Reducing South Africa’s infrastructure deficit with more funding

We all know that infrastructure is a key determinant in the growth of our economy. So, what holds back infrastructure investment? Kirsten Kelly talks to Shaheed Alli from Nedbank CIB about bankable projects and the variety of available financial instruments for infrastructure finance.

Infrastructure projects can be challenging to structure into a bankable transaction. Some of these projects are meant to be funded purely by government funding. Other infrastructure projects will fall within the public-private partnership (PPP) space.

Then there are smaller projects that could fit purely within the private sector. It really is a mixed bag, and there will never be a single finance model that can apply to all projects,” says Shaheed Alli, principal: Infrastructure Water and Telco Finance Division, Nedbank Corporate and Investment Banking

Alli believes that PPPs are a good model to alleviate pressure on the fiscus.

“Infrastructure projects are capital intensive. PPPs allow for the upfront capital to be raised in the private sector and this makes it more affordable for government, as government usually pays a unitary payment over an extended period of time – as opposed to raising the capital required up front. This also allows for government to deploy multiple projects. In addition, one of the benefits of a PPP is that the risk of the build itself, as well as the operations side once the build is completed, is transferred to the private sector. Also, jobs are created for the private sector – making a broader contribution to the fiscus.”

Guarantees

While a lot can be done to reduce pressure on the fiscus, some projects will always need guarantees.

“In my experience, I have never seen a project (yet) call on a government guarantee. There is a benefit to having guarantees in place. One such benefit is that if one looks at a pricing model, pricing with a guarantee will always be better than pricing without such support. This benefit flows into pricing the transaction, which is then passed on to the private sector that is doing the build for government. The private sector can then offer government better pricing for the build.”

In addition to pricing benefits, a guarantee adds certainty to the market. Institutional investors like pension funds and insurance companies prefer long-term debt, but require certainty of debt repayment. Guarantees also help to increase liquidity in the market.

Blended finance

While not new, Alli believes that blended finance can assist in bringing more projects to market.

Blended finance is a structuring approach that enables organisations with different objectives to invest alongside each other while achieving their own objectives (whether it be financial return, social impact, or a blend of both).

“An example would be: if only 80% of the project is commercially viable, then 20% of the project would need to be funded by a development finance institution (DFI) or government itself,” explains Alli.

Another example is blended finance between DFIs and commercial banks. DFIs typically offer better pricing and longer-term debt. For instance, a commercial bank may offer 10-year tenor, while a DFI would offer a 15-year tenor – and this could be the deal enabler.

“There is also the blending of product sets, such as offering a combination of a senior loan, mezzanine loan and even CPI debt. These blended product sets offers a lot of flexibility,” he continues.

Nedbank believes that by supporting infrastructure projects that can further SDGs, we can get a return for our shareholders while improving the environment and the lives of people.”

Bottlenecks for infrastructure delivery

Alli emphasises that funding is not a bottleneck for infrastructure delivery. “There is a lot of funding available with DFIs and commercial banks. It is about getting these projects to market and making them bankable.

“Regulatory processes take a long time and working with multiple government departments can be a cumbersome process. There should be a focus on streamlining some of these procedures and making them more efficient. Dealing with these bottlenecks is a balancing act. For example, Treasury approvals cannot be removed – they play a very important role in making sure that, among other things, the procurement process is transparent. Competitive bids, transparency and value for money should always be encouraged,” explains Alli.

While PPPs are a good model, it takes a very long time for these projects to come to market, as they have to go through a lengthy approval process. Alli believes that it is very difficult to skip any steps in the regulatory process when it comes to PPPs.

“It is a rigorous, time-consuming practice but it works very well. You will be hard pressed to find any allegations of impropriety with PPPs and this is because of the Treasury process. The immediate challenge lies in streamlining the regulatory process, while maintaining its integrity.” A

lli adds that a good example of a programme that accelerates project delivery is the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP). This is a competitive tender process that was designed to facilitate private sector investment into grid-connected renewable energy generation in South Africa. As a result, South Africa has achieved more investment via independent power producers in four years than the rest of sub-Saharan Africa has over the past two decades.

“REIPPPP has brought large-scale projects to market in a very short period of time, with all of the checks and balances in place through a competitive bidding process. Multiple investors look

at these projects and compete against each other. With REIPPPP, government can deliver against its mandate by using the expertise and funding of the private sector,” he says.

Infrastructure delivery can be accelerated with partnerships between the public and private sectors.

Risks

Each infrastructure project will have a different risk profile. One of the risks around the financing of infrastructure projects is the ability of the developer/ contractor that won the tender to deliver the project.

“As a bank, it is in our interest to make sure that these infrastructure projects are developed properly and on time. That is a safeguard for government. If we do not make sure that developers/contractors deliver on a mandate, we do not get paid,” states Alli.

Lenders appoint their own technical, legal, financial and insurance advisors on board. When a project is presented to the bank, the deal team – together with the advisors – will interrogate the information and ascertain whether the project is feasible and cost-effective, as well as whether it can be delivered within the given parameters.

In order to safeguard against these risks, a developer/contractor will be bound by contractual liquidated damages if a project is delayed or is not delivered.

All these measures assist in mitigating risks in projects.

The good news

President Cyril Ramaphosa announced the development of an infrastructure investment project pipeline worth R340 billion in network industries such as energy, water, transport and telecommunications in his 2021 State of the Nation Address (SONA).

“I think that there was an expectation that projects would start to roll out within a few months of the President’s SONA. But, in

reality, these projects take time to come to market. However, the formation of the Infrastructure Fund is a very positive development,” adds Alli. The Infrastructure Fund is a government funding and ancillary support service for co-financing blended finance programmes and projects.

Through the Infrastructure Fund, government will provide support for the co-financing of projects and programmes that blend public and private resources.

I think that there was an expectation that projects would start to roll out within a few months of the President’s SONA. But, in reality, these projects take time to come to market.”

Currently, provision has been made for R100 billion over 10 years. The Infrastructure Fund will be used as viability gap funding for large-scale infrastructure investments. The support will take different forms, such as funding deserving infrastructure projects, blended co-funding, capital subsidies, or interest rate subsidies and guarantees.

Parties in the Infrastructure Fund memorandum of agreement include Infrastructure South Africa in the Department of Public Works and Infrastructure, National Treasury, and the Development Bank of Southern Africa (DBSA).

“This shows government’s commitment to successfully rolling out infrastructure projects. Nedbank has met with the team from the Infrastructure Fund. It is a formidable team comprising experienced people from both the public and private sector,” says Alli.

Another positive development is the DBSA’s Project Preparation fund, which supports infrastructure projects through funding the preparation of projects that fall short of the needs of both the public and private sector – as, in many cases, sponsors do not have funding available to prepare projects to the investment stage.

Alli adds that there are often delays in simply getting the project to the market. “Generally, there are limited skills in getting projects to bankability – which is understandable, as that may not be a government entity or private business’s core function. Therefore, the DBSA will play a vital role through its Project Preparation Business Unit in assisting to bring projects to the market.”

As a ‘green bank’, Nedbank will always take the social and environment impact of a project into consideration and it is passionate about driving the Sustainable Development Goals (SDGs). “As a bank, we believe that by supporting infrastructure projects that can further SDGs, we can get a return for our shareholders while improving the environment and the lives of people,” concludes Alli.