How Nigeria Can Unlock N12.05trn Pension Fund Assets For Infrastructure Development

To say that a growing infrastructure gap is threatening the long-term growth of a developing economy such as Nigeria would be stating the obvious. Due to a combination of aging infrastructure, years of under-investment by governments, and expanding populations, it is estimated that based on the Nigeria Integrated Infrastructure Master Plan that about $3trn annual investments in infrastructure will be needed through 2030 to support global economic growth.

Unfortunately, over the last three decades, public capital investment in infrastructure has declined due to limited funding.

For instance, within a five year period covering 2015 to 2019, the Federal Government recorded a funding gap of N3.03trn in the implementation of capital projects of Ministries, Departments and Agencies.

The amount was arrived at based on an analysis of the budgetary provisions of each year and the respective budget implementation reports as obtained the Budget Office of the Federation.

Figures obtained from the Budget Office of the Federation showed that during the five year period, the total amount allocated for capital projects was N9.64trn, while the actual amount released during the period was estimated at N6.61trn.

This resulted in a funding shortfall of about N3.03trn during the five-year period.

A breakdown of the figure showed that in the 2015 fiscal period, about N722.2bn was allocated for capital projects out of which N557bn was actually released. This resulted in a funding gap of N165.2bn.

For 2016, the government approved the sum of N1.58tn for capital projects out of the total annual budget of N6.06tn.

From the N1.58tn budgeted for capital projects in 2016, the sum of N1.21tn was released, leaving a deficit of N368bn.

Further analysis of the data from Budget Office revealed that out of the N2.36tn allocated for capital projects in 2017, N1.56tn was actually released by the government. This resulted in a funding shortfall of about N800bn.

In 2018, the government released the sum of N2.07tn for capital projects execution out of the budgeted amount of N2.87tn. This caused a funding gap of N800bn.

The financial crisis has further reduced the scope for public investment. Public finances have become so strained in Nigeria that private capital may be the only realistic option.

The traditional sources of private finance (debt and equity) for infrastructure projects are also becoming more constrained in their capacity to provide long-term capital. While Commercial banks continue to face capital and liquidity constraints, Multilateral lending institutions have increased their support to the infrastructure sector during the crisis. But they alone cannot offer a solution. With traditional funding sources limited, experts say that pension fund could play a larger role as a source of capital for infrastructure development

At the end of October this year, the amount in the Pension Fund Asset was estimated at N12.05trn. This fund could help finance long-term, productive activities that support sustainable growth, such as transportation infrastructure projects.

The long investment horizon of pension funds and other institutional investors should make them natural investors in less liquid, long-term assets such as infrastructure. Yet to date, pension fund investment in infrastructure has been quite limited.

For instance, Pension Fund Administrators can invest up to N2.4trn in infrastructure funds and bonds if not for the non-availability of such eligible funds and bonds in the financial market.

The Regulation on Investment of Pension Fund Assets had provided that PFAs could invest pension assets for infrastructure development through bonds and funds respectively, up to a maximum of 15 per cent and five per cent of assets under management.

Going by this regulation and based on the valuation of the pension assets as at October 2020, which stood N12.05trn, up to N2.4trn could be invested by the PFAs in infrastructure funds and bonds.

But the main challenge inhibiting the PFAs from investing the pension assets for infrastructure development is the non-availability of eligible instruments (funds and bonds) in the financial market.

Mindful of this development, the governors two weeks ago reportedly proposed to borrow from the pension funds. The development had led to series of backlash from some stakeholders who said that the proposal should not be considered.

For instance, the Socio-Economic Rights and Accountability Project had sent an open letter to President Muhammadu Buhari urging him to use his “good offices and leadership position to urgently instruct the Director-General and Board of the National Pension Commission to use their statutory powers to stop the 36 state governors from borrowing and/or withdrawing from the pension funds purportedly for infrastructural development.”

While pension funds are not borrowed but rather invested in line with the investment regulations issued by the National Pension Commission, the investment regulations allow pension funds to be invested in asset classes such as Bonds, Sukuk, Treasury Bills, Global Depository Notes and other securities issued by the Federal Government, provided that the securities are guaranteed by the Federal Government.

The investable assets also include Bonds and Sukuk issued by eligible State and Local Governments provided that such securities are fully guaranteed by Irrevocable Standing Payment Orders and subject to the fulfilment of the conditions set out in the Commission’s Circular on “Minimum Requirements for the inclusion of State Bonds as Investible Instruments in the Pension Industry.”

The Pension Commission had deemed it necessary to prescribe that pension funds may be invested only in the Bonds floated by states that have fully complied with the CPS. This however does not guarantee pension funds investing in the state bonds, as Fund Administrators are required to conduct several risk analyses to decide if investing in such bonds meets expected yields and risk appetite. Accordingly, Fund Administrators may wish not to subscribe to a state bond.

Speaking on the development, the Managing Director of the Nigerian Sovereign Investment Authority, Mr Uche Orji said one of the major achievements of the Pension Reform is the establishment of robust legal and institutional frameworks for the administration of pensions in Nigeria.

In addition to the legal safeguards and institutional checks and balances, he said the Commission, as the regulator of all pension matters in Nigeria, has entrenched good corporate governance practices, high ethical standards instituted through rigorous supervision and regulation of the industry.

When asked if it was right for the governors to propose the withdrawal from the fund for infrastructure development, he said, “I think there is all sort of misunderstanding of what the proposal is. This conversation started last year when the NSIA presented the government’s forum, and a committee was set up to explore how to make it easy for Pension Funds to invest.

‘And I think it is important to understand the operative word here, it is an investment opportunity being presented to pension funds as opposed to a statement that connotes a grab of the pension fund, that is not correct.

“The committee had the DG of Pencom as a member, so NSIA was asked to join the committee with the Central bank, the Ministry of Finance, Pencom, everybody was on the committee. so that is the first I want you to understand.

“The second point is how do we make it possible? All over the world, Pension funds invest in infrastructure, and the reason is that infrastructure projects have a long period of operating and are structured properly to provide you a stable source of cash flow.

“This is something that should be interesting to pension funds managers, so it is about looking at viable projects and structuring them in a manner that will make them investable and inviting the pension funds to look at it and decide whether to invest in it or not.

“At a certain point of the conversation, one of the representatives of the pension fund administrators joined in the conversation to see how we can structure the project in a manner that will make it easy for investment for both the NSIA and the Pencom.”

The NSIA Boss said it is not abnormal for pension funds to be invested in infrastructure if they are economically viable.

He added, “Don’t forget pension funds do not belong to the government, they belong to the people, so the Funds Manager takes the decision to invest in it. So when the fund manager takes a look at his asset allocation it includes infrastructure, fixed income, equities, those are the mandates of the pension funds administrator.

“So I think it is important that it is clarified and people understand and this is how NSIA got involved in the first place.

“Now let me speak to you about what makes an infrastructural project viable, and part of it is because over time we have not actually focused on infrastructure in a manner that looks at the economic viability of projects.

“One of the projects that NSIA is involved in right now is the Lagos-Ibadan expressway, an incredible economically viable project. We are talking about a high traffic road of about 100,000 vehicles a day that would be tolled, we are looking at a road where the right of way as available to the concessioners is 45 meters on either sides of the median, with all the economic benefits from that for those who want to run the gas pipeline, telecom lines, power cables, businesses on the road, trailer parks, these are economic opportunities for a road like that.

“The NSIA is looking to invest in it, the pension funds, if possible should also invest in it. So I’m not sure where the lines crossed but the reality is that the reason why we were involved in it was in looking at how we turn infrastructural projects to economically viable investments that pension funds would actually want to be part of.”

Orji said the opposition to the proposal was based on some form of misunderstanding of what the programme is meant to achieve.

He said, “The road company would issue a bond which by the way is done everywhere in the world and the pension fund manager would decide whether the return, the risk and the security around it makes sense and then they make the investment.

“So don’t misconceive this to be a raiding of the pension funds and using it to build roads, these are commercially viable entities and it is only if they are commercially viable that the NSIA invest in it. The NSIA by its own Act has the Nigerian infrastructure funds and its expected to also make returns.

“So these are projects, like bonds we invest in, issued by the project companies and you will only invest if the terms work for you and these terms include the returns, the tenure, the security package around it by the guarantees around the income you want to make and you have the option to invest.

“So in looking at the Pension Act you just quoted, I think it fits perfectly, and the road company also has an equity option, and if the NSIA chooses to take the equity why not.

“This is a bond instrument and not a loan, it is only left for you to determine if the terms are right and invest in it.”

While there may be some barrier to investing in infrastructure, experts said there is need for government to help infrastructure developers tap into
potentially important sources of financing such as pension funds.

ENDS