Pensions Funds, Key To Unlocking Africa’s Economic Growth

“At this point. We leave Africa not to mention it again. For it is no historical part of the world: it has no movement or development to exhibit. .. What we properly understand by Africa is the Unhistorical, Underdeveloped spirit, still involved in the conditions of mere nature, which had to be presented here only as on the threshold of the world’s history.”- Georg Wilhelm Friedrich Hegel.

By Tendai Makaripe

Despite Hegel’s damaging views on Africa, the continent has made strides towards attaining economic growth with current research statistics noting that it is the world’s second fastest-growing region, experiencing average annual GDP growth of 4.6 percent for the period from 2000 and 2016.

For the current five-year period until 2022, Africa’s real GDP is projected to grow at 3.9 percent annually.

Nonetheless, Africa cannot be written in the same sentence with Europe and parts of Asia in terms of economic growth due to a number of factors, chief among them being the continent’s slow progress in effectively investing in infrastructure.

Infrastructure is an essential component in promoting shared economic prosperity that is why it is featured in Goal 9 of the 17 Sustainable Development Goals (SDGs) of the 2030 Agenda which speak to the “Building of resilient infrastructure and promoting sustainable industrialization and fostering innovation”—adopted at the historic September 2015 U.N.

According to a 2017 research paper authored by Dr. Amadou Sy for the Brookings Institution titled Leveraging African Pension Funds for Financing Infrastructure Development: “Infrastructure holds a transformative power in our societies and economies. Through the construction of electricity, transportation, and telecommunications networks, we are able to power our homes and businesses, connect our producers to markets, and share information rapidly, boosting our trade, competitiveness, economic opportunities, and quality of life.”

The direct link between infrastructural development and economic growth is the reason why countries like China invest heavily in infrastructure.

The Belt and Road Initiative which aims to rebuild the ancient Silk Road connecting China and Europe has become China’s signature foreign policy.

Morgan Stanley, an American multinational investment bank and financial services company has predicted that China will spend about USD$1.2-3 over the life of the BRI though estimates on total investments vary.

China’s state planner has over the years been speedily approving big infrastructure projects as seen by the approval of 16 projects, worth about 1.1 trillion yuan (US$163.2 billion) by the National Development and Reform Commission (NDRC) as at December 2018, according to South China Morning Post analysis of official data.

The most expensive project on the approval list is an expansion of the Shanghai Urban Rail Transit.

With a price tag of 298.35 billion yuan (US$44.24 billion), the network is aimed to better connect the financial hub’s two airports and two major railway stations, according to a December statement by the NDRC.

Resultantly, China’s GDP has grown by 6.6 per cent, in line with the government’s target for growth of “about 6.5 percent.”

Unfortunately, such massive infrastructural investments are not prevalent in Africa because governments cannot bankroll these massive projects which has resulted in many of its countries experiencing stunted economic growth.

Research has shown that only 30 percent of Africa’s population has access to electricity, 34 percent has access to roads, and internet penetration rate is low, a mere 6 percent compared to 70-90 percent for other developing countries.

Additionally, the infrastructure deficit is particularly acute in sub-Saharan Africa, with the poorest countries in Africa falling far below other low-income countries on all infrastructure-related indicators.

Power remains Africa’s Achilles’ heel when it comes to infrastructure with as many as 30 countries experiencing regular power outages, according to a 2010 report by the World Bank and France’s development agency.

Financing of infrastructural projects in Africa remains a problem with experts estimating that governments need over US$120 billion a year for delivering on Africa’s infrastructure.

Resultantly, 15 African countries have not achieved 10 percent of the Sustainable Development Goals’ (SDGs) targets related to infrastructure according to a recent report from the UNDP.

To address these infrastructure gaps and fully achieve Goal 9 of the SDGs and Aspiration 2 of Agenda 2063, experts contend that governments need to explore and solicit alternative sources of funding that could be raised from Africa’s own institutional investors from pension funds, insurance companies, and sovereign wealth funds among others.

Pension funds have the potential to be a much greater source of capital for urgently needed massive investments in infrastructure which in turn leads to massive economic growth in Africa.

“Pension funds can dedicate a share of their assets specifically to infrastructure. Such direct investment in infrastructure is implemented through equity investment in unlisted infrastructure projects through direct investment in the project or through a private equity fund. Such investment can also take the form of debt investment in project and infrastructure bonds or asset-backed security,” said economist, Benedict Marufu.

This is why recently, South African President Cyril Ramaphosa announced that a renewed focus on infrastructure will form the backbone of his economic stimulus package.

“Infrastructure expansion and maintenance has the potential to create jobs on a large scale, attract investment and lay a foundation for sustainable economic expansion,” said Ramaphosa.

He recognized the importance of pension funds in economic growth through infrastructural development.

Said Ramaphosa: “We want them (pension industry) to participate with us in building the core infrastructure assets for the nation.”

Importance of the pensions industry in infrastructural growth was observed by Farayibi Adesoji, a Nigerian scholar in a research titled The Funded Pension Scheme and Economic Growth in Nigeria.

His findings revealed that when pension fund contributions from both private and public sectors in Nigeria increased greatly they constituted a huge investment fund in the capital and money markets which increased liquidity in the economy and created employment opportunities as well as improvement in the investment climate.

“The study concluded that with good risk and portfolio management by pension fund administrators and custodians, the contributory pension has the capacity to boost the Gross Domestic Product (GDP) in Nigeria and very convenient to retirees compared to the previous defined benefit scheme,” read part of the paper.

Another study by Christopher Wanjala Mungoma from Kenya showed the existence of a relationship between pension fund assets and economic growth in Kenya.

However, significance of pensions industry is invisible because very few pension funds in Africa are relatively large enough to provide adequate help in developing infrastructure.

Data sourced from Sy’s research paper revealed that when ranked by their assets as a share of GDP, pension funds in South Africa (87.1 percent), Namibia (76.6 percent), and Botswana (47.3 percent) rank among the four largest in a sample of 38 emerging economies.

Kenya (18.3 percent), which has the fourth largest African pension system compares well with the average sample size of 17.0 percent of GDP.

The relatively small size of Nigerian pension assets (7.8 percent) compares favorably to pension assets in a number of emerging markets such as India (0.3 percent).

Another challenge hampering the growth of pensions industry which ultimately affects infrastructural development pertains to unfavorable laws.

Associate of the Infrastructure Development and Engagement Unit at Nelson Mandela University, Bongani Mankewu notes that there is need in many countries to implement necessary pension and insurance reform acts to extend their mandates to infrastructure investments through the infrastructure fund.

“This will enable the creation of needed jobs and necessitate a sound policy framework for investment in infrastructure, supervised by a Reformed Pension and Insurance Act, to adequately devise instruments to channel both pension funds and insurance resources to the required infrastructure projects,” reasons Mankewu.

Stringent pension laws have stalled growth as is the case in Nigeria where the National Pension Commission’s regulations have been criticized for limiting infrastructure growth and, in some cases, require federal guarantees for bonds.

On a more positive note Malawi, the Organization for Economic Co-operation and Development (OECD) identified Malawi as having among the least restrictive pension regimes in the world.

Africa’s quest for economic greatness lies in effectively making use of pension funds for infrastructural development as the old age Chinese adage goes: ‘if you want to get rich, first build.