Can Pension Funds Help Solve Africa’s Infrastructure Deficit?
Despite the global focus on growth trends in Africa, one trend has flown mostly below the radar: the increase in the number and size of pension funds. In addition to evidencing increased income security, the continent’s growing number of pension funds could potentially be a new source of funding to address Africa’s infrastructure deficit, estimated by Ernst & Young to be $90 billion annually.
African pension funds, which are currently estimated to hold USD 334 billion in assets, are now beginning to invest in large infrastructure projects throughout the continent. Traditionally, these pension funds have invested primarily in local, fixed-income bonds. Compared to other types of investment funds that feel market pressure to yield quicker returns, pensions have a long investment horizon and are thus well suited to more protracted, capital-intensive projects. Numerous examples of African pension funds investing in infrastructure projects have emerged in recent years. The South African Government Employees’ Pension Fund, as one example, has made investments in solar power and telecommunications projects. Just last April, Tanzania’s state-run pension fund invested USD 135 million to construct a six-lane toll bridge across Kigamboni Creek in Dar es Salaam.
The growth and increasing sophistication of pension funds is positive news for infrastructure projects throughout Africa. Now, as development banks and private equity funds target pension funds in Africa as sources of investment capital there are important legal and policy challenges that need to be addressed in order for pensions to truly drive major infrastructure construction and improvement. There are three challenges in particular worth considering:
(1) Overconcentration. As it currently stands, the bulk of pension funds throughout Africa are concentrated in sixteen major markets, and specifically in four countries: Nigeria, South Africa, Namibia and Botswana. According to a report by the South African investment advisory firm RisCura, these four countries alone hold some 90 percent of Africa’s pension fund assets. This suggests that most infrastructure investment will accrue to major markets, leaving smaller countries to rely on traditional pension investment strategies.
(2) Opposition. To date, labor unions have been the most vocal opponents to pension funds’ participation in infrastructure projects. In Nigeria, for instance, the Nigeria Labour Congress publicly opposed investment in infrastructure, arguing that public sector projects are too often mismanaged, too often delayed and overall too risky to entrust pension assets to.
(3) Restrictive Regulation. The current landscape of regulation across the continent does not adequately reflect the increasing sophistication and ambition of African pension funds. An increasing number of funds are seeking to make investments in infrastructure projects outside their own country. In some countries, however, national laws require that pension funds only make domestic investments. In addition to precluding funds from investing in high-yield projects in other countries, such regulation constrains a fund’s ability to contribute to the capital-raising efforts of regional development banks. In contrast, in other countries, as in Nigeria, the National Pension Commission’s regulations limit infrastructure and, in some cases, require federal guarantees for bonds. Nonetheless, the restrictions are commonplace, and make it considerably more difficult for pension funds to invest in infrastructure than other types of funds making similar investments. Moving forward, more African countries may wish to follow the example of Malawi, which the OECD specifically identified as having among the least restrictive pension regimes in the world. Looking outside Africa, another model for relaxed regulation is Canada, which eliminated its rule barring pension funds from investing internationally in 2005 and imposes no ceiling on pension funds’ ability to invest in public or private bonds.
Despite the above challenges, African pension funds are likely to make an even more substantial impact on infrastructure investment across the continent in the next few years. In particular, one promising trend is the rise of regional funds that are targeting pensions as institutional investors, including the Pan-African Infrastructure Development Fund, the Africa Development Bank’s Africa50 Fund and the COMESA Infrastructure Fund. The emergence of numerous such entities is starting to create greater regional coordination in the growing pension market and, as importantly, making a new source of African capital available to address the region’s infrastructure deficit.