UNITED States Senator Elizabeth Warren some years ago described pension funds as “a loan to the company” — a fund from where companies could borrow.
BY TATIRA ZWINOIRA
It appears players in Zimbabwe’s energy sector have bought well from that observation and in fact, find the practice quite lucrative.
Pension funds are increasingly being used in Zimbabwe’s money markets as a cheap source of funding for long-term projects.
With the prevailing poor economic conditions in the country today, sourcing finance from traditional sources such as banks, government and the private sector is no longer sustainable.
Zimbabwe Energy Council (ZEC) executive director Panganai Sithole says the country’s outstanding international obligations have made it difficult for Zimbabwe to access foreign direct investment (FDI), leaving domestic resources as the only available alternative.
“We have to look for domestic resources to develop our infrastructure. This is the reason why we have to start our discussion with pension funds. Pension funds are a very strategic partner to ZEC, in the sense that they have resources available for investments on both long term and short term,” he said.
“We have also noted that, globally, pension funds have warmed up to invest in the energy sector. In Zimbabwe, we recommend that all power projects be accorded prescribed asset status. Whilst this is not a total panacea to all funding challenges, it will serve as a good starting point.”
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Pension funds are more easily accessible to projects that have been accorded prescribed asset status. It is a regulatory move by government for insurance and pension companies to hold a minimum of 10% of their assets in such instruments.
As at December 31 2016, the pension fund industry had assets totalling about $2,3 billion. According to the Infrastructure Development Bank of Zimbabwe (IDBZ), the energy sector requires $4,3 billion financing. ZEC is in talks with the Zimbabwe Association of Pension Funds (ZAPF) to find common ground on areas of possible funding of the energy sector.
“The colour of the energy sector has changed drastically. A well-resourced and financed energy sector should be able to stimulate economic activity for the country through downstream industry development,” Sithole said.
Players in the energy sector could seek financing in three ways — debt, equity or alternative investments.
Financial consultant Welcome Mavingire said, under debt, long-term bonds to the energy sector could be issued as prescribed assets.
“An example is a situation where a company intends to raise $10 million for a period of five or 10 years. The company promises, say, a 10% per annum interest which they will pay annually. If that company has the prescribed asset status, it becomes more attractive to the pension fund because they are complying with the regulatory requirements,” said Mavingire.
Mavingire is also managing consultant at Intellego Investment Consultants, a financial consulting firm.
“The second option is to have it as equity. The company would be inviting the pension funds to participate in the project.”
Internationally, pension fund investments into the energy and infrastructure are slowly becoming a growing trend.
Also, pension fund investment allows energy players to make re-payments over longer periods as the project develops.
ZAPF director general Tendayi Kakora said pension funds required approval from the board of trustees before they can decide where to invest their money.
The Zimbabwe Electricity Transmission and Distribution Company and IDBZ were already approaching pension funds seeking investment, Kakora said.
However, as with any investment, there is always risk and downsides. Some pension funds might view energy as a complicated and technical investment and as such, avoid investing there, Mavingire said.
Mavingire said the energy sector was also heavily regulated and therefore remained a cause for concern for some fund managers who may view regulations as unpredictable.
Among the local energy projects that need urgent financing are the Solgas Solar project located in Hwange Matabeleland North requiring $7,2 million, Osborne Dam mini hydro project ($6,63 million) and Tokwe Mukosi mini hydro ($35 million). These projects are projected to generate 65MW of power.
Out of all the energy projects, according to the Zimbabwe Power Company’s website, only the Kariba South Extension project has secured finance of about $355 million and is expected to be commissioned next year.
Other pending projects include the Hwange Power Station expansion, Batoka Gorge hydro-electric scheme, ZPC solar projects in Gwanda, Insukamini and Munyati, and the Lupane coalbed methane project, among others. These projects require a combined $4,11 billion.
ZEC has made efforts to stimulate funding for the various initiatives in the energy sector by working on a renewable energy policy and the biofuel policy. However, this has failed due to lacklustre private sector participation.
The Energy Policy of 2012 has struggled to secure financing.
The financing shortage comes as proposed water solar heating projects and rural electrification projects have stalled due to limited availability of funds.
