We are excited to announce that RisCura is partnering with Africa Investor to launch Africa’s first infrastructure performance index.
For years one of the constraints for investment into infrastructure has always been the lack of a benchmark, one of the essential elements in the ecosystem of institutional investment. It is for this reason that we hope the introduction of this index will enable increased investment into this asset class.
This initiative enjoys the support of the African Sovereign Wealth and Pension Fund Leaders Forum, the World Pensions Council, BATSETA, and official institutions such as NEPAD/African Union and the EDFI, the Association of bilateral European Development Finance Institutions amongst others.
Indices and benchmarks play a critical role in investment management, the value of which should never be underestimated. Consider the case of an institutional investor in the process of making an asset allocation decision within alternative investments. The availability of a reliable performance index allows returns to be compared, not only against a benchmark, but between asset classes. As a result, when considering the investor’s risk profile, an optimal asset allocation can be made.
Over the last two decades Africa experienced periods of per capita income growth that were higher than those seen in developed nations. However, of late, numerous factors have led to a slowdown in the region’s economic activity. Many would argue that the inadequate supply of infrastructure services is one reason for this.
A comparison of sub-Saharan Africa to other developing nations shows clear underperformance when it comes to infrastructure development. Research by the World Bank has quantified the potential impact infrastructure development would have on Africa’s growth trajectory. According to this research, improvements in quantity of infrastructure development to levels seen in other developing regions could see GDP per capita growth increase by at least 1.2% annually. Adding in enhancements to the quality of infrastructure would contribute a further 0.5%; increasing growth by a total of 1.7 % annually. This growth is even more impactful when compared to the world’s leading nations. The impact on GDP growth, from making strides in both the quantity and quality of infrastructure, rises to 2.6% annually. Simply put, the potential benefit of funding Africa’s infrastructure deficit is significant.
When looking for answers to the continent’s infrastructure financing need, it’s easy to look at public investment as the main solution. However, with insufficient current levels of infrastructure spend as a percentage of GDP and increasing debt-to-GDP ratios, most African countries have little room in their fiscus to accommodate higher infrastructure spend. The solution lies with alternative sources of finance – institutional investors. Pension funds’ long investment horizon make them especially suited to infrastructure investments. The potential for these investments to deliver a predictable cashflow stream over a sustained period, coupled with an element of inflation protection is attractive for institutional investors.
So, why are we seeing insufficient levels of capital committed to infrastructure funds? The reasons for this remains complicated, with numerous elements of a thriving investment ecosystem, such as significant pools of institutional capital, sufficient assets managers and robust regulatory regimes, still developing. While some elements will take longer to develop than others, the introduction of infrastructure performance information for Africa is a simple step in the right direction. Institutional investors often cite a lack of performance data as a constraining factor when considering infrastructure allocations.
Compiling a performance index is a big step forward for any asset class aiming to attract additional investment. With the assistance of the relevant parties, we believe creating this index will address one of the problems within the environment.
head of unlisted investment services, RisCura