Last year, infrastructure investments in low- and middle-income countries like South Africa rebounded. Private participation in infrastructure reached almost $92 billion (R1.7 trillion) in 2022, a 23% increase from the previous year, according to the World Bank. While noting this increase, the infrastructure investment gap in South Africa alone is estimated to be R4.8 trillion by 2030. These sums show the significant size of the investment opportunity. 

However, there are several myths that stand in the way of investors incorporating this asset class into their portfolios – and it’s important we debunk these. 

1. Infrastructure investments are too risky 

The most common myth about infrastructure investments is that they are too risky. This is simply not true. Yes, they are often large, complex and have a long time frame. They are also usually linked to government expenditure, which may expose them to political risk, and they are subject to regulatory risk, which can lead to unexpected costs and delays. However, if considered appropriately, including infrastructure in one’s portfolio has significant benefits. 

Firstly, they are often state-sanctioned, providing an additional layer of security. An example would be South Africa’s Renewable Energy Programme (REIPPP) – this is considered one of the country’s Strategic Integrated Projects (SIPs) which forms part of SA’s broader infrastructure development plan. Benefits of being considered a SIP include governmental support, including direct and indirect commitments, and being backed by governmental policies. Furthermore, SIPS also benefit from streamlined approval, which aids in reducing bureaucratic processes and thus expedite project implementation. 

Secondly, these projects have private-sector investors acting as both developers and capital providers, often with support from international funders. This adds to the credibility of these investments, as they draw on a large amount of capital and expertise. 

Thirdly, investors are protected by the high levels of regulation and legislative certainty regarding these types of projects, ensuring they will be completed on time.

Fourthly, these investments offer a level of control that public markets can’t provide – for example, by offering board seats or voting rights to investors. This gives private investors a greater say in the direction of the company and can lead to better returns.

Lastly, investors are protected in the sense that long-term projects with designated outcomes face serious and punitive penalties if they do not meet deadlines on time. Developers want to avoid these penalties at all costs, as they can result in delays and increase the cost of funding projects. Moreover, their reputation is on the line should they not adhere to requirements and fail to meet deadlines. This measure acts as a safeguard of sorts for those investing in infrastructure projects.

2. Infrastructure investments are only for institutional investors and lack liquidity

Another common myth about this asset class is that it is reserved for large institutional investors and that the asset class is completely illiquid. While this may have been true in the past, the reality is that this asset class is maturing and becoming more accessible to retail investors through various means, including mutual and exchange-traded funds. As an indication of market sizing, according to the Global Impact Investing Market Report (2022), the impact investing market is expected to grow to $824 billion by 2026. Further to this, the latest PwC Asset and Wealth Management Report (2022) notes that the global ESG-related assets under management are expected to reach $34 trillion by 2026. 

It is our lived experience that investors are increasingly eager to explore. By including infrastructure in their portfolios, it not only offers a real opportunity to invest in sustainable projects that have a positive socio-economic impact, but it also offers a compelling, uncorrelated return potential. Our inference here is that infrastructure investments form part of a sustainable investing class, which gives priority to developmental assets and are thus highly in step with environmental, social and governance (ESG) and UN Sustainable Development Goal (SDG) considerations. 

We believe that investing in infrastructure should also mean investing in a sustainable future, which includes clean energy, job creation and an improvement in access to basic services, such as water and healthcare. This will enable us to reach the SDGs by 2030 and contribute to positive change in Southern Africa.  

Infrastructure investing is also attractive from a cash-flow perspective. Once projects move from the construction to the operational phase, their capital needs diminish, while distributions to investors increase. In addition, more entrants are entering the space, both local and international. 

When considering that more capital is flowing into the sector from investors and that assets start producing cashflows, these in combination aid in managing liquidity for clients. Furthermore, given the inflows into the sector, we have seen a secondary market for infrastructure investments slowly emerge, which over the next decade should further enhance liquidity management.  

From a product creation perspective, given the merits of infrastructure investing detailed above, one can understand the rationale for regulatory changes, such as that enacted in Regulation 28, allowing for further investments into the asset class. Additionally, the rise of products, such as actively managed exchange-traded funds, allows  retail investors to commit more savings to infrastructure. 

An example is Prescient’s Clean Energy and Infrastructure Fund, which makes investments that facilitate infrastructural and clean energy development in Southern Africa. The fund has participated in every round of SA’s REIPPP initiative, helping development initiatives, while earning commercial returns for clients. The open-ended fund is available to both institutional and retail investors and is accessible via various means. 

3. Infrastructure investment in emerging markets doesn’t compare favourably with developed nations

Given the political instability, fraud and corruption that is often evident in emerging markets, most observers would assume that infrastructure investment in emerging markets is significantly worse than in developed markets. 

However, our research shows just the opposite. In line with research from Moody’s, defaults in emerging market (EM) projects are less prevalent than their developed market counterparts. In fact, Africa has the second lowest default rate in infrastructure debt in the world. Where there have been cases of defaults, infrastructure investments in EM tend to show better recovery rates. Furthermore, returns in EM infrastructure projects compare more favourably than those in developed markets, despite risk considerations. 

Therefore, while infrastructure investments have traditionally been the domain of institutional investors, they have become increasingly attractive to individual investors given the successes achieved to date. Importantly, well-constructed infrastructure investments offer a unique combination of operating under a known regulatory framework, providing stable and long-term returns, having the benefit of inflation protection (many assets have the ability to adjust their prices/tariffs based on inflation), and finally, offering portfolio diversification. DM/BM

Author: Conway Williams – Head of Credit at Prescient Investment Management.

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