The pace of infrastructure roll-out and its impact on development levels will benefit from a focus on environmental, social and governance (ESG) metrics and private sector investment in impactful, well-governed infrastructure, says private equity infrastructure funds manager African Infrastructure Investment Managers (AIIM) co-MD Vuyo Ntoi.

“The proposed changes in South Africa to asset class rules that will allow pension funds to elect to invest in infrastructure are welcome and, given AIIM's experience in developing private sector-led and public-private partnership (PPP) infrastructure across Africa, will help to stimulate investment in and the roll-out of vital infrastructure on the continent,” he adds.

The focus on ESG factors helps to reduce risks for investors - improving the likelihood of successful investments and attractive returns - and also helps to ensure that the infrastructure built provides broad and sustainable benefits to communities and economies.

This follows after the National Treasury last week published draft amendments to Regulation 28 of the Pension Funds Act for public comment.

“ESG has been an integral part of AIIM’s portfolio considerations and was fully integrated into the investment processes and structures well before it became a core aspect of impact investment. Institutions and pension funds have focused attention on the impact of the investments they are backing,” he says.

Impact investments focus on the intended and expected impacts of infrastructure development not only on the immediate beneficiaries, but also on communities and the environment, he explains.

“This is important because it helps to ensure that projects are sustainable from a community and stakeholder perspective," says Ntoi.

Pension funds, in particular, have long-dated liabilities and the cash flow offered by infrastructure makes it an ideal asset class for such funds. If the stable nature of the cash flows associated with infrastructure are taken into consideration, it becomes an attractive asset class on a risk-return basis, one with low correlation to many more traditional asset classes in a pension portfolio.

“The economic fundamentals for investment in infrastructure remain compelling, especially considering that infrastructure must be expanded to accommodate urbanising populations and there is a significant need for infrastructure development and investment on the continent,” he says.

The proposed changes to the regulations should help to increase the direct and indirect exposure to infrastructure projects that pension fund trustees can pursue.  However, as many trustees are yet to consider and review infrastructure fund managers, it will be important that their investment consultants and advisers steer them to experienced investment managers who are able to secure superior risk-adjusted opportunities for their clients.

“We have successfully financed private sector-led and PPP infrastructure projects over more than 20 years. Improving infrastructure across the continent has many positive externalities, as significant improvements in energy provision and the provision of new corridors for trade allow countries to grow their economies,” highlights Ntoi.

Infrastructure is a critical factor in the health and wealth of a country, enabling private businesses and individuals to produce goods and services more efficiently. Infrastructure provides the basis and platform on which economies can grow, with studies showing that infrastructure investment provides 1.5-times the costs in GDP growth benefits over two to five years. Infrastructure can assist economies, such as an effective, reliable transport network helping the agriculture and mining sectors to move goods. It acts as a binder for economies, moving people and produce to markets, he explains.

“Additional investment in infrastructure improves the operating environment and the prospects for businesses to serve local and international customers. The presence of such infrastructure is a key driver, which determines the extent to which foreign investors are interested in doing business in countries.”

In recent years, AIIM has seen more private-sector-led self provisioning infrastructure projects, especially for companies looking to support their commercial and industrial operations. There are significant benefits from such self provision, as in many instances surrounding communities can also benefit from this infrastructure. AIIM has positioned itself as a partner to large companies seeking to explore this route of infrastructure provision.

Globally, 40% of all private investment in infrastructure comes from pension funds, with pension funds in Canada and Australia allocating around 10% of their portfolios to the asset class.

This has proven a successful strategy in driving robust returns for the investors and increasing economic infrastructure for these countries. Structured correctly, the provisions of the proposed amendments to Regulation 28 have the ability to provide significant stimulus and funding for the build out of new, critical and sustainable infrastructure for South Africa.

“We believe that it is crucial that the legislation is tailored to broaden the investment opportunities available to pension funds and add to the impetus to develop especially new productive infrastructure rather than simply driving a rebalancing of allocations to existing assets which may now unintentionally be captured within the infrastructure definitions,” explains Ntoi.