Responsible Investment, Prudential Regulation and Infrastructure Finance in Africa

Three major events that would ultimately reshape Africa’s infrastructure policy discourse occurred in the second quarter of 2014. The First was the World Economic Forum in Africa, which held in Abuja in early May and attracted over $68 Billion in investment commitments to the Continent. This was closely followed by the 49th Annual Meetings of the Africa Development Bank (AfDB) in Kigali, Rwanda, where stakeholders, amongst other things, resolved to collectively harness the Continent’s abundant human and material resources for the economic development and prosperity of its economies. The third and most significant event – from an infrastructure perspective – was the just concluded African Union’s Summit on Financing Infrastructure Development that took place in Dakar, Senegal. At the Dakar Summit, Heads of States & Governments, Multilateral Agencies, and Institutional Investors deliberated strategies for fast-tracking the implementation of key priority infrastructure projects within the framework of the African Union’s Programme for Infrastructure Development. At the end of the Summit, stakeholders adopted the “Dakar Agenda for Action (DAA) –Moving Forward Financing for Africa’s Infrastructure”.

The underlying themes of all three events were the imperative of unlocking the vast domestic financial resources for infrastructure development, the creation of an efficient policy framework that would drive long-term, sustainable investment in infrastructure and the stimulation of effective Public-Private Partnerships for a truly Pan-African infrastructure renaissance. It is no surprise that institutional investors are keen to tap into the bourgeoning economic growth in Africa. Indeed, a plethora of sectors and markets in the Continent are attractive in their own right, quite apart from offering more promising returns than those in now saturated developed economies. Then again, sustained average GDP growth rates of above 5% have seen off even some of the most ardent Afro-sceptics, as what were hitherto regarded as structural weaknesses – profound deficits in infrastructure and service provision – now represent endogenous investment opportunities. From healthcare to regional road and rail networks, power supply to ports infrastructure, resilient investors are reaping tremendous benefits from addressing pent-up demand.

Yet while Africa’s diversity remains the Continent’s most enduring competitive edge, it also poses fundamental challenges of genuine and long-term sustainable development of Africa. Sustainable development here means the triad of social, environmental, and economic development. Investment strategies would thus require painstaking consideration of risks as well as the rewards that lie behind inherent opportunities. The impact of poor corporate governance practices on shareholder value, exacerbated by the recent global financial crisis, for instance, has consciously raised issues such as transparency, risk management, business ethics, fiduciary duties, amongst others, to the front burner of the investor agenda. The issues of unemployment, diseases, poverty, climate change, and inequality are also pressing needs for investors to consider in their investment decisions, This novel approach to investment – Responsible Investment – is one that overtly acknowledges the importance to institutional investors of environmental, social and governance (‘ESG”) factors and the long-term stability of financial markets. It recognizes that creation of long-lasting return on investment is essentially dependent on transparent, predictable and well governed environmental and economic systems; systems that are underpinned by clearly defined prudential regulatory guidelines.

Unsurprisingly, pension fund managers the world over are changing mandates to reflect considerations of responsible investing and consequently the growth of ESG mandates in overall investment strategy is on the rise. Nonetheless, many trustees still require further education and how they should quantify performance and assess the extent to which ESG mandates are delivered upon. Responsible investment precepts and prudential regulatory guidelines thus constrain investors and regulatory authorities to critically assess the full spectrum of investment and regulatory risks, opportunities and challenges, so as to adequately allocate capital in a mode that is aligned with the short, medium and long term interests of their clients, beneficiaries and the larger society.

The foregoing issues would be at the front burner in the forthcoming inaugural edition of the World Pension Summit ‘Africa Special’, to be delivered by the National Pension Commission (PenCom) in a strategic partnership with the World Pension Summit Netherlands. Scheduled to hold from the 7th – 8th of July 2014 in Abuja , the Summit, the first of its kind in the Continent, brings together pension professionals from around Africa and other jurisdictions to deliberate upon emerging trends in pension regulation, contemporary challenges in risk-free capital allocation, and situating the pension administration within the larger pro-development public policy discourse. Coming on the auspicious occasion of the tenth anniversary of the pension reform in Nigeria, the summit would also be a veritable forum for interrogating the dynamics of the globally acclaimed exponential growth of the Nation’s pension industry.

As pension professionals converge in Abuja, a major issue to be discussed will undoubtedly be the development of a holistic policy and regulatory framework for leveraging the vast financial resources in the continent to accelerate the implementation of critical high-impact infrastructure projects. Infrastructure development indubitably remains a key driver and a critical enabler of sustainable growth in Africa and the current favorable economic landscape in the continent provides a unique opportunity for the public and private sectors to collectively address the infrastructure gaps. Focusing on Africa’s infrastructure challenges will indeed help in creating the economic pre-conditions needed for longer-term growth as well as to foster poverty alleviation. In the words of Senegalese President Macky Sall at the just concluded Dakar Financing Summit on Infrastructure, “Africa needs to first rely on internal investment if it is to achieve the infrastructure developments it urgently needs”. In a similar vein, President Goodluck Jonathan advocated for greater integration of the economies and infrastructures of African countries, and a paradigm shift in the way the resources of the continent are mobilized and utilized. This objective is no doubt, most imperative.

Given the sheer size of pension fund assets across the Continent, Pension fund managers should ideally be at the forefront of the quest for a more aggressive domestic resource mobilization and increased private-sector support for infrastructure finance and economic integration in Africa. However, unleashing the continent’s growth potential and accelerating private sector led sustainable development must be underpinned by responsible investment principles and cutting-edge prudential regulatory guidelines. One of the central arguments for responsible investment is that it provides a means of delivering market or better-than-market returns in such a manner that is fully aligned with the interests of both the investors and the society, as the investment chain is more focused on long-term value creation. Indeed, institutional investors are increasingly recognizing the critical role of prudential regulation in delivering stable, well-functioning and well-governed markets.

Pension funds Managers are constantly trying to find the right balance between the very long duration of their liabilities and the need for liquidity to pay beneficiaries. This balance sits alongside the growing requirements of prudential regulation and the increasing expectation of policy makers that pension funds would responsibly be invested in much needed infrastructure. The WPS Africa Special Summit thus presents a unique opportunity for Pension Professionals to speak with a concerted voice on these and other challenges facing the Continent.

As a Strategic Partner and Regulatory Agency, the Nigerian Pension Commission is confident that the World Pension Summit ‘Africa Special’, would help formulate the most appropriate institutional framework for investment activities, seek an appropriate regulatory framework for the pension industry, and synthesize a pipeline of feasible investible assets and bankable infrastructure projects for the African Continent.