Michael Tichareva
PENSION funds are a major source of capitalin the investment markets, especially the listed investment sector in many countries.
A study conducted by the Organisation for Economic Development and Cooperation (OECD) in 2011 revealed that pension funds, although major providers of capital, were not big players in real estate and private equity, and most certainly in infrastructure.
Our own experience confirms this as the situation has not changed over the last decade. In most African countries, pension funds hold large amounts for investment.
However, the allocation towards infrastructure is generally disappointing, accounting for less than 5% of pension fund assets in developed pension fund jurisdictions such as South Africa, although Regulation 28 of the Pension Fund Act is currently under review.
The reasons for limited investment in infrastructure are the many barriers that exist in this asset class that are generally not known.
The OECD report notes that infrastructure investing offers different characteristics from other asset classes, which could represent barriers to entry to potential investors.
They cite high upfront costs, lack of liquidity, and the long asset life that require significant scale and dedicated resources to understand the risks involved.
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Pension funds, being predominantly long-term investors and holding high capital resources that many other investors lack, are one of the most suited to infrastructure investment.
Governments and project sponsors need to recognise the major barriers to investment in this asset class and create an environment that promotes pension fund investment.
Many factors, including the lack of well-prepared and bankable investment opportunities, lack of clarity on the few investment opportunities that may be available, lack of political commitment over the long term, regulatory instability,regulatory barriers,lack of transparency, fragmentation of the market among different level of governments, negative perception of long term value of infrastructure and high bidding costs involved in the procurement process of infrastructure projects, make Pension Funds perceive infrastructure investment opportunities as too risky.
There is also the perception of misalignment of interests between infrastructure funds and pension funds in addition to the shortage of data on the performance of infrastructure projects, including lack of benchmarks for measurement of performance. Other pension funds do not invest simply because they lack scale and expertise.
In creating a supportive environment, the results of the investigations of the OECD show four key factors that may lead to increased infrastructure investment by pension funds.
These are the availability of investment opportunities for private finance capital and, therefore, for pension funds; the maturity and size of the pension fund market; pension fund regulations that may require pension funds to hold infrastructure investments; and increasing knowledge of infrastructure risks and returns as an asset class.
In the industrialised countries of Europe, North America, and Australia, the involvement of the private sector in the provision and operation of infrastructure rapidly increased over the past 30 to 40 years, with both histories of privatisation and public policy leading to models such as Public-Private Partnerships attracting pension fund investment.
In Australia for example, as the number of infrastructure transactions grew, so did the availability of financial instruments, predominantly infrastructure funds, providing investors with access to infrastructure investment opportunities, leading to the development of investor understanding of infrastructure.
The maturity and size of the pension fund market play a key role. In most of Africa, the pension fund industry is developing and still very young.
Apart from South Africa and a few other countries in North Africa, there is a limited investment by African Pension Funds into infrastructure.
However, Africa can still benefit from the allocations made by pension funds in the other more developed markets through foreign direct investments as long as the risks are well managed and the returns are commensurate with the risks.
Regulations relate to both regulations encouraging pension savings, thus directly influencing the size of the pension fund market and the overall institutional capital available, and those directing where those savings must be invested, thus directly influencing the amount of institutional capital available for investment into infrastructure.
Most countries’ institutional investors’ traditional exposure to infrastructure has been through bonds with some regulations requiring investment into government bonds that may then be used in infrastructure development.
As knowledge of this asset class increases, there is a need for consistent investment by pension funds, both directly and indirectly, with direct investment requiring exceptional knowledge.
The OECD report concludes that the major reforms required to promote infrastructure investments include:
Government support for long-term investments by designing policy frameworks that are supportive of long-term investing;
Reforming the regulatory framework for long-term investment; and
Improving conditions for infrastructure investment by creating a transparent environment. Countries like Zimbabwe can do well in leading such reforms.
- Tichareva is the executive chairperson of Claxon Actuaries. — [email protected].
