A flawed infrastructure plan
The proposed changes to regulation 28 of the Pension Funds Act are intended to provide an enabling environment to support the government’s plan for increased infrastructure investment.
The National Treasury is understandably trying to tick the boxes that would appeal to investors that are not familiar with infrastructure investments.
However, we have some concerns with the current draft amendments.
The Infrastructure Development Act of 2014 states that “infrastructure” means installations, structures, facilities, systems, services, or processes which are part of the national infrastructure plan.
Our interpretation of this definition is that private infrastructure is not covered by the proposed amendments.
We need clarity as to whether the idea was to focus only on funding public infrastructure.
If that is the intention, we are concerned that, first, the bulk of amendments might prove to be redundant and, second, that private sector infrastructure won’t benefit from these changes.
The definition needs to be expanded to cover all infrastructure.
For a start, private sector financing is likely to be the foundation of the next round of renewable energy procurement, which will create private energy generation infrastructure.
But as the draft changes stand, investment managers and pension funds that participate in these projects won’t be able to recognise their investments as “infrastructure”.
The proposed amendments are also skewed towards listed instruments.
This is understandable: after all, the advantage of listing is the perception of better liquidity, as well as the transparency and relative ease of monitoring compliance with the JSE’s debt listing strictures.
The problem is that most infrastructure finance transactions are complex multiparty contractual arrangements: the specific terms and conditions are commercially sensitive, and as a result are not publicly available.
Therefore, the practicalities of managing disclosure requirements make it difficult for infrastructure-related transactions to comply with the JSE’s debt listing requirements.
Still, companies involved in infrastructure projects, as well as the government, need to reconsider the level of information that is not being made public.
Some of the confidentiality clauses are extraordinarily and unnecessarily cumbersome. Take, for example,
Eskom’s requirements that any photographs of a power plant need written approval, while the seller isn’t allowed to photograph or film project sites unless the buyer has given prior written approval.
The infrastructure market is also predominantly a loan market rather than a bonds market. The opportunities to list infrastructure debt through project bonds are in place, but very few have been listed.
As we have suggested in our submission to the Treasury, there is an option to explore an interim step, between making information public and being able to fulfil the JSE’s listing requirements. This interim step could be a bond that can be offered to investors in a regulated market such as Strate, where unlisted assets are traded but in a dematerialised format. Investors that sign confidentiality agreements would then gain access to transaction documents.
The interim step does not have the cumbersome timelines required by the JSE, such as a minimum number of days before calling a meeting of investors.
The timelines required by the JSE for listed assets would be operationally cumbersome for most investors and impractical for borrowers.
While listing by itself does not ensure liquidity, it would, in time, be a natural consequence of a broader pool of investors participating in the infrastructure asset class, most of which require price transparency. The draft amendments also make provision for the recognition of infrastructure investment in equity portfolios.
The higher 10% limit for infrastructure applies to companies with a market capitalisation of greater than R2bn, which is a large capitalisation for companies in a nascent asset class.
Investment in companies not listed on an exchange does not have an allocated limit for infrastructure recognition and pension funds remain limited to a 10% aggregate exposure.
This implies that equity investment in infrastructure companies would have to predominantly go the private equity route.
Mnisi is sector head for asset management and
The practicalities of disclosure make it difficult for infrastructure transactions to comply with the JSE’s debt listing strictures