During his maiden budget speech, Finance Minister Enoch Godongwana announced a provisional R17.5 billion injection for the Medium-Term Expenditure Framework for infrastructure catalytic projects, aiming to upgrade roads, bridges, water, sewer, transport, and school infrastructure, as well as hospitals and clinics.By Heleen Goussard, Head of Alternative Investment Services, RisCura For some time, the government has had its eye on the long-term savings industry, which includes life offices and retirement funds, as a potential funding partner for its infrastructure programme. To enable retirement funds to participate in this investment opportunity in an appropriate manner, both changes in regulation and risk-management processes are required. To enable these regulatory changes, National Treasury released draft amendments to Regulations 28 of the Pensions Funds Act that if passed will enable retirement funds to invest up to 45% of their portfolios in local infrastructure projects, and in the press release, alluded to a further 10% in projects on the African continent. This is a massive increase from most funds’ insignificant exposure currently. Due to the size of investments, projects require complex funding structures, and a slew of equally complex regulations and red tape needs to be navigated to make projects viable and investable. Investing in infrastructure is complex and needs to be done in a risk-managed fashion. Retirement fund trustees and asset managers need to be clear about what they’re investing in and the potential impact on the portfolios they manage on behalf of millions of members. Understanding the extent and nature of one’s exposure to risks is the starting point of all risk management processes. Opportunely, the Association of Savings and Investments South Africa (ASISA) has published a Standard to guide asset managers and trustees in reporting requirements. Developed in conjunction with the investment firm RisCura, it not only provides a definition of infrastructure as an investment and also classifies infrastructure investments in terms of their risk and impact. Having a proper definition and classification system will help to make these investments measurable and comparable between portfolios, while also enabling the industry to coherently demonstrate to the government the extent of their participation in infrastructure investment. This is the ASISA definition:
“The basic physical structures and systems (e.g., buildings, roads, power supplies, water supplies and communication networks) for the provision of utilities or services and constructed for public use or enjoyment.”This definition largely correspondences with the one proposed in the draft of the changes to Regulation 28, with the only point of contention the inclusion of soft infrastructure which is not necessarily bricks and mortar to the draft definition of Infrastructure. The Regulation 28 draft also indirectly addressed another long-standing ambiguity in the industry on whether infrastructure can be seen as an asset class. The new draft Regulation 28 treats Infrastructure as an exposure within other asset classes, which agrees to our understanding and how Infrastructure is treated as an investment theme. Classifications Having defined infrastructure, RisCura then assisted in the development of a set of classifications for ASISA with particular emphasis on risk and impact. Where possible existing classification were used to ensure consistency in reporting and understanding. On the risk side, RisCura based the industry classification developed by EDHEC, The Infrastructure Company Classification Standard (TICCS), one of the top 15 European business schools as it is comprehensive and internationally recognised). Financial instrument classification is another important indicator of risk. For this classification, the International Financial Reporting Standards classifications were largely used. Impact was considered in two ways. First, RisCura mapped the industry classification through the Sustainable Development Goals of the United Nations. Then, RisCura looked at the level of public access, of which there are three types: untolled, tolled, and untolled for special groups. Untolled infrastructure is typically supplied free to the whole population. Projects of this type are seen as high-impact, such as supplying free internet to everyone in the country. Or free library services. Tolled infrastructure includes the likes of electricity – it’s also high impact but it is paid for. Finally, ‘untolled for special groups’ would include projects such as student housing. Tolled infrastructure can be more viable if governments are fiscally constrained, as these projects have the potential to raise their own revenue, but is less impactful as it does not always increase the poor’s access to infrastructure. Having a good understanding of how much capital is invested in infrastructure assets as well as what the nature is of exposure is allows asset owners to make informed and appropriate further investments decisions. This should contribute to asset owners being able to participate in the investment opportunity offered by governments plan to invest in infrastructure in a well-regulated and risk-managed manner, ensuring the best outcome for pensioners.