Both Swedish and African pension funds are growing and today own capital that is hundreds of times larger than development assistance. The money could be used to invest in infrastructure projects in Africa, writes Annie Sturesson, former senior economist at the Ministry of Finance in Uganda.
The proportion of assets saved in pension funds is increasing sharply around the world. In a time of low interest rates and turmoil on the stock market, pension funds in the western world are finding it difficult to find long-term and profitable investments. This is despite the fact that many African countries are in enormous need of investment in infrastructure projects with high economic and social returns.
In Uganda, the government is increasingly desperately looking for investors for major road and energy projects. The untapped potential of pension funds to meet Africa's investment needs is an increasingly topical issue that deserves more space in the Swedish development assistance debate.
No shortage of money
A common misconception is that Africa's biggest challenge is the lack of capital. There are savings, especially in pension funds, both at the global level and in Africa. In 2014, pension fund assets in OECD countries were estimated at over $ 25 trillion.
The potential of pension funds as investors has received increasing attention in recent years. The International Conference on Financing for Development in Addis Ababa in July 2015 was no exception.
"This is not a lack of capital. There's money out there. The problem is to combine supply and demand of capital ", said Minister of Finance Per Bolund at a side event on innovative development financing in Addis Ababa. According to Bolund's analysis, the big challenge lies in accessing risks and ignorance that prevent capital from being invested in Africa.
Fear of risks
Africa is associated with great risks, both subjective and objective. The perceived risks are largely due to a lack of knowledge and experience of the continent. The objective risks, on the other hand, are based on actual risks such as corruption, political instability and unreliable regulations. At the global level, just under 1 per cent of pension funds' capital is estimated to go to infrastructure projects and only an insignificant part of the investments are made in Africa.
The Swedish general pension funds, the AP funds, are no exception. The AP funds annually manage more than SEK 1 billion in Swedish pension money, which can be compared with Sweden's development assistance budget for 400 of just over SEK 2015 billion. Only 40- 0,2 percent of the AP funds' investments are in Africa.
The low investment of pension funds in Africa is problematic given the continent's great need for capital. Africa is estimated to need $ 90 billion a year over the next ten years for investment in infrastructure, primarily in roads and energy.
African pension funds are growing a lot
Africa as the main destination for Western countries' pension capital is probably a long way off. One source of investment that is on the rise, however, is the continent's own pension savings.
The OECD estimates that the total holdings of African pension funds, which in 2013 was $ 350 billion, will double by 2020 and reach $ 7 billion by 000. In Uganda, the assets of the country's largest pension fund, the National Social Security Fund (NSSF), are valued at 2050 , $ 1,6 billion. The fund raises more money each month than it has time to invest.
That the NSSF puts money in the mattress in an economy where capital is a scarce commodity is far from optimal. In Uganda, borrowing is expensive. The loan interest rate with the banks is 24 percent. Given the thirst for capital, the investment opportunities should be good for the country's pension funds. But Geraldine Ssali, Deputy CEO of the NSSF, believes that it is just the opposite: "There are not enough investment opportunities in Uganda ", she says.
NSSF's investment portfolio is limited to government securities, equities and real estate. High inflation and a sharp decline in the Ugandan shilling make government securities risky. With only 15 listed companies, the Ugandan stock market is still in its infancy. Real estate has long been seen as one of the few safer investment alternatives in the country, which has led to country speculation.
Few projects are ready for funding
When Uganda's national pension funds question the investment opportunities in the country, it is hardly surprising that the foreign pension funds also hesitate.
In Uganda and most African countries, there is no shortage of projects in need of investment. However, there are few projects that are "bankable", ie well prepared and ready for financing.
For investors, projects with incomplete technical investigations and delayed government permits risk leading to costly delays. This has led to increased interest from donors, including the African Development Bank, to improve national capacity to prepare projects in countries such as Uganda.
Another relevant initiative that is expected to be launched in 2016 is Convergence, a global platform and "dating agency" between investors and projects.
It takes more than airbags
In order to increase interest in sustainable investments in Africa, Sida has in recent years launched several initiatives, primarily in the energy and infrastructure area. Within the framework of PowerAfrica, an initiative aimed at doubling the supply of electricity on the continent, Sida has, together with partners, developed an investment model for Nordic pension capital. By offering guarantees, Sida reduces the risk for the pension funds and contributes to a more flexible and broader capital base.
Initiatives where donors act as airbags contribute in the long run to creating a broader interest and new entrances to the African markets. But in order for Africa to be more strategically included in the pension funds' investment portfolios, the underlying causes of the investment risks must be addressed, both the perceived and actual risks. Important and often uncomfortable reforms need to be pursued by African decision-makers in order to fundamentally improve the countries' investment climate.
Strengthened work is also required in designing and preparing projects. In the long run, Swedish pension funds can become an increasingly important source of investment for well-selected projects in Africa. But instead of sitting and waiting for foreign pension money to start flowing, countries like Uganda need to make better use of the savings that already exist in the country, especially in the national pension funds.