16 December 2012

Nigeria: Risking Pension Funds for Infrastructural Projects

Lagos — Minister of Works, Mike Onolememen, at the opening of a four-day public hearing on the urgent need to address the deplorable state of federal roads across the country recently said over N2 trillion would be required to fix all federal roads across the country in the next four years. In solving the problem, the minister proposed alternative ways of funding the projects that include the use of N2.5 trillion pension fund, adoption of annuity contracts for key arterial routes, borrowing from multilateral agencies for key highway infrastructure, floating of road bonds for highway projects, and viability gap funding (through proposed road fund).

Others still are implementation of five per cent fuel surcharge, user-related charges (tolling, heavy-user charges for haulage companies, mining, etc), and conventional public/private partnership (PPP) finance for road infrastructure.

The minister also expressed concern over the inadequate annual budgetary provision for road projects, and argued that "the average budget of about N100 billion for road development is grossly inadequate for the nation's 35,000 kilometres of federal road network and for a country that budgets N300 billion and N150 billion for its Central Bank and Deposit Insurance Corporation respectively.

"What is needed is about N500 billion yearly in the next four years to fix the country's ailing road infrastructure and bring it in sync with road infrastructure development in other thriving nations in the world," he said.

PenCom's position

Before then, Muhammad Ahmad, the out-going Director-General of the National Pension Commission (PenCom) had explained the need to invest pension fund on infrastructure. Since pension assets are long-term assets, they should finance long-term assets; and because they finance long time liability, they are available, he said .

"Honestly that is what pension assets should do. For the pension industry to be sure that the funds are invested in long-term assets, infrastructure is basically one of the items. However, there must be visible signs, as a matter of priority, that the funds are secured," he said.

Ahmad said though the fund may be good for infrastructure finance, there must be clearly well defined terms, exit strategies that would ensure the funds are invested as stated.

"The starting point is for us to identify clear projects with long-term benefits that could be invested in; the concessioners should also come up with real structure process. Should we continue to finance infrastructure when we have private sector fund from the budget? I don't think so," he said.

Welcome development but...

However, economic infrastructure experts welcome the idea. In fact, Opuiyo Oforiokuma, Managing Director of ARM Infrastructure and Investment Managers told Sunday Trust that PenCom had in the past issued guidelines permitting Pension Fund Administrators to invest up to 30 per cent of their fund portfolios in infrastructure, through investing in infrastructure bonds and specialist infrastructure equity funds.

He said: "The recent news headlines about government approving the use of pension funds for infrastructural development in the country are consistent with the position, as we already know it.

"The total value of funds under management by Nigerian Pension Fund Administrators is around N3 trillion today, and some estimates indicate that the total of funds under management will grow by 30 per cent per annum in coming years".

This, according to him, means that to the extent that Pension Fund Administrators actually decide to avail themselves of the opportunity to invest in infrastructure as provided for in the PenCom guidelines, there will be a new and significant source of funding available for infrastructure.

Also, Frank Ogiamien of Partnership Plc described the proposal as a welcome one but the law establishing PENCOM will have to be looked at to be sure the suggestion can stand.

"It's a suggestion by government that pension money should be used on infrastructure. The law establishing PENCOM will have to be looked at to be sure the suggestion can stand," he said.

"It is true the money belongs to people but the government is concerned about its safety and investment in infrastructure which is long term can serve to preserve the money", he added.

Similarly, David Imafidon Adonri, Managing Director, Lambert Trust and Investment, supports the idea, saying it is a positive step.

"The decision of the federal government to borrow N2 trillion from Nigeria Pension Fund to finance infrastructural development is a positive step.

"The Infrastructure Bonds that will be issued will offer a safer and profitable investment outlet for Pension Funds. It will also deepen the domestic bond market. Luckily, we now have a liquid OTC secondary market for government bonds which will be further enhanced when the Nigeria Stock Exchange bonds platform is reactivated," he said.

Adonri however warned that issuance of the infrastructure bonds may exacerbate public debt and further crowd out investment funds from the equities market and the real sector.

The Managing Director and Chief Executive Officer, APT Securities, Mallam Kasimu Garba Kurfi, said since the fund is contributory fund from individuals, state and private organizations, federal government cannot decide alone.

"As of now, a total of N3 trillion accumulated fund under the new system of contribution pension funds made of FG contribution of the Federal Civil Service, state civil services for those state that have joined the schemes such as Lagos, Ogun, Osun, Delta, Kaduna, Niger to mention but a few and private companies. Therefore, it is not possible for the FGN alone to decide," he said.

"But I am aware that PENCOM regulatory bodies will soon release a new investment guideline that will enable the Pension Administrators invest some of the funds into infrastructure bonds to facilitate issues of such bonds to benefit from the funds.

"You should also note that even at that level, it is up to Pension Administrators to invest or not because a similar provision is given to them to invest up to 25 per cent of their total funds into equities market but today less than 10 per cent was invested," he said.

Nigeria in the face of the world

Ogiamien believes that the implication would mean that the fund will bring about improved infrastructure with positive outlook.

"There will be increased productivity and GDP. If anything, the initiative will make foreign bodies have more confidence in Nigeria since the people's money will be seen to have been channelled to economic development," he said.

Adonri also shares his view. He said "since closing the nation's infrastructural deficit will in the long run be beneficial to the productive real sector, negative impact of the bonds now could be counterbalanced by future benefits".

However, he said, the judicious use of the fund to develop infrastructure is the major source of apprehension; and with pervasive corruption in the public service, the fund may end up being stolen and the liability passed on to future generations.

Oforiokuma, on his part, said the proposal holds the key to the economy and that foreign perception of Nigeria would be positive.

"We believe that the impact on foreign perception of Nigeria should be positive. Pension fund investment in infrastructure is not new, and various examples exist around the world where this is already happening, including in Ghana, South Africa, Europe, the USA, Australia, Canada and Korea, among others.

"Infrastructure development is a key driver of economic growth. Multilateral institutions have estimated that every US$1 billion of investment in infrastructure translates into a 1 per cent increase in GDP. Closer to home, the Vision 20:2020 National Technical Working Group on Transportation, following a detailed study in 2009, concluded that in the transport sector, the neglect of Nigeria's roads implies an N80 billion loss of network value and N35 billion additional operating costs annually," he said.

According to him, in order to deal swiftly and effectively with Nigeria's infrastructure deficit, investment in infrastructure must remain a national priority, especially if the nation is to achieve her Vision 20:2020 aspirations as well as improve the socio-economic wellbeing of Nigerians.

"Pension Fund Administrators are custodians of the funds, and administer and invest them on behalf of the individual contributors, in accordance with the law and regulations governing pension funds.

"While the funds do not belong to government, they can through enacting and amending laws, and through the regulatory framework, direct and influence how pension funds are administered and invested by the Pension Fund Administrators", he added.


Oforiokuma, however, said that in order to reduce downside risks to their investments, Pension Fund Administrators should obtain good professional advice when considering where to invest, and are encouraged to take infrastructure exposure by investing in specialist infrastructure funds like the ARM Infrastructure Fund, where the requisite experience and expertise exist.

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