National Pension Commission of Nigeria and The IFC
Abuja March 2008
Alternative Asset Classes
for Pension Funds
Transforming Need into Opportunities:
Financing Infrastructure Trough
Capital Markets –The Inca Model
Johan Kruger
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Topics
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The Democratisation of South Africa
The Rationale for an Intermediary
The INCA Model
Prerequisites for Pension Fund Investments
In Infrastructure
The Advantages of Infrastructure
Investments
Possible Intermediaries
Conclusion
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The Democratisation of South
Africa
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Pre Democratisation
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Local Authorities White, Black, Indian,
Coloured
 White
-economic base –strong cash flowinstitutional capacity-good infrastructureGovernment support – no problem accessing
capital markets
 Black etc - no economic base-grant
dependant=weak institutional structureinadequate infrastructure-no private funding
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The Democratisation of South
Africa
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Post Democratisation
Priority amalgamation of local authorities
 Investor withdrawal
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Service Boycotts
Tremendous Backlogs
Lack of policy framework
Fruits of the new South Africa has to be
delivered
 Market gap in private sector infrastructure
funding
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Rationale For Inca
Local authority portion minute in
comparison with total contractual
savings institution’s portfolio (0.2%)
 Lack of understanding of local
government
 Uncertain policy environment
But
 Private sector know they must invest or
jeopardise stability of Country
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Inca
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Started in 1996 with $10 m
Peaked in 2004 at of $1000 m Portfolio
Started in response to government appeal
to private sector
Structured as intermediary between
infrastructure providers and capital markets
Listed and rated bonds on market
Created two subsidiaries:non profit capacity
building fund and distressed bond company
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Basic Business case
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Classic aggregation/disaggregation
intermediary
Issue bonds in domestic market and conclude
international loans to raise money
Pre approved credit limits
Provide funds to borrowers
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Amortizing or bullet/coupon
Bulk is on balance sheet lending
Provide assistance trough an non profit
company
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The Inca Model
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Offers investors
Understandable financials of single entity
 Opportunity for social investment
 Market related return - listed and AA-rated
bond
 Liquidity by market makers
 Diversified risk and equity/reserve buffer
 Dedicated expertise & risk assessment
 Second corporate bond in South Africa
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The INCA Model (2)
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Offers Local Authorities
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Access to private sector finance
Reasonable rates given risk profiles
Transparency
Assistance
Offers Shareholders
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Opportunity to invest at market related rates
Benefit of participation
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Structure of Inca
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Choice of shareholders
Financial institutions
 Empowerment and gender partners
 DFI’s ( political insurance and credibility)
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Rated (AA-)
 Back to back bonds in inception phase
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no interest rate risk
 No expensive treasury
 Government stock hedging
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Structure of Inca (2)
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General obligations
Computerised credit model
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Pre assessment
Shadow rating
Turn around time 3 weeks
Determines capital requirements
Determines pricing
Caveats
Limited but incentivised staff
Non banking entity
International Funding
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Capital Structure Of Inca
Equity
Mezzanine debt
Senior debt
6%
23.5%
70.5%
• Return Govt
plus 12-14%
• Return Govt
plus 2- 3.5%
• Return Govt
plus 0.82.0%
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Credit Model
Solvency
Liquidity
Turnover
Standardization
Financial position
Income
Cash flow
Growth indicators
Economic environment
Shadow rating
Diversity of tax
Score
Physical factors
Peer Deviation
Management
Competence
Institutional capacity
Dispute resolutions
Backlogs
Payment levels
Policies
Practices
Socio-economic analysis
Environmental
Potential problem areas
Capital,pricing,
caveats
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Typical Projects
Funding of:
 Municipal and regional infrastructure
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Roads
Sewerage
Water
Electricity
other
Parastatal infrastructure
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Performance
Portfolio peaked in 2004 at more than
$ 1 Billion
 Defaults never exceeded 0.2%
 Return to shareholders always in excess
of 20%
 Capacity building fund had a major
Impact
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Prerequisites for Successful
Intermediaries
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Rule of law –fair and timely
Decentralised authority and autonomy
Creditworthy or credit enhanced borrowers
Acceptance of cost recovery principles and/or
appropriate subsidy where required
Developed capital market – access - yield curves to
price risk- tradability
Risk/reward in balance
Clear policy framework
Capacity to deal with defaults
Trust from investment sector in management
Credible shareholders
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Prerequisites for Pension fund
Investment in Infrastructure
Pension fund’s first responsibility is to
their members
 Risk must be acceptable
 Reward must be market related and
competitive
 Appropriate listed and rated tradable
instruments must be available
 Long term yield curves
 Must be socially acceptable projects
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The Advantages of Investment
in Infrastructure
Natural match between long term fixed
rate requirement of infrastructure
funding and the long term needs of the
contractual savings sector
 Diversification opportunity
 Higher yields possible
 Stimulates economic growth
 Benefits members
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Risks for Pension Funds
Failure of infrastructure providers
 Failure of intermediary
 Market risks
 Reputational risks
 In Nigeria administration problems with
intercepts
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Possible Borrowers and
Intermediaries
State governments
 Local authorities
 Utility Companies
 Private sector intermediaries
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UDBN
 Banks
 Spv’s
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Conclusion
Infrastructure is a natural area for the
pension fund industry and Inca in South
Africa has proved the viability of
investment in development
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