Does a review of Regulation 28 provide a boost to South Africa's infrastructure roll out plan?

Without adequate mobilisation of financing, infrastructure roll-out is unattainable, writes Bongani Mankewu.

Can Regulation 28 proffer the flywheel effect to the infrastructure roll-out plan?

Critical to the development of the African continent is the paucity of financing models reified to achieve industrialisation through sustainable infrastructure development.

The incentive of infrastructure as an asset class is to catch attractive monetary qualities – appealing returns; low correlation with other asset classes; long-term, inflation hedging; and low default rates to name a few.

The dearth of infrastructure investment still acts as a preventive force in naturalising infrastructure investments as a financial asset class of its own. Adding to that, infrastructure as an asset class is dependable on financing itself through painstakingly calculated ex-ante cash flows. What is confirmed to be a challenge is governance that includes agency problems with moral hazard, project design, and contractual efficiency with financing models. Perfected by stable governance, infrastructure is progressively seen as an optional asset class close by bonds, currencies, equities, and others, in the financial investment landscape.

The proposed review on Regulation 28 is progressive as it aims to increased investment in infrastructure given the current low economic growth climate. For optimum mobilization of financing Regulation 28 review must dovetail with the limpid DFIs mandate to proffer the flywheel effect to the Economic Reconstruction and Recovery Plan (ERRP) through Infrastructure delivery.

Therefore infrastructure assets added with its ex-ant cash flow, long term, and inflation hedging can be painstakingly considered an asset class. Governance stability is essential to capture economic value, in contrast to procurement processes that are embedded in market thinking, using government-endorsed structures (public-private partnerships (PPPs) and the like) that are fundamentally market-based and market-shaping instruments. These devices of contemporary infrastructure finance, design, commission and deployment are constructed by markets and market actors, delivered by markets, procured through markets, and ultimately traded on markets.

This par for the course can be ameliorated by regulations that discipline markets while capital mobilisation is defining ‘infrastructure’ as an asset class like equity, bonds, loans, and private equity. Intriguingly is the extent to which pension savings induce behavior on capital markets determined by the structure of pension systems and in many instances further enhanced by pension fund reforms undertaken. Despite reforms undertaken, the Public Investment Corporation and most of the development finance institutions (DFIs) behave no differently to private asset management firms, they seek returns and profits, rather than industry development that creates aggregate demand to stimulate the economy thus poverty alleviation.

There are various means to structure infrastructure ventures, development banks, commercial banks, and Special Purpose Vehicles can issue listed or private mezzanine financing, representing quasi-equity instruments, namely fixed income financial products with equity rights, particularly appealing for investors like pension funds. Therefore, regulation of the monetary and fiscal policies influences the possibility of moral hazard that theoretically surfaced through the capital structure of the PPP financing as an instrument.

Fiscal affordability assessment acts to identify and measure the PPP expenditures of the sovereign State, evaluate the impact of implementing the PPP projects on the aggregated economic output with a focus on linkages for the value added to the industry.

Scaling up infrastructure investment is a global challenge in the developing world, delivering infrastructure is a key component of the 2030 Development Agenda and a prerequisite for achieving the Sustainable Development Goals (SDGs).

South Africa's efforts are in alignment with Goal 9 of the SDGs and Aspiration 1 of Agenda 2063 of the African Union (AU) which both prioritise infrastructure development.

Also read: South Africa seeks to lift infrastructure investment with change to pension fund rules

To address the infrastructure deficit in African states and completely accomplish Goal 9 of the SDGs and Aspiration 1 of Agenda 2063 of the AU, governments should quicken and escalate endeavors to activate homegrown and outer financing assets for infrastructure.

Infrastructure classified as an asset class with no ambiguity on policy supervision of the pension funds and DFIs can avail the desirable flywheel effect to the ERRP for South Africa to lead the successful execution of the African Continental Free Trade Area which must nurture real value chains, thus industrialisation.

Therefore, pension funds, DFIs, and State-owned enterprises in South Africa must be provided with clear instruction on the balance between commercial and developmental objectives and clarify the process on the costing and funding of each.

This opinion piece was written for Engineering News by Bongani Mankewu Nelson Mandela University Infrastructure Development & Engagement Unit associate

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