Investors in and management of South African construction companies have been waiting a few years for the Government's promised infrastructure programme to kick into gear. A Presidential Infrastructure Co-ordination Committee was established to fast track the process, using tactics successfully employed ahead of the 2010 FIFA World Cup. Last Tuesday the process received a timely boost with the promulgation of the Infrastructure Act, and with today's announcement on the BRICS Development Bank, things are finally starting to happen. In this Undictated Special Podcast, Futuregrowth's Jason Lightfoot unpacks what the new Act means. And suggests that the success of the Renewable Energy Programme suggests that once all the pieces are in place, the infrastructure boom will arrive. – AH.ALEC HOGG: This undictated podcast is brought to you by Futuregrowth Asset Management. With us today: Jason Lightfoot from Futuregrowth. On the 1st of July the Infrastructure Act came into being. How long has this been in gestation? .JASON LIGHTFOOT: For quite a while now, probably the last two or three years at least. It's been put through the various cycles..ALEC HOGG: What's the whole purpose behind it?.JASON LIGHTFOOT: The idea is mainly to prioritise infrastructure development within South Africa and what it does is it refers to the National Infrastructure Plan, which came into play a couple of years ago. What it does is it looks at various integrated projects. It will look at things like energy, municipal infrastructure, rail, road, and transport corridors. It actually creates the right structure and focus, and tries to streamline the infrastructure development by referring and placing a lot of emphasis on their Presidential Infrastructure Coordinating Committee..ALEC HOGG: Yes, because that's been around a while but it doesn't seem to be able to get any traction. Is this going to give it some?.JASON LIGHTFOOT: Well, that's the whole idea behind it, that it puts the right structures in place to align the right powers to the PICC..ALEC HOGG: Who is on the PICC, apart from clearly, Zuma himself?.JASON LIGHTFOOT: Well, it's Zuma and then, it's various Presidential Committees etcetera, so he probably has sole powers to bring the right Presidential substructures in place, with the right parties next to it in various areas. It might change from time to time. It just depends on who the right guys are at any point in time..ALEC HOGG: Why did they need an Act to make this work?.JASON LIGHTFOOT: Yes, that gives power to something like this, so it actually just creates the right forum to address the massive backlog that we have in the country. Obviously, things are benefitted by filing it into law, it actually just brings a greater level of importance to it..ALEC HOGG: I suppose the two big issues, apart from actual delivery (and we can talk about that in a moment) that they need to look at is the corruption, because we've had a whole Competition Commission looking into that, and land expropriation. Let's start off with corruption. Is there anything in the Act that will directly address that?.JASON LIGHTFOOT: Yes, there are structures in the Act where it refers to that. Obviously, when things go out to tender they can't necessarily give it to a potential linked parties, as such. There are 'look-through's' in the Act in terms of when a tender is awarded that they can't actually award it to a connected member in that regard. There are protections in place to cover that..ALEC HOGG: Are politicians generally excluded?.JASON LIGHTFOOT: Pretty much, yes – politicians and their immediate families..ALEC HOGG: Well, that's certainly a step in the right direction. Expropriation: for instance, it's quite interesting up here on the Highveld. We've been looking at the plans for Gautrain, but that would include quite a lot of required expropriation. Is there anything in the Act about that?.JASON LIGHTFOOT: It does refer to it, yes, so they do have some level of power in it but ultimately, it refers back to the Expropriation Act where structures have been put in place with regard to that. They obviously can't just go and expropriate land per se. They obviously have to refer back to the steps, which were put in place in respect of the Act itself..ALEC HOGG: From an investor's perspective, does this finally mean that the infrastructure boom we've been promised, will arrive?.JASON LIGHTFOOT: Hopefully. The government's achieved quite a lot in the last 20 years, but it's not nearly enough. The slow economic growth is still a massive concern. Right now, we need a lot of focus in place on infrastructure, which will drive job creation and economic growth. For investors, there have been very good examples of policy. Renewable Energy has been a fantastic program that was put into place, which drove investment in that area. Hopefully this will create additional models that they can rely on, and that can potentially drive investment in this area..ALEC HOGG: The construction groups' share prices have done very little in the last year or so. Would you see the promulgation of this Act as a trigger to reassess that?.JASON LIGHTFOOT: It's likely that will drive the share prices if they won contracts on the basis of this infrastructure drive. If government is able to execute on this whole plan, the main concern is sure, you might have good policy in place but ideally, you'd like to execute those desired results..ALEC HOGG: Stepping back a little and giving us some of your thoughts and your opinion, do you think they can?.JASON LIGHTFOOT: Yes, I think so. I'll refer back to the Renewable Energy Program. That was a fantastic program that took place, and if they can emulate that across various different infrastructure nodes, I think it could possibly work..ALEC HOGG: Why did that work, and what we've had on infrastructure so far, not work?.JASON LIGHTFOOT: I think they had the right team in place. They had the right focus, which just drove Renewable Energy and given the dire need of energy in this country, that obviously was another driving issue for that..ALEC HOGG: Yes, the construction companies themselves, also got pretty involved in that. Again, from a broader perspective, we do have a plan in South Africa, which appears to have been built on the Chinese plan: "First we build a road, and then economic growth follows." These are obviously very different countries with very different challenges. Do you think you can translate that plan into South Africa and kick start this economy? .JASON LIGHTFOOT: Yes, I think so. Obviously, the key concern is job growth and lack of jobs in South Africa. I think as a start that will be a good implementer to drive that process, take it forward, and result in potential foreign direct investment in South Africa..ALEC HOGG: Clearly, we need to do something to get this economy going..JASON LIGHTFOOT: Correct..ALEC HOGG: You haven't told me whether I can go and buy in construction shares yet. Can I just buy the index? Is this significant enough to maybe refocus one's mind there?.JASON LIGHTFOOT: Yes, my background…I'm mainly a bond guy, so I play in the infrastructure space. Yes, there might potentially be some opportunities to relook at that sector..ALEC HOGG: All right, and from the bond perspective, is there any debt that's now becoming more attractive, as a consequence of this new Act?.JASON LIGHTFOOT: I play in the infrastructure space and I look after the Futuregrowth Infrastructure and Development Bond Fund. It's a fund that primarily focuses on developmental-type assets and infrastructure-type assets so hopefully, this will result in a greater array of assets that one would be able to choose from in the future. Deal flow is of concern at the moment, but this will potentially drive deal flow for the market..ALEC HOGG: How has deal flow contracted then, over the past few years?.JASON LIGHTFOOT: We were mentioning that. Referring back to that, it's been a great addition to deal flow in the market, but primarily where they buy your traditional Eskom and Telkom chartered bonds. Whereas we're quite focused on the other space where we obviously partner with banks and intermediaries, to try to get additional inflow or different diversity in our Funds in this particular sector. .ALEC HOGG: The World Bank and the IFC: do they play a big part there?.JASON LIGHTFOOT: These developmental institutions play a role and they have acquired a few of the transactions in the space, so it potentially is an opportunity for them to provide some funding, yes..ALEC HOGG: I know it's a little outside of your direct area, but what about Abil? Have you been watching the performance of those bonds, given all the turbulence that's been going on around that company?.JASON LIGHTFOOT: Yes, the bond spreads haven't done too much – and of course, we saw the national bond spreads widen slightly. I think it's just a 'wait and see' game..ALEC HOGG: In the bond market, you play in big numbers so I suppose if something does go sour as we saw with the whole First Strut nonsense, it could give you a big hit. Does that make your risk assessment a lot more focused?.JASON LIGHTFOOT: Yes, obviously one needs to check each party on its own basis – its own risk parameters. Sure, they haven't really had any defaults in the market since the First Strut transaction, so I think we will wait and see what happens..ALEC HOGG: As far as the downgrading by the rating agencies is concerned, has that had a knock-on effect? .JASON LIGHTFOOT: As I said, the local spread hasn't really widened. Obviously, there has been some widening on the international spreads..ALEC HOGG: Jason Lightfoot is with Futuregrowth and this undictated special podcast was brought to you by Futuregrowth Asset Management.
