3 July 2009

Infrastructure backlogs and investment opportunities

South Africa's recent power supply crisis, characterised by demand outstripping supply, has raised some tricky questions: How severe are the power shortages? How long will they persist? What are the prospects for improvement? How can investors respond to the crisis?

Although the number of power outages has drastically reduced, the general consensus is that, in the absence of significant investment, power shortages will continue to be a feature of our economic landscape. The reduction in power outages can be attributed largely to better planning by Eskom and electricity savings by consumers. However, the impact of these measures and initiatives is likely to be neutralised by growth of the South African economy over the next decade.

Eskom has invested significantly in major power generation projects (including the Medupi and Bravo power stations), several of which are scheduled for commissioning in 2012. The commissioning of these power stations will go a long way towards addressing the power crisis in the future.

Eskom's response to the power crisis has highlighted several challenges facing the country's utilities and municipalities. Even though the return on investment makes infrastructure development viable and profitable in the medium- to long-term, few investors are willing to wait this long before realising a return on investment. This makes financing infrastructure challenging. This is particularly problematic for Eskom, which needs to raise in excess of R100 billion over the next five years, within the context of ailing markets. These challenges, however, present opportunities for investors, particularly pension and provident funds, to invest in infrastructure development. Pension funds are ideally placed to invest in infrastructure development, as their investment horizon is long term and often matches the ultimate profitability of infrastructure development projects. Pension funds also represent public resources which, if effectively employed, can yield improved service delivery for the public. Investment in infrastructure funds therefore not only realises a competitive market return, but also facilitates service delivery and meets social objectives.

In terms of Regulation 28 of the Pension Funds Act of 1956, pension funds are authorised to invest up to 20% of their holdings in securities and loans guaranteed by local authorities and national and provincial utilities. The Public Investment Corporation Limited, which manages assets valued at R786.8 billion, including government employees' pension funds, together with a range of leading South African and African institutional investors, recently launched an infrastructure fund, the Pan African Infrastructure Development Fund. This fund aims to raise up to $1 billion for investment in key infrastructure development projects on the African continent.

The pooling of resources through dedicated infrastructure development funds compliments public private partnerships, and has enormous potential in addressing infrastructure backlogs.

Despite the current down-turn in global markets, the South African economy is continuing to grow, albeit at a slower pace for now. This growth will necessitate the development of power stations and other infrastructure. All of these developments will require an increasing stream of investments, which in turn will facilitate further sustainable growth. This is an opportune time to think creatively about infrastructure development and for the leveraging of private-sector resources to fund such development.

Deon Govender and Velile Memela

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