Africa’s pension funds alone will not solve the continent’s infrastructure financing shortfall unless governments deepen capital markets that can channel long-term savings into bankable projects, according to new research published by Afreximbank.
The study challenges a growing assumption among policymakers that Africa’s expanding pension assets can be directly deployed to finance roads, ports, power plants and other infrastructure. Instead, it concludes that pension funds have little direct impact on infrastructure development, with capital markets serving as the critical link that enables those savings to reach long-term projects.
The findings come as African governments seek new domestic sources of financing to narrow an infrastructure funding gap estimated at between $68 billion and $108 billion annually, amid declining concessional financing and tighter global capital markets. Africa requires between $130 billion and $170 billion of infrastructure investment each year but currently invests only about $75 billion, the paper said.
Drawing on data from 52 African countries between 2005 and 2017, the research found a negative relationship between pension fund assets and infrastructure development when considered on their own. However, pension assets had a statistically significant positive effect once combined with developed capital markets, suggesting that stock and bond markets provide the mechanism through which retirement savings can finance infrastructure.
“The results of the estimation show that capital markets help channel pension fund resources into infrastructure development,” the paper said, adding that governments should prioritise strengthening capital markets if they want to mobilise domestic institutional capital for infrastructure.
The study argues that pension funds are naturally conservative investors because they are designed to protect retirement savings, making them less inclined to invest directly in long-term infrastructure projects that carry construction, political and regulatory risks. Instead, developed capital markets can package those investments through instruments such as infrastructure bonds, public-private partnerships and specialised infrastructure funds that better match pension funds’ risk profiles.
The research suggests that developing domestic capital markets could become increasingly important as African governments look to reduce dependence on foreign borrowing and donor financing. By issuing infrastructure bonds and expanding investment products, governments could mobilise larger pools of local institutional capital while providing pension funds with investable assets suited to their long-term liabilities.
The paper also recommends integrating smaller African capital markets to attract investors from within and outside the continent, arguing that fragmented markets currently lack the depth and liquidity needed to finance large infrastructure projects.
According to the research, Africa’s pension assets are estimated at about $1.1 trillion, but much of that capital remains invested in government securities and other liquid assets rather than infrastructure. Regulatory constraints, shallow capital markets and a shortage of suitable investment vehicles have limited pension funds’ participation in long-term development projects despite reforms in several countries.
The findings add to a broader debate over how African countries can mobilise domestic savings to finance infrastructure at a time when development finance is becoming more constrained. Rather than viewing pension funds as a standalone solution, the study concludes that strengthening capital markets and improving the investment environment are prerequisites for unlocking institutional capital to support sustainable economic growth.
