MTBPS: Plan to make it easier for pension funds to finance infrastructure
CAPE TOWN - The government plans to make it easier for pension funds to invest more in infrastructure projects, potentially unlocking billions of rand of additional funding to boost economic development.
Finance Minister Tito Mboweni said in the Medium-Term Budget Policy Statement (MTBPS) they had started a review of Regulation 28 of the Pension Fund Act, to make it easier for retirement funds to increase investment in infrastructure, “should their board of directors opt to do so.”
Old Mutual Corporate managing director Prabashini Moodley said Mboweni had allayed fears of prescribed pension fund asset allocation by saying trustees need to decide where to invest.
She said currently Section 28 already allowed up to 25percent of pension funds to be invested in infrastructure, but only 2.8percent was invested.
“One needs to ask if it is the limits that has prevented further investment, a lack of understanding by trustees, a lack of vehicles to invest in or other factors,” she said, adding that lengthy and other regulatory processes had the effect of lengthening these projects and making them more costly.
Infrastructure development is at the centre of President Cyril Ramaphosa’s Economic Recovery and Reconstruction Plan to boost the economy post Covid-19.
Critics, however, have questioned how infrastructure will be funded given the government fiscal constraints, and they have said that the government has made promises of greater infrastructure investment before, but nothing has come of it.
Optimum Investment Group economist Dr Roelof Botha said there should be no problem with more investment in infrastructure bonds by retirement funds choosing to do so, given that money market investments were currently earning only 4-5percent per annum, while viable infrastructure projects could deliver potentially an additional 200-300 basis points, “more or less guaranteed”.
He said the construction industry was likely to welcome the MTBPS.
“Infrastructure development is not going away. To all those cynics out there, the bricks and mortar will start flowing very soon,” he said.
Section 28 of the Pension Funds Act sets investment limits where pensions may invest their members’ funds to prevent a concentration of assets and illiquid assets from being included in investment portfolios.
For instance, currently, retirement funds can invest up to 35percent of their portfolios in various unlisted assets.
The Association for Savings and Investment South Africa (Asisa) said yesterday that they were aware of the Section 28 review, and had submitted comments for it. Once the draft gazette was out for public comment, Asisa would provide further input.
The association, whose members hold about R2.5trillion of savings assets, said retirement funds had an important role to play in the development of a country through their investments, and pension funds worldwide invested in real assets.
Low investment in infrastructure by pension funds in South Africa had not been a question of willingness to invest, but rather the absence of viable projects, and the Independent Power Producer Project, which had attracted funding of more than R200bn from the private sector, was an example of this, the association said.
South Africa recently gazetted strategic infrastructure projects worth R340bn.
Mboweni said a draft gazette on the review of Section 28 would be released shortly for public comment, outlining components of Regulation 28 that were being proposed for review.
Steel and Engineering Industries Association chief economist Michael Ade said the planned increase in public infrastructure spending over the next three years was welcome as it would help reignite demand for the intermediate or finished goods of struggling manufacturing businesses.
However, the partnership between the government and private sector needed to be strengthened to implement the various planned projects effectively, he said.
Mboweni said early results from the Infrastructure Fund included subsidies of R2.2bn to support the Social Housing Programme, while a further R6.7bn had been committed to this programme. "The total investment from this programme would be R20bn over 10 years,” he said.
A Student Housing Programme worth R96bn was under way to service nearly 300000 students a year when complete.
The Budget Facility for Infrastructure would support new projects, including through blended finance in partnership with the private sector. These included hospital projects in KwaZulu-Natal, such as the extension of Chief Albert Luthuli, and the Western Cape, like Tygerberg and Klipfontein. There were also new proposals to develop 12 harbours in the Eastern Cape, KwaZulu-Natal, Northern Cape and Western Cape.
Mboweni said the existing public finance regulatory framework was being reviewed to unblock infrastructure investment by the broader government.