Leveraging African Pension Funds to Fill Africa's Infrastructure Gap
This blog benefited from the comments of the MFW4A Coordinator, David Ashiagbor.
New figures from the African Development Bank estimates that Africa needs to invest between US$130 and 170 billion in infrastructure annually, with a funding gap of $68—108 billion1. These are much higher than previous estimates of $93 billion in investment needs and a $31 billion financing gap. At the same time, financing for Africa’s infrastructure has declined by 25%, from a high of $83.3 billion in 2013 to $62.5 billion2 in 2016, according to the Infrastructure Consortium for Africa (ICA).
African governments, western donors, and other bilaterals/multilaterals together provide over 75% of funding for the continent’s infrastructure today. Pressure on public budgets, both domestic and foreign, mean that these alone cannot fund the continent increased needs, as evidenced by the decline in funding (see chart and table). Global attention has therefore turned to how the private sector can contribute to funding Africa’s infrastructure needs. In this context, there is increased interest in the role of Africa’s pension funds in funding the continent’s investment needs.
Source: "Infrastructure financing Trends in Africa - 2016" (ICA)
Economic growth, an emerging middle class, and pension reforms have brought more people into the social security net and have contributed to the growth in pension fund assets under management (AuM), across the continent. Price Waterhouse Coopers (PwC) estimates AuM in 12 African markets will rise to around USD 1.1 trillion by 2020, from a total of USD 293 billion in 20084. Hard figures are difficult to come by, but it is estimated that less than 1% of AuM across the continent is invested in infrastructure. Why is this and how can African governments, institutional investors, and DFIs work together to leverage Africa’s growing long term savings to fund its investment needs?
For African pension capital to be a viable source of funding for infrastructure, the pension funds need to have the ability and the willingness to invest in the asset class. Their ability to invest is affected by issues like regulation (Is the pension fund allowed to invest in alternative assets? If so, under what conditions and to what extent?), their existing assets under management, as well as their understanding of the sector. The willingness of these same pension funds to invest in infrastructure is affected by their understanding and evaluation of the risks, their assessment of how infrastructure fits within their investment policy and strategy, and their ability to identify projects they are willing to back.
Regulation is often cited as the main stumbling block to investment in infrastructure by African pension funds. However, reforms in key markets are creating an enabling environment for local institutional investors to participate in infrastructure. Nigeria allows pension fund managers to invest up to 5% of AuM in infrastructure funds and 15% in corporate infrastructure bonds5. However, as of March 2018, only 0.08% of AuM was invested in infrastructure bonds and 0.01% in infrastructure funds, according to the National Pensions Commission (PenCom)6.
Some commentators argue that the low levels of investment in these asset classes reflect regulatory barriers such as a ban on direct equity stakes and limitations on cross-border investments. In their view, regulators should be encouraging pension funds to use alternative assets like infrastructure and private equity as a risk diversification tool, and that these limitations, especially with respect to cross-border investments, achieve precisely the opposite effect. Regulators respond that their first duty is to protect the pensions of their fellow citizens. In that context, it would be unwise to give pension funds unrestricted access to an asset classes which neither they, nor the regulators, are familiar with. One only has to look to the origins of the global financial crisis to understand the potential damage which cause.
To invest in infrastructure successfully, African pension funds need the resources to do so. With AuM in countries like Nigeria growing at close to 30% per annum, and given that less than 5% of the population of sub-Saharan Africa is covered by the pension plans, there is obvious scope for significant growth. The global industry figures hide wide variations across and within countries. Industry fragmentation is a major issue in many countries, with assets split across dozens of small pension funds, meaning that they can only make minimal investments, which can be below the minimum ticket size of many infrastructure projects.
Unlocking the potential of African pension funds to finance infrastructure also means addressing factors that influence their willingness to invest in the asset class. First among these is the lack of awareness about the ‘infrastructure asset class’ across the continent. Even in South Africa, with its sophisticated financial markets, few pension funds have experience of investing in infrastructure. Pension funds, regulators, and other stakeholders must be empowered with the right information which will enable them to evaluate if and how infrastructure fits within their investment strategies and objectives.
Secondly, the scarcity of investable assets and the corresponding dearth of appropriate vehicles through which to invest must be addressed. This is a familiar subject for many commentators. However, until recently, there has been little effort to understand the specific risk appetite, regulatory regime, and return expectations of African pension funds. The assumption has been that these are the same as for other classes of investors. The result is that many projects presented to African pension funds today are not investable from their point of view. In short, the approach needs to shift from one of product placement to one of designing investment solutions for African pension funds.
Enabling actions must address both the supply and demand sides of pension fund investment in infrastructure. Potential solutions include targeted interventions in the development of investable infrastructure projects and special purpose vehicles, risk-sharing mechanisms, and more traditional co-investment opportunities through investment platforms. Overall, fostering an exchange of knowledge and a sharing of experiences among industry stakeholders—notably, pension funds, regulators, and asset managers—is key to unlocking institutional capital for infrastructure finance in Africa from both domestic and international investors.
With the appropriate regulation, governance and internal capacity to assess and manage the risks associated with investment in infrastructure, there is no reason why African pension funds cannot take on a greater role in financing the continent’s infrastructure transformation in the medium to long term.
1 African Economic Outlook 2018, African Development Bank. www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/African_Economic_Outlook_2018_-_EN.pdf
2 Infrastructure Financing Trends in Africa 2016, ICA. http://www.icafrica.org/fileadmin/documents/IFT_2016/Infrastructure_Financing_Trends_2016.pdf
3 ICA members include among others G8 countries, African Development Bank, Development Bank of Southern Africa, World Bank, European Commission and European Investment Bank.
4 Source: Africa Asset Management 2020 -‐ Report by PwC examining the asset management industry across 12 African countries (Algeria, Angola, Botswana, Egypt, Ghana, Kenya, Mauritius, Morocco, Namibia, Nigeria, South Africa, Tunisia). http://www.amafrica2020.com/amafrica2020/docs/am-africa-2020.pdf
5 PenCom Regulation on Investment of Pension Assets, 17 December 2012.
6 PenCom Monthly Report March 2018. https://www.pencom.gov.ng/wp-content/uploads/2018/05/Summary-of-Pension-Fund-Asset-RSA-Registration-as-at-31-March-2018.pdf
About the authors
Arnaud Floris is a Financial Sector Development Advisor with the Making Finance Work for Africa (MFW4A) Partnership. He holds a wide range of working experiences in resource mobilization, general management and strategic development roles within development finance and private sector organizations across Europe and Africa. Before joining MFW4A, Arnaud worked within the resources mobilization and allocation unit of the African Development Bank, where he was a lead team member of the African Development Fund's Performance-Based Allocation process, involving over 100 stakeholders, 54 beneficiary countries, and a three-year budget of 7.5 billion Dollars.
Yves Kra is an Associate Research Officer in the Knowledge Management Team of the MFW4A Partnership. Among other daily tasks, he conducts assessments of African national financial sectors and drafts corresponding reports. Moreover, Yves conducts on-demand, bespoke research for the MFW4A Secretariat and its partner institutions, most notably the African Development Bank, European Investment Bank, and the Agence française de développement (AFD). Yves holds a Ph.D. from Paris XIII University, which he defended in 2017 as part of a research project on the complementarity between banks and microfinance institutions in WAEMU (West African Economic and Monetary Union). His current research interests include development finance, microfinance, banking, and applied econometrics to developing countries.