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Pension industry funds vital in infrastructure development

OPINION
By Joseph Rono | March 7th 2021

Joseph Rono-Director for Strategy, Finance and Investments at CPF Financial Services.

In its quest to become a newly industrialised middle income earner and eradicate poverty by 2030, Kenya has embarked on massive investment projects.

Infrastructure development, one of the foundations under which Vision 2030 is anchored, saw the rollout of gigantic infrastructural projects, key among them the Standard Gauge Railway (SGR), the Lapsset project and expansion of the ports and international airports. All these aimed at opening up Kenya to international markets, positioning itself as a key financial hub in sub-Saharan Africa.

Historically, infrastructure development in Kenya has been financed exclusively by the government through the exchequer or blended with funding from development partners. In recent years, the government has also issued infrastructure bonds specifically designated for big projects. Increasing constraints on public finances associated with growing demands for social expenditure have led to the involvement of the private sector in the provision and operation of infrastructure through public-private partnerships (PPPs).

According to the World Bank, Kenya faces a significant infrastructure financing deficit estimated at $2.1 billion (Sh228 billion) annually, which constrains growth and development. Owing to this, sustained expenditures of almost $4 billion (Sh436 billion) per year will be required to meet the country’s infrastructure needs. With public debt standing at 57 per cent of GDP, this deficit cannot be met any further by public resources.

Studies show that increasing infrastructure financing could improve Kenya’s per capita growth rate by up to three per cent.

Kenya is not unique. As the need for investment in infrastructure continues to grow the world over, private sector interest in financing infrastructure projects has risen. This has proved to be a good alternative in markets where investment avenues remain fairly the same. Such investments cover a wide spectrum of projects – from large infrastructure such as transport to social projects such as hospitals – and involve different forms of financing.

Data explaining the size, risk, return and correlations of these diverse asset classes is therefore limited, which may be making pension fund investors cautious. Given that investing in such assets also involves new types of investment vehicles and risk for pension funds to manage – such as exposure to leverage, legal and ownership issues, environmental risks as well as regulatory and political challenges – such caution may well be justified.

However, if governments wish to help infrastructure developers tap into potentially important sources of financing such as pension funds, certain steps should be taken.

Kenya’s substantial investment need for infrastructure requires a combination of traditional and innovative financing mechanisms, along with greater efficiency in both public and private spending. Well-tailored pension reform will not only help achieve the primary goal of ensuring old-age income security, but also make pension assets available for investments, including infrastructure.

As impact investors, Laptrust and the County Pension Fund intentionally seek the dual objective of producing both financial and social returns that meet the fund’s investment objectives. This is a significant move away from traditional asset classes.

Building on successful experiences in its energy sector, the Government of Kenya has expressly committed to mobilising private investment in infrastructure with PPPs representing one avenue for doing so. Laptrust and the County pension Fund are therefore providing a comprehensive approach that will lead to a pipeline of bankable projects.

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- The writer is the Director for Strategy, Finance and Investments at CPF Financial Services

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