An interview with Ahjeeth JaiJai, Head of Asset Management and Treasury at the Infrastructure Fund
In September 2018, the Infrastructure Fund initiative was announced by President Cyril Ramaphosa to change the State’s approach to the financing of public infrastructure projects with the intention of ensuring more efficient and effective use of resources and the acceleration of infrastructure development within South Africa.
In August 2020, the Development Bank of Southern Africa, the National Treasury, and the Department of Public Works and Infrastructure signed a Memorandum of Agreement in respect of the DBSA’s mandate to establish and manage the Infrastructure Fund.
The signing of the Infrastructure Fund MoA signified an important milestone in terms of bringing together key stakeholders to create a blended financing facility for infrastructure projects.
The Infrastructure Fund is intended as government funding and ancillary support for co-financing of blended finance programmes and projects. This includes financing from the local capital market and international financing institutions as a complement for broader budgeting reforms that the Government is undertaking to address problems in the infrastructure value chain. The support will take different forms, including fund deserving infrastructure projects, blended co-funding, capital subsidies and interest rate subsidies and guarantees.
Given the limited government finances that have been worsened by the Covid-19 pandemic, the strategic importance of infrastructure as a lever and stimulus for economic recovery and growth has come to the fore. This constrained fiscal environment limits the availability of investment resources and there is thus a greater need for government to work together to create an enabling environment for effective partnerships with the private sector, DFIs and international financiers and the local capital market to enable the leveraging of additional resources. The Infrastructure Fund opens opportunities to partner with the private sector and international financiers.
The obligations of the DBSA towards the MoA will be to establish the Infrastructure Fund through a dedicated implementation unit housed in the DBSA as well as to manage and administer the Fund. The important responsibility of the DBSA will be to facilitate the financial structuring, procurement and implementation of priority blended-finance projects and programmes, as identified by ISA.
We spoke to Ahjeeth JaiJai, Head of Asset Management and Treasury for the Infrastructure Fund, to better understand its role in facilitating the transformation of investment in South African public infrastructure and the current status of developments.
Role of the Infrastructure Fund
Please describe the role of the Infrastructure Fund in enhancing collaboration and attracting private-sector investment to support the government’s SIPs programme, as well as describing the blended financing solutions that have been developed, and any success and challenges experienced to date?
The DBSA has been mandated to incubate the Infrastructure Fund, but the formation of the fund is the result of active engagement amongst National Treasury, the DPWI and the Presidency. The rationale behind the formation of the Infrastructure Fund is to do things differently, and to develop alternate ways to execute project financing of infrastructure projects and programmes.
When the Infrastructure Fund engaged with the market, being a broad group of parties ranging from asset managers, industry bodies, banks and lawyers, we had to evolve our understanding of their requirements and ways to execute project financing. A platform like the Infrastructure Fund is a critical step to getting this right and has been created to accelerate the implementation of infrastructure programmes and projects identified by Infrastructure South Africa.
In the short time since our establishment, we have identified that there isn’t a shortage of capital from the private sector, but that what was needed was a sound platform where public and private sector contributions could be brought together to fund infrastructure programmes.
At its very heart, the notion of blended finance is to crowd private sector contributions alongside public sector contributions into an infrastructure project to sustain itself over a 15 to 20 year timespan. More than that, it is also to broaden the investor pool. In the past, you would have had commercial lenders taking risk and selling risk off to pension funds or asset managers post completion, but now it’s opportune to involve everyone in the process from the beginning. So, blended finance involves bringing all these stakeholders together as well as developing innovative ways of financing infrastructure.
In terms of blended finance solutions, these are intended to solve the problems of market failure or disruptions. Often, such market failures or disruptions are what makes investors nervous to participate in an infrastructure project or programme or, alternatively, increases the cost of funding. So blended finance for the Infrastructure Fund means that the riskier element of a financing structure is something that the Infrastructure Fund will assume. That could be through any number of instruments and, not to put names to them, but it could be instruments that would back more secure types of funding, not just senior. It could be mezzanine or junior, for example. Ultimately, the Infrastructure Fund will be that buffer between the risk that the market doesn’t want to take and the risk that can be taken to allow for maximum or greater market participation in an infrastructure project or programme.
If you look at the typical infrastructure financing transaction, its term is anywhere between 15 and 20 years. That’s typically what market participants would look at in terms of providing funding, but the actual asset value is not limited to that 15 or 20 year term. Many of these assets have a useful life of up to 45 years depending on a large number of factors that take place at inception.
If we had to argue that the first 15 to 20 years is required to repay debt and generate a return for shareholders, the period between 20 and 45 years is actually when there’s still value in the infrastructure asset. When we talk about any first loss, the first loss may take the form of a government guarantee or a pure first loss type of instrument, but there is no reason why that instrument can’t be structured in such a way that serves as a buffer of security for the financing structure up to year 20, but from years 20 to 45 there is no reason why that instrument cannot then be used to create sustainable value for the instrument holder.
What you’re doing is saying that all participants and, in this case, the Infrastructure Fund, need to make sure that the infrastructure project or programme from day zero is well managed, well procured and well executed to ensure preservation of value over the full life of the asset. That’s also, in our view, a large part of what blended finance means. It’s not taking a 15 to 20 year view but creating value on a sustainable basis for beyond years 15 to 20.
I think that capacitating the Infrastructure Fund and getting the right type of people around the table to deliver on the mandate has been one of the successes to date. Over the short time since its establishment last year, we have put together a team of around 14 people (for now), which comprises a healthy mix of professionals, both from the private sector and the public sector. Each individual has between 12 and 20 years’ experience and understands what broader market participants require from a financial and technical perspective in executing an infrastructure project. They have done it before and, with this level of experience, we also have a young group of individuals supporting them.
On the investment side, the Minister of Finance, in his 2021 budget made an allocation of R18 Billion over the next three years to the Infrastructure Fund – R4 Billion for 2021/22, R6 Billion for 2022/23 and R8 Billion for 2023/24. For the last six/seven months, the Infrastructure Fund has actively taken projects to the National Treasury for funding approval for almost the full capital allocation of 2021/22. We see this as a big success and also a great learning experience for many members of the team to understand National Treasury’s process, what its ask is and how to approach funding requests. That’s only on the financing element. It also meant that the Infrastructure Fund had to work with project owners, either state owned entities, government departments or the actual custodian of the national infrastructure asset to take through their processes on a blended finance basis to National Treasury.
There has been significant engagement with a diverse number of private sector participants. The Infrastructure Fund wants to ensure that there is consistency of messaging to the market and also that there is symmetry of information to all participants. Its primary communication channels will be through industry bodies, which will be used as a first point of call to channel information. Remember, procurement of financing is equally challenging as the procurement of normal goods and services. In this regard, transparency is key with all engagements happening at the same time and working alongside Infrastructure South Africa. With time, the intention is that there will be a portal with information available on the infrastructure programme, in particular on the projects that have been gazetted. So, if you are a market participant you will see this in the Infrastructure Development Act or the Government Gazette which sets out the SIPs, etc. As market participants, you will know what is in there and if you stay close enough to those projects, you will know what is coming to market. So, the intention is to use industry bodies as a first port of call, but that doesn’t mean to say the Infrastructure Fund will not engage with individual pension funds, asset owners, asset managers, asset allocators, banks or any other market participants. I think that’s pretty useful, because it provides us with guidance for appetite in the market and, likewise, we can share what we do as the Infrastructure Fund and how we’re approaching blended finance. Understanding risk appetite is very important in developing appropriate blended funding solutions.
There are many projects being earmarked for funding but making sure that the projects have been adequately prepared, are well structured and that they can then be taken through post feasibility takes a lot of work. Since the Infrastructure Fund’s inception, the challenge, which can also be seen as an opportunity, has been sifting through projects to determine which should be prioritised and putting manpower behind these projects. It’s still early days and, perhaps, we are in ourhoneymoon period, but the energy levels are high, the team is pushing hard and as I mentioned earlier, we are also making significant progress in terms of accessing our allocation to take projects to final approval in this fiscus period.
Proposed changes to Regulation 28
The proposed changes to Regulation 28 provide retirement funds more certainty and flexibility to increase capital allocations to investments in public infrastructure. From the Infrastructure Fund’s perspective, what are your views on the proposed changes and, in particular, the benefits for the SIPs programme?
There are multiple views on the proposed amendments to Regulation 28, some are finding a way of working within it and others are looking for its scope to be expanded. From a SIPs perspective, there are effectively three buckets of projects that one can fund.
We have the 50 projects and 12 special projects that have been gazetted but, at the same time, there are also some that are purely social and would require fiscus exclusive contribution. At the other end of the spectrum, there are projects that can sustain purely private sector funding that will be implemented on a commercial basis.
However, that category called blended finance resides between the two where you need a bit of government contribution and private sector contribution to execute on the Infrastructure Fund mandate. In relation to Regulation 28, it’s very much not being constrained by what you see coming only through the Infrastructure Fund. The investment universe for infrastructure is much wider than the Infrastructure Fund and that is why Infrastructure South Africa plays such a critical role as they are not only the custodian of pipeline for the Infrastructure Fund, but also all the projects that fit that entire spectrum from purely social to ones earmarked for private funding.
Recent unrest and implications on raising private sector funding
The recent rioting and destruction of property and infrastructure in KZN and Gauteng makes raising private sector and foreign direct investment more difficult. It is still early days but, from your engagement with investors, what are the key concerns/risks that the Infrastructure Fund alongside the government need to address to provide investors with certainty that investing in SA infrastructure will provide them with the necessary return for their investment, considering the current political risk?
It’s still early days, so the impact on investor sentiment still needs to be unpacked. No doubt it can make investors nervous, but I think how we respond to these risks is important. The unrest reemphasises the importance of cash flow and making sure that your cash flows are protected. When infrastructure, or any asset for that matter, is destroyed or damaged it impacts the ability of that cash flow to be generated, which invariably means then your blended finance solution becomes the “at risk” portion of the financing structure and I think that is where the mindset will move to among market participants. There may be a premium requested to price for such risks which then makes infrastructure delivery a lot more costly, but also the ask from the blended finance risk sharing will be a lot more now.
The consequences, from a pure investment perspective, are something that, as a country, we can ill afford. Capital can be better used for rolling out new infrastructure versus replacement of destroyed or damaged infrastructure.
There is no doubt that domestic and foreign investors remain committed to the country and that they want to be involved in infrastructure projects. We have spoken to some investors, who have voiced an element of concern, but it’s not to the extent where they are shutting off the taps to infrastructure investing in South Africa. We haven’t had that in our recent engagements, which I think is encouraging.
Strategic Integrated Projects
Can you provide an overview of the SIPs and how ready these projects are for private sector investment, with examples of projects that are moving forward and the expected impact of such projects?
Developmental impact and the social impact are critical to our consideration as the Infrastructure Fund. The thinking around this is that social impact should have a multiplier and a positive knock-on effect across the broader economy.
Let me first say that the preferred approach of the Infrastructure Fund in rolling out infrastructure projects is on a programme basis. The reason why the programme basis is being pursued is that it has a much more sustainable and meaningful effect at scale. In addition to that, you can leverage resources and economies of scale, on a programme basis.
Against that backdrop, if you think about the need for student accommodation in South Africa, that’s one of the most critical areas requiring investment. Not having an adequate place to reside affects your results at the end of the day and therefore the national output of skill. One of the programmes we have been working on is student accommodation with the intention to develop around 300 000 student accommodation beds within a 10-year period. The programme should result in providing students with a safe and secure place to reside while studying not just at universities but also at TVET colleges, etc. It is across the spectrum of higher learning that we are looking at rolling out student accommodation. With more qualified people being turned out, there has to be a positive effect on the economy but employment opportunities is the key issue right now. So, in the short term, what the student housing programme will result in is significant construction jobs on student housing projects across the country due to it being highly labour intensive. There is also a firm intention to bring in new entrants into the market who can benefit through the student housing accommodation programme. There are a lot of SMEs that play across the entire value chain of student housing. It’s the Infrastructure Fund’s hope that we can create jobs and new businesses alongside the student housing programme.
This is one of the key programmes we are focused on, primarily because of the much broader positive impact that it can have for our country, individuals and job creation over the short, medium and longer term.
Black participation in the SIPs programme
One of Government’s intentions is to use the SIPs programme to support Black infrastructure service providers in transforming the industry from an ownership, participation, capabilities and skills development perspective. Has the Government set a target for Black participation in the SIPs programme? How is this expected to be funded/achieved and how will the key stakeholders (Infrastructure Fund, Infrastructure SA and the National Treasury) ensure transparency of process in appointing service providers with the relevant competence to execute these projects to avoid potentially resulting in higher cost of delivery (inflated contracts), poor design/execution and possible corruption?
The Infrastructure Fund has engaged, and continues to engage, with the industry associations to ensure that programmes are put to market that ensure that the entire value chain has meaningful Black participation of Black owned and Black controlled service providers.
Insofar as targets are concerned, they are often set as minimum targets, so you may, for example, have a 20 to 30% threshold, which the codes and legislation will stipulate. The intention is not to use it as a maximum threshold, but a minimum threshold where you can start getting broader participation in the SIPs.
The question around funding for B-BBEE participants is something that we are working on. It’s not an easy one because the cheque sizes are large. However, having said that, the projects are often long dated which, by its nature, requires an alignment between all participants. If you are looking at the pure equity ownership of the project, then there may be a lock-in element of equity, but this comes back to creating alignment with the asset owner, for example the stateowned entity, to make sure that we are all aligned over the full life of that particular asset.
The value chain is varied and wide enough where there is a continuous requirement to pay service providers for construction, maintenance and operations services. This is where liquidity comes through. Although there are areas of the financing structure that, by their nature, result in a lock-in for Black participants, I think there are other areas where the operators and service providers will have access to immediate liquidity. This is a result of the nature of infrastructure that they’re going to be to a construction company or supplier into the construction industry or they may be a service provider to a student housing type of accommodation facility. There are many other dynamics around the entire value chain that can create liquidity, not necessarily resulting in Black participants being locked-in for a 20-year period.
It is critical that empowerment must be meaningful. More than that, we need to improve the way that projects are prepared and structured. Project preparation is key, and that project preparation being translated into proper project implementation is just as important, as well as the ongoing monitoring and evaluation to ensure there are no inefficient costs. This is very important for the Infrastructure Fund and these are elements on which we place significant focus. Programme management, the actual implementation and, thereafter, the ongoing monitoring and evaluation from an active asset management perspective is critical. By putting in place levels of rigour and robustness in the process, we will ensure a) there is meaningful participation of Black participants in the value chain and b) more than that, that we manage the way costs have been apportioned to the involvement of Black participants in projects.
What measures are the Government and the Infrastructure Fund putting in place to provide investors with confidence that the SIPs programme will have strong governance to ensure no irregular or wasteful expenditure during implementation?
I think there is general recognition that confidence and transparency are critical to achieving blended finance solutions. What that means is that the Infrastructure Fund, particularly through our programme management function, does have a robust control framework that ensures that all our processes, specifically when it comes to procurement and implementation, meet sufficient standards of rigour that are auditable. The Infrastructure Fund’s audit process is informed by past learnings that can be used to ensure appropriate management of potential governance risks.
So how do we deal with procurement issues? How do we deal with implementation where you don’t have funds going directly to projects but going via a middleman before it reaches the project? A lot of control measures come through building systems and processes which can withstand any mischief creeping into the system. That’s within the Infrastructure Fund’s control, and that’s something that we are actively implementing. We also provide support to project owners throughout the infrastructure value chain. We make sure that the governance and monitoring is taken seriously throughout the development of the project and post implementation. Disbursement of funds needs to go through a very stringent process and our preference would be to pay directly to service providers and not via a middleman. So those are the little changes that we’re looking at implementing, but I know that the impact could be meaningful purely given what we’ve learnt from the recent past.
Monitoring is also key. One of the key requirements of the Infrastructure Fund is that we have monitoring and evaluation of projects from implementation and execution right down to completion and thereafter as well.
At the beginning, I touched on us making sure that we protect value for the entire life cycle of the asset and not just for the 15 to 20 year period when there is funding risk. That mindset shift is important in the sense that if you take that 45 year view, you have to make sure that you have adequate maintenance, and good operators in place removing fruitless and wasteful expenditure over the life of the asset. So those subtle changes in approach being introduced, we think, also goes in some small way towards protecting the governance aspect of infrastructure finance.
Vision for the Infrastructure Fund
In 10 years’ time, what will success look like to you and how confident are you in realising the ambitious target set by the Government for infrastructure investment in South Africa?
That’s a good question. If we consider the National Development Plan, one of our targets is the improvement in fixed capital formation. For an economy of our size to grow meaningfully, you need to have fixed capital formation of around 30%. We are currently sitting between 12-17%. I think our first true objective measure of success will be the Infrastructure Fund’s contribution towards achieving the 30% fixed capital formation in the country.
The other measure will be that if you had to take a 10-year timeline, the R100 Billion that government has committed should translate into R1 Trillion worth of infrastructure delivery within the country.
Personally, those are the two benchmarks that we need to be measured against.
Can we achieve it? I think it is possible and the one very heartening element we are doing right now is collaborating with private sector participants, be it the pension fund industry, the investment community, the banks, etc. There’s a deep willingness to fund infrastructure, but those prerequisites to unlocking that funding is around transparency, confidence, governance, etc.
I think the energy is there. The drive and the willingness to get this done is clear. It’s not an easy road but I do think it’s possible. I think that, with all participants pulling in the same direction, it is doable. Government is onside; Infrastructure South Africa is onside; and Dr Ramokgopa’s team is phenomenal in assisting this process as well. So, I think the vision can be realised.
Head of Asset Management and Treasury at the Infrastructure Fund
Ahjeeth is a seasoned investment executive with extensive, multiple sector investment banking and alternative investments experience across the capital vertical (debt, quasi equity and equity). In addition to robust operational and board experience, he has demonstrable interdisciplinary experience in respect of the commercial, legal and financial disciplines having frequently combined the three to achieve successful and effective business outcomes. Ahjeeth was admitted as an attorney in 1996.