# 4   Institutional investors as a potential source of infrastructure financing

In all of the African focus countries except South Africa, further financial sector development, including notably of institutional investors such as pension funds and insurance companies, is needed to increase the availability of longer term financing, including for infrastructure. The underdeveloped institutional investor base that continues to exist in nearly all of these countries also impedes overall capital markets development. One country, the Democratic Republic of Congo, does not even have a functioning pension system.<sup>26</sup> A combination of factors constrains the development of insurance sectors and pension systems in these countries. Social security systems are very basic in many of these countries. High, widespread poverty prevents people from buying insurance or obtaining pension coverage. In some countries (for example, Ethiopia), pension systems only cover government employees, the military, civil servants, and state enterprise employees. Pensions paid are thus very modest and often insufficient. Postretirement benefits can be less than 50 percent of earnings in many cases.

The HIV/AIDS pandemic has shortened average life spans and has taken a toll on national social security systems in several countries. There are also cultural reasons for the slow development of insurance sectors: in certain countries (in Niger, for example), some people view insurance services as improper because they involve speculating on an individual’s lifespan.<sup>27</sup> In Muslim countries such as Senegal and Sudan, insurance companies have been offering _takaful_ policies to comply with _sharia_ , since conventional insurance services are not permitted under Muslim law.

Limited investment options in the African focus countries excluding South Africa make it difficult to achieve a balanced investment portfolio suitable for a pension fund. There is thus significant scope for private pension providers, which have begun marketing to private-sector employers in several countries as a good way to attract staff (Madagascar). There are some cases where investment allocation thresholds for institutional investors have been set that are too onerous to allow for compliance in practice (Tanzania’s insurance sector). Financial impropriety/scandal has troubled several national pension systems and some insurance sectors have been troubled by suspensions of activities of some companies (Uganda).

There is a trend away from defined benefit and towards defined contribution schemes in many of these countries. The latter are viewed as less costly, more transparent, and easier to manage. In Nigeria’s reformed pension system, for example, funds are now mostly defined contribution, involving privately managed pension funds. Assuming this trend ultimately fosters a well-managed, appropriately regulated institutional investor base with private fund participation, there could be significant growth of assets

> 26 Pension system coverage in the Democratic Republic of the Congo is severely limited, in the wake of the conflict situation that prevailed in the 1990s. Pensions are provided by the National Social Security Institute (Institut National de Security Sociale, INSS), supervised by the Ministry of Labor and Social Security, but only covered around 1 percent of the working population in the sectors it was charged with covering as of 2003, according to the most recently available data (Axco).

> 27 Axco, various dates..

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