Africa Infrastructure’s Pensive Pensions

As the G-20 Finance Ministers’ gathering in Germany offered another commitment to raising African investment, international organizations weighed in with a strategy for better mobilizing local and external pension fund assets for infrastructure development. The UN’s special adviser, New Economic Partnership (NEPAD) and the Brookings Institute co-authored a paper noting that despite its priority in the Sustainability Goals, only one-third the continent has access to electricity and roads, and 5 percent to the internet. Annual outlays needed to redress the gap are close to $100 billion, and national budgets contribute just over half that sum. A 50-year agenda envisions high-speed transport and digital networks that can lift intra-African trade from 10 percent to 50 percent, but public investment spending has often been “wasteful” with 40 percent lost to inefficiencies according to project research. Numerous regional platforms and initiatives have been launched to facilitate national and cross-border allocation, and the African Development Bank recently closed a dedicated fund with $850 million in share capital. US, Europe, Asian BRICS, and other emerging market sources are active in the space. Pensions/output is low and dominated by pay as you go schemes outside South Africa, Botswana, Kenya and Nigeria, and infrastructure lacks specific financial instruments. Tax revenue remains low and commercial sovereign bond issuance came to just $15 billion a decade after official debt relief. External development lending and public-private partnership account for $30 billion annually, but OECD-based institutional investors with over $90 trillion under management are a vast untapped pool and they increasingly emphasize environment, social and governance (ESG) factors and long-term commitments key to successful projects. Individual pension funds in advanced and emerging markets can range from $100 billion to trillions. According to surveys only 1 percent is put in infrastructure-related unlisted securities, although Canadian plans in particular are exceptions, with the Ontario Municipal Employees portion at 15 percent. They have joined with development agencies on specific channels with an evolving interest in “green” bonds to promote energy alternatives.

African countries had $380 billion in hand as of end-2013, around $60 billion outside South Africa. Nigeria is second with $25 billion, and Botswana, Kenya and Namibia range from $5-$10 billion. Nigerian funds only received infrastructure authorization under a 2014 law, and regional size is constrained by less than 10 percent labor force enrollment given large informal economies. Recent reforms have concentrate on the guaranteed defined benefit pillar rather than the private contribution supplemental tiers common in other emerging economies. In-house fund manager expertise is often limited and lack of liquidity and mandatory portfolio guidelines are additional deterrents. Municipal, project and corporate bonds are typical structures but broader capital markets are unsupportive, the review notes. Transparency, adequate pricing, government debt benchmarks, and technology platforms are lacking, and cross-border ties could be a catalyst as with the African Development Bank’s Financial Market Initiative. South Africa’s Government Employees fund (GEPF) dominates there and many state enterprises like Eskom also have big pots. The system is regulated by the Financial Services Board and the current GEPF infrastructure slice is 1.5 percent as the strongbox again may be pried open by ruling party activists demanding higher social amid urgent physical and policy building tasks.