ON THE KAMPALA Skyline workers can see their savings soar. Pension Towers, an office complex financed by the state-run provident fund, will be one of the tallest buildings in Uganda. Work began in 2008 and was marred by fatal accidents, allegations of corruption and budget overruns. The skyscraper illustrates the growing size of African pension funds and the challenge of investing that money in a meaningful way.
It’s a strange problem to have. The African Development Bank estimates that the continent needs $ 130 billion to $ 170 billion in infrastructure per year to provide roads, water, electricity and the Internet to its people. Businesses are asking for capital. The little they receive often comes from strangers, who don’t hesitate to pack their bags when the going gets tough. Such a risk does not exist with local pension funds, which collectively manage around $ 350 billion in assets in sub-Saharan Africa, according to RisCura, an investment firm. And yet, many local funds say they are struggling to find places to invest.
Pension funds have experienced impressive growth over the past decades for a variety of reasons. In South Africa, the government injected money into the civil service pension scheme to allay members’ fears of losing their benefits after apartheid ended. Its successor, the Civil Servants’ Pension Fund (GEPF), is the largest in Africa, with assets of around $ 110 billion. In Nigeria, a mandatory retirement system was introduced in 2004, and combined fund assets have grown nine-fold over the past 15 years, reaching $ 31 billion.
Pension schemes generally cover only the small fraction of Africans who have formal jobs. But they can still be big fish in small ponds. In Namibia, for example, the value of pension fund assets is greater than the annual value of the country GDP.
What to do with all this money? Consider the choices presented by Richard Byarugaba, the Managing Director of the Uganda National Social Security Fund. It already owns a third of the freely traded shares on the local stock exchange, where only 16 companies are listed. An alternative is property, like the ill-fated Pension Towers, but building things is a lot more complicated than just “pumping concrete,” he notes. Thus, 78% of the fund’s investment is in bonds and the like, mainly government debt (see graph). In Africa, unlike rich regions, this gives high yields.
This reliance on government securities is typical of fund managers almost everywhere, except in South Africa, which has particularly deep capital markets. The Public Investment Company, which manages the assets of the GEPF, places 41% of its investment in listed stocks, as well as 7% in an unlisted portfolio that has been scrutinized for suspected irregularities. Pension funds in Botswana and Namibia also invest an unusual amount in stocks, often overseas. Botswana’s civil servants’ pension fund could buy out all of the national debt and still have money to spare. Moemedi Malindah, its chief executive, wants to invest more locally, but the options are limited: she has had such a hard time finding private equity managers that she has had to launch a program to create them.
Talking about diversification into alternative assets is ahead of reality. In Nigeria, for example, pension funds invest only 0.5% of their assets in infrastructure. This is in part because fund managers don’t know how to assess risk, says Wale Okunrinboye of Sigma Pensions, one of the largest funds in the country. It’s a similar story when fund managers look at private equity. “Some of them want to dip their toes in the water but they’re just scared,” says Abi Mustapha-Maduakor, managing director of the African Private Equity and Venture Capital Association, an industry organization.
There are efforts to change that. In Kenya, more than 20 pension funds have formed a consortium to invest in infrastructure, pooling their ability to spot failures. Governments and foreign donors are considering how to take part of the risk by issuing guarantees.
The long-term investment horizons of pension funds align with the need for “patient capital” to build a continent. Yet the first job of a pension fund manager is to protect the savings of future retirees. The type of public-private partnerships they might invest in has had mixed results in Africa. Until there is a track record of success, most will just continue to lend to governments and let politicians build the roads instead. ■
This article appeared in the Middle East and Africa section of the print edition under the title “Building Bridges”