South Africa faces an infrastructure challenge of historic proportions. Estimates point to a shortfall of more than R2 trillion over the next two decades, with electricity and water shortages just some of the symptoms of a gap that deeply affects every citizen. Government cannot fund this alone, and neither can the private sector. Success requires a coordinated partnership approach.
Retirement funds have increased their allocations to infrastructure over the years, reflecting growing sophistication about these investment opportunities. Beyond diversification and return enhancement, infrastructure debt’s long duration and predictable (often inflation linked) cash flows provide a natural hedge against liability risks. When structured well, these investments can reduce funding ratio volatility while contributing to real economic development.
Three decades of experience pays off
Futuregrowth launched its Infrastructure & Development Bond Fund in 1995. Since then, we have financed projects ranging from small-scale agri-businesses to large-scale energy and transport initiatives, to name a few – all while delivering benchmark-beating returns.
As an early investor in the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) we gained valuable experience in large-scale partnerships. Over three decades we have learned how structuring approaches, risk-mitigation techniques and partnership co-ordination contribute to positive results.
Bridging the gap between capital and need
The capital markets (pension funds and banks) have available capital. However, this can only be deployed via bankable deal opportunities such as the REIPPPP – with R250 billion lent to 123 projects with zero defaults – a striking outcome and blueprint for other infrastructure opportunities.
Four pillars of partnership success
Our experience has shown that four pillars underpin successful partnerships in infrastructure investing:
1. Relationship networks and early involvement: Getting close to programmes before contracts are signed allows investors to understand risks and shape projects to work for pension funds. Getting involved early ensures fiduciary responsibilities can be upheld and risks appropriately measured and priced.
2. Multi-stakeholder coordination: Everyone has a role to play. Government cuts through red tape, regulators create an enabling environment and communities benefit through job creation and sometimes ownership. Capital providers can add investment expertise.
3. Returns vs impact: Developmental outcomes are important but cannot come at the expense of returns. The right partnerships create opportunities to deliver both, proving that responsible investing and sound fiduciary duty can co-exist.
4. Lifecycle management: Infrastructure projects are long term (often 20 years or more) and problems can arise. Active, hands-on management is needed to resolve problems before defaults occur and to protect investors’ interests over the life of the project.
These pillars are interdependent and create a systematic approach to deliver returns for investors while achieving on-the-ground impact.
Building resilient portfolios
Another lesson is the value of diversification. For example, a R20 billion fund concentrated in ten large deals creates very different risk and volatility dynamics from one across 100 diverse smaller deals. The latter produces a more resilient portfolio with better risk return characteristics and lower volatility.
Achieving optimal diversification isn’t easy. It requires internal expertise across various sectors, each with different structural requirements and risk profiles, as well as external partners to source and structure viable opportunities. It is crucial to know who you’re funding and whether you can work together if issues arise.
What funders are looking for
Funders need predictability, transparency and fairness. In infrastructure, this translates to:
- A predictable, stable legal and regulatory environment (so structuring solutions aren’t built on shaky foundations);
- Commercially viable projects underpinned by transparent, competitive bidding and clear agreements between EPCs, O&M contractors, shareholders, the public sector and Treasury; and
- Allocating risks to the party best able to manage them. For example, in the case of a Public Private Partnership (PPP), the private sector takes construction, technology and operational risks; while government needs to take on political and payment risks.
The REIPPPP demonstrated how this works. Clear power purchase agreements, Treasury’s backing of Eskom’s obligations and aligned contracts combined to create a solid foundation for private capital to flow.
From theory to practice
Moving from theory to practice requires a robust investment process run by experienced investment professionals with deep sector knowledge and years of experience. Early engagement with bidders, thorough risk analysis, disciplined credit committee oversight and top-tier legal guidance all form part of the process. But process alone is not enough. It must be embedded in programmes that offer clear rules, appropriate risk sharing and stakeholder alignment.
The choice is clear
Well-structured partnerships pave the way for investors to deploy capital in risk adjusted opportunities while delivering the infrastructure South Africa so urgently needs. When retirement funds, government, communities and capital providers each play their part, infrastructure finance becomes more than just an alpha opportunity for investors – it becomes a mechanism for real economic progress and improved quality of life for citizens.If every stakeholder pulls in the same direction, South Africa can replicate proven successes, scale them across sectors, and build a more resilient country for all.