A few short days after the National Budget 2021, National Treasury released draft amendments to Regulation 28, setting out clear limits for infrastructure investment as an asset class.
Regulation 28 is intended to protect retirement fund savings by limiting exposure to any one asset class. Currently, the regulation does not define infrastructure as a specific category, although infrastructure investment is spread across several asset classes such as equity, bonds, loans and private equity. Consequently, current data from retirement funds do not record the exact investment in infrastructure.
A media statement from National Treasury notes that the proposed review to Regulation 28 is informed by a “number of calls for increased investment in infrastructure given the current low economic growth climate”.
In his Budget speech last week, Finance Minister Tito Mboweni said the South African economy was expected to rebound by 3.3% this year, following a 7.2% contraction in 2020, after which it should average 1.9% in the outer two years.
The government has committed to a R791.2-billion infrastructure investment drive to this end.
“We are already partnering with the private sector and other players to roll out infrastructure through initiatives such as the blended finance Infrastructure Fund,” Mboweni said.
The Infrastructure Fund is intended to be used to provide viability gap funding for large-scale infrastructure investments. This support will take different forms, including funding deserving infrastructure projects, blended co-funding, capital subsidies or interest rate subsidies and guarantees.
The proposed amendments to Regulation 28 include:
Malusi Ndlovu, director of large enterprises, markets at Old Mutual Corporate, says the overriding implication of the proposals is that they will make it easier for retirement funds to assess their current exposure to infrastructure investments.
“The fact that investment in domestic infrastructure is limited to 45% is not necessarily a bad thing, but a limit of 10% for infrastructure investment in the rest of Africa is a little problematic, given that the biggest appetite for infrastructure funding lies in other African countries,” he says.
Ndlovu says when looking at the proposed Regulation 28 amendments, there are three things to consider:
- Choice: The amendments propose limits for investment in infrastructure, but these are not prescribed limits. That means that retirement fund trustees can still exercise their discretion and decide not to invest in infrastructure if that does not align with the fund’s investment strategy;
- Suitability: Infrastructure investments tend to be long-term investments that provide higher returns in excess of inflation over time. This means investing in infrastructure projects is particularly suitable for retirement funds, where members are investing from the ages of 25 to 30 and disinvesting when they retire at 60 or 65; and
- Sustainability: As society becomes more aware of the importance of sustainable investments, infrastructure has taken on greater relevance for investors. “Most South African retirement fund members plan to retire in South Africa. Their fund’s investment in infrastructure would generate financial returns as well as social returns in the form of stimulating economic activity, increasing the resilience and sustainability of their own communities,” Ndlovu says. Tanya van Lill, chief executive of the South African Venture Capital Association (Savca), seconded this point. “For example, a retirement fund in the clothing industry could invest in infrastructure to directly benefit the area where employees live, improving roads and building schools,” she says.
Van Lill applauded National Treasury choice to split private equity into a stand-alone asset class with a limit of 15%.
“Last June, Savca motivated to be separated out because hedge funds comprise a completely different asset class with a different risk profile,” she explains.
According to Savca, the current Regulation 28 asset classes and ceilings act as constraints on asset allocation decisions, potentially leaving investors with inefficient portfolios.
“This is particularly the case when asset classes with uncorrelated returns and risks, stemming from fundamentally different economic drivers, are grouped under a single threshold. Changes to Regulation 28 could provide pension funds with a higher degree of diversification, which would not only offer positive public benefits by improving the overall financial security of pension fund savers in the long run but also provide much needed economic stimulus to the South African economy,” Van Lill says.
Typically, larger retirement funds have been investing in private equity to date, but the private equity industry is hopeful that the proposed amendments will help more retirement fund trustees see that they have the option to invest in private equity.
“I think it is vital that retirement funds carry out their due diligence before investing in an infrastructure project, just as they would with any other investment. They should be looking for project managers with successful track records, who can show proof of previous projects and returns generated. Another good signal is the presence of experienced and reputable investors on the project, such as international development finance institutions,” Van Lill says.