Africa’s infrastructure backlog is well-documented, with the World Bank placing it at an annual value of approximately US$93 billion a year.
Globally, infrastructure is increasingly being considered as an accepted asset class within a number of pension plans’ investment policy statements. While acceptance is slow, it is growing. The OECD Annual Survey of Large Pension Funds and Public Pension Reserve Funds (2015), surveyed large global pension plans from 2010 to 2014. The funds represented US$7,8 trillion of global savings and a sub-set of these funds reported an increase in infrastructure asset allocation over this period, up from 2,8% to 3,5%.
Infrastructure is broad in categorisation, but how do institutional investors decide where to invest? This question is best answered by the World Bank Group (WBG) Sustainable Infrastructure Action Plan FY 2012-2015 – a guideline on how the WBG will respond to infrastructure financing needs in developing countries. The plan provides guidance to African institutional investors on infrastructure investments.
It identifies three priority infrastructure categories that African institutional investors can draw upon:
Ripple Effects: An example of this is a regional power project with ripple effects beyond the host country, or a rural infrastructure package that boosts agricultural productivity with ripple effects on rural income and development;
Bottleneck: Investments that unlock the volume, cost, and quality of economic activity. An example is the development of an accessible source of clean water that provides rural women with more free time by reducing time (wasted) in sourcing clean water and increasing their time for other economic activities; and
Missing Links: Infrastructure investments that interconnect two markets or areas such as a bridge within a region or a cross-border power interconnector, international road corridors, or fibre-optic links in a region.
The plan’s guidelines, Africa’s infrastructure backlog and the global dynamic of infrastructure now being included as part of pension fund asset allocation provide African pension funds with an opportunity to consider this as an asset class within their strategic asset allocation.
Infrastructure investments are long-term and its primary appeal is its potential to deliver a predictable cashflow stream over time. In principle, this asset class presents a compelling natural “fit” to the longer-term liability profiles of most pension funds that demand (ideally) predictable matching cashflows.
From a public policy perspective, African governments are providing clear direction on how to address the infrastructure deficit. The New Partnership for Africa’s Development (NEPAD) supported the Programme for Infrastructure Development in Africa (PIDA) to identify key cross-border infrastructure investments between2012 and 2040. African leaders also committed to prioritise eight regional infrastructure projects under the Presidential Infrastructure Champions Initiative (PICI) in 2012. More recently, NEPAD established the Continental Business Network (CBN). The network aims to facilitate private sector engagement and leadership in important continent-wide infrastructure projects, particularly the regional infrastructure projects under PIDA.
While the supra-national policy environment appears progressive, the rules and restrictions faced by many pension funds and long-term savings pools (insurance) remain constrictive. The International Organisation of Pension Supervisors (IOPS) surveyed 32 countries in 2011, with the results highlighting regulatory restrictions primarily towards unlisted and alternative investments such as infrastructure. The IOPS research provides remedial advice on the need for national regulators to review regulations for these investments.
The specialised nature of infrastructure as an asset class has also seen the emergence of specialist private equity funds and fund-of-funds offering investors exposure to it. It therefore makes sense for institutional investors to consider developing a specific infrastructure investment policy to form part of their broader investment policy and investment governance policies. The infrastructure investment policy should feature the same metrics applicable to their traditional assets, such as allocation factors, risk and return budgets, concentration limits and independent valuation parameters, to name a few.
African institutional investors may be lured by the high, stable and long-term cashflow and inflation protection potential of infrastructure investment, coupled with its low correlation to traditional asset classes. However, smaller pension funds should be mindful that infrastructure investing generally requires substantial financing and specialist investment governance to be successful. Ultimately, investment in this asset class will need to be undertaken in-step with regulatory and supervisory reform and the urgency for African institutional investors to accelerate infrastructure development. They should however remain mindful that such investments must be of primary benefit to the members when they retire.
– Gerald Gondo
Business Development Executive, RisCura
*This article originally appeared on ESI Africa online on 20 September 2017
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