Pension funds can close infrastructure funding gaps

FOR while now, pension funds in Zimbabwe have been struggling to find investment assets that constantly and consistently grow their members’ pooled funds.

But perhaps the assets these funds were looking for have been ‘hiding’ in plain sight.

A 2013 World Bank report titled ‘Zimbabwe’s Infrastructure: A Continental Perspective’ projected that increasing the country’s infrastructure endowment to that of the region’s middle-income countries could boost annual growth by about 2,4 percentage points.

The significance of infrastructure is also cited in International Monetary Fund ( IMF) calculations, which project that increasing public investment by 1 percent of gross domestic product ( GDP) boosts growth by 2,7 percent, private investment by 10 percent and employment by 1,2 percent after two years.

And it is this framework that is guiding the Government’s current infrastructure drive as indicated in the five-year National Development Strategy 1 ( NDS1).

Although the Government is a critical financier of public works through the Consolidated Revenue Fund, there are still funding gaps that can be covered by institutional investors such as pension funds.

Given the huge pools of funds that many pension funds sit on, observers say pension funds can help promote a country’s financial development and economic growth through strategic investments.

Actuaries Gandy Gandidzanwa and Itai Mukadira say investing in infrastructure for pension funds can meet their need for positive yields and inflation hedging.

“Infrastructure, as an asset class, has both the capital growth and income generation attributes – the right combination for long term investing.

“Only very few other asset classes have those characteristics in combination – certainly not listed equities or conventional bonds. The growth is also in real terms.

“In the absence of inflation-linked bonds, and with a listed equity space struggling to beat inflation, this is a much-needed quality,” they say.

Zimbabwe has numerous infrastructure projects underway and in the pipeline.

Under the NDS1, major infrastructure targets for the period to 2025 include: increasing power generation capacity from 2 317 megawatts ( MW) to 3 467 MW;

the construction of additional 280km of transmission and distribution infrastructure, and increasing access to potable water from 77,3 percent to at least 78,3 percent and water storage capacity from the current 15,423X10⁶ mega litres to 16,979X10⁶ mega litres.

Government is also targeting to expand access to improved sanitation facilities from 70,22 percent to 77,32 percent in both urban and rural areas; to increase the number of kilometres of road network that meet Southern Africa Transport and Communications Commission ( SATCC) standards from 5 percent to 10 percent and number of kilometres in good condition from 14 702km to 24 500km, and to increase internet penetration rate from 59,1 percent to 75,42 percent and mobile penetration rate to 100 percent.

From another perspective, to the extent that pension funds do invest in public infrastructure they will also ensure improved quality of life for pensioners insofar as the quality of infrastructure can be used as a measure of the quality of life of the citizens in a country, while the amount of a nation’s infrastructure has an important bearing on sustainable long-term economic growth.

Currently most pension funds’ investments (around $177,1 billion according to latest data from the Insurance and Pensions Commission as at the end of the first quarter) are skewed towards equities and rental properties.

However, the push by the authorities for pension funds to invest in developmental projects through prescribed assets has seen a gradual investment shift towards key public infrastructure.

“We have also been receiving a lot of applications for dams. The Kunzvi project, for instance, if this could be funded, the water problems for Harare would be a thing of the past,” said IPEC Commissioner Dr Grace Muradzikwa recently.

“So, the expectation is that the industry will also look into these areas and contribute towards economic development, affordable and clean energy.”

But for pension funds, it’s not just an issue of simply investing in important developmental infrastructure. Pension fund trustees have a fiduciary duty to ensure that any acquired assets earn money.

This necessitates that the Government has in place an effectively structured Public Private Partnership ( PPP) framework that attracts institutional investors.