African Infrastructure can Secure your Pension
I am sure you want a decent pension. And if your pension money does some good in the world, while growing at a steady rate, it’s even better.
When finance ministers meet this week in Washington for the World Bank Spring Meetings they will reiterate the need to increase investments on the African continent. Ever since that iconic “Africa rising” cover of the Economist back in 2011, this has also been discussed in financial institutions and asset management companies.
However, it is not happening at the pace and scale we hoped for.
Today’s “world population pin code” is 1114, which means that roughly 1 billion people live in the Americas, Europe and Africa respectively and 4 billion live in Asia. 30 years from now, this will have changed to 1125 when the Americas and Europe still are 1 billion each and the African population has doubled and Asia has increased by 25 percent. You would expect this fundamental demographic shift to shape investment streams.
Of the $1.8 trillion in total Global Foreign Direct Investments, 60 billion is invested in African countries according to the UN. As a comparison, investments in Asia are seven times that and for Latin America they are 2-3 times bigger.
Estimates vary, but no-one questions the huge need for infrastructure investments in Sub-Saharan Africa. These needs exceed $100 billion annually over the next decade. To get an idea about the amount of capital needed, and the embedded business opportunities, imagine connecting one billion people to the mobile phone network and Internet, connecting 650 million people to the electricity grid, and building roads and public transport systems to serve another billion people.
There is capital if we can move it in the right direction. The world’s largest 500 asset managers held $81.2 trillion in 2016, and the 22 major pension markets held $41.3 trillion in total value at the end of 2017. In the current low interest economy of the OECD countries, with high savings rates and low investment appetite, the asset managers are having a hard time finding decent returns. The real interest rate in advanced economies is around or just above zero, while it was 4-5 percent back in the 80s. One of the explanations is that the supply of capital outweighs the demand in OECD Countries.
This is a perfect economic case for using long-term savings to fuel young economies, and for long-term investors to look beyond OECD’s bond and equity markets. So why is it not happening at the pace and scale we want it to? From my conversations with people in finance, policy and development I hear three main reasons.
One is that pipelines of investment ready products and projects are not good enough. Private investment will flow if there are bankable projects, but many countries lack a strong enabling environment to build a pipeline. These countries need the international community to support them with policy guidance and capacity development to get the institutional mechanisms right.
Another is that regulation of institutional investors and banks does not enable this. Banks are regulated by the Basel III directive and European pension funds are regulated by the Solvency II directive. Both limit the possibilities for investing in Africa. These disincentives are clearly an area for politicians to address, to fine-tune and make the regulatory environment more conducive for investments where they are needed and yield better.
A third reason is an inefficient financing for development ecosystem. This year the OECD launched Blended Finance Principles to support member countries to leverage private capital for development purposes, a step in the right direction but not enough. The Multilateral Development Banks are uniquely placed to play a central role in realizing these ambitions by supporting institutional capacity and enhancing the quality of project pipelines, and by using the financial structure to leverage public funds from their shareholders, multiply them into financing and crowd-in financing from private sources. This calls for improved instruments, which will only happen if shareholders agree to move the MDBs in this direction.
I see enormous potential and some hurdles, and I am not alone. We are beginning to see examples to learn from. For instance the Sustainable Development Investment Partnership was set up to catalyse infrastructure investments and has managed to increase dialogue between MDBs, institutional investors and national project owners, identified a pipeline with hundreds of projects and the first transaction is just about to come through. And when the African Development Bank recently launched a €500 million social bond it was three times oversubscribed within three hours, with asset managers, pension funds and insurers taking 26 percent of the investment.
Asset managers, pension funds and insurers can tap into enormous opportunities and serve not only a better world, but also citizens in the OECD economies. We will all be happy to see better return on our capital, and at the same time make sure that the growing population in Africa are able to thrive and prosper.
To make it happen we need more concrete partnerships between the private and public sector. Whenever I meet ministers from member countries I urge them to enable investments in low-income and fragile countries, and when I meet CEOs from the financial sector I tell them to think long-term.
What can you do to move things?
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