Pension funds key to unlocking Africa’s infrastructure funding

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: SContreras@Euromoney.com

By:
Virginia Furness
Published on:

Mobilizing global pension funds could be the key to financing Africa’s $150 billion infrastructure needs, but more investor education is needed to unlock dollar savings globally.

Ghana’s minister of finance has called on global pension funds to help meet Africa’s vast infrastructure needs, easing the funding burden which has seen several African countries load up on unsustainable levels of expensive dollar-denominated debt.

The African Development Bank estimates that Africa’s infrastructure needs are between $130 billion and $170 billion a year; however, financing for African infrastructure currently falls short by between $68 billion and $108 billion a year.     

Ken-Ofori-Atta-desk-160x186

Ken Ofori-Atta

“The question we need to confront is how do we get appropriate financing to be able to do that,” says Ghana’s minister of finance Ken Ofori-Atta. “The debt burden that comes with infrastructure financing is too heavy.”

Part of this funding will come from development banks such as the World Bank, European Investment Bank and IFC, as well as from China, but officials are urging for action from one of the world’s largest sources of private capital.

“There needs to be a sit down with global pension funds to make infrastructure an asset class, which now it isn’t, which would be able to give certain accommodation,” says Ofori-Atta.

Private investment in Africa stood at just $8 billion, out of a global spend of $90 billion in 2019 so far, according to World Bank data.

“There are trillions of dollars sitting in pension funds in Japan. If we manage to collectively solve that part of the puzzle, we will be able to make the huge jump we need,” says Makhtar Diop, vice-president of infrastructure at the World Bank. “Plus the rate of return is very good.”

New market

Pension funds have been particularly reticent in part because of a lack of understanding of the macro risk in African markets, according to Bryan Carter, BNP Paribas Asset Management’s head of emerging market fixed income.

Many funds are focused on investing in countries without macro risk, and are uncomfortable taking on local currency funding risk, he adds. However, he believes that infrastructure is becoming a bigger focus for funds looking for yield, saying: “It’s still a new market, but yes, I would say the interest is there.”

Still, the cost of infrastructure financing in Africa is, in many cases, prohibitively expensive. But with African default rates low, experts are urging for a programme of education for investors.

Henri Fouda, a portfolio manager at Wellington Management Company says: “When you look at infrastructure, the default rate is very low compared to the Middle East, but the spread Africa has to pay is very high versus the rest of the world.

“We need to reduce that gap if we want things to move in Africa.”

Lucy Heintz-Actis-160x186

Lucy Heintz, Actis 

Blended finance also remains an option, as it will help African countries to attract foreign capital and help funds to gain confidence in their investments.

Lucy Heintz, partner at Actis, an emerging markets-focused private equity firm with $12 billion assets under management, told delegates at the IMF/World Bank meetings in October that “International financial insitutions are key to mobilizing other forms of capital and de-risking investments.”

Actis has recently completed a $1.23 billion fund raise for its first Long Life Infrastructure Fund. Almost 50% of Actis’ investors are pension funds.

Governments are also waking up to the multiplicity of financing options available.

“Certainly, everybody talks about China bringing in capital, but the US government's Opic transforming into the Development Finance Corporation will bring another angle to it,” says Ofori-Atta. "But for Africa, really it’s to begin to question the current global arrangements of financing, and especially for countries in transition."

Additional reporting by Oliver West