Kenyan pension funds band together for infrastructure investment

Nine Kenyan pension plans have formed a coalition to invest in local infrastructure, private equity and real estate in deals structured to also potentially include direct investment by international asset owners and managers.

The first project under consideration is a $2 billion toll road in Kenya — the Nairobi-Nakuru-Mau Summit Highway — that is being supported by guarantees from the World Bank. The consortium would invest a combined equivalent of $70 million in local currency to the project once the contract is awarded.

Three groups are on the Kenya National Highways Authority's shortlist to build the project, an expansion of a 180-kilometer road into a four-lane highway. The authority could make a selection any time now, according to people close to the process.

The consortium would make a relatively small investment in local currency, acknowledged Sundeep Raichura, Nairobi-based group CEO of pension plan administrator Zamara Actuaries, Administrators & Consultants Ltd., who has helped to create the consortium. The nine pension plans have entered into an agreement to work together, but Mr. Raichura added other local pension plans are interested. The group could expand to 15 members with combined total assets of $2 billion, he said.

The goal is that additional financing, in dollars or euros, would come from another consortium of U.S. and European asset owners, he said.

"The project would be financed with a combination of equity financing from the project sponsor, foreign and local currency debt, and also guarantees from the World Bank to mitigate the risk," Mr. Raichura said.

Investing in infrastructure is new for most pension plans in Kenya, said Constantine Kandie, Narobi-based director on the board of the Moi Teaching and Referral Hospital, which oversees its 3 billion Kenyan shilling ($30 million) pension scheme.

In Kenya, most pension plans are relatively small; the pension world is fragmented, she said. However, together Kenyan pension plans have a combined 1 trillion shillings in assets, she added.

"It's quite a pot of money," Ms. Kandie said. "A lot of trustees have invested in property, a lot of trustees have invested in government bonds. However, we were unable to make bigger investments in infrastructure, real estate and other asset classes because we don't have enough money at individual levels."

What's more, many trustees now want to take a more proactive approach to investing, said Ms. Kandie, who for five years had been a trustee on the 2 billion shilling Kenya Revenue Authority Staff Revenue Scheme in Nairobi. Ms. Kandie stepped down from that position in June.

"By coming together in a consortium, we would be able to speak with one voice and add our voice to how pension funds are used and utilized. Trustees are viewed as very cautious and risk averse, but I feel trustees don't have enough information," she said.

Investing directly would give trustees more visibility into their investments, Ms. Kandie said.

Trustees also would like to make investments that would aid their communities, she said, by investing in infrastructure projects such as roads and affordable housing.

Assisting the effort to bring non-African investment to the toll road project is a group called Mobilizing Institutional Investors to Develop Africa's Infrastructure, which is working to attract U.S. asset owners to invest in African infrastructure. Known as MiDA, the organization is a partnership of the National Association of Securities Professionals; the United States Agency for International Development's Office of Private Capital and Microenterprise; and the Africa Private Capital Group of the Southern Africa Mission.

"A lot of us (MiDA's members) are already investing in Kenya, especially in the energy sector in private equity," MiDA's Managing Director Aymeric Saha said.

In 2015, the Kenyan government changed regulations to allow pension plans to invest up to 10% of their assets in private equity and venture capital.

However, infrastructure has not yet been designated as a specific asset class for local pension fund investment, Ms. Kandie explained. Currently, pension plan officials can invest in infrastructure as part of a 5% catchall allocation, but they expect the government soon will issue regulations that could allow up to 10% in infrastructure, she said.

"This (project) is exciting because this type of partnerships and structures is the way to resolve the global infrastructure finance gap, with combination of international development banks, institutional investors, mobilization and education programs, financial guarantees/risk sharing and other," Mr. Saha said.

In Kenya, this first investment by the Kenyan pension plan consortium is "very, very important," Ms. Kandie said.

If that toll road project goes smoothly, it will be easier for Kenyan pension funds to make future investments as part of a consortium, she said.

The World Bank got involved at the request of the Kenyan government because there is a great need for infrastructure financing in Kenya, as well as other countries in Africa, and the government has limited resources, said Catiana Garcia-Kilroy, lead financial sector specialist, World Bank Group, Washington.

"For some projects ... infrastructure is more efficiently developed or built by the private sector," Ms. Garcia-Kilroy said.

One of the challenges is to maximize the local currency portion of the financing because completely financing the projects in dollars exposes the projects to foreign-exchange risk, she said.

"Kenya is good at financing the energy sector, done mostly in dollars ... It's a great program and very solid … The downside is that the foreign-exchange rate is passed onto the public," Ms. Garcia-Kilroy said.

Right now, Kenyan officials are determining the most suitable vehicle for pension funds and insurance companies to invest in the toll road project, she said.

"It's something that needs to be discussed in-depth with the government of each country," Ms. Garcia-Kilroy said. Vehicles range from project bonds to infrastructure debt funds and an asset owner consortium alongside an external developer.

Mr. Saha added: "Financing infrastructure in local currency is a big, big challenge. It's a new way to finance infrastructure, especially for institutional investors. It has to be done over time and gradually."

The World Bank also is working with the South African government on infrastructure projects, Ms. Garcia-Kilroy noted. Progress in South Africa has been slower due to the political situation in the country, "which is challenging," she said.