Zimbabwe’s cash rich pension funds have expressed interest in investing people’s retirement savings in struggling state-owned entities and infrastructure, Business Weekly can reveal.
The move towards these “novel” investment assets would mark a significant move from a previous investment focus on core or prescribed assets such as the stock market, money market, Government bonds and property as illiquid bonds and stocks have become an impediment to both public and private pension fund managers.
Normally, these core assets should be generating reasonable returns, but Zimbabwe’s inflationary environment has increased risks associated with such investments. More so, these assets are mostly fixed and as such, become difficult for pension funds to reconcile a fixed interest instrument with ravaging inflation.
“There are so many private equity investments happening right now; what we are asking for we come together as an industry,” Zimbabwe Association of Pension Funds (ZAPF) director general Sandra Musevenzo told an insurance and pension conference in Harare this week.
“You (the Ministry of Finance and Economic Development can) then grant them prescribed asset status.
“You find that in other countries, especially Europe, the rail network, the road network, infrastructure is run by pension funds. So we are coming right now and saying that can you (the Government) . . . allow pension funds to have this opportunity, grant these (infrastructures) prescribed assets status and then we go forward,”.
“We then come up with a special purpose vehicle together with Government. You will be allowing us to run the road network, we develop it then it’s given prescribed asset status.
“In that sense, it can become lucrative for pension funds to invest in this instrument.”
The total value of Zimbabwe’s pension funds
(consisting of insured funds, self-administered funds and stand-alone self-administered funds) amounted to just below $10 billion, about US$622 million, according to Insurance and Pensions Commission.
Worldwide, estimates show that pension funds account for around 40 percent of all investors in the infrastructure asset class, excluding projects directly funded and developed by governments, municipalities and public authorities. Giant US pension fund, CalPERS, adopted a new investment policy in 2008 with a target 3 percent allocation of assets or US$7,2 billion in infrastructure. For CalPERS, the target return is a net 5 percent above inflation over five years. Just under a decade ago, Britain unveiled a plan to encourage large-scale pension investments in roads, hospitals, and airports aimed at enticing US$30,97 billion in infrastructure.
Stake in struggling parastatals
Zimbabwe Insurance and Pensions Apex Council (ZIPAC) chairperson Tassius Chigariro weighed in: “The Government is rich, it owns a number of assets that are not properly functioning. For example the National Railways of Zimbabwe (NRZ), Zimbabwe Electricity Supply Authority (ZESA) and the Zimbabwe United Passenger Company (ZUPCO). Why does the Government have to own them and why aren’t these given to pension funds to run them, not for a bond but for ownership, for the rates, the fees, the tolls, and Government can sit back and enjoy the taxes?
“And in such a case, where the pension funds are running NRZ, for example, that should count as a prescribed asset.”
But such moves have not come without any controversies. Last August South Africa ruling party, ANC’s economic policy head Enoch Godongwana, raised public debate when he said the party was investigating the use of prescribed assets for pension funds, that is, to use pension funds to help fund, among others, embattled state-owned entities — as a way of avoiding getting an emergency loan from the International Monetary Fund (IMF).
In Zimbabwe’s case, however, the proposals by the pension fund appears to tie in with Government’s objective to either privatise or partially privatise a number of State-owned enterprises and parastatals. The country is currently accelerating its reform of State-owned enterprises and parastatals. After having approved the implementation framework for 43 SOEs and parastatals in 2018, Government last year listed five public enterprises (TelOne, NetOne, Telecel, ZimPost and POSB) for immediate reforms and work was already underway to identify transaction advisors.
Finance and Economic Development Minister Mthuli Ncube applauded the “out-of-the-box thinking”, saying the Government was also of the same view.
“I like the thinking,” he said.
“We could actually hold the Government’s equity in the Sovereign Wealth Fund, and it’s very easy to create because it’s just a special purpose vehicle holding the Government’s stakes in various institutions, from 1 percent to 100 percent, or whatever. And then we have pension funds being co-investors in that, and that’s how Government also dilutes its shareholdings. It’s certainly something that we have been exploring seriously.”
But what is the risk-return profile that these pension funds are looking at with such investments?
The Organisation for Economic Co-operation and Development (OECD), in its 2009 working paper titled “Pension Fund Investment in Infrastructure” gives its suggestion:
“A theoretical analysis could start with the Capital-Asset-Pricing-Model and establish risk premier for infrastructure assets.
“For primary infrastructure investments, for example, they could include a credit premium, an illiquidity premium, a small cap premium, and perhaps others.
“This would speak for a return and risk expectation somewhere between public and private equity.
“On the other side, mature infrastructure services with high and stable dividends may have a risk-return profile closer to utility stocks with a low stock market beta or corporate bonds. In a nutshell, more work will need to be done in this field.
“The definition and heterogeneity of infrastructure asset is a crucial element in the analysis, and the specific mix of risk premium varies a lot across infrastructure investment vehicles.”
SOEs and parastatals have historically played an important role in the Zimbabwean economy, contributing around 40 percent of the country’s value added.
But in recent years, they have been chronically recording huge losses.
“And with most of them receiving quasi-fiscal resources from the Reserve Bank of Zimbabwe, in addition to transfers from the national budget through their parent ministries, these entities have become a heavy burden on the fiscus.