Economist urges the government to expedite passing the standalone Bill on PPP
Botswana’s pension funds are facing significant obstacles in investing repatriated assets in infrastructure due to the absence of a standalone Public-Private Partnership (PPP) Bill and a dedicated Infrastructure Fund.
As repatriation typically happens in cash, the money market has emerged as the primary destination for these assets with big banks benefitting from this windfall. The duration that funds remain in the money market has been influenced by the slow speed and lack of ease of investing in other asset classes.
Given their focus on long-term infrastructure projects, pension funds’ repatriated assets remain in banks for an extended period because of the general nature of the projects from inception to completion.
A policy decision was made to increase the minimum local investment limit for retirement funds from 30% to 50%. Through a gradual transition over five years, commencing on June 1, 2023, the intent is to see the funds invested in productive sectors and activities across the economy. Accordingly, the applicable rules (PFR2) were amended to allow for a greater portion of funds to be invested in asset classes such as infrastructure (about P8 billion was repatriated last year).
Non-Bank Financial Institutions Regulatory Authority (NBFIRA) said the revised pension fund rules introduced Local Infrastructure Funds as an asset class. In that regard, a pension fund is allowed to invest up to 5% of its total investments in infrastructure as an asset class. Rule 11.8 of the PFR2 states that “A fund shall only invest in infrastructure through a specialist-private-equity type of fund, public-private partnership, infrastructure bond, or such investment fund listed on the Botswana Stock Exchange.”
But at present, observers argue that there is no easy route for pension funds to invest in infrastructure because of the absence of legal regulation that gives pensioners assurance of getting back their money.
Lessons from Australia
An economist at one of Botswana's leading banks has urged the government to expedite passing the standalone Bill on PPP.
Naledi Madala of Absa Bank spoke at a recent construction seminar, stating that the law will provide a legal framework for the operations of the PPP model. She believes this will boost confidence among the private sector to participate in this area.
Drawing lessons from Australia, Madala advocates for a robust secondary market and the development of infrastructure as an asset class.
“Australia has developed a robust secondary market, primarily driven by the public-to-private sale of infrastructure by federal and state government looking to rationalise government balance sheet and improve efficiency service delivery,” she said adding that the Australian financial sector (with early entrants in this market, such as IFM) has successfully developed a deep set of expertise in owning and investing in infrastructure assets.
“This led to the establishment of infrastructure as an asset class.”
Madala’s views come at a time when the country is facing significant macroeconomic headwinds and a challenging fiscal position characterised by the downturn of diamonds and depleting savings.
A common denominator observed by Global Monitor is that in Botswana, infrastructure projects rely heavily on government spending and PPP projects. Global Monitor provides unique data, expert analysis & innovative solutions to companies in the world's largest industries.
Hence Madala warns: “The deeper we fall into this position, the higher the likelihood that some planned projects may have to be postponed.”
'Funds at an advanced stage'
While not divulging more, Boa Ntebele, the Head of communications & Consumer Affairs at NBFIRA said “The developments within the pension funds industry is that some Funds are at an advanced stage and have already set aside funds for this asset class, while others are progressing the issue through their internal structures”. “Following the amended PFR2 there has been a positive development as there has been a noticeable interest in the asset class,” she said.
“The Public-Private Partnership (PPP) is a well-established funding mechanism for infrastructure development and other economic ventures. Accordingly, pension funds can participate.”
Asked about the status quo of the infrastructure projects on the pipeline that NBFIRA is aware of which pension funds will invest in, the regulator said “The Ministry of Finance has responsibility for coordinating projects that qualify for funding jointly by the public and private sectors”. “Accordingly, they are best placed to provide the latest information on the specific question.”
Private Debt
In the absence of a PPP bill, pension funds can invest in infrastructure through an Infrastructure Fund. However, there is also no Infrastructure Fund. Asked about this, Ntebele said NBFIRA does not play a role in setting up the asset classes, in this case, infrastructure funds.
Since this asset class is new in the Botswana market, she said the Regulatory Authority anticipates it will grow over time and play a positive role in the development of local infrastructure while at the same time creating value for members of pension funds.
Investment experts observed that currently, the common way pension funds have been investing in infrastructure is through private debt given that even PPP uptake has been slow. The value of the market is still unknown. Fund Managers previously anticipated growth in the private market.
Statutory Limits
The overall retirement funds have demonstrated an upward trend over the years. The Retirement Funds industry’s total assets were P139 billion assets as at December 2023, 59% (P83 billion) was invested in offshore markets, while 41% (56 billion) of pension funds’ assets were invested domestically, thus achieving the statutory target of having 38% onshore assets by December 2023.
Pension funds are ahead of the 2024 limit of 41% and experts don't think that they will just sit on the money in banks (which would only be a small proportion of their total assets anyway). In other words, being ahead of schedule in terms of the statutory repatriation requirement and with no infrastructure to invest in, the money will just stay offshore. About P4 billion is expected in the coming year.
Money Market benefits from repatriation
Given that repatriation often occurs in the form of cash, the money market has become the natural entry point for these assets.
“We are seeing a lot of cash entering into the money market space and staying there for longer than investors would like to see,” Mbaki Mudlovu the Portfolio Manager Of fixed Income at Botswana Insurance Fund Management (Bifm) said recently during a breakfast seminar.
First National Bank Botswana (FNBB), a custodian of pension fund assets, revealed that it received approximately P6 billion in inflows from pension fund repatriation. This windfall, alongside what CFO Dr. Mbako Mbo termed “a robust treasury function”, has positioned FNBB to leverage these funds effectively, with 14% of its income now stemming from treasury instruments.
Typically, the bank said, these funds go through deposit accounts before deployment to target asset classes. Due to their focus on infrastructure, which is inherently long-term, bankers expected the pension funds’ assets repatriated to Botswana to be sticky. They believe that such circumstances present opportunities for asset managers within the money market space, typically spanning up to 12 months. The money market involves trading in very short-term debt investments, including Treasury bills and Bank of Botswana Certificates (BoBCs).
Mudlovu said how long the cash stays within the money market asset space is determined by how quick or the relative ease to invest into the other asset classes, be it bonds, private equity, alternative space, or equities.
“We have seen relative ease to get into the bond side.”
However, a key challenge for pension funds is the limited opportunities for investing repatriated funds domestically, which may result in some of the money sitting idle in bank accounts. Experts believe this issue stems from a general lack of domestic investment opportunities for pension funds, rather than being specific to infrastructure. Opportunities have not emerged in other asset classes.
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