Let's Talk About Infrastructure and Energy: Session 1

In this series of short videos, Jason and Olga discuss the topical subject of Infrastructure Investment from the perspective of Futuregrowth, an institutional asset manager. They will outline the current challenges in the eco-system, discuss the current reform programme and the need for private sector investment, and the building blocks required to unleash private sector capital. They will also provide some case studies to illustrate what has previously worked and can work again, if all the players in the eco-system play their part.

Transcript

Good afternoon. My name is Jason Lightfoot I’m a Senior Portfolio Manager at Futuregrowth Asset Management, managing our flagship Infrastructure and Developmental Bond Fund.

Hi, and I’m Olga Constantatos and I’m Head of Credit here at Futuregrowth Asset Management.

So this is the first of a series of conversations that we would like to have around infrastructure and investment. We have written and spoken at length for many years on this topic and we thought it would be a good time now to share some of our emerging insights in this space. We want to talk about some of the challenges that are in this area as well as some of the opportunities. And the topic we're going to tackle today is really just to sketch out the landscape and what it looks like right now. And in future series, we'll talk about how we solve for the challenges and the opportunities.

But maybe Jason you could kick us off with what is the lay of the land right now?

Yeah, I mean, it's a topic that's very close to our hearts, and we obviously see the benefit that it has for pension funds. We’ll talk more about that later, but also the fact that it has a good inference or a bearing on economic growth for the country.

So one of the measures that we look at from an economic perspective is Gross Fixed Capital Formation, and we use that as a percentage of GDP. So what that refers to is how much is actually being spent on real capital assets.

For example, so in things like investments into toll roads, power utilities, ports and harbours South Africa really has been on a downward trajectory where it's been fairly low compared to its other emerging economy peers. But if you look at the long-term picture over the last 60 years or so we’ve probably been close to about 15% of GDP. If you compare that to China, as one of the economies that are at the forefront in that perspective, they’ve been closer to about 35% and it has a direct bearing on economic growth.

Where, if you look at our long-term economic growth, we’re close to about 2,5% compared to China which is at about 8,5%. So you see the importance of investing into infrastructure and the bearing it has on economic growth over the long term.

Certainly, and economic growth is something we all need in this country. And I think what Jason also outlined is that the sectors in which this investment is needed is very much in the energy and logistics space, and that is something that we are all as citizens of South Africa are feeling very deeply.

The two entities that are kind of, I guess, responsible for delivering on some of those investment needs, are Eskom and Transnet. And unfortunately, they themselves are not in a state where they can take on additional borrowings to make these investments themselves.

The State as well has got debt to GDP numbers that are very high and so there's a limited capacity for the state to take on further borrowings to do these investments themselves.

And so the conversation of late has turned very much to enlisting the private sector and how the private sector can help the State in making these investments in these core areas, particularly energy and logistics. And so it's very evident that there are investment opportunities there, but the private sector is being enlisted to help. And I think the next question we want to really ask is to say, well, you know, can we help? What is the capacity for the private sector to be able to make these investments?

I mean, in terms of the expected capital expenditure, or funding requirements rather, in this space is said to be north of about 1,9 trillion rand over the next 10 to 15 years. So it should set up a whole mix of different sectors. But as I alluded to earlier, energy and transport are the key sectors that do require funding, as an immediate start.

So if we look at energy, for example, it's about 1.4 trillion rand that's required. That's based on the Integrated Resource Plan of 2019. Sure, it does need to be updated, but it is expected to be in that sort of realm. And again, you alluded to the fact that capital markets and or bank institutions and the retirement fund industry, they do need to play a role.

This government ultimately can’t. Their balance sheet is in a poor state, given the fact that the State debt to GDP number is close to about, say, 75% right now and it’s expected to grow to close to about 92%. Given the fact that they also still continue to provide guarantees for its SOEs who can’t fund off their own balance sheets. So it really is a sad state of affairs. Coming from the industry, it is our key aim to play a role here, but ultimately these deals and opportunities need to be bankable. We’ll talk more about that later in our next instance of this series.

It's really about creating an environment to allow the pension fund industry to invest in these opportunities. Given the fact that these assets are ultimately of the tune to the long-term liabilities. Yeah, so we've established this huge need for investment. There’s big capacity certainly in the retirement fund industry to make these investments. And I think, really, the next conversation that we would like to have is just to talk about how to unlock some of these opportunities and make them happen. What do we need to see in terms of frameworks and in order to make these investments, these much-needed investments, happen? So we'll have that conversation next time.

Great. Thank you.