African countries go on to face major infrastructure needs, and their governments want private investment so as to address these challenges. This is especially important given the growing impact when it comes to climate change as well as the emphasis in terms of sustainable development agendas. Local pension funds, along with other institutional investors, represent a major yet underutilized financial resource.
There are two prominent examples of pension fund consortiums within Kenya and South Africa that present promising models so as to involve Africa’s institutional investors to tackle the infrastructure financing gap while also meeting the continent’s increasing infrastructure development requirements. In a span of just three years, the two consortiums have successfully brought-in more than $500 million in new infrastructure finance. This clearly shows the potential if all 54 countries in Africa could harness the funding power of their own institutional investors in the same manner.
Issues & Opportunities
The yearly infrastructure financing shortfall in Africa happens to be more than $100 billion due to governments facing major budget deficits and having to prioritize distinct needs. The inadequate position of infrastructure on the continent happens to have an adverse effect on economic growth, causing a dip of 2% per year and reducing economic productivity by almost 40%.
In South Africa, reducing energy infrastructure costs the country $51 million every day in economic losses. This is apart from the disturbance and unrest caused by power rationing and blackouts.
It is well to be noted that there is an urgent need when it comes to investment in infrastructure so as to address people’s basic needs as well as push economic development.
Fortunately, the assets when it comes to pension funds on the continent are experiencing growth. At present, only a few people happen to be having major investments in the infrastructure sector and other real assets. But these asset classes offer an appealing opportunity because of their long-term investment landscape as well as solid environmental, social, and governance traits. In addition, they provide competitive returns along with dependable cash flows, while at the same time being safeguarded against inflation.
In Kenya, a major portion of pension funds is allocated to government securities, which currently stands for 46% of their investments. Infrastructure as well as alternative assets happen to offer a valuable opportunity for diversification, which is the need of the hour.
What factors are at present hindering Africa’s institutional investors from raising their portfolio allocations to infrastructure?
The key factors to consider happen to be being aware of opportunities, having the necessary capabilities, and understanding the scale of the situation. Many opportunities do not cater, especially to local pension fund investors, which means that there happens to be a lack of expertise in assessing potential investments as well as deploying capital.
Infrastructure projects happen to be capital-intensive and can pose a great challenge for individual funds to invest in. Hence, only the largest funds are able to meet the required investment requirements.
Consolidating pension funds into a consortium happens to be an effective solution in terms of overcoming challenges as far as local infrastructure investment is concerned. It enables funds to combine their technical as well as capital resources, thereby creating a platform for collaboration. Here are two examples:
The Kenyan Pension Funds Investment Consortium- KEPFIC happened to be launched in 2020 with the support of USAID and the World Bank. The consortium went on to receive assistance from advisory firms like MiDA Advisors and CrossBoundary. KEPFIC initially began with just five funds, but it has experienced significant growth with time. Currently, it boasts a membership of 24 individuals who cohesively oversee a substantial asset portfolio, which happens to be valued at more than USD $5.2 billion.
To date, KEPFIC has successfully organized $113 million for infrastructure investments. The organization happens to be making significant progress towards its ambitious goal of raising $250 million in the course of five years. The consortium has already gone on to make three investments that are in line with Kenya’s development priorities, such as an affordable housing bond, a construction project for university student housing, as well as a road project situated in northeastern Kenya.
The consortium has also recently released its 2023 Investment Deal Book, which showcases 19 selected opportunities with a value of more than $2.5 billion. These opportunities span across various sectors, including telecoms, transport and logistics, energy, healthcare, agriculture, etc.
A virtuous cycle
The consortium model offers several benefits for both countries’ infrastructure financing and advancement needs.
Firstly, they contribute to the growth of the entire infrastructure finance sector by facilitating collective investment in large-scale opportunities. Joining a consortium comes with several benefits for pension fund members, like creating economies of scale, enabling them to achieve cost efficiencies, and optimizing their resources. Additionally, being part of a consortium also allows them to share risk, reducing their individual exposure and, hence, enhancing their overall financial security. Secondly, membership in the consortium enhances their bargaining power when negotiating deal terms, such as those that involve local currency.
Thirdly, the engagement of pension funds happens to be serving as a catalyst for the market to develop more specialized products that go on to cater specifically to these investors. This, in turn, helps in developing a positive feedback loop, leading to a virtuous cycle.
In addition to raising capital, KEPFIC and AOFSA happen to be influential advocates for the pension fund community in policy and regulatory settings. For instance, AOFSA has gone on to support regulatory changes in South Africa to raise the pension funds’ allocation limits to infrastructure. Similarly, KEPFIC advocated for editing the investment regulation policy in Kenya to recognize infrastructure as a separate asset class.
They also happen to be making an important mark on social impact goals. In South Africa, the AOFSA has allocated almost one-third of the funds that are being deployed through the pipeline facilitated by USAID to fund managers who happen to be either women-owned, first-time, or black.
Although there happens to be a strong desire to support more diverse fund managers, individual pension funds may not have had the capacity to provide such significant support.
Duplicating the model
The support provided by USAID as well as its partners allowed for capacity building and training initiatives that aimed to educate potential members of the pension fund consortium, acquaint them with the model, and also build relationships among important stakeholders. The consortium governance structure was designed because of the assistance of advisory support. Additionally, advisory support happened to play a major role in terms of obtaining legal status as well as facilitating the expansion of membership.
Ongoing technical support has helped in the identification and assessment of possible investments for the consortium members to consider. Managing the consortium has been a significant challenge because of the need to balance the individual mandates as well as the priorities of each member fund. Undoubtedly, it requires a great deal of understanding and patience to learn how to work together effectively.
In South Africa, there are at present more than 1,200 active pension funds, with numerous potential partners in neighboring countries too. In addition, West Africa as well as other regions outside of Africa also happen to provide promising opportunities to broaden and test this structure. This innovative framework of matching pension funds with infrastructure investments happens to be a clear win-win situation.