonds and project finance for rail and port expansion and maintenance, investing in the national road network, and providing bonds and project finance for development of public and privately owned airports.

New enterprises, job creation: “Not only does unemployment cause untold social damage, especially to the youth, but it represents a waste of economic resources and a loss of national income,” says Oliphant.

In addition to housing, healthcare and education, the GEPF invests in B-B BEE projects as well as smaller and medium-sized enterprises that expand the base of job creation.

In turn, the GEPF believes, these can provide excellent opportunities for long-term investors.