Pension investment could bridge African infrastructure gap

October 2014  |  FEATURE  |  SECTOR ANALYSIS

Financier Worldwide Magazine

In recent years African nations have begun to experience a new feeling of confidence surrounding the role of their pension administrators. Built on a solid foundation of an increasingly stable political atmosphere, widespread social security reforms, a nascent middle class and genuine economic growth of over 5 percent of GDP, the continent has begun to wake up to the transformational role that pension funds can play in its wider economic development. Accordingly, the African pension fund industry is fast becoming an increasingly popular investment opportunity for both domestic and international investors, who can provide much needed capital as well as vital experience and expertise.

Yet despite improving economic conditions there is still a substantial deficit in the continent’s infrastructure funding and development. In order to adequately meet wider infrastructure demands, countries will need to source significant new investment to meet the continent’s considerable funding shortfall of around $50bn. Africa requires investment of approximately $95bn per annum to meet the current infrastructure demands of its energy networks and its systems of roads, railway and ports, considerably more than the $45bn per year investment that the region currently receives. Nigeria alone will require around $10bn annually over the next 10 years in order to suitably maintain its infrastructure network.

Some analysts have suggested that pension investment could bridge the infrastructure investment and development gap. Although a great deal of work has been done to improve infrastructure networks across the continent over the last few years, there is still much more work to be completed. There is a belief that pension funds are in pole position to play a critical role in the continent’s development, helping to drive both economic and infrastructure progress across Africa.

Recently, the African Development Bank (ADB) proposed a new investment fund which will look to raise between $3bn and $10bn. The new fund will attempt to source financing from a number of investors including local and non-African pension funds, insurance groups, sovereign wealth funds and institutional investors. The fund, which will be known as Africa50, will form a vital part of the ADB’s plan to meet its goal of “delivering vital infrastructure through a new global partnership platform”. The bank will pledge around $500m of its own funds before seeking external investors.

In light of these developments, pensions and pension reform are becoming hot topics throughout Africa. According to a new report released by the Commonwealth Secretariat, the Making Finance Work for Africa Partnership and the Emerging Markets Private Equity Association (EMPEA), a number of African states have embarked on pensions reforms of late, creating new private pension systems, which are rapidly accumulating assets under management. In Nigeria alone, the country’s pension industry has expanded enormously in recent years. In December 2008 the Nigerian pension industry was worth just $7bn, by December 2013 it had risen to around $25bn. But Nigeria is not alone in experiencing exponential growth. A similar transformation will occur soon in Ghana, according to the joint report. Between 2014 and 2018 the Ghanaian pension industry is expected to expand by up to 400 percent, furthermore, pension assets now equate to around 80 percent of GDP in Namibia and approximately 40 percent in Botswana. The EMPEA report indentified Kenya as being an ideal location for increased pension spending. According to the report, “as Kenya continues to develop, it will require significant infrastructure investment over the next few decades. The area of public private partnership investment as an investable asset class should grow, and alongside it, longer-term asset classes with different payout profiles like private equity will become more accepted”.

As a result of the build up of cash under the management of pension fund administrators abroad, and with Basel III rules restricting banks’ investment capacity in infrastructure, pension funds in Africa have become targets for a number of large multinational corporations, governments, infrastructure developers and operators in capital intensive sectors in recent years. Government agencies in particular have been courting pension funds of late. However, if African governments are to attract significant investment from pension funds, more must be done to improve the regulatory environment. Not many African nations have a regulatory atmosphere conducive to investment from pension funds. In order to successfully tap the capital locked up in pension funds, countries must create and foster a holistic policy and regulatory framework which will allow for the utilisation of funds which have been earmarked for infrastructure investment projects.

Private equity can also play a significant role in the development of African infrastructure. According to the EMPEA report, private equity “provides an attractive solution for African companies in search of growth capital”. Currently it is estimated that around 1 percent of total private equity investment worldwide is concentrated in Africa, however, with private equity giants such as the Blackstone Group and Carlyle Group, the world’s two largest buyout firms, pledging to increase their investments in the region, the asset class could also have a significantly larger role to play in Africa’s development.

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Richard Summerfield