An April 2017 study for Germany’s Federal Ministry for Economic Cooperation and Development (BMZ) by consultant Klaus Maurer put Africa’s annual need for economic and social infrastructure at $135bn a year to keep pace with the development needs.
Most of the financing comes from governments, development finance institutions, investment banks and international partners such as Europe and the US and emerging partners such as China, India and Turkey. But still, according to Maurer: “The financing gap is estimated at about $60bn per year.”
Global pension funds are interested. Canada’s CAD85.2bn ($63.4bn) Ontario Municipal Employees Retirement System had 14.9% in unlisted infrastructure at the end of 2013 and a target of 21.5%. When all goes well, infrastructure offers long-term, inflation-linked income, ideal for pension funds. Some institutions combine to create investment platforms and share expertise, and Africa represents opportunities.
But Africa has its own awakening giants: domestic institutional investors. Giant funds already dominate local economies and nascent capital markets in some countries, especially in southern Africa. New regulatory frameworks in other countries are creating funds that are growing at over 30% a year.
Maurer estimates that in 2014, assets under management by pension funds, insurers and sovereign wealth funds were $800bn, of which South Africa, with a world-class capital market, accounts for 65%.
Research by PwC suggests traditional assets under management across 12 key African countries will grow to $1.1trn by 2020.
Heleen Goussard of investment specialist RisCura says that getting local currency investment works well: “There are great opportunities and this is beneficial for both infrastructure projects and the pension funds. Infrastructure projects are traditionally largely funded by foreign currency, causing excessive foreign currency risk, which in turn drives up the cost of capital.
“Institutional investors will have access to local currency debt investments outside of the traditional instruments, allowing for diversification and the opportunity to earn a higher return within an acceptable risk profile.”
Obstacles include underdeveloped local financial and capital markets, coupled with high-yielding local currency government debt in countries such as Ghana (at the time of writing, six-month T-bills yield 13.86%) and Uganda (15-year bonds at 15%) crowding out other investment options.
Fiona Stewart, senior financial sector specialist in the capital markets practice at the World Bank, says: “The main challenge is that the number of ‘bankable’ projects is still relatively limited, and capital is not so scarce. The challenge is therefore making space for local currency financing when hard-currency funding is often cheaper (certainly in the short-term) and the local institutional investors lack the capacity and experience to get involved in structuring deals.
“Getting governments to recognise the need for local currency funding is key, and finding experienced partners to work with local institutions to get the deals structured in a way which meets their risk and return requirements is needed.”
David Ashiagbor, coordinator of Making Finance Work for Africa at the African Development Bank, warns that not all infrastructure projects are suitable for pension funds, whose aim is to provide incomes for pensioners. Pension fund trustees have a fiduciary responsibility to their contributors. This point is often forgotten in the discussion.
“Pension fund money is not development money,” he says. “They should ask: ‘Is there a way that we can use the money in a way that meets pension fund objectives, and adds to infrastructure?’”
Pension funds are already investing in infrastructure projects, sometimes to support government efforts, such as Tanzania’s National Social Security Fund investment for 60% of the Kigamboni toll bridge, which cost at least $135m, and when Ghana’s GHS8.8bn ($2bn) Social Security and National Investment Trust started investing into power projects in 2010.
Ashiagbor, though, highlights the perennial problem for institutional investment in infrastructure. “Worldwide, pension funds don’t generally do greenfield infrastructure, because of the risks. Most of the infrastructure projects offered to African pension funds are greenfield.
You layer on top their lack of experience in and in the underlying sectors, so there are capacity issues. It can be quite overwhelming for local pension funds to be confronted with all this,” he says.
“A lot of people are coming to these guys and saying ‘we want you to do equity’. The funds are replying: ‘We would be ready to do project bonds backed by a pool of assets.’ But they are told the debt has been sold to the commercial banks.
There’s a lot of product-pushing going on rather than going in and listening to them and offering investment solutions.”
This is changing, though. South Africa’s giant Renewable Energy Independent Power Producer Procurement (REIPPP) is structured to meet investors’ needs, according to Goussard: “In order to participate in the REIPPP programme, developers needed to raise significant debt. Initially, this debt was raised with the banks, but with some of this debt being refinanced currently, there has been significant interest and uptake from institutional investors.
“This could serve as a model in other parts of Africa, to involve banks in the initial raising of debt (even if it is in foreign currency), but to then refinance the debt to institutional parties when they have better line of sight on the risk profile.”
Ashiagbor recommends that sponsors talk to funds and regulators from the outset. “I haven’t come across one African regulator who is dogmatic. I think they are very willing and very open to having conversations and working together to find solutions. The industry project sponsors, be they private equity or infrastructure, have a tendency to lecture the regulators and pension funds without trying to understand why things are the way they are and how we can change.”
Projects should be built with development partners such as investment banks and development finance institutions taking on the early high-risk stages and selling stakes to local institutions once long-term local-currency yields are well established.
“They need to engage early,” Ashiagbor continues. “When they are doing PPPs they will talk to everybody except the local pensions and the local regulator, they will go off and structure and assume that these people will invest, they need to do the groundwork of understanding.
“If you create a structure today, it may be that with today’s guidelines it’s not allowed; but if you engage with the regulator, it’s likely that the regulator will work with you to arrive at a structure that works for everybody. The regulator is going to need six months or more to get to grips with that structure. The most basic error is product-pushing, not designing investment solutions.”
Stewart says all parties must work together to enable local funds to invest. “Concentrate on increasing the pipeline; building PPP expert units; commit to involvement of at least an element of local currency financing in deals; create the right regulatory environment (allowing instruments to be created and institutional investors into them); work with international development organisations to help structure deals, build capacity of local investors and provide guarantees and other support as required.”
New structures may be needed. Kenya’s Retirement Benefits Authority is working on the potential for pooled investment by pension funds into government-led infrastructure, including funding a $96.8m superhighway.
Nigeria’s Pension Reform Act was passed in 2014 to allow funds to invest into infrastructure, but in terms of 2015 regulation the Securities and Exchange Commission only allows investment into a fund worth at least NGN5bn ($13m) and awarded through competitive bidding to a concessionaire with a track record of success. Initially, none were available.
Filling the gaps
Fund managers are stepping up. Harith General Partners launched the 15-year $630m Pan-African Infrastructure Development Fund (PAIDF1), supported by GEPF and five other pension funds, which invested into 70 projects. Pension funds are also key investors in PAIDF2, which had its $435m first close in 2014 and is targeting $1.2bn.
ARM-Harith Infrastructure is a joint venture with Nigeria’s Asset and Resource Management Company and was the first to meet Nigerian regulations with a $250m closed-end fund with a focus on transport, energy and utilities projects in West Africa. Dubai-based Abraaj and London’s Actis also channel institutional investors into private equity infrastructure investments.
The Emerging Africa Infrastructure Fund has $597.9m of funding from European governments and DFIs, alongside private investors. In July 2015, the African Development Bank and 20 African governments put $700m in initial subscriptions into the Africa50 fund, and the target is $1bn in 2018 and medium-term $3bn. In November 2017, Africa50 announced it invested 25% equity into six solar projects totalling 400MW in Egypt.
Across Africa, success will breed acceptance as people enjoy the benefits of well-run new infrastructure. Management and governance are critical when building, financing and operating PPP projects.
As Ashiagbor says: “I don’t see how you can be developmental if you are not commercial.”