Tapping pension funds to finance infrastructure projects

By Odhiambo Ocholla

Pension funds provide good alternative to financing infrastructure development projects. Kenya currently spends about eight per cent of GDP on infrastructure, which represents 28.7 per cent of budget.

The Vision 2030 development strategy placed the country infrastructure needs at a hefty Sh200 billion over the next decade.

A key issue is how to attract private investors willing to participate in infrastructure projects given their complex and risky nature.

As the need for investment in infrastructure continues to grow, private sector financing for infrastructure projects is gaining currency.

Given the long-term growth and (potentially) low correlation aspects of infrastructure investments, pension funds have also shown interest in increasing their exposure to this area, along with their move into alternative assets.

Pension funds

Proper securitisations of project can be designed with financial innovations for any new large-scale infrastructure projects.

It is against this background that the use of pension’s funds to finance infrastructural projects is long overdue.

While the country’s economy will be stimulated by infrastructure development, tapping pension funds as source of domestic long-term capital is commendable.

The pension sector had accumulated a significant amount of resources with total pension funds assets amounting to excess of Sh250 billion.

This is a significant amount coming on the backdrop of streamlined pension fund industry. It’s significant to note that 37 per cent of total pension industry assets are invested in equity of listed companies at the NSE, while averagely 33 per cent is invested in Government paper and the rest in cash deposits, property and offshore market.

It is imperative that these resources be tapped by infrastructure projects. The Government made it clear in this year’s budget, that it will tap the private sector and the capital market for infrastructure development.

In recognition of challenges involved in the long-term financing for infrastructure development, the Minister in the recent budget, proposed an amendment to the Retirements Benefits Act for new investments by pension schemes that receive statutory contributions be put in the Government securities and infrastructure bonds issued by public institutions only.

Attracting private investors

A new approach is needed in financing infrastructure to properly cultivate investment, which yields more benefits beyond the infrastructure project. Pension’s funds should be encouraged to invest in several roads and airport concession by investing in concession partners.

Private infrastructure investment instrument must be structured to fit into the investment strategies of pension funds, while appropriate changes in the pension fund regulatory framework should be encouraged.

I believe pension funds would particularly be interested investing in instruments that provide higher returns, opportunities to reduce risk through diversification, inflation protection, have liquidity and provide short-term and mid-term cash flows. If properly structured, infrastructure financial instruments can meet some of this need and as a result be attractive to the pension funds.

Infrastructure investment risks

Nevertheless, infrastructure investment is an activity which is inherently risky because of it’s strategic inflexibility and bureaucratic nature. Indeed, infrastructure investments in pension funds tend to provide a higher return than the one obtained by the pension funds portfolios.

Although infrastructure projects are riskier, they provide diversification benefits given that their returns are less correlated with existing pension fund portfolios.

These investments contribute to overall economic growth, including the creation of new jobs, thereby generating even more resources for the pension funds and benefiting others stakeholders.

Nevertheless, this investment also has some risk that must be overcome before pension funds undertake them.

Participation of pension funds in financing infrastructure projects produces positive effects for the whole country, because investment in infrastructure improves quality of life, increases the competitiveness of the country and produces increased economic growth.

In the same way, pension funds can achieve greater risk diversification in their portfolio, incorporate long-term investments and obtain an adequate yield.

The writer ([email protected]) works with Sterling Investment