Concerns on draft amendments to Regulation 28

15 April 2021

This article first appeared in Financial Mail on 15 April 2021

RMB flags concern that draft amendments to Reg 28 omits private infrastructure & skews towards listed investments

By Isabella Mnisi

The proposed amendments to Regulation 28 are intended to provide an enabling environment to support the government’s plan for increased infrastructure investment as part of its economic recovery framework.

National Treasury is understandably trying to tick the boxes that would appeal to investors who are not familiar with the infrastructure asset class and who have historically not allocated directly to it. However, we have some concerns with the current draft amendments.

The Infrastructure Development Act, 2014 states that: ‘‘infrastructure’’ means installations, structures, facilities, systems, services, or processes which are part of the national infrastructure plan. Our interpretation of this definition however is that private infrastructure is not covered by the proposed amendments.

Clarity is needed as to whether the intention was for the amendments to focus only on funding of public infrastructure. If it is the intention, we are then concerned that, firstly, the bulk of amendments might prove to be redundant and secondly, that private-sector infrastructure would not benefit from these amendments.

We believe that the definition needs to be expanded to cover all infrastructure.

Private-sector financing is likely to be the foundation of the next round of renewable energy procurement which will create private energy generation infrastructure.

Investment managers and pension funds that participate in these projects would not be able to recognise their investments as infrastructure if the definition proposed in the draft amendments is retained.

The proposed amendments are also skewed towards listed instruments. The advantage of listing is the perceived better liquidity of listed instruments and the transparency and relative ease of monitoring compliance with all other regulations associated with the debt listing requirements.

However, most infrastructure finance transactions are complex, multiparty contractual arrangements that carefully define and apportion the project risks.

The specific terms and conditions are commercially sensitive, and as a result are not publicly available. Therefore, the practicalities of managing disclosure requirements make it difficult for infrastructure-related transactions to comply with the JSE’s debt listing requirements.

The project companies and government need to evaluate and reconsider the level of information that is currently not being made public.

Some of the confidentiality clauses are extraordinarily and unnecessarily cumbersome. For example, requirements to procure Eskom’s written approval to take photographs of a power plant - and that no facilities to photograph or film in or upon the project sites shall be given to or permitted by the seller unless the buyer has given prior written approval.

The infrastructure market is also predominantly a loan market rather than a bonds market. The opportunities to list infrastructure debt through project bonds are in place, but very few have been listed. As we have suggested in our submission to National Treasury, there is an option to explore an interim step, between making information public and being able to fulfil the JSE listing requirements. This interim step could be a bond that can be offered to investors in a regulated market like Strate where unlisted assets are traded but in a dematerialised format. Investors that sign confidentiality agreements would then gain access to transaction documents.

The interim step does not have the cumbersome timelines required by the JSE such as minimum number of days before calling a meeting of investors and board resolutions, amongst others.

These timelines that are required by the JSE for listed assets would be operationally cumbersome for most investors and also impractical for borrowers.

While listing by itself does not ensure liquidity, it would, in time, be a natural consequence of a broader pool of investors participating in the infrastructure asset class. Investors require price transparency, which can be achieved by using alternative trading platforms that are regulated and based on modern technology.

The draft amendments also make provision for the recognition of infrastructure investment in equity portfolios.

The higher 10% limit for infrastructure applies to companies with a market capitalisation of greater than R2bn, which is a large capitalisation for companies in a nascent asset class. Investment in companies not listed on an exchange does not have an allocated limit for infrastructure recognition and pension funds remain limited to a 10% aggregate exposure to the equity category.

This implies that equity investment in infrastructure companies would have to predominantly go the private equity route.

The proposed 15% aggregate limit for private equity funds on their own will help to facilitate investments.

The JSE’s listing requirement are meant to protect investors and this is critical to protect investments and maintain confidence and trust in the market.

Mnisi is Sector Head for Asset Management and Funds at RMB