Government opts for voluntary approach rather than prescribed assets

On 23 July, President Cyril Ramaphosa convened the Sustainable Infrastructure Development Symposium - South Africa (SIDS-SA). MoneyMarketing’s editor, Janice Roberts, spoke to Janina Slawski, Head: Investments Consulting at Alexander Forbes, who attended the event.

I’d like to go back to the end of May, when the Infrastructure Commission in President Ramaphosa’s office held discussions with asset managers and banks around the almost R2tn that the government needs for infrastructure development. These meetings were a precursor to SIDS-SA and I understand that Alexander Forbes was part of them. What was the general mood like at these gatherings?

It was generally very positive. They had several introductory sessions and Alexander Forbes participated both as an asset manager, as well as the representative of investors including pension funds. And then they had the pitching sessions, presenting some of the ‘shovel-ready’ proposals that are essentially ready to seek funding. Our head of Alternative Investments, David Moore, who has worked at a development finance institution and has had exposure to big infrastructure investment projects over an extended period of time, attended these pitching sessions. SIDS-SA has been an initiative with an extended delivery timeline, with a deep immersion in what it takes to deliver projects that are ready for investor consideration. You will remember that in 2018, the president hosted the first Investment Conference that targeted substantial infrastructure investment and, essentially, the President’s Office has since then been walking a journey with Development Finance Institutions, with commercial banks and with other private sector financial institutions to develop a pipeline of projects ready to present to investors. The extent of the journey walked to date, and the extent of involvement of infrastructure experts, bodes well for the success of this initiative.

One of the key success factors that has come through in the SIDS-SA discussions, is that these infrastructure projects are too big for local investors alone. South Africa needs to attract investment from international Sovereign Wealth Funds, the big European pension funds, the big university trust and endowments in the US and other large international investors. The reality is that the government is going to have to issue a volume of normal bonds because it has to finance its fiscal deficit. If an existing pension fund, for example, puts more money into investable infrastructure projects, then they’ll be disinvesting from government bonds and other assets – the assets than can go into infrastructure investments from local investors are finite, and represent opportunity costs versus other investments.

I think the SIDS-SA initiative represents a truly exciting investment environment for international investors – a lot of them are looking for developmental impact investment opportunities, as well as for green energy investment opportunities to potentially obtain carbon credits to offset their carbon emissions. This could be an opportunity to marry South Africa’s infrastructure investment imperatives with international investors’ appetite for impact investments in developing markets.

Would you say that the present voluntary approach is better than the prescribed assets approach?

Yes, I agree 100% with the present voluntary approach. If there is any attempt to try to squeeze existing pension fund investors through prescription, that will not create new money. It will just result in a re- allocation from existing asset classes, and with a potential reduction in investment returns – because instead of investing where investors want to invest, they would be forced into some sort of prescribed investment. What we are actually seeking is diametrically the opposite to investor-unfriendly policies such as prescription. We, and we believe the SIDS-SA initiative, is seeking to create investments that are attractive to pension funds and other investors, in which they will voluntarily want to invest. But by far the biggest source of funds for these projects is going to be new international investors.

Can and should pension funds play a role in funding these infrastructure investments? And what about Regulation 28 of the Pension Funds Act?

Yes, if the pension funds have the appetite to invest into illiquid investments. There’s one thing we have to understand about the South African retirement fund industry and that is that the majority of our retirement funds in South Africa are defined contribution funds in nature. Whilst the biggest funds in the country are defined benefit funds – for example the GEPF and the Eskom Pension and Provident Funds that still have long-dated, defined benefit type liabilities – the majority of funds (certainly by number) are defined contribution funds. Defined contribution funds by their nature are not necessarily very long-dated, given the short time that individual members might spend in their funds. They need to have assets available for the member that withdraws tomorrow, and to have the ability to calculate daily unit pricing and enable members to switch between portfolios.

One of the most interesting discussions that could happen in tandem to SIDS-SA is whether there are alternatives to traditional long-dated infrastructure investment vehicles. We hope that discussions around more liquid solutions will include the concept of green bonds and listed infrastructure bonds – the Association for Savings and Investment South Africa has been very involved in these discussions and the financial engineering that would be required to deliver these investible solutions. There is a trajectory that over time there will be more and more opportunities for investors to invest into infrastructure investments in liquid forms, but initially your big investors tend to be Development Finance Institutions, big Infrastructure Funds, and Sovereign Wealth Funds.

How ready is Alexander Forbes itself to invest in these infrastructure projects?

We are keen to invest into these projects for our investors, and to advise our standalone clients to invest into these projects. We cannot, however, put too much of our clients’ money into illiquid investments. The current environment is a very unfortunate illustration of why you can’t do that. We have several instances of clients that have illiquid investments that were not necessarily initially a large proportion of assets, but as they’re having to retrench employees or make other payments as their businesses or industries experience financial difficulty, they are having to pay more and more out of their liquid assets. This means that their unlisted assets start becoming a bigger and bigger proportion of their total assets. In our largest multimanager portfolio, the Alexander Forbes Investments Performer Portfolio, we already have a large allocation to alternative assets, at approximately 5%. We would never go to 15% because in this environment, we would not be able to liquidate and pay clients if and when they need their money, and other investors will face similar constraints.

You asked earlier whether there is a need to amend Regulation 28 of the Pension Funds Act, which has a 15% limit on alternative investments, to accommodate infrastructure investments. The reality is that most investors can’t actually go to the current limit – not because they don’t want to, but because they can’t afford to put so much into illiquid investments.

How can one predict that these infrastructure investments discussed at SIDS-SA will be well-managed?

As we’ve heard in the SIDS-SA discussions, there has been a lot of focus on the construction industry, which has been subject to a significant level of corruption, especially in the lead up to the 2010 World Cup. This potential for corruption or any potential for lack of delivery is a key issue that has to change in the infrastructure environment, and every stakeholder has to assist in ensuring that it does change. We know that even the best managed mega-projects can go horribly wrong in terms of overruns and not meeting timelines. What we have found as a strong positive in the SIDS-SA discussions is the whole process that has been followed in getting the candidate infrastructure projects ready for presentation. Experts who have been involved in successful delivery of mega-projects across the world have been advising on how to get a project ready for presentation, and in advising on how to enhance prospects for successful delivery.