Africans are reminded every day of the need for more and better infrastructure. Estimates are that Sub-Saharan Africa’s infrastructure needs USD 93 billion per year “two-thirds for investment in new physical infrastructure and a third for operations/maintenance of existing assets”. But, only USD 45 billion is being raised and deployed. Foreign national investors and banks, after the global financial crisis, may not have the assets to deploy or may be less inclined to. At the same time, long-term investors are also turning more towards infrastructure investment and looking to PP opportunities. The growth in institutional investment happens at a time when – due to internal pressures and external stakeholder influence – pension funds are seeking returns with longer investment horizons and more funds are seeking to be invest, integrating ESG factors.
Institutional investors in frontier and emerging markets are challenged by the context within which their assets are accumulating, where the socio-economic situation suggests there is a strong demand for capital, economic growth will be possible, where capital is wisely deployed and shareholder value created, not destroyed. But, pension funds face two major risks in infrastructure investing: firstly, the future forecasting of consistently positive and relatively low-risk returns and the potential volatility given the limited history of returns and the potential volatility given the limited history of returns of asset class. Secondly, the large political component increases the investment risk linked to political or regulatory impact, especially where infrastructure assets are influenced by local regulations with untested regulatory oversight. A traditionally conservative bunch, pension funds are always mindful of risk of “fiduciary duty” to be prudent investors and the new infrastructure asset class certainly has construction and asset-class risks.
If the global infrastructure market is estimated to attract US$3.5 trillion from pension funds in this decade raising the average allocation from 2% to 15%, how will this increase the positive impact on Sustainable Development, especially in Africa? Pension fund investors seek the diversification benefits and the predictable and reliable long-term cash flow streams. And with size, major pension funds are now able to do these deals directly, disintermediating advisers or third-party intermediaries. Can African PPPs deliver long term infrastructure development and will that lead to a long-term growth, where negative Environmental, Social and Governance costs are decoupled from economic growth?
Excerpts from the CSR Files Volume 2 Issue 1 2012