Institutional finance development banks needed to drive pension investment in infrastructure

The lingering debate about utilising Nigeria’s growing pension funds for infrastructure development will not materialise until there is adequate security and guarantee for the fund to be released.

While the weight of political risk characteristics of the Nigerian environment poses a major challenge irrespective of possible government guarantees, direct participation in the projects and guarantees by institutional finance development banks would help haste process and unlock the funds for infrastructure development.

Experts say major finance development institutions like the World Bank, International Finance Corporation (IFC) and African Development Bank (ADB) should assist Nigeria like what they have done in other jurisdiction by participating in infrastructure projects and providing guarantees.

“This has happened in other jurisdictions, so i don’t see the reason it should not happen in Nigeria for the benefit of the Nigerian public, the experts stated.

The experts are concerned about continuous debate on investment of pension funds in infrastructures without fruitful result, say the participation and clear involvement of major international development finance institutions will build the needed confidence and attract both local and foreign investors to play in the sector.

“They said that policies must be instituted to attract global infrastructure advisors and managers in order to build capacity and facilitate knowledge/ skills transfer to Nigerians.”

Ehimeme Ohioma, head, Investment Supervision Department, National Pension Commission (PenCom) in a presentation at a recent seminar for journalist organised by the Commission said infrastructure is a potential avenue for pension funds to reap higher and consistent returns on investment, if adequate policies, structures and regulations are instituted.

He stated that several countries in Europe, Latin America and Africa have successfully utilized part of the accumulated pension funds by investing in new infrastructure projects or renewing dilapidated ones.

Ohioma speaking on the theme “Pension Funds for Economic Development: Investing Pension Funds in Infrastructure” said pension assets in Nigeria, valued at N5.96 trillion as at 30 September 2016, are currently the largest available pool of patient capital that could help reduce the country’s infrastructure gap.

According to him, pension fund investment in infrastructure is a reasonable proposition given the good asset/liability match, as infrastructure projects are long term investments that match the long duration of pension liabilities.

He observed that similar jurisdictions like Nigeria have effectively deployed pension funds for investment in infrastructure projects including Ghana, Kenya, South Africa, India and Brazil.

According to him, major projects in the past were hampered by policy inconsistencies and lack of political will, so form basis for major concerns for deployment of pension funds without adequate guarantees.

He said because of the uniqueness of pension funds which must be available to the owners as and when due, the funds has to be deployed only on commercial viable projects, with full repayment Guarantee by government, especially in the early stages of projects financing.

“There must be also strong political will and consistency in formulation of policies to retain investor’s confidence.”

Ohioma noted further that the minimum requirements/ criteria for pension fund investments in infrastructure, as stipulated in the Investment Regulation is very robust, and provides adequate safeguard for pension fund assets.

“It has open and transparent transactions procedures and processes, in terms of biddings process, contractors, selection and pricing among other qualities.

The Regulation on Investment of Pension Fund Assets issued by the National Pension Commission was amended in 2010, to allow for investment in alternative asset classes e.g. infrastructure “Bonds” and “Funds”; private equity funds and real estate/housing.

The projects, the guideline emphasised must be of quality, bankable, self-financing and commercially viable. Besides, it must have strong political risks cover as well as robust legal framework to protect all parties, especially investors.

Nigeria has a large infrastructure deficit in all key sectors, largely due to population growth, demographic change and urbanization, which have driven increased demand for infrastructure in Nigeria.

In 2016, the national budget significantly increased the allocation to capital expenditure, by up to 26.2 percent of the budget, which amounted to N1.59 trillion, while Ministry of Finance estimates an annual infrastructure need of N7.3 trillion.

The implication is that only 22 percent of the ministry of finance estimated annual need for infrastructure can be accommodated by the 2016 budget.