Kenya’s annual infrastructure funding gap stands at more than Sh203 billion ($1.8 billion). The World Bank estimates that the country requires an annual spend rate of Sh453 billion ($4 billion) over the next decade to close this infrastructure funding deficit.
While Kenya’s infrastructure has shown robust growth recently, the burgeoning debt portfolio and growing public outcry over continued borrowing could threaten the pace of infrastructure development and dent investor confidence.
This has led the Kenyan government to look for alternative forms of funding from the private sector through public private partnerships (PPPs).
The entire pension industry, on the other hand, boasts of over Sh1.319 trillion in assets under management which comprises up to 13.31 percent of the gross domestic product as of June 2021, according to the CBK.
The sector plays an important role in the economy relating to key channels of transmission especially financial and labour markets.
Thus, an increased participation of the pension sector in the infrastructure development automatically reduces the country’s public borrowing requirements; positively affecting the economy by reducing its vulnerability and enhancing its growth.
As opposed to commercial banks and development finance institutions that have short to medium-term investment horizons, the long-term nature of infrastructure projects has made it striking for the Kenyan pension industry. Public infrastructure is monopolistic hence the attractive and predictable returns.
The most recently floated infrastructure bond offered a tax free return of 10 percent per annum which was impressive compared to a 10.4 percent loss on quoted equities as reported by Actserv Survey Report in 2020.
This extreme precariousness of stocks was an eye-opener for many investment funds on the need to re-evaluate their asset allocation.
Additionally, public projects are less affected by economic cycles and hence have low volatility compared to other financial asset classes. State projects have shaken off the negative effects of the pandemic and recorded growth over the past two years.
This is despite the low interest rate environment and poor or unstable performance of other asset classes like stocks.
In an environment where fund managers are looking for better returns, the trustees are closely monitoring the scheme’s performance to deliver good retirement security to their members.
Furthermore, the pension industry is proactively seeking portfolio diversification opportunities and hence infrastructure investment is quickly gaining momentum.
The broadening of allowable investment categories by the Retirement Benefits Authority in October introduced infrastructure as a distinct investment category under the pension fund investment regulations.
The move allowed pension funds to directly invest up to 10 percent of their portfolio in the asset class unlocking approximately Sh140 billion for allocation to the asset class.
Infrastructure projects are capital-intensive, require expensive structuring and due diligence fees making it difficult for individual pension schemes to explore this investment class.
To counter this challenges, various pension schemes and other industry stakeholders came together to explore optimal channels for sustainable alternative investment assets leading to the formation of the Kenya Pension Fund Investment Consortium with the support of the US Agency for International Development and the World Bank.
This was followed by an MOU with the Capital Markets Authority and the Nairobi Securities Exchange to enhance pension fund activity in the capital markets through infrastructure projects and alternative investments.
The consortium aims at expanding access to critical infrastructure for Kenyans, improve returns for pensioners, and reduce Kenya’s dependence on Chinese debt. It also sends an important signal to investors globally that Kenyan pension funds are good local partners.
With the 2022 elections around the corner, businesses are getting jittery and beginning to take cover. Pension funds are no different. While the pension players cannot avoid some systemic risks, it is important for fund managers to have a well balanced portfolio on a risk-return basis to ensure that they offer their members high returns and preserve their contributions at the same time.
Continued training to trustees and other stakeholders on alternative investments such as infrastructure will go a long way in enabling schemes to increase their portfolio diversification.
While benchmarking performance against peer pension schemes in 2022, of keen interest will be to analyse the performance of those that have hugely considered the alternative investments class and have long-term diversified portfolios.
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