2023 | The year for infrastructure

2023 | The year for infrastructure

2023 | The year for infrastructure 768 513 Tamela

The newly amended Regulation 28 governing the allocation of retirement fund assets came into effect in January 2023 after numerous rounds of public input.

The newly amended Regulation 28 governing the allocation of retirement fund assets came into effect in January 2023 after numerous rounds of public input. One positive outcome is the increase of up to 45% investment into South African infrastructure projects, thus making these projects more accessible for private investors.

An improvement of the economy lays partially on a sustainable supply of electricity, job creation, financial inclusion, and access to quality education. There are entrepreneurs and SMEs who are championing these causes but lack access to funding. With traditional banks positioned to finance large, well-established corporates, therein lies a gap in funding smaller, nascent, and lesser-known enterprises.

Mezzanine funding is that layer of financing between senior debt and equity. Mezzanine funding is better positioned than traditional banks in funding SMEs as SMEs tend to be higher up the risk curve. Mezzanine funding is advantageous to businesses as equity dilution is avoided due to the provision of debt funding. From the mezzanine funder’s perspective, there is merit in investing alongside a business-owner who has skin-in-the game to ensure alignment of interests.

Through their businesses, SMEs address aspects of the country’s poor economic performance per the medium-term budget policy statement (26 October 2022) (“MTBPS 2022”). Specifically, unreliable electricity supply and lack of job creation.

“Increasing the supply and reliability of energy is a key part of economic growth reforms, and new measures to achieve this include greater scope for private-sector generation of electricity.” MTBPS 2022

This is in line with global trends creating an opportunity for the private sector to contribute towards the advancement of the economy through infrastructure investments. Despite the challenges South Africa faces, there is ample opportunity for development with private sector involvement.

As defined by the amended Regulation 28 of the Pension Fund Act, infrastructure is “any asset that has or operates with a primary objective of developing, constructing and/or maintaining physical assets and technology structures and systems for the provision of utilities, services or facilities for the economy, businesses, or the public.

Infrastructure is a key driver of economic and social development. A feature that sets apart developed economies from emerging economies is their commitment to infrastructure development and maintenance.

The global energy crisis and green energy transition, 4IR driving the ICT sector, deterioration of infrastructure in South Africa and turbulent equity markets in 2022 indicate that it may be time to look at more resilient asset classes, themes and longer-term investments that have the potential to yield good risk adjusted returns.

As with any other investment, each infrastructure opportunity needs to be critically evaluated to suit the investor, particularly as investment horizons might be longer and the asset class is not as liquid as traditional asset classes. The project cycle also needs to be assessed; if it is in the greenfield or brownfield stage, it may be less risky. These investments can be accessed through direct investments, publicly listed funds, private infrastructure funds and public-private partnerships (PPPs).

National Treasury has committed R100 billion over a 10-year period to the Infrastructure Fund, housed within the Development Bank of Southern Africa (DBSA), encouraging PPPs. However, the success of a PPP hinges on cutting the red tape within the approval processes and establishing trust between the public sector and private sector.

Other forms of financing include issuing equity, debt and bonds. Green bonds and project bonds are increasingly becoming popular in South Africa. The first listing of an infrastructure project bond was in 2013 with the proceeds used to fund a solar power plant and a more recent green bond issuance in early 2022 was 3.8 times oversubscribed, indicating a clear appetite for funding sustainable investments.

How can we help?
Tamela has extensive experience and capabilities in capital markets, capital raising, project and corporate finance for various sectors including infrastructure, power and energy, financial services, mining and property. For more information contact (011) 783 4907 or zama@tamela.co.za.

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