NOMPU SIZIBA: National Treasury released a proposal to amend Regulation 28 of the Pension Funds Act to make it easier for pension funds to invest in infrastructure projects. These proposed amendments were released for public comment last Friday, a couple of days after Finance Minister Tito Mboweni delivered the national budget speech, in which he indicated that this was National Treasury’s intention.
Well, to discuss this matter further I’m joined on the line by Malusi Ndlovu, director of large enterprises at Old Mutual. Thank you so much, Malusi, for joining us. Now, the proposed amendments look at making it easier for pension funds to invest in infrastructure projects. What are the specifics? Does infrastructure become an investment class on its own, or what?
MALUSI NDLOVU: Hi, Nompu. It’s really good to be here, and good evening to your listeners as well. The changes that have been proposed by the Ministry of Finance relate to making it easier to invest in infrastructure by different types of retirement funds, as you’ve actually said.
Now there are two ways that one can think about infrastructure from an investment perspective. Either it’s a different asset class on its own, or it’s a theme within different asset classes. The way that Treasury has chosen to look at it is the latter, where within equity it’s possible to invest in infrastructure and have an ownership stake in an infrastructure asset; and within bonds it’s possible to invest in infrastructure and basically issue debt towards infrastructure assets and so on – and similarly across all the different asset classes.
So what they are proposing is that you have limits within each of the regulated asset classes, with an overall cap of 35% among domestic assets, and another 10% for African-based investments.
NOMPU SIZIBA: We know that the government is keen to use infrastructure investment to help spur economic growth but, from a pension-fund point of view, how significant might this be for pension-fund member returns?
MALUSI NDLOVU: I think one has to look at this as one step among many towards the ultimate aim of increasing how much pension funds invest in infrastructure assets. This move alone should not necessarily result in an increase in those investments from retirement funds. I think what it’ll do is increase the visibility of how much retirement funds are already [invested] in infrastructure and give them a view as to how much headway they have to invest even further. That alone is good, because it’s going to spur more conversations among trustees with their advisors about the options, and what they can do even more.
However, in order to get to the ultimate aim of actually increasing the level of investments that are made from retirement funds, there’s a lot that has to be allowed to …… [2:57] the ecosystem as well, such as making sure that there’s a lot of investible assets and projects that are available, making sure that there’s a constant deal flow of these investments coming through, so investors can be comfortable, and they can allocate them on a continuous basis.
There have to be models for partnership between the public and the private sectors. All those things are part of the ecosystem, beyond just the regulation of retirement funds, and it would be good to see movement in those aspects as well, especially as South Africa is already quite well developed and has very good capabilities along those lines.
But I think the more we invest in those, the more we are going to see more infrastructure investments from retirement funds and other investors.
NOMPU SIZIBA: Do you suppose that pension-fund board trustees will be excited about the greater prospect for investment? And, assuming it does get the seal of approval once all the public comments come through and so on, as with all investments obviously due diligence would remain quite important. Just imagine if pension funds had invested in projects like the Medupi or the Kusile coal-fired power plants for example.
MALUSI NDLOVU: That’s a very important point to make, Nompu, and we’re very glad that the discretion of trustees to make investments has been retained. So this hasn’t been done in the form of prescribing that retirement funds have to invest in infrastructure. Rather, they have an option to do so, and the wording in the explanatory memorandum also goes as far as talking about all the things that trustees have to think about before making these investments – cashflow profiles and so forth, some of the things that have already been done.
So investors and members of retirement funds need not panic that this is going to result in irresponsible investments being made. The trustees still make the final court.
Now, as to whether trustees are going to be excited and more interested – I certainly think so. If you look at just infrastructure as an asset class, there are a few features that make it particularly attractive to retirement fund investors.
One is the really long investment profile that you’ve got. Typical projects can take anywhere from four to 12 years to realise [returns], and they’re not liquid – so you’re not able to buy and sell your holding as you would in a stock market. Now retirement-fund investors invest for periods of 20 to 30 years, and so this makes infrastructure particularly well suited; and the return that one gets in return for that – the risk of holding that asset for very long – is quite attractive. Infrastructure, particularly, has provided returns that are 5%, 6%, sometimes 7%, which you won’t get anywhere.
So I’m certainly hoping that retirement-fund trustees and their advisors are going to look at this as an opportunity to reassess whether or not they want to increase investment into this asset class, or asset theme, and take the right steps in doing so.
There are also going to be, I suspect, a lot more investment opportunities being made available, and that competition and increase in supply of investment funds should drive some healthy competition. We should see more professionalisation into this space – even though we are already quite professional – and just increase the ability of South Africans to take advantage of this asset class.
NOMPU SIZIBA: And, of course, given government’s emphasis on infrastructure development to help spur the economy, the timing is rather interesting and quite opportune, because one of the things that government does want to ensure happens is PPPs – your public private partnerships.
MALUSI NDLOVU: Yes, absolutely. Even before we had this Covid- and lockdown-induced recession, there was already a huge backlog in infrastructure investment. If you look at the African continent as a whole, we require about US$90 billion per annum in infrastructure investment to make up the gap, and we are attracting only about $25 billion. This was already there. And now we sit with this recession and we need to get out of it and generate some growth.
The great thing about infrastructure is that you are physically building something from scratch, buying land, buying materials, hiring people who would have been unemployed, bringing in different suppliers, bringing in professionals, architects, engineers, lawyers and others. It really is the very essence of creating economic activity when you put up infrastructure assets. Not only that, once it’s up and running, it makes economic activity easier.
So if there is a well-placed, well-functioning road between two towns, suddenly it takes 10 or 20 minutes to move from one town to another, as opposed to having to plan for a hotel, making it difficult for people and goods to move. And that immediately reduces the cost of doing business in that region.
So infrastructure is a great asset to stimulate economic activity. I think the timing of the proposed changes is very good, and one hopes that investors are going to take advantage of this opportunity, not just to generate good returns, but also to provide a social return for themselves.
NOMPU SIZIBA: It does sound like a really exciting prospect. Let’s hope all goes well in this regard. Thank you so much, Malusi, for your insights there. Malusi Ndlovu is the director of large enterprises at Old Mutual.