Africa's growth bottleneck: why the money isn't flowing
As Africa grapples with an estimated $170 billion annual infrastructure financing gap, pension funds are being increasingly recognised as key players in addressing this challenge. With their long-term investment horizons, pension funds are well-positioned to finance critical infrastructure projects across the continent, unlocking growth while generating sustainable returns for members.
“The long-term investment horizon of pension funds makes them natural investors in less liquid, long-term assets such as infrastructure,” said the FSCA’s Retirement Funds team. “This allows for growth and value realisation over an extended period.”
Infrastructure investment aligns well with pension funds’ long-term obligations. These projects offer the potential for strong, inflation-linked returns and low correlation to traditional asset classes, making them attractive for diversification and long-term growth.
“There’s a strong case for infrastructure investing in Africa,” FSCA noted. “Pension funds’ interest in diversification and yield enhancement aligns with the long-term nature of infrastructure investments. Risk should be rewarded through higher returns.”
Unlocking opportunities and managing risks
Despite the strong fit, pension funds currently allocate less than 3% to infrastructure across the continent. This remains far below the 10% benchmark seen in OECD countries. “Should pension funds reallocate just 10% of their investments to infrastructure, it could unlock over $50 billion for development,” FSCA stated. “Canadian pension funds invest approximately 20% in infrastructure and have achieved superior long-term returns.”
Infrastructure opportunities span a wide range of sectors, including energy, transport, digital infrastructure, and healthcare. However, the FSCA emphasised that trustees must conduct thorough due diligence. “Boards of trustees must apply their minds to which types of infrastructure are most viable and suitable for their fund members. Due diligence and research are critical.”
On the risk side, the FSCA highlighted the importance of governance: “Governance risk is a key concern - good governance is essential for the success of infrastructure investments.”
Mitigating these risks involves several strategies. “Ensuring that there are guarantees in place, and co-investing with professional private investors, are some of the ways to manage risk while still achieving investment objectives,” the FSCA advised.
Regulatory support is also essential. While South Africa permits up to 45% investment in infrastructure (with a 25% per issuer limit), many African countries still have restrictive caps. “Low caps serve as an impediment to infrastructure investment. We need frameworks that allow for increased exposure and collaborative investment structures,” FSCA said.
Across the continent, the presence of relatively small pension funds limits their ability to participate in large-scale projects, unless they act collectively. “Through consortiums, smaller funds can pool resources to fund major infrastructure projects. The regulatory frameworks must allow for this,” they noted.
A new frontier for pension capital
The policy landscape is evolving to encourage cross-border investment. “In the East African Community (EAC), pension funds treat the region as a domestic market,” FSCA explained. “Similarly, the SADC Finance and Investment Protocol supports regional development. Harmonisation across WAEMU, CEMAC, EAC and SADC could facilitate much-needed cross-border infrastructure investment.”
Environmental, Social, and Governance (ESG) considerations are also central. “Infrastructure investments must adhere to national ESG taxonomies and regional standards,” said the FSCA. While impact metrics vary depending on the nature of the investment, transparency and accountability remain critical.
“In Nigeria, the Sovereign Investment Authority has successfully used pension assets to finance roads, energy and healthcare projects, improving the quality of life for citizens. In South Africa, the PIC has channelled pension money into renewable energy, contributing to sustainability goals.”
The FSCA also stressed the need for formal disclosure practices and proactive member engagement. “Member communication is vital. Educating members on the societal impact of infrastructure investing, while ensuring portfolio diversification and solid returns, builds trust and buy-in.”
Pension funds poised to lead
Looking ahead, the role of pension funds in Africa’s infrastructure space is only set to grow. “We’re seeing more products structured specifically for infrastructure, and the pipeline of viable projects is expanding,” said the FSCA. “Pension funds can achieve alpha for their members while simultaneously investing in economic growth, job creation, small business empowerment, and improved public services.”
To scale up participation, several factors must align - regulatory support, incentivisation, disciplined governance, and harmonisation across regions. “Pension funds have the potential to be game changers in Africa’s development story,” the FSCA concluded.
Writer’s Thoughts
As Africa faces a $170 billion infrastructure gap, the pressure is mounting on financial markets to step up. Strategic investments in infrastructure could unlock immense growth opportunities while delivering solid, long-term returns for stakeholders. Do you agree? Please comment below, interact with us on X at @fanews_online or email me your thoughts.
