At the third edition of the World Pension Summit (WPS)- Africa Special, which recently held in Abuja for the third consecutive time, courtesy of the National Pension Commission, PenCom, and WPS, global pension experts, investors, stakeholders, and delegates dissected the challenges and prospects of financing infrastructural development in Africa with pension funds. If the insights, suggestions, and opportunities flowing therefrom are taken advantage of, Africa, especially Nigeria, may well be on her way to better infrastructure that would stimulate the much needed socio-economic transformation, writes Johnbosco Agbakwuru.With Nigeria and indeed most African countries facing daunting economic challenges, it was not surprising that the dynamics for pension funds investments, especially in the area of infrastructure, took centre stage at the just-concluded World Pension Summit-Africa Special (WPS- AS) themed “Pension Innovations: The African Perspectives) and co-hosted by the Netherlands-based WPS and the National Pension Commission, PenCom, in Abuja. Declaring the Summit open, President Muhammadu Buhari, who commended PenCom for a sustained progress in pension administration in Nigeria, also remarked that attracting global experts to brainstorm on better industry administration in Africa and resource deployment to move African economies forward was in order. “Nigeria and indeed most African countries are facing many challenges in the areas of the economy and security.
These challenges heighten the demands on our meagre resources and constrain our pursuit of infrastructure, which is traditionally seen as the sole responsibility of government. “This summit is, therefore, a welcome development as it brings together experts, professionals in pensions and related fields and indeed governments to discuss and exchange ideas on strategies to attract the much needed private sector funding from both within and outside the continent, and this is to compliment the efforts of national governments.“The Federal Government of Nigeria, on its part, will work to ensure that the required channels and support are put in place for pension funds and other institutional investors to provide the required financial intermediation in addressing Nigeria’s infrastructure gaps”, the President, who was represented by Nigeria’s Head of Service, Mrs. Winifred Oyo-Ita, said. Earlier, speakers like the Director General, DG, of the PenCom, Mrs. Chinelo Anohu-Amazu; CEO of WPS, Chris Battaglia; founder of the WPS, Harry Smorenberg and former President of Nigeria, Chief Olusegun Obasanjo had also spoken on the infrastructural deficits in Africa and need for urgent intervention.PenCom DG, Mrs. Anohu-Amazu, called for the strengthening of Africa’s pension systems and also bridging the continent’s infrastructure deficit, which she said would require a sustained spending of around US$93 billion annually, translating to about 15% of Africa’s GDP. “How do we build deep and efficient capital markets and financing models that would enable institutional investors such as pension funds to invest in infrastructure?” she queried, urging the summit to proffer answers.
To Mr. Battaglia, Nigeria, which is currently experiencing economic recession, required a strong economic stimulus by deploying pension funds for infrastructure investment as one of the measures to revive the economy.
Chief Obasanjo, on his part, stressed the need to find how pension funds could be utilized as a critical tool for positive socio-economic development, especially in the provision of long-term finance.Obasanjo said: “We must also find a way of using the pension fund in our development, particularly in infrastructural development. There are examples we can look at all over the world. In housing, Singapore is a good example where they have used their pension fund to make sure that there is no Singaporean who do not own a house. There is no reason why we cannot tow that line”. He however called for cautious innovations in investing pension funds.
Dynamics for Pension Investments
In plenary, the WPS-AS did not leave anybody in doubt that it came prepared to find ways forward in mobilizing and investing African pension funds to address Africa’s infrastructure deficits.The session, which was moderated by William Streeter of the International Infrastructure Finance (IFC) Specialist, USA, comprised experts like Solomon Adegbie-Quaynor of the IFC, Sub-Saharan Africa; Sev Vettivetpillai, Global Head of Thematic Fund, The Abraaj Group, UAE; Wale Adeosun, Founder/CEO, Kuramo Capital Management, USA; and Gabriel Shumba, Founder & Managing Partner, Shumba Group LLC, USA.Opening the discussion on the sub-theme, Streeter said there was a general perception of a lack of bankable infrastructure projects in Africa, unlike in developed economies and most emerging markets such as China and Brazil, especially in areas such as electricity projects.
This, he said, was as a result of reformS supporting private investment in the electricity sector in most markets. He also observed that countries, like Canada, Australia, and the Netherlands, with well-developed capital markets and large development banks had easy access to capital for developmental projects compared to those with less developed markets. According to him, they have pension funds equal to or greater than the size of their GDP, which provides an opportunity for investments in Africa.
Streeter stated that pension funds in Africa were predominantly invested in government securities and therefore have not significantly contributed in developing infrastructure projects. He added that Pension Funds have to save to meet long-term liabilities and infrastructure represents long-term economic assets, which is ideally suited for pension funds investment.
In his contribution, Solomon Adegbie-Quaynor said that lack of infrastructure restricted GDP growth by about 2% in Africa. He observed that infrastructure was not only limited to core infrastructure such as power, transport and utilities, but also includes business infrastructure such as affordable/social housing, commercial property, logistics etc.
He listed lack of bankable projects, inadequate project development and structuring skills as well as the lack of true early equity investments by project developers, among others, as major setbacks to infrastructure investment in Africa. Therefore, there was the need to address not just the project development and structuring, but also early equity investment issues. With regards to project defaults, he stated that regulatory risks accounted for 3% of default risk in the Organisation for Economic Co-Operation and Development, OECD, countries, whereas in Africa, regulatory and political risks, combined, were cardinal reasons for project default.
Sev Vettivetpillai noted that Africa had huge growth potentials in major sectors such as energy, healthcare and education, but noted that available capital in Africa is “smart” and looks for bankable projects. He further stated that in Africa, financial closure on infrastructure projects took 6-7 years, which is too long and increases project costs thus reducing returns.
To make progress, infrastructure projects needed to be structured in ways that satisfy the objectives of the various stakeholders (Government, Equity Provider and the Fund Manager) to consequently present a win-win situation for all stakeholders.
To Gabriel Shumba, understanding the nature of these funds and the objectives is key to appreciating the relationship between pension funds and alternative investments. Pension funds need to think of alternative asset classes not just from a returns perspective, but also from a risk management perspective. Wale Adeosun outlined four reasons why pension fund managers need to invest in alternative assets. These include: return on investments (studies in the USA indicated that Endowment Foundations outperformed pension plans and the primary reason being investments in alternative assets), diversification benefits, high-risk perception which discourages capital flows into Africa and hedging against inflation.
Experts and stakeholders agreed that to make a headway, African Governments, Pension Fund Managers, and Regulatory Authorities should create project development vehicles where developers are paid off at financial closure to mitigate project risk.
There is also the need to establish Regional Association of Pension Regulators to promote regional projects and enable further diversification of pension investment.
Again, the Private Equity Fund Managers and Pension Operators Association should explore structuring options to optimize pension investment in private equity, while stakeholders in the infrastructure and private equity space should organize, establish and institutionalize standard practices for Project Developments. And there is need to conduct Asset Allocation Study for the African pension industry.
The journey to Africa’s infrastructure sufficiency is certainly not a day’s job. But if the insights, suggestions, and opportunities flowing from the summit are taken advantage of, Africa, especially Nigeria, may well be on its way to acquiring infrastructural capacity needed to stimulate the much-needed socio-economic transformation. Meanwhile, as Africa awaits the fruits of the summit, stakeholders, investors, experts, believe PenCom also deserves a pat on the back for its foresight in providing the platform.