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National Pension Commission of Nigeria and The IFC Abuja March 2008 . Johan Kruger . Alternative Asset Classes for Pension Funds . Transforming Need into Opportunities: Financing Infrastructure Trough Capital Markets –The Inca Model . Topics. The Democratisation of South Africa

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alternative asset classes for pension funds

National Pension Commission of Nigeria and The IFC

Abuja March 2008

Johan Kruger

Alternative Asset Classes for Pension Funds

Transforming Need into Opportunities: Financing Infrastructure Trough Capital Markets –The Inca Model

  • 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
the democratisation of south africa
The Democratisation of South Africa
  • Pre Democratisation
    • Local Authorities White, Black, Indian, Coloured
      • White -economic base –strong cash flow-institutional capacity-good infrastructure-Government support – no problem accessing capital markets
      • Black etc - no economic base-grant dependant=weak institutional structure-inadequate infrastructure-no private funding
the democratisation of south africa1
The Democratisation of South Africa
  • Post Democratisation
    • Priority amalgamation of local authorities
    • Investor withdrawal
        • 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
rationale for inca
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


  • Private sector know they must invest or jeopardise stability of Country
  • 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
basic business case
Basic Business case
  • Classic aggregation/disaggregation intermediary
  • Issue bonds in domestic market and conclude international loans to raise money
  • Pre approved credit limits
  • Provide funds to borrowers
    • Amortizing or bullet/coupon
    • Bulk is on balance sheet lending
  • Provide assistance trough an non profit company
the inca model
The Inca Model
  • 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
the inca model 2
The INCA Model (2)
  • Offers Local Authorities
    • Access to private sector finance
    • Reasonable rates given risk profiles
    • Transparency
    • Assistance
  • Offers Shareholders
    • Opportunity to invest at market related rates
    • Benefit of participation
structure of inca
Structure of Inca
  • Choice of shareholders
    • Financial institutions
    • Empowerment and gender partners
    • DFI’s ( political insurance and credibility)
  • Rated (AA-)
  • Back to back bonds in inception phase
    • no interest rate risk
    • No expensive treasury
    • Government stock hedging
structure of inca 2
Structure of Inca (2)
  • General obligations
  • Computerised credit model
    • Pre assessment
    • Shadow rating
    • Turn around time 3 weeks
    • Determines capital requirements
    • Determines pricing
    • Caveats
  • Limited but incentivised staff
  • Non banking entity
  • International Funding
credit model
Credit Model




Financial position



Cash flow

Shadow rating

Diversity of tax

Economic environment


Growth indicators

Physical factors

Peer Deviation


Institutional capacity


Potential problem areas

Dispute resolutions


Socio-economic analysis


Payment levels




typical projects
Typical Projects

Funding of:

  • Municipal and regional infrastructure
    • Roads
    • Sewerage
    • Water
    • Electricity
    • other
  • Parastatalinfrastructure
  • 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
prerequisites for successful intermediaries
Prerequisites for Successful Intermediaries
  • 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
prerequisites for pension fund investment in infrastructure
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
the advantages of investment in infrastructure
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
risks for pension funds
Risks for Pension Funds
  • Failure of infrastructure providers
  • Failure of intermediary
  • Market risks
  • Reputational risks
  • In Nigeria administration problems with intercepts
possible borrowers and intermediaries
Possible Borrowers and Intermediaries
  • State governments
  • Local authorities
  • Utility Companies
  • Private sector intermediaries
    • UDBN
    • Banks
    • Spv’s
  • Infrastructure is a natural area for the pension fund industry and Inca in South Africa has proved the viability of investment in development