Infrastructure fund delivers a return of more than 10% over 12 months

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This interview was originally aired on RSG Geldsake in Afrikaans. The transcript below has been translated into English.

RYK VAN NIEKERK: South Africa’s infrastructure shortage is one of the biggest stumbling blocks to faster economic growth. We see this in problems with our roads, railway lines, harbours, water systems and, of course, our electricity infrastructure.

The question, however, is not just how big the backlog is, but how South Africa is going to finance and rebuild the infrastructure, and what role the private sector and investors can play in that.

Natalie Phillips is the deputy managing director of Ninety One. Natalie, a very warm welcome to the programme. Large amounts that urgently need to be invested in infrastructure are often mentioned. According to you, what is the scale of this amount, and why is it important for investors?

NATALIE PHILLIPS: I am very glad we are talking about this large need, because South Africa certainly has a large infrastructure shortage.

If we look at the numbers, if we look just at Johannesburg, our executive mayor Dada Morero recently also spoke about how we are trying to cover the need in Johannesburg through our infrastructure investments.

As an example, about 30% of the electricity that the city has to purchase is lost.

And then if we look just at the water problem in Johannesburg, 46% of the water is lost before it reaches households or businesses.

So we believe this is not just an abstract policy issue that we have here, but the reality is the great need for South Africa to sort out this shortage and this problem.

RYK VAN NIEKERK: Now, in South Africa we start talking about things only when they become an absolute crisis – and we are now talking about infrastructure as a great crisis. Why did we not start talking about it earlier?

NATALIE PHILLIPS: We have been talking about infrastructure for a long time. And the government also has new guidelines in terms of the pension funds: Regulation 28 allows pension funds now to invest directly in infrastructure.

So the opportunity is there, and we have felt for a long time that it can make not only a great impact on the country if the private sector gets involved, but can also actually give you good returns – which I will talk about later.

I think the momentum has built up over several years, but has now picked up speed, I believe, with Operation Vulindlela – which was launched in 2020.

The first phase addressed the major infrastructure bottlenecks – energy, logistics and telecommunications.

But Vulindlela is really now in phase two – which was announced last year – where local government and the municipal environment had to start focusing on it.

So we think that the impact now is very evident. Many of us already see the great impact, but we believe that it is at this level, at the municipal level, that it really has an impact on everyone. When we look at potholes, water interruptions and load outages, these are things that now affect everyone – and I believe that is why it has become more pressing.

But these are things that have built up momentum over several years. So yes, we also believe that the investment momentum has now begun.

I now also think that as South Africa is no longer part of the grey list there is good sentiment – a more positive sentiment towards South Africa, as well as the South African market – with, I think, the returns from the stock market now being more positive.

Overseas investors are also more positive, as well as the pension fund market in South Africa. I now believe there are opportunities here, and there are great investment opportunities. That makes us very excited.

RYK VAN NIEKERK: Let’s talk about those investment opportunities to which you have referred – to the fact that these should be viable projects, that investors must be able to earn a return from them.

What is the model that you think should be put into operation or used to make infrastructure projects viable?

NATALIE PHILLIPS: We firmly believe in that, and we have actually been working on it. We started in 2008 on the credit side, with an unlisted investment fund, the Ninety One Credit Opportunities Fund.

And then in 2020 we also started our South African Infrastructure Debt Fund.

We believe that investors should not own the infrastructure themselves; what we actually do is we lend directly to projects and institutions that can address the country’s infrastructure needs.

A great example is that we recently invested in the Trans-Caledon Tunnel Authority. We supported it through loans; this basically supplies raw water to the Vaal River system, on which Gauteng depends. That is an actual example of what an investment in our infrastructure fund will do.

I think what is also important is that the government remains the central actor. So it would still be the owner of these systems, but we would supply the capital. We believe there is great investment opportunity there.

If we look infrastructure funds over the past 12 months, our fund, for example, delivered a return of 10.28%.

And if you look at the stock market over the same period, the stock market gave you a mere 4.6% – because we all know the past 12 months have been quite difficult for the South African stock market.

So there you get a real investment return. It is very diversified because you are not only exposed to the South African stock market, but actually do well.

You hand things over to the specialists – such as our credit team or other credit teams in the country, investment businesses like Ninety One – and they invest directly in these projects.

The other good thing is you can make an investment in a variety of sectors: say for water or for energy.

For example at the De Aar wind project we made a large investment in that.

We supported it – and that really helped to bring stability to the electricity grid, as well as reducing the reliance on coal power.

These are real examples of investments that we have made in a diversified portfolio. They give the South African investor a different type of return that is not only from the stock market – and the returns are not at all bad, if I may say so, Ryk.

RYK VAN NIEKERK: Yes, that sounds very good. But we have been talking about these public-private partnerships for a long time. The government simply does not itself have the money to invest in this infrastructure, and private investment is critical.

But is the time for talk over? And is the private sector at a point where money can really hit the road – so that we can now see infrastructure projects being launched on a large scale?

NATALIE PHILLIPS: Yes, we certainly believe this is the case. We think things have changed very, very much.

First, as I said, the government launched Operation Vulindlela in 2020, and we believe that the government wants to make it work. The president himself recently at our office’s 35th anniversary celebration earlier this year spoke about how it wants the private sector to work together with government – and government knows that it also has a responsibility here.

If we just look at the Durban harbour, we are terribly excited about the projects there, and that the private sector and government working together there will work.

With regard to Business Unity South Africa and the business leadership there, and the conversations with government taking place, we do believe that it is not just talking, but that we have actually already seen activity.

There are also, of course, many projects now being privatised – and that is a big step in the right direction, if I may say so – from the government wanting to show that they take things seriously.

We also believe, if we look overseas at how well infrastructure projects have worked through the cooperation between the private sector, business, and pension funds, it is clear you actually need all three. You cannot just have one alone.

We can say we want to invest in infrastructure in the country, but it does not help if the government does not unlock those opportunities. There is a large pipeline of opportunities that we see coming through.

Secondly, we believe the returns must be there, and there are many investment managers who now have a long track record of delivering good returns.

Then, lastly, you naturally have the private sector and business working together. We think over the past 12 months there has been a lot of activity – and actual projects being unlocked.

RYK VAN NIEKERK: Lastly, the big buzzword at the moment is AI, artificial intelligence. Does it play any role in this debate?

NATALIE PHILLIPS: Ryk, yes, we are very excited about this. Again, if we look at what is happening in China, it is very exciting.

China is a good example, where they do not necessarily see what we call AI or artificial intelligence as the only [or] the greatest investment opportunity; there is also the infrastructure ecosystem.

That is where China has done terribly well – seeing that and basically bringing energy and digital infrastructure together, treating the two as a major investment opportunity.

If we look at South Africa, for example, we already have a large and very strong digital foundation. If we look at data centre platforms like Teraco and Open Access Data Centres, they have already done a lot. We have invested in those companies as well.

So our infrastructure fund has invested in Teraco and done very well, and we believe that is part of the opportunity – because artificial intelligence cannot work if there is no infrastructure.

So it is absolutely critical that this is central to the success of artificial intelligence infrastructure for South Africa.

So yes, those are two examples already, and China, as I said, is a good example.

We believe that the biggest limitation is not simply the generation of electricity, but also its transmission. That is why we think we must get power to the places where the data centres and digital platforms really need it.

We even see it in our own business. One needs it, because otherwise you cannot successfully implement your artificial intelligence in your business or in the country.

So, absolutely, Ryk – the one basically cannot exist without the other.

RYK VAN NIEKERK: Natalie, thank you very much. That was Natalie Phillips, deputy managing director of Ninety One.

Brought to you by Ninety One.

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