Africa does not lack the money needed to finance its development, President William Ruto has said, instead blaming restrictive financial rules for keeping huge pools of local capital away from infrastructure and other productive projects.
Ruto said African countries must urgently change the rules governing pension, insurance and other institutional funds to allow more of the money held on the continent to finance projects at home.
The President said Africa has more than $2 trillion in domestic non-bank capital, including more than $1 trillion in pension and insurance assets, but much of this money is not reaching projects that need long-term financing.
He spoke at the Africa We Build High-Level Roundtable on the sidelines of the 81st United Nations General Assembly in New York on Monday, where he called for reforms to the continent’s financial and regulatory systems.
Ruto questioned the continued preference by African pension funds for investments outside the continent even as major local infrastructure projects struggle to secure funding.
“Africa’s problem is no longer the amount of capital available to it. Africa’s problem is the set of rules that decide where that capital is allowed to go. Why do African pension funds prefer US Treasuries over African power plants?” he asked.
He said the high cost of insuring productive assets was another obstacle to investment, noting that expensive insurance can make projects that would otherwise be viable more difficult to finance.
Ruto also criticised the risk premiums applied to African countries, saying they may not properly reflect their records on defaults and recovery.
He called for the continent to use African data when assessing African risk, saying more accurate pricing would help reduce the cost of capital.
The President cited a UNDP estimate that more objective credit ratings could save African countries up to $74.5 billion.
He also called for changes to prudential and liquidity requirements that he said discourage investors from committing funds for long periods.
Ruto said a 30-year investment in Africa should not be treated as an exotic asset simply because of its long-term nature.
Beyond regulatory changes, he said African countries need stronger financial systems to convert available money into projects that can attract investors.
He identified bankable project pipelines, credit enhancement mechanisms and local-currency financing instruments as some of the tools needed to achieve this.
Ruto used Kenya’s pension sector to demonstrate the disparity between the amount of capital available and the funds reaching infrastructure projects.
He said the country’s pension industry has assets worth about Sh3.2 trillion, with 46 per cent invested in government securities and only 0.02 per cent placed in infrastructure debt.
According to Ruto, this means that for every shilling going into infrastructure debt, nearly Sh2,000 is invested in government paper.
He said the situation could mean that pension contributions from a teacher in Eldoret end up financing Treasury bills instead of a geothermal plant located closer to the teacher’s home.
Ruto said Kenya was ready to provide a test case for efforts to change the way African risk is assessed.
He said the country was willing to share its default and recovery data and make pension and insurance regulators available to rating agencies, insurers and international standard-setting bodies.
“If the evidence vindicates the methodology, we accept it. If it does not, then we expect the methodology to change,” he said.
The President also pointed to measures Kenya has already taken to bring more private and institutional money into infrastructure development.
He said the National Infrastructure Fund, signed into law in March, is expected to mobilise up to $40 billion for roads, ports, power and water projects through equity instead of taking on additional public debt.
Ruto also cited the listing of Kenya’s first infrastructure fund on the Nairobi Securities Exchange, which raised Sh3.4 billion with support from the United Kingdom.
He said Kenya had increased its equity in the Africa Finance Corporation by Sh3.25 billion ($25 million) and agreed to host the corporation’s regional office in Nairobi.
Ruto proposed that a working group based in Nairobi be formed to examine the obstacles that continue to limit infrastructure financing across Africa.
The group would study the barriers and present its findings at the next Africa We Build Summit.
He said the team should come up with quantified findings within 12 months.
Ruto said resolving the financing challenge was urgent as African countries prepare to meet the infrastructure needs of a population projected to approach 2.5 billion by 2050.
“Our goal should be simple: to make financing productive African assets ordinary, not heroic,” he said.