JOHANNESBURG – The Infrastructure Research Development Centre (IRDC) on Monday said that relying on foreign investment for economic development always comes at a price, and that South Africa should prepare itself as it is on a quest for investment.
President Cyril Ramaphosa will this week convene the inaugural South Africa Investment Conference where representatives of government, business, and labour will meet with investors in a bid to present the country as an attractive investment destination.
Bongani Mankewu, executive director of IRDC, said that infrastructure is a key component in a country's ability to capture the gains from trade possible through globalisation as most studies confirm that lowering trade costs by 10 percent through infrastructure investment can increase exports by more than 20 percent.
"The recently released estimates of the output elasticity of infrastructure, which employed a multi-dimensional measure of the physical stock of infrastructure amongst the tools, as opposed to infrastructure spending, is between 0.07 and 0.10. This which translate to a 10 percent rise in infrastructure assets directly increases [gross domestic product] GDP per capita by 0.7 to one percent," Mankewu said.
"Infrastructure assets can be made to have plain vanilla attributes to institutional investors such as pension funds and insurers as they can assist with liability driven investments and provide duration hedging. Infrastructure projects are arguable long-term investments that could match the long duration of pension liabilities."
Mankewu said long-term investors are realising that infrastructure assets are a natural habitat for their investments as they tend to match their long-term liabilities, provide inflation-protected yields and have lower correlation to other financial assets.
But Mankewu said that unfortunately, headline risk such as unfavourable Policy Certainity Index, PMI and other tools need painstaking handling.
"Persistent uncertainty erodes investor confidence in the government, leading to inferior contractual terms and higher costs for taxpayers or consumers. A clearer pipeline of projects, based on information standards agreed between government, industry and investors, would increase confidence and encourage competition," Mankewu said.
"The two major perceived risk in most developing countries including South Africa are sovereign ceiling in international ratings. It is feared that this will curtail greatly the supply of finance and currency risk which weighs heavily on long-term financing."
Mankewu said currency risk allows the conclusion that by developing local capital markets and strengthening of domestic institutional investors, the fundamental sovereign and currency risks can be mitigated or even eliminated.
He added that the establishment of the proposed Infrastructure Fund must be viewed as the entering upon a "Terra Incognita" by both entrepreneurs and policy makers.