Nathaniel Micklem, Co-Head of Emerging Market Alternative Credit and Vivienne Taberer, Investment Director, at Ninety One
Dedicated infrastructure investing is a relatively new concept in South Africa compared to more developed economies. We answer frequently asked questions about this asset class and explain why investors should consider infrastructure debt as an integral part of their investment portfolios.
What is infrastructure as an asset class?
Infrastructure is a defined asset class that refers to the essential physical structures and systems needed for the functioning of an economy. At Ninety One, we give the asset class the broadest possible definition, which encompasses supporting economic growth and improving the quality of life. This includes transport and logistics networks, energy and power, water and waste, data and communications, as well as social infrastructure.
Why is infrastructure vital for emerging markets?
Infrastructure investments are critical for socio-economic development, particularly in emerging markets like South Africa. These projects create jobs, enhance the quality of life, and promote sustainable economic growth. For example, over the next three years, the City of Cape Town plans to invest R43 billion in infrastructure development, which is expected to create 135 000 jobs. This multiplier effect demonstrates the potential for these infrastructure investments to reduce unemployment and stimulate economies at a more granular regional and local level.
Beyond job creation, infrastructure investments provide access to critical services, such as transportation, electricity and clean water, which improve health outcomes and economic productivity. This is particularly important for rural areas. For example, road upgrades have reduced travel time and improved market access for small-scale farmers, while investments in water infrastructure have provided communities with clean, reliable water sources, improving health outcomes for people in remote locations.
The Renewable Energy Independent Power Producer Procurement Programme (REIPPP) serves as an excellent example of the impact of infrastructure investments. Since its launch, the programme has created more than 52,000 jobs, largely in underserved communities. Furthermore, it has contributed to South Africa’s energy mix by adding over 6,400MW of renewable energy capacity to the grid, reducing the country’s dependence on coal.
What are South Africa’s main infrastructure needs?
South Africa faces its own unique set of challenges, particularly in energy, transportation, and water infrastructure.
Energy: South Africa appears to be at the tail end of a long-standing energy crisis brought on by ageing coal-fired power stations, technical failures and mismanagement. Load shedding is estimated to have reduced economic growth by 1.8% and cost the economy 650 000 jobs in 2023. In response to these issues, Eskom launched its Generation Operational Recovery Plan (GORP) to ensure a consistent energy supply to the country through ongoing structural improvements of its generation fleet. While the power utility still faces many challenges, its GORP is making inroads, with September 2024 marking the sixth consecutive month of no load shedding.
Transportation: Although South Africa boasts one of the most developed road and rail networks in Africa, many secondary roads and parts of the railway network are poorly maintained. Urban traffic congestion is a significant issue, with lost productivity estimated to cost the economy R1 billion annually. Freight transport, in particular, needs attention as it is limiting economic mobility and increasing the cost of logistics.
Water: Water infrastructure is another critical area of concern. The Department of Water and Sanitation recently reported that in 2022, South Africa lost about 46% of non-revenue water through leaks, well above the international standard of around 30%. Climate change and poor maintenance of water distribution networks compound the problem, leaving many areas, particularly in rural South Africa, facing water shortages.
Outside of these major areas, there are also large requirements for health, education, housing and communications infrastructure.
In terms of financing, it is estimated that South Africa needs a hefty R6.5 trillion over the next 10 years to meet its infrastructure needs. However, budget constraints mean that the government has allocated just R2.3 trillion to infrastructure investment under the National Development Plan (NDP) 2030. This leaves a funding shortfall of approximately R4.2 trillion, creating a significant opportunity and need for private-sector participation to fill the gap.
What are the investment opportunities through private and public participation?
The public and private sectors both play critical roles in infrastructure development. Public-private partnerships (PPPs) are an essential model for South Africa, allowing the government to leverage private sector capital and expertise while significantly improving the delivery of services.
South Africa’s Gautrain rapid rail system is often referenced as the blueprint for running a successful PPP project. Launched in 2010, the system has reduced road traffic congestion between Johannesburg and Pretoria, becoming a model for future transport infrastructure projects. The success of this PPP demonstrates the viability of private-sector participation in large-scale projects.
The REIPPP is another key example of successful public-private collaboration. The programme has attracted R209 billion in private sector investment and is enabling South Africa to transition towards renewable energy, reducing carbon emissions and diversifying its energy mix. The renewable energy sector continues to offer significant investment opportunities, with the government recently announcing plans to procure an additional 11,800MW of renewable energy by 2030.
Additionally, the government’s National Infrastructure Plan 2050 (NIP 2050) outlines key projects requiring private sector involvement, including the expansion of port and airport infrastructure, upgrades to water and sanitation systems, and the development of new housing units to address the housing deficit. These projects represent attractive investment opportunities for both domestic and global investors.
Why invest in infrastructure?
Infrastructure investments offer a strong risk/reward profile, particularly in South Africa, where infrastructure needs are critical and ongoing. These investments provide stable, inflation-linked returns over long periods. Infrastructure assets, such as toll roads, renewable energy projects and utilities, are essential services that maintain consistent demand, even during economic downturns, which means these assets are typically less cyclical in nature.
Infrastructure assets tend to offer lower volatility than traditional equity investments, making them attractive to institutional investors seeking long-term, predictable income streams.
However, there are risks. In South Africa, political instability, regulatory hurdles, and corruption have delayed projects and reduced expected returns. The Medupi and Kusile power plant projects, for example, experienced significant cost overruns and delays due to poor governance and technical failures, leading to reduced returns on investment.
Despite these risks, government-backed contracts, public support, and recent regulatory reforms have helped to mitigate some of the uncertainties surrounding infrastructure investments. Moreover, private investors in sectors such as renewable energy have benefited from the introduction of more transparent and investor-friendly policies, especially within the REIPPP framework.
Should investors include infrastructure debt in their investment portfolios?
Allocating a portion of a portfolio to infrastructure debt is a prudent strategy for investors seeking stability, diversification, and steady returns. Infrastructure debt investments are typically lower risk than equity investments, as they are typically secured by physical assets such as power plants, toll roads, or water treatment facilities. In addition, historical defaults have been lower and recovery rates higher than the broad credit universe generally.
In South Africa, infrastructure debt offers investors both the opportunity to contribute to critical national projects and to benefit from predictable, inflation-linked returns. Given the country’s substantial infrastructure funding gap of R4.2 trillion, private debt financing is crucial to close this gap and meet national development goals.
In addition to offering stable income, infrastructure debt investment helps drive economic growth, improve essential services and create jobs in local communities. By investing, we not only secure attractive financial returns but also contribute significantly to long-term national development and socio-economic upliftment.
In terms of portfolio allocation, infrastructure debt assets offer stable, long-term cash flows due to their essential nature and regular revenue streams. They also have a low correlation with traditional asset classes, such as equities. Infrastructure debt, therefore, has the ability to enhance portfolio diversification and reduce volatility. Many infrastructure assets have revenues linked to inflation, making them a natural inflation hedge.
In addition, as Moody’s global data highlights, infrastructure debt has lower default rates and higher recovery rates than the overall credit market. The combination of these factors makes infrastructure debt a compelling addition to any well-diversified investment portfolio.
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