The renowned development economist Paul Collier has recently suggested[1]
funding Africa´s infrastructure by deploying a part of the huge asset base of
pension funds and life insurance companies. The idea sounds great but is all
but new[2].
And Collier´s suggestion may downplay the barriers to private co-financing of
infrastructure precisely in those countries where demographic trends will
generate the highest migration pressures: in low-income Africa such as the
Sahel Zone countries.
Nonetheless, Collier´s suggestion has been
picked up with enthusiasm by Germany´s finance minister Schäuble.
Unsurprisingly, as the often fatal privatization of basic public services and
the balance-sheet contraction of the public sector are central guidelines of
the Lord of the ´Black Zero´.
Prima facie, the idea to engage institutional
investors in co-funding Africa´s infrastructure is quite beguiling. Pension
funds, life insurers and also sovereign wealth funds can be patient investors,
as their balance-sheet liabilities reflect long-term savings for old age or
future generations. Patient investors are a good fit for infrastructure
projects, which tend to have a long gestation period. Moreover, as
infrastructure returns correlate little with returns from other assets, they
can contribute to higher risk-adjusted returns of institutional portfolios.
According to the
World Bank´s Africa Infrastructure Country Diagnostic (AICD), the
infrastructure need of Sub-Saharan Africa exceeds US $93 billion annually over
the next 10 years[3]. To
date less than half that amount is being provided (mainly from domestic and
foreign official sources, with about half from China), thus leaving an annual
financing gap of more than US $50 billion to fill.
Table 1: Global Assets
Managed by Long-Term Institutional Investors
Assets, $ trillion/Year
|
2012
|
2020
|
Pension funds
|
33.9
|
56.5
|
Insurance companies
|
24.1
|
35.1
|
Sovereign wealth funds
|
5.2
|
8.9
|
Total, long term
institutions
|
62.2
|
100.5
|
Source: PwC
Asset Management 2020: A Brave New World, New York 2016
Ignoring valuation changes, the rise projected
for the three groups of institutional investors translates into annual asset
additions worth $4.78 trillion per year on average. To fill Africa´s annual infrastructure
funding gap of $50 billion, one percent of new institutional investment by
pension funds, life insurance companies and sovereign wealth funds would need
to be invested in Africa´s infrastructure every year[4].
These numbers suit wonderfully the Bella
Figura that the German G20 Presidency wants play with respect to Africa.
Skepticism seems warranted, though: Despite the
longstanding policy focus of G8/20 leaders, private long-term investment in
Africa´s infrastructure has remained deficient. As Africa´s infrastructure gap
became officially recognized, the Infrastructure Consortium for Africa (ICA) was established in July 2005 as a
recommendation to the G8 Summit in Gleneagles (UK) by the Commission for
Africa. Subsequently, G20 leaders highlighted the importance of private
long-term financing to foster long-term growth[5],
in particular since 2012. The G20 Summit 2013 in Moscow saw the creation of a
permanent working group to identify and remove barriers to private investment
in African infrastructure. G-20-OECD High-Level Principles of Long-Term Investment Financing by
Institutional Investors were
agreed. All these efforts have achieved little:
·
The index of Africa´s
infrastructure (AIDI) stagnates since 2010, after rising for a decade thanks to
Chinese cooperation.
·
Private finance still plays a
minority role in funding Africa´s infrastructure. Its share recently dropped to
15% (2015) from 23% (2012).
·
In capital imports to low-income
Africa (<$1.045/head/year), the share of blended finance (mobilized by
development finance institutions) has remained at a one-digit percentage level.
The rational for
private investment in Africa by long-term institutional is high, but so are the
barriers.
On the supply
side, regulatory supply-side barriers and past decent returns for life insurers
and pension funds explain why they mostly have stayed in the comfort zone of
liquid bond and equity markets. Despite widespread whining about low or
negative interest rates (particularly in Germany´s conservative media), OECD
surveys on pension funds and life insurers report annual average returns of 3-5%
for recent years. Rising bond and equity markets have allowed long-term
investors to leave assets in their comfort zone of highly liquid securities
markets. Ultimately, encouraging
long-term investment of pension funds and life insurers in infrastructure -
including in Africa - will need the G20 to engage in a coordinated dialogue
with regulatory authorities (such as EIOPA, the European Insurance and
Occupational Pensions Authority) and the Financial Stability Board (FSB)—the
international body of finance ministers, central bankers, and other agencies
established in 2009 after the global financial crisis.
On the demand side, African countries remain poor, have immature domestic financial markets,
and have recently featured deteriorating scores of safety and rule of law. This
holds particularly in those low-income countries, such as in the Sahel Zone,
where present demographic and future migration pressures remain extremely high.
Common infrastructure project risks (completion, performance, revenue,
financing, maintenance and operation risks) weigh also particularly in
low-income Africa. In low-income Africa, a prominent role of private
institutional investors should be envisaged only once the discussed
host-country barriers have been largely removed.
Despite policy efforts to mobilize private
finance through official development finance interventions, they so far have
represented a small fraction of the flows directed to low-income Africa. The
central dilemma: Low domestic savings, weak government finances and a low debt
tolerance militate against forcing foreign private debt and contingent fiscal
liabilities upon low-income African countries where infrastructure deficits are
most blatant. Grants, remittances and FDI equity finance should be preferred
over debt-creating finance as IMF debt sustainability assessments have
deteriorated in a number of Africa´s countries, not least due to public
infrastructure commitments[6].
Despite those
warnings and limited absorption capacities, development banks around the world have
an incentive to do business. The International Finance Corporation (IFC), part
of the World Bank Group, is showing particular ingenuity. Thanks to its Managed Co-Lending Portfolio Program (MCPP),
the Allianz AG has now invested $500 million in emerging-country infrastructure[7]. The
Allianz engagement carries relatively little risk as IFC (joint with SIDA, the Swedish
aid agency) assumes the first-loss in the joint infrastructure fund. In turn,
Allianz is guaranteed a return of 4-4.5% above LIBOR. Not a bad deal for
Allianz AG. But who will pay for the implicit subsidy?
[2] I myself helped popularise the idea in several papers in the early
1990s. Find them in Helmut Reisen (2000), Pensions,
Savings and Capital Flows: From Ageing to Emerging Markets, Edward Elgar
Publishing Ltd in association with the OECD, Cheltenham (UK).
[3] Vivien Foster and Cecilia Briceno-Garmendia
(Eds.) 2009, Africa’s Infrastructure: A Time for Transformation, World Bank,
Washington DC: 2009.
[4] R. Kappel,
B. Pfeiffer & H. Reisen (2017), „ Compact with Africa: Fostering Private
long-Term Capital“, forthcoming, DIE-GDI Discussion Paper.
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