Pension Funds in Capital Markets & Infrastructure Development

Pension Funds in Capital Markets & Infrastructure Development Comments at the IOPS Global Forum, Mombasa, Kenya, 31st October 2008 JAPHETH KATTO CEO,...
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Pension Funds in Capital Markets & Infrastructure Development Comments at the IOPS Global Forum, Mombasa, Kenya, 31st October 2008

JAPHETH KATTO CEO, CAPITAL MARKETS AUTHORITY

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Presentation Outline Snapshot of the Pensions Industry in Uganda

Snapshot of Capital Markets Industry in Uganda Pensions and Capital Markets Development in Uganda Pensions and Infrastructure Development in Uganda Comments on Papers presented

Way Forward Capital Markets Authority

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Snapshot of the Pensions Industry in Uganda  Dominated by the National Social Security Fund (NSSF)

 Members funds 2007/8 – (approx) Ugx 1.08 trillion  Approximately 40 private sector pension schemes with assets of approximately UShs 100billion (2003)

 Public Service Pension Scheme (Pay-as-You Go) in arrears of over Ushs 400 billion. Will become contributory.  Members of Parliament Pension scheme recently established. Contributory but self regulated.  Private sector schemes not regulated

 A regulator expected by the end of 2008. It’s this regulator which will spearhead the pension reform Capital Markets Authority

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Snapshot of Capital Markets Industry in Uganda

No restrictions on foreign investment

One stock exchange with 9 listed companies and a market capitalization of over Ushs 6 trillion 4 outstanding corporate bonds worth Ushs 103 billion 29 outstanding treasury bonds worth Ushs 1.5 trillion 5 fund managers with Ushs196 billion funds under management Capital Markets Authority

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Pensions and Capital Markets Development in Uganda Opportunities Provision of demand for securities Provision of Underwriting for Initial Public Offers Provision of liquidity in the stock market Stabilization of prices in the stock market since they are long-term investors Enhancing corporate governanace Capital Markets Authority

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Pensions and Capital Markets Development in Uganda Challenges  Governance Issues  Lack of a pensions regulator. What model.  Unliberalised pensions sector  Monopolistic pension industry dominated by one player  Non-involvement of professional investment managers in the management of the pension funds especially of the dominant NSSF  There are very few listings of debt and equity products  An undiversified product base (i.e. there are a few types of securities available in the market)

 Lack of credit rating agencies Capital Markets Authority

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Pensions and Infrastructure Development in Uganda Opportunities Vast natural endowments available for infrastructure projects from land to rivers and water bodies with a potential for energy production

Huge demand for infrastructure (roads, railways, housing) from the high population growth rates and development needs of Uganda Capital Markets Authority

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Pensions and Infrastructure Development in Uganda Challenges Usual dilemma of investment objectives of pension funds: Fund Returns vs National Economic Development High risky nature of infrastructure projects especially green field projects (i.e. investments that depend on cash flows of newly constructed or underconstruction projects)

Valuation: Usually mark to market valuation is required by pension funds which is not usually possible for instruments backed by infrastructure assets Capital Markets Authority

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Juan Yermo’s Paper Pension Fund and Capital Markets Informative and well-researched paper On preconditions and key determinants of capital market impact of pension funds: ● Uganda successful with macrostability and wellregulated banks ● Challenges are with governance and regulation. Private pension sector unregulated and regulation of public sector (NSSF) weak ● Access to anxilliary services is also a challenge. Services (trustees, custodians, administrators, fund management not well developed). Capital Markets Authority

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David Tuesta’s Paper Infrastructure Investment and Pension Funds in Latin America Very useful presentation and case studies Uganda yet to purseue any reforms but would like to learn from other countries

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Nic Rouse’s Paper Infrastructure in Africa – a Debt Perspective Very useful paper and would like to see EAIF in Uganda Little experience of PPs in Uganda. Bujagali Power Project a good test case.

Legal framework and local capacity has to be developed. Issues of sovereign and corporate rating need to be addressed. I agree – political will is a pre-requisite. Risks of interference in pricing and delivery.

Need to change culture – people still expect Government to provide roads (free of charge), Capital Markets Authority subsidised water andProtecting power. Your NoteInvestments however low

Way Forward  Good Governance is a must

 Urgent need of pensions regulator – must be “independent” and regulate all schemes (NSSF, parliament, public service)  Pensions sector needs to be liberalised.  Pension fund regulations must be structured so that the goal of safeguarding the value of pensions does not hinder investments in viable and profitable infrastructure projects  Infrastructural projects also need to tailor their instruments to satisfy the needs of pension funds. These instruments to be attractive to pension funds, they need to be, to the extent possible: i) More liquid ii) Less risky (lower probability of failure) iii) Less volatile Capital Markets Authority

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Thank You Capital Markets Authority

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For More Information

Contact: Capital Markets Authority 8th Floor Jubilee Insurance Centre 14 Parliament Avenue P.O.Box 24565 Tel: +256 414 342788 Fax: +256 414 342803 E-mail: [email protected] Website: www.cmauganda.co.ug Capital Markets Authority

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