Germany will use its presidency of the G20 group of leading industrialised and emerging economies to "encourage private investment and investment in infrastructure" in Africa, according to Finance Minister Wolfgang Schäuble. Paul Collier, who has been called upon by the German Finance Minister to produce a blueprint for a "Compact with Africa," has specified in a recent interview with the weekly Die Zeit that it is intended to stimulate the huge asset base of insurers and pension funds to help finance Africa's infrastructure.
In a series of blog posts, I will discuss the issue here; so stay tuned.
G20 policy focus on fostering private sector engagement in funding sustainable infrastructure in Africa is all but new. Throughout the 2010s, G20 leaders have highlighted the importance of private long-term financing - focusing on infrastructure investment - to foster long-term growth. The rationale for private investment in Africa by long-term institutional investors is high, but so are the barriers.
Aging countries will see rising capital-labor ratios and reduced the returns to capital, while the rising share of sub-Saharan Africa's working-age population is increasing the continent's productive potential and capital returns in Africa. This constitutes the economic case for sending long-terms savings to younger economies1. This economic case has been joined recently by added pension pressures due to tumbling interest rates. The global search for yield is akin to driving long-term investors to look beyond OECD bond and equity markets, into so-called alternative investments.
According to the World Bank's Africa Infrastructure Country Diagnostic (AICD), the infrastructure need of Sub-Saharan Africa exceeds US $93 billion annually over the next 10 years2. To date, less than half that amount is being provided (mainly from domestic and foreign official sources, with about half from China)3, thus leaving an annual financing gap of more than US $50 billion to fill. During the first decade of the 2000s, all African regions have made progress in improving their infrastructure, but since 2010 Africa's infrastructure deployment has become uneven and on average not progressed further, according to AICD data.
Pension funds, life insurers4 and sovereign wealth funds are characterized by the long-term nature of their balance-sheet liabilities, which enables them to invest for the long-term in infrastructure projects with long gestation periods. Asset classes such as infrastructure, which are valued less frequently and can therefore have a lower ex-post standard deviation of returns, can be a way for funds to maintain higher return targets, while dampening portfolio volatility.
There is fairly sketchy evidence on the total asset base of institutional long-term investors. Taken together, total assets managed by pension funds, insurance companies and sovereign wealth funds (SWFs) are projected by PcW to reach $100 trillion by 2020, up from $62 trillion just eight years earlier (Table 1).
Table 1: Global Assets Managed by Long-Term Institutional Investors
|Assets, $ trillion/Year||2012||2020|
|Sovereign wealth funds||5.2||8.9|
|Total, long term institutions||62.2||100.5|
Source: PwC Asset Management (2016), 2020: A Brave New World, New York
Ignoring valuation changes, the rise projected for the three groups of institutional investors translates into annual asset additions worth $4.78 trillion per year on average. To fill Africa's annual infrastructure funding gap of $50 billion, one percent of new institutional investment by pension funds, life insurance companies and sovereign wealth funds would need to be invested in Africa's infrastructure every year.
Despite the longstanding policy focus of G8/20 leaders, private long-term investment in Africa's infrastructure has remained deficient. Private finance still plays a minority role in funding Africa's infrastructure. Table 2 documents the share of private finance in funding Africa's infrastructure; it has apparently declined between 2012 and 2015, from 23 percent in 2012 to 15.6 in 20155.
Table 2: Who Is Financing Africa's Infrastructure?
Source: ICA (2016), Infrastructure Financing Trends in Africa - 2015
The questions the German G20 Presidency should therefore raise go beyond announcing another "Compact with Africa." It should explore why the decade-long G20 push for private investment in Africa's infrastructure failed to produce results so far. Rather, regulatory supply-side barriers and low-income Africa host barriers should be analysed to identify root causes, appropriate dialogue partners and vested interests. The next episodes will provide them: watch this space! Single mega projects such as the Ouarzazate Solar Power Station should not blind us to these urgent questions.
1 See the collected essays in Helmut Reisen (2000), Pensions, Savings and Capital Flows: From Ageing to Emerging Markets, Edward Elgar Publishing Ltd in association with the OECD, Cheltenham (UK).
2 Vivien Foster and Cecilia Briceno-Garmendia (Eds.) 2009, Africa's Infrastructure: A Time for Transformation, World Bank, Washington DC: 2009.
3 IMF (2014), Regional Economic Outlook: Sub-Saharan Africa, Washington, DC: October, chapter 3.
4 Not all insurers have long-term liabilities. Casualty insurers, for example, have short-term liabilities. In Europe, however, life insurance companies hold 80 percent of the assets held by insurers.
5 For data, see ICA (2016), Infrastructure Developments in Africa 2015, The Infrastructure Consortium for Africa Secretariat c/o African Development Bank: Abidjan.