In generic terms, economic theory categorises infrastructure assets, as public goods. This means a good or service that is provided without profit to all members of society. The absence of the profit incentive (by default), has placed the provision of public goods or services in the laps of governments, to be paid for by tax revenue.
For Africa, the accelerated development of its infrastructure (inclusive of repairs and maintenance) is vital to achieve sustainable social and economic development milestones. So urgent is this need that the responsibility for providing infrastructure can no longer solely rest with African governments. Accordingly, African governments can no longer afford to ignore private sector investment in infrastructure as an option to alleviate the burden on the public purse. The mobilisation of private investment such as the long-term savings of African pensions and insurance pools must be addressed.
Historically, infrastructure assets were traditionally the beneficiaries of large public subsidies, with the intention of balancing commercial viability and social objectives. Now, in the face of increasingly limited public fiscal resources, policy-makers need to choose between privately-financed (in part or whole) infrastructure or no infrastructure. Ultimately, long-term investors (pension funds) who are contemplating participating in the funding of African infrastructure assets, are spending more time assessing whether African governments are creating a fair and enabling environment that is equally attractive to both domestic and foreign long-term investors.
Local regulation remains one of the main drivers of asset allocation. In Africa, a specific focus on developing, deepening and making capital markets more accessible to both international and local long-term investors is a key ingredient for the successful mobilisation of private capital towards infrastructure projects., A critical review of possible restrictions or obstacles to the movement of capital should gain primacy in any deliberations of macroeconomic policy planning. In order for African debt- capital markets to perform their intended critical role of “crowding-in” local and foreign long-term savings towards African infrastructure projects, aspects such as fully convertible exchange rates and allowance for capital to easily move in and out of African countries should be deemed precedent conditions. The corollary benefits of these clear and positive macro-economic policy signals will be evident. The OECD Principles for Private Sector Participation in Infrastructure further elaborates:
“Private participation in infrastructure can also help develop financial markets. Loans to infrastructure projects can be securitised with double benefits of lowering the funding costs and adding depth and liquidity to domestic capital markets. The financial resources for purchasing such instruments are available in the insurance and pension sectors of most countries.”
For North African countries there is a strong imperative for policy planners and long-term savings institutions to capitalise on their demographics (and in turn the underlying profile of their core savings-base), through the issuance of Sukuk – the Islamic equivalent of bonds.
Unlike traditional bonds, Sukuk securities, which adhere to Islamic Shari’ah principles, give investors a share of an asset together with the attendant cash flows and risk. Traditional bonds simply confer ownership of a debt. As Sukuk securities adhere to Islamic laws, interest can neither be charged nor paid.
Sukuk can provide North African (specifically) and African governments (more broadly), access to growing Islamic finance liquidity pools. Importantly, Sukuk presents a viable alternative given the change to global banking regulations under Basel III, where banks are less willing to hold long-dated and less liquid assets on their balance sheets, due to the primacy that is now given to bank liquidity under Basel.
Islamic financing (Sukuk) can only be extended to productive activities, trade, and real assets – a perfect fit for most targeted infrastructure assets. Another key reason pension funds should consider Sukuk as an infrastructure asset within their portfolios is that in addition to the asset offering the opportunity for diversification, Sukuk holders can take a certain level of comfort from the fact that the Islamic banks that invest alongside them tend to hold their investments until maturity, creating a more stable investment for the asset class.
However, to truly capitalise on this alternative manner of funding infrastructure, regulatory authorities will need to amend their legal and tax legislation to allow for full implementation of Shari’ah governance issues. There already is precedence on the continent: Senegal became the first African nation to issue sovereign Sukuk in 2014, followed in quick succession by South Africa, Cote d’Ivoire, Niger and Nigeria, with the total issuance from these African countries amounting to US$2billion to date. S&P reports that globally Sukuk issuance in 2017 increased by 45.3%, reaching $97.9 billion, up from $67.4 billion in 2016, underpinned primarily by the jumbo issuances of some Gulf Cooperation Council (GCC) countries.
Business Development Executive, RisCura
* This article first appeared on ESI Africa online on 12 September 2018