Infrastructure risks that pension managers must not take

That the Nigerian Contributory Pension Scheme (CPS) that came following the Pension Reform Act 2004 and amended in 2014 has grown pension assets under management to the tune of N5.3 trillion, as at end of February 2016 is no longer news.  And that these funds could be channelled into infrastructure financing given the infrastructure gap Nigeria faces which runs into trillion dollars is also not new in public discuss.

Also that those managing the money, pension managers have regularly said in considering investment of pension funds, the critical concern is about safety of the funds in realisation of the key objective of the scheme, which is to ensure that those who contributed upon retirement are able to access their pensions as and when due has also been popularised.

But that whether or not, pension managers and those in custody of the funds are willing to invest in infrastructure for national development, if the instruments are right, safe and capable of yielding returns, is ‘YES’.

This assertion was further reinforced recently when Pension Fund Operators Association of Nigeria (PenOp) engaged journalist covering pensions in Nigeria to explain burning issues in the industry including investment in infrastructure. The meeting attended by “egg heads” and experts in the pension industry including representatives of the National Pension Commission brought to limelight that investment in infrastructure with pension funds can easily be realised even under the present investment guidelines, if government offers infrastructure bond targeted on specific projects.

The instrument, which allows maximum 15 percent of the funds to be invested in infrastructure bond, is capable of unlocking in excess of N500 billion based on active fund of Retirement Savings Account (RSA) contributors from the present pension size of N5.3 trillion.

But that pension managers should invest in what has been described as Greenfield, being engaged in infrastructure funding from conception to design, construction, finishing and then operation is not feasible and does not work, given the kind of risks associated with such processes. The experts who pointed some of the risks said that from investor perspective, infrastructure projects have their own inherent risks, including construction and development risks of (greenfield) projects; operational, demand and market risks; financial and interest rate risks; management and governance risks (e.g., corruption); regulatory risks (e.g., changing energy regulations); and political risks (e.g., changes in government or infrastructure policies).

Again on the argument that other countries including South Africa invest their pension monies in infrastructure including into Nigeria, the experts say such countries run a different pension system that allows such risks. While those countries sit on large government funded pension scheme, Nigeria operates a contributory system- meaning the fund is owned by individual RSA holders.

Some of the countries that operate similar pension scheme with Nigeria include Latin America, Brazil and Chile, while South Africa and Venezula operate similar and different system.

Abimbola Sulaiman, head of Investments, Pensions Alliance Limited said that infrastructure bonds is the easiest way to introduce majority of pension funds into infrastructure investments, as it is similar to traditional bond investments.

Sulaiman further said, “The bonds should be tied to specific projects and issued with government guarantees.”

Eguarekhide Longe, chairman, Pension Funds Operators Association of Nigeria (PenOp), said PFA’s are ready to invest in infrastructural bonds whenever the government decides to float them to finance key developmental projects.

Promising that the pension fund managers are ready to engage with government to expand the economic space, even though, it is not their primary objective, he added that, care must be taken not to invest pension fund in a project that will not regenerate it, saying, ‘if you put pension fund in a project that does not regenerate it, the money is gone and in many cases, as we have found, the project has not been delivered because it was not properly conceived.’

While debunking claims that PFAs don’t want to invest pension assets in infrastructure, he said the managers had requested the investment banking community to come up with products that abide by the investment guidelines in Pension Act, which operators can finance, noting that this has not been done.

“The fact is that there are ample provisions in the investment guidelines that allows for investment in projects, so to say, infrastructure, private equities and real estates, bonds, among others. But what has happened is not that the money is idle in the PFAs or that the fund managers have not looked for those projects. It is not their jobs to go and create projects, but we have actively sorted the investment banking community to develop products that we can invest in,” he pointed out.

Detail Commercial Solicitors in its latest report on ‘How much can Nigerian pension funds really spend on infrastructure?’ concludes that from the current investment regulation, the bulk of pension funds available for infrastructure may be obtained via FGN and CBN securities and bonds. “Therefore, government should first and foremost focus on FGN secured infrastructure bonds and not on infrastructure funds. To maximise this benefit, government may need to recalibrate its utilisation of funds accessed via this window – by reducing utilisation for recurrent expenditure and increasing utilisation for infrastructure investment.”

The report further said that PFAs simply require a guaranteed return and are not concerned with how FGN utilises the money.

It further observed that a structure for FGN guaranteed corporate bonds (floated by project SPVs or FGN entities like the Federal Airports Authority) on specific infrastructure projects might be explored. “This manner of project enhancement would go a long way to unlock pension funds for infrastructure projects and reduce the project risk profile.”

On the proposed multitier investment guideline being proposed by the industry regulator, Detail Commercial Solicitors noted that as soon as the regulations are passed, FGN and PenCom should enforce the minimum investment of 5 percent to incentivize PFAs to start investing in infrastructure albeit in bite sizes. “PFA’s must learn the ropes with investing in infrastructure projects.”