Pension funds – should they be financing infrastructure in Africa?

10 Sep 2018

The economic environment for private equity investments in Africa is much rosier than a few years ago when the global economy was in a downturn. The improved conditions bode well for infrastructure development on the continent and this may reflect Africa’s status as the world’s fastest urbanising continent.

As such, David Ashiagbor - Coordinator in Making Finance Work for Africa, a division of African Development Bank (AfDB) says Africa needs a strong financial sector that finances real economy and real investments needs in the continent.

Ashiagbor was in the capital Gaborone this week for the Insurance Institute of Botswana’s second annual conference.

He told his audience that currently the continent only invests four percent of its GDP in infrastructure, apart from energy. Infrastructure, he said, is an asset class that can provide a distinct addition to African pension and investment portfolios and should be considered.

Should African pension funds play an active role in infrastructure development, Ashiagbor said, the continent’s GDP would then increase by two percent annually.

Previous surveys show that the rapid urbanisation in the continent is underpinned by a strong demand for infrastructure, which AfDB estimates to be around US$170billion a year for the next decade.

According to Ashiagbor, such developments cannot be much dependant on government alone as governments’ demands are huge already and are already highly indebted. There is too much pressure in governments.

It also emerged at the conference that in Botswana, between 2012 and 2016, pension funds had fixed 89 percent of its assets in equities with less investment in infrastructure registered.

STRICT REGULATORY

While some industry players argue that regulators are too harsh, Ashiagbor does not concur with the belief.

“Yes there are some countries that underline the ability to invest offshore, but it is not the Pension funds who say they can’t. The other barrier is that the absent of data remains a huge challenge in Africa, on the performance if these sectors, their track records, benchmarking in formation…nothing is ever readily available,” he worryingly expressed.

“Botswana is one of the few where institutional investors are allowed inactively to invest offshore and this has halved it in the last five years. We have seen change in regulation of pension funds in many markets, into systems that require mandatory requirements. A lot of regulatory changes have been driven by the increase in assets under management,” he highlighted.

By March 2017, the date for which latest figures are available, local pension fund assets amounted to P77.5 billion of which 62.1 percent was held offshore.

The other challenge he noted was the knowledge gap from regulators, trustees and pension managers which he said still exists, as well as on project sponsors and asset managers.

UNLOCKING AFRICAN CAPITAL

Ashiagbor said it is imperative to consider core investment vehicles, as it reduces risks and allows for learning exchanges. “You could do with AfDB, for instance, which has more experience. You can also have core investments at country level. This allows cost sharing in both due diligence and management. De-risk by unbundling the risks. Have policy dialogue and understand the real blockages and following them through to ensure they happen,” he advised.

He also emphasised on the country pension funds to have a strong local institutional base and the capacity building needs to be targeted at the right people. “We have not seen commensurate on project developers on where real investments are. Hearing from peers from Africa is key,” he added.

WHAT BOTSWANA PENSION FUNDS SAY

Sunday Standard is aware that most local pension funds have invested relatively 60 percent or above of their funds offshore and 30-40 percent is local. Amongst them is the Botswana Public Officers Pension Funds, Debswana Pension Fund, University of Botswana DC Pension Fund.

Professor Emmanuel Botlhale, a Fund Trustee from the University of Botswana DC Pension Fund said that, the Fund has invested 60 percent offshore and 40 percent domestic. “Äs an investor you invest in incentives. In Africa alone our investment is at one percent. We would want to put money in Africa but we are cautious on the risks.”

Moemedi Malinda, Investment and Portfolio Director at BPOPF, says their level of investment in Africa is at two percent and this is for a five year term. The problem is not capital but projects, he said.

Thato Norman, Investment Manager at Debswana Pension Fund says, “we are 60 percent offshore and 40 percent onshore across different assets classes. Invest in assets with lower correlations. We are only one percent in Africa. We needed to go into frontier markets, but it is highly volatile.”

Considering that most pension funds look oversees to invest their eggs of investments for better returns; perhaps it is high time for African countries to enact policies to attract Africa’s pension funds to invest in continent’s infrastructure projects.

The industrialisation of Africa is at a critical stage and needs a sustained action by African governments.

If Africa is to be successful in increasing the number of regional and domestic infrastructure projects and show impact in advancing sustainable inclusive development; wholesale changes are needed in mind-set and perceptions on the issue of investment risk in Africa.