South Africa pins infrastructure hopes on green-bond appetite

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In July, 62 priority projects were announced in the first stage of the infrastructure programme.


In July, 62 priority projects were announced in the first stage of the infrastructure programme.

  • SA is eyeing green bonds to fund the R2.3 trillion infrastructure programme.
  • There is a shortage of R140 billion in phase one of the programme, according to Public Works Minister Patricia de Lille.
  • The green-bond programme is planned to be launched before the end of the year.

South Africa plans to tap global appetite for green bonds to
help fund an infrastructure programme worth as much as R2.3 trillion over the
next decade.

Winning over the private sector and streamlining the
project-approval process will be key to the drive, launched by President Cyril
Ramaphosa in June to revive an economy that was already in recession before the
coronavirus struck and is expected to contract by the most in nine decades this
year. In July, 62 priority projects were announced in the first stage of the
programme.

“There is a shortage of R140 billion in phase one, and
a large part of that will come from green bonds,” said Patricia de Lille,
the minister in charge of the public works department that’s overseeing the
program. “We can’t just be a government of announcements and sod turnings.”

South Africa faces backlogs in everything from power plants
to broadband services and housing. While the government has traditionally
funded most infrastructure, its coffers are empty, and it’s looking to tap the
about R12 trillion that the country’s business organisations estimate is the
total of savings and bank assets.

“It’s not that the private sector doesn’t want to invest
in infrastructure projects,” said Leon Campher, the chief executive
officer of the Association for Savings and Investment South Africa, an industry
body of fund managers and insurers that’s working with government.

“The problem generally with infrastructure has been
that it has been scattered all over the place. Local authorities want projects,
provincial authorities want projects, government departments want projects and
there’s no coordination.”

Those departments don’t have the skills to properly assess
projects and raise funding for them, he said, adding that the creation of a
national infrastructure office may change that.

The public works ministry and the infrastructure investment
office in the presidency have started talks with investors and the JSE, which
operates South Africa’s main stock and bond exchange, and plans to launch its
green-bond programme before the end of the year, De Lille, a former mayor of
Cape Town, said.

Appetite for so-called ESG bonds – notes that meet
environmental, social and governance criteria— is rising worldwide. Mexico sold
750 million euros worth of sustainable bonds this month while Saudi Arabia’s
power utility issued $1.3 billion of green bonds. Emerging-market governments
and companies have sold a record $10 billion of green, social and sustainable
bonds this year.

Green transport

While only R9.3 billion of green bonds have been listed on
the JSE, the exchange could handle larger volumes, said Shameela Ebrahim, the
bourse’s chief sustainability officer. The JSE has 1 800 bonds issued on its
platform with a market capitalization of more than R3 trillion rand.

Eligible projects could range from renewable energy to green
public transport and water management, De Lille said.

Announcements on the time lines of some of the priority
projects should begin in October, De Lille said. The process has been
accelerated by bringing the project approvals under one roof, the central
office of Infrastructure South Africa, and conducting license applications and
environmental impacts assessments at the same time, she said. A R100 billion infrastructure
fund, that will partner with private investors in so-called blended finance
projects, has been set up.

“We have a team at Infrastructure South Africa looking
at the concept of listed project bonds and/or green bonds where you are funding
renewables, so that you can crowd in more pots of capital,” Campher said. “That
would be an attractive vehicle into a project for a provident fund that puts quite
a premium on liquidity.”

One-stop shop

The government has also asked private companies to second
professionals to the infrastructure department in a bid to get the projects up
and running.

“It’s the first time in the history of South Africa to
have one department for infrastructure,” De Lille, the only member of
Ramaphosa’s cabinet who is not from the ruling party. “We have created a
single entry point for all infrastructure.”

In addition to a lack of skills, the poor state of South
Africa’s finances and those of its state companies such as power utility Eskom
Holdings is an obstacle, according to Vuyo Ntoi, co-managing director of Old
Mutual’s African Infrastructure Investment Managers.

“With technically bankrupt state-owned enterprises as
the counter parties you need some sort of guarantee,” he said in an
interview. “The challenge around government and the Eskom balance sheet
needs to be resolved.”

READ | Government kicks off bid conference for additional
power, as Eskom struggles along

Dario Musso, co-head of infrastructure finance at FirstRand’s
Rand Merchant Bank, said plans put in place by the government are making good
progress and that the state has showed a greater willingness to work with the
private sector.

“We are seeing great momentum, more than we have seen
in the last decade,” he said. “But it’s not an overnight thing. It is
a very long-term, staggered play to get these projects to market and get them
delivered in a bankable way.”

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