Building South Africa’s future: can infrastructure investment overcome regulatory hurdles?

The government’s plan to turn South Africa into a bustling construction site through increased infrastructure investment has broad support, but it faces major roadblocks – most notably, the country’s tangled regulatory landscape.

In his address at the opening of Parliament in July, President Cyril Ramaphosa laid out a bold vision: a five-year infrastructure investment plan that aims to turn South Africa into a massive construction zone. “From our largest metros to the most remote rural areas, we aim to transform South Africa into a construction site,” he declared, detailing plans for new roads, bridges, homes, schools, hospitals, clinics, broadband fibre, and power lines.

Turning this ambitious vision into reality depends on two key ingredients – skilled workers to oversee massive projects and the hefty funding required to get them off the ground. Unfortunately, the country is short of both.

However, the government believes it has a game-changer up its sleeve – a “magic wand” of sorts that could make these challenges disappear: public-private partnerships (PPPs). With the right collaboration, it says, this could be the key to unlocking the country’s infrastructure dreams.

Read: Proposed Regulation 28 amendment – are prescribed assets coming back?

Mika Adsetts, global chief investment officer of Momentum Multi-management, spoke on the topic “Helping South Africa rebuild: Infrastructure and partnerships” at the Institute of Retirement Funds Africa conference earlier this month. Adsetts argues that although PPPs are vital, relying solely on them will not be enough for the country’s infrastructure ambitions to succeed; a diverse mix of investments is crucial to scale up projects.

“We need private sector investment, we need government investment, but also, crucially, we need foreign direct investments. And we need those multilateral institutions and family offices and institutional investors from around the world to come into the sector.”

He adds that although there is significant capital within the private sector, much of that money has already been deployed and, while the South African retirement industry is a big sector, the capital from that sector needs to be harmonised and mobilised within limits.

“Because there are constraints and consequences to investing in infrastructure and there are competing interests.”

Although the need to harness private sector investments, particularly from the substantial pools of savings available, exists, he cautions that this approach must be handled with care.

“Even though the regulatory environment allows up to 45% (Regulation 28) to be invested in infrastructure, is that a sensible application of capital in a retirement fund? We need to be mindful of that,” he warns.

Then there are the varying risk appetites among different stakeholders to consider. Adsetts says to attract investments from all parties, there must be clear differentiation in capital structures.

“To make the investments attractive for the different participants in the value chain, there needs to be a differentiation in the capital structure and different abilities to take risk at the level that is comfortable for yourself with the trade of liquidity and time horizon and all those other things,” he says.

More crucially, Adsetts emphasises that for South Africa to attract foreign investors and their capital, there must be a clear and concise regulatory framework free of contradictions.

“Policy certainty is a key thing… You need to know what you’re letting yourself into, know that the rules of the game are not going to change over time,” he says.

Ironing out regulatory conflict

Adsetts says one of the big issues that faces the South African deployment of capital into the environment is the level of regulatory conflict that exists.

“There’s a lack of alignment and consistency of regulations, and more recently, there’s been a lot more focus on infrastructure-specific rules and regulations, but there’s a little bit of patchwork in the mosaic, and it’s quite difficult to navigate through all the different issues.”

He says there are multiple sets of legislation that do not agree.

“You’ve got environmental impact assessments, you’ve got Companies Act, you’ve got the Public Finance Management Act, you’ve got the Municipal Finance Management Act that do not necessarily speak to each other. We need less legislation, not more.”

He says a piece of legislation that retirement fund administrators have been grappling with intensively over the past couple of years is the relaxation of Regulation 28 – a regulatory regime that pushes money outside of the country. At the same time, there’s been pressure on infrastructure investments.

“So how do we deploy that capital,” he asks.

A second example is the new two-pot retirement system. According to Adsetts, the two-pot legislation requires a level of liquidity in funds to address real needs in membership. But high levels of liquidity mean you cannot invest in infrastructure projects, he explains.

“When I talk to my portfolio managers, there’s been a huge hesitancy to commit significant amounts of capital to illiquid projects in the context of not trade – how much capital is going to be drawn out of portfolios that need to be serviced on a fairly short turnaround as a result of the two-pot system.”

Constitutional supremacy is firmly established in South Africa. Constitutional supremacy refers to the principle that the Constitution is the highest law of the land, meaning that any law or government action that is inconsistent with the Constitution is invalid.

Adsetts explains that if there’s a framework for conflicting legislation, it can be resolved through the Constitutional Court.

“Portfolio managers do not want to manage portfolios through the court. So even though there is that ascendancy of regulation, the reality is that at the micro level, regulation needs to harmonise, and it needs to make sense, and it needs to be able to make the right trade-off.”

He says what is needed is an overarching framework that divides where the priorities are, “not having a legal department scouring through multiple sets of legislation”.

What constitutes infrastructure?

Even if the government can effectively address the regulatory framework across its various silos, significant hurdles still remain. One major challenge is determining what exactly qualifies as infrastructure. Adsetts explains that although Regulation 28 provides clear guidelines on permissible investment amounts in infrastructure, the precise definition of what constitutes infrastructure appears still to be evolving.

“There is a little bit of work that is currently happening in terms of organising some of the views of what constitutes infrastructure, but in my experience, it is a little bit of ‘infrastructure is in the eye of the beholder’.”

He adds that, from a reporting standpoint, demonstrating that an investment qualifies as infrastructure can be quite challenging. “There are massive administrative burdens that you need to build into your annual reports or risk reports and everything else.”

Political commitment – or the lack thereof – is another significant stumbling block. While it is assumed that PPPs will play a critical role in addressing the country’s infrastructure backlog, Adsetts observes that the political landscape can be murky.

“When you listen to different factions or political parties, there are times when you’re not sure there is full political support for private sector-led infrastructure.”

He cites the hesitancy surrounding the opening of railways between Johannesburg and Durban as an example of the complexities and mistrust that exist on both sides of the political spectrum.

“There’s fear, and there’s a level of mistrust on both sides of the political spectrum, the public and the private sector. Political commitment, and consistency of political commitment, is something to get right.”

And while investing in infrastructure projects that will uplift the population is the right thing to do, it also needs to make business sense. Adsetts says there’s a massive need for infrastructure investment in the country, “but how many bankable projects that are attractive to portfolio management and asset management companies are there?”

“You’ll tend to see that the big players in infrastructure investments are a lot of life companies. Why are the large companies the big players in infrastructure investments? Because we’ve got balance sheets that can take liquidity risk, which is not really the case for a lot of the other asset managers. That creates constraints and lack of opportunities for them as well.”

Two other key aspects that Adsetts touched on during his presentation were developing the rights skills and prioritising maintenance. He emphasised the need to attract and train the right skills, such as engineers and scientists, to effectively develop and manage infrastructure projects.

He also stressed the often-overlooked need for prioritising maintenance, adding that the significant backlog in maintaining existing infrastructure threatens the longevity and efficiency of these assets.

“It’s always nice to look at the new glamorous projects, the Medupi Power Station and the Kusile Power Station, that’s currently coming online. But maintenance is crucial. It’s pointless to invest in mega projects, then run them at 90% capital capacity for 20 or 30 years and get surprised when they start falling over.”

The future of South Africa’s infrastructure hinges on effectively addressing these critical elements.