Secretary-General

Leveraging pension funds for financing infrastructure development in Africa

 

Third International Conference on Financing for Development
OSAA-OECD high-level side event on leveraging pension funds for financing infrastructure development in Africa

Introductory remarks by Angel Gurría, Secretary-General, OECD

15 July 2015

Addis Ababa, Ethiopia

(As prepared for delivery)

 

Excellencies, Ladies and Gentlemen,

 

It is my great pleasure to be here with you today at this critical juncture for financing development. As we will discuss ways of channeling institutional investment into infrastructure, let me first underline:

 

  • the critical role that network industries can play in favour of development;
     
  • why private sector participation matters;
     
  • outstanding challenges ahead of us.

 

The impact of smart investment goes beyond private interests. Investing in infrastructure—especially social infrastructure—can connect communities, enhance social cohesion and make economic growth benefit the people. Yet, as the demand for infrastructure increases with growth, trade and urbanisation, developing countries are struggling to meet their infrastructure needs.

 

Given the scale of the funding gap, government budgets—traditionally the major source of financing for infrastructure—cannot be expected to finance alone infrastructure development. The OECD estimates that globally, annual infrastructure investment needs will average 3.5% of GDP through 2030. Cumulative investment of USD 53 trillion in low-carbon energy supply and efficiency will also be needed by 2035 to ensure that the goal of holding global warming below 2⁰C is achieved.

 

However, low income countries, including many African economies, have yet to effectively attract private investment into national infrastructure networks: over the past two decades, 37% of public-private infrastructure projects have been conducted in lower middle-income countries, and only 4% in low income countries.

 

Unlocking investment: What’s the problem?

 

On the financing side, big corporations- normally a major source of investment infrastructure, are hoarding cash in these uncertain times. In OECD countries, only 8% of FDI inflows received in 2010-12 ended up in infrastructure sectors, as opposed to more than 10% in 2007-2009. Another source of infrastructure investment, the banking sector, is now subject to stronger regulations, which can in some cases impede its ability to channel capital into long-term investment destinations.

 

At the same time, institutional investors, including pension funds, own USD 93 trillion in assets in OECD countries alone, and infrastructure should be a natural destination for such long-term capital.  This is not happening in practice, as less than 1% of pension funds are invested in infrastructure and only a small part of it is devoted to low-carbon projects.

 

As one could expect, Africa barely features on the radar screen of this 1% as an investment destination. However, given the low interest rate environment and volatile stock markets, institutional investors from both OECD and emerging economies might be increasingly interested in long term, inflation protected returns from real productive assets such as infrastructure. As pension funds are also rapidly growing in African countries in particular in South Africa, Nigeria, Kenya, Uganda and Tanzania, they could also become a substantial source of financing for local projects.

 

On the other side of the equation, the policy environment for infrastructure investment is not sufficiently enabling, undermining investor confidence even when the necessary finance is available. Investment liberalisation is an unfinished business: the OECD FDI Restrictiveness Index shows that, in the 58 countries covered, utility markets are still more closed to foreign investment relative to the rest of the economy. More could also be done to level the playing field between state-owned enterprises and their private competitors.

 

On the trade side, the recent OECD report “Overcoming Barriers to International Investment in Clean Energy” shows that local-content requirements are hampering international investment in clean energy infrastructure. Improving the framework conditions will thus also be critical to unlock private investment in developing countries’ infrastructure.

 

How can the OECD help?

 

We have just recently updated the OECD Policy Framework for Investment, which provides an action-oriented checklist for governments to assess their investment climates. It focuses on how a supportive environment reduces the costs and risks of investing, notably in infrastructure. The PFI shows us that the investment climate is affected by many factors, including political stability, rule of law and property rights, government regulations, transparency and accountability, and enforceable contracts. The existence of a stable and predictable environment in which both domestic and foreign investors can operate is vital for providing investors with confidence.

 

We have used the PFI in over 30 countries, including seven economies in Sub-Saharan Africa, to support regulatory reform. On top of this, the 15 member states of the Southern African Development Community (SADC) are working with the OECD on a multi-year programme aimed at developing a regional Investment Policy Framework (IPF) based on the PFI. With the updated PFI, we hope to strengthen further our engagement with Africa.

 

Institutional investors also face specific barriers to long-term investment, such as the lack of appropriate financial vehicles as well as a dearth of data on this sector and related opportunities in low income countries.  This situation is particularly stark in Africa, where equity market capitalization is low, and stock markets – which exist in only a third of Sub-Saharan African countries – are often shallow and illiquid.

 

From the home country perspective, regulations preventing institutional investors from investing non-rated projects in their balance sheets represent another obstacle, as only a minority of African countries have an investment grade. But there are efforts aimed at unlocking some of these obstacles and the OECD is working with institutional investors and their regulators on addressing them. In particular, the G20/OECD High-Level Principles on Long Term Investment Financing by Institutional Investors set out policy recommendations aiming to mobilise institutional investor assets for long-term investment without diluting prudential safeguards.

 

Fundamental reforms thus appear necessary if we are to see a significant increase in infrastructure investment. There is no way around and no short-cuts to improve the domestic investment climate. The OECD is working directly with countries and regional groupings towards that end, using comprehensive tools such as the PFI as well as partnerships such as the NEPAD-OECD Africa Investment Initiative or the SADC-OECD Regional Investment Policy Guidance to be released next week.

 

 

Ladies and Gentlemen:

 

Let me conclude by highlighting the catalytic role that Official Development Assistance (ODA) can play to help developing countries enhance their framework conditions for infrastructure investment and to leverage, through pooling and blending mechanisms, institutional investment. ODA reached a record high of USD 135.2bn in 2014 and will remain a crucial resource to help the poorest nations.

 

The OECD thus stands ready to continue working with African governments and donors on promoting the policy changes that can enhance infrastructure investment at the required pace and scale.

 

Thank you.