Prepared By: Dr. B.L. Ramakrishna, Humanitarian Engineering Faculty, Arizona State University
Jefferson Fellow 2013-, Former Senior Science Advisor, State Dept/USAID
President Obama and Prime Minister Modi of India are committed to significantly deepen and broaden the engagement between US and India and recently pledged to ensure that partnerships in science, technology and innovation are a key component of US-India relations for the 21st century. They emphasized the role that science, technology and innovation partnerships can play in addressing pressing challenges in areas such as food, water, energy, climate, and health. They focused on developing innovative solutions that are affordable, accessible and adaptable and meet the needs of the people of the two countries as well as benefit the global community. This blog highlights two of the activities spurred by their call to action.
On December 18-19, 2014, representatives from the US National Academy of Engineering (USNAE) and the Indian National Academy of Engineering (INAE) convened a joint symposium on “Engineering Education in the 21st Century: Issues Related to Grand Challenges”. They met at the hallowed halls of the historic National Academies building on Constitution avenue in Washington DC to discuss how one could best align the “Grand Challenges of Engineering for the 21st century” conceived by the US National Academy of Engineering and the grand challenges for India’s development in the 21st century for the mutual benefit of both countries. The issues covered were, research, industrial partnerships and workforce development.
Grand challenges for India’s development seamlessly aligned with many of the Grand Challenges for Engineering proposed by USNAE especially in areas important for India such as, Energy Harvesting and Energy Security, River Science and Water Resources, Sustainable, Green and Smart Cities, Agro-Bio-Nano Technology, Sustainable Healthcare, Big data for Development and Network and cyber security. Unique attributes of the US–India partnerships are the shared belief that innovation and entrepreneurship are essential for addressing societal needs, the potential for a meaning engagement of the dynamic and dedicated Indian diaspora in the US and the excellent opportunity that India presents for scaling solutions as well as for transferring appropriate technologies to other developing countries.
One of the main goals was to explore the potential of forging mutually beneficial partnerships that will facilitate India’s engagement in the implementation of a Grand Challenge Scholars Program (GCSP), based upon the U.S. model. The Grand Challenge Scholars Program aims to create leaders for the 21st century globalized world so that they can address complex social issues with a systems engineering approach. The program also prepares engineers to shape public policy, to transfer technical innovation to the market place, and to inform and be informed by social science and the humanities. This was the first meeting of its kind to be organized between US NAE and the corresponding institution from any foreign country and will be the first step toward an international GCSP initiative. Officials involved at various stages of the US GCSP presented elements of the GCSP and shared their experiences regarding the issues involved in starting such programs locally as well as nationally. Indian representatives focused on their views about potential benefits and the relevance of such a program in India, how it might be launched there, the potential impediments as well as shared thoughts on anticipated reactions from schools, students etc. A document of commitment will soon be released that describes the core educational principles needed for tackling the Grand Challenges that could be signed by institutions of engineering education and research in India.
The second event was the organization of the "Global Partnerships for Energizing Development” workshop on January 6th in Bangalore, India to bring together stakeholders representing academia, industry, entrepreneurs, NGO’s and government to design and implement programs at the nexus of Engineering Education and Entrepreneurship for promoting sustainable development in India. The workshop touched upon a) Applied Research & Development, b) Definition of “Problem-sets” and “Solution-sets”, c) Education, Training and Workforce Development, d) Industrial Liaison and Partnerships, e) International Exchanges, f) Testing/Quality Control of Appropriate Technologies and Products and g) Innovation and Entrepreneurship
The goal was to promote global partnerships to deliver practical, contextual and vibrant programs at engineering colleges across India, which are mostly in or near urban areas, to address India's development needs, which are primarily in rural or peri-urban areas. The types of partnerships include, 1. Partnerships between US and India across academia, industry, government, youth, NGO's and diaspora 2. Rural-Urban Partnerships in India for service learning and 3. Partnerships between Engineering Education and Sustainable Development that take advantage of the large scale of engineering education to address large scale problems.
Frugal Engineering and Innovation for India offers a fantastic test bed for engineering under constraints because of the necessity to conserve resources (doing more with less), working through lack of infrastructure (lack of roads, transportation, electricity, broadband etc.), the need to optimize price (improve affordability without compromising on quality), and finally the huge scale of the problem (which is both a challenge and an opportunity). The response following the workshop was overwhelming and it is time now to put shoulders to the wheel and move the initiative forward.
It is expected that these activities are a great beginning that will herald a strong and sustained mutually beneficial partnership between US and India and bring to bear science, technology, innovation and partnership for global development.
This announcement has been posted at the request of our friends and colleagues at USAID who are actively soliciting comments on a set of policy recommendations emanating from a recent workshop. Please see below for details.
This past October, the U.S. Agency for International Development partnered with the UN Development Program, UN-Habitat, and UN Global Pulse to organize a workshop entitled, “Asia Urban Futures Workshop: Shaping Solutions to the Challenges of Tomorrow for Asia’s Cities.” The workshop agenda noted:
“The majority of Asia’s population now lives in cities. The percentage of national populations living in urban areas in developing Asia ranges from 15% in Sri Lanka to as high as 74% in Malaysia. While Asia is home to over a dozen megacities with populations of over 10 million, most of the growth in urban dwellers has been occurring in smaller towns and cities. Most of these cities are built along the coast, which makes them vulnerable to the effects of climate change, particularly in countries such as Bangladesh, Vietnam, and the Philippines, which are facing significant climate impacts. The rate of urbanization continues to accelerate while the consequences of climate change, in terms of duration and intensity, are increasing rapidly. Unless we are able to look at these trends and recalibrate our programming, we will be addressing only today’s crises and not tomorrow’s challenges. The core objective of this workshop is to integrate strategic foresight on urbanization trends and solutions in the development program planning process.”
Highlights and policy recommendations from that workshop have now been published here. The workshop organizers are actively soliciting comments on the policy recommendations and are especially interested in hearing from the GSS community.
Please send your comments and recommendations directly to the workshop organizers by posting your comments directly on the following website: http://www.newsecuritybeat.org/2015/02/keeping-asias-urbanization/
I recently organized and chaired a panel discussion on urbanization at a closed-door conference of private investors. The title of my opening remarks was “Urbanization and Disruptive Technology: Opportunities for Doing Well by Doing Good.” A slightly revised text of my opening remarks follows below.
Consider the following quotes, factoids, and projections:
What does all of this mean for your work as impact investors?
Over the next 30 years, the relentless march of urbanization and emergence of new disruptive technologies will radically transform the shape of the global economy and the drivers of global growth. Most of the global population growth, purchasing power growth, GDP growth, and growth of urban and peri-urban areas will be concentrated in cities, especially in emerging markets. Meeting the ensuing demands for water, energy, food, health care, energy efficient buildings, and climate resilient investment in an economically and ecologically sustainable fashion will be a daunting challenge. But it can also be a dazzling opportunity -- an unparalleled business opportunity that can generate high returns for investors, innovators, and entrepreneurs in both developed and developing countries.
A peek over the technology horizon suggests we will not satisfy these demands by deploying the same technologies that were in vogue 20, 50, or 100 years ago. On the contrary, the exponential growth of disruptive technologies is likely to give rise to a wide range of unprecedented leapfrogging and retrofitting opportunities. Just as cell phone technology leapfrogged land line telephony, new proven technologies for off-grid, distributed power generation and drinking water purification, construction technology, and urban transportation will have profound effects on how urban services are supplied, financed, and organized into viable businesses.
Of course, the really interesting opportunities will emerge when leapfrogging and retrofitting opportunities inherent in disruptive, exponential technologies collide with the rapid growth of cities to generate the possibility of smart cities, the internet of things, 3D printing of buildings, water filters, and numerous other devices, big data, the cloud, etc.
The guiding questions for today’s discussion are:
The past year was a banner period for green, climate friendly financial innovations. When the P80 got started in 2006/2007, financial support from pension funds, sovereign wealth funds and other large institutional investors for sustainable investment projects was in its infancy. That's clearly not the case seven or eight short years later, when all sorts of "green" or "climate friendly" financial market innovations are coming online, scaling up rapidly, and developing new conduits for mobilizing financial support from institutional investors.
A case in point is the recent announcement that the Ontario Teachers’ Pension Plan (OTPP)with C$140.8 billion in net assets as of December 31, 2013 and Canada’s Public Sector Pension Investment Board (PSP) with C$99.5 billion of net assets under management are teaming up with Spain’s Banco Santander S.A. Pursuant to the terms of their agreement, Banco Santander will identify, prepare, and evaluate potential wind, solar and water infrastructure investments and the two Canadian pension funds will serve as a de facto in-house financing arm for at least a portion of the total project cost. The first round of projects financed under this scheme is valued at $2 billion, but “significant additional amounts” are expected to be invested over the next five years.
This seems to be an ideal division of labor. The pension funds will focus on their comparative advantage which is providing long term capital. At the same time, the pension funds will outsource the project identification, preparation and monitoring to Banco Santander, which has the requisite in-house skills for these tasks, skills which are noticeably missing from pension fund staffs.
Green bonds, aka climate bonds, are another interesting innovation which seems to have come of age in 2014. Total green bond issuance was $11 billion in 2013, $36 billion in 2014, and is expected to be close to $100 billion in 2015. Compared to today's green bond market, the first green bonds issued by the World Bank in 2008, designed in partnership with Skandinaviska Enskilda Banken (SEB), were a relatively timid affair, albeit path breaking for their time. Institutional investors channeled their money to the World Bank which used the proceeds to finance green investments identified, prepared, and supervised by the World Bank. Pension and sovereign wealth funds were taking World Bank AAA credit risk; rather than the credit risk of the individual green projects which were the ultimate beneficiaries of their capital. They were financing the World Bank in the first instance and green projects only indirectly.
From those rather modest beginnings, the green or climate bond market has grown rapidly into a financial market juggernaut. Today, all sorts of institutions ranging from private companies, to multilateral organizations like the EIB and IFC, to states and cities to universities are issuing their own green bonds to finance green projects identified and prepared by the issuers. Repayment is coming from a variety of sources, ranging from the issuer's balance sheet to revenues generated exclusively from the green projects themselves.
What is so innovative and important about these recent financial market innovations? Two features seem especially important. First, these financial instruments are generating new conduits for channeling funds from institutional investors to green projects. Second, they are bundling groups of small projects into larger scale financial packages which are inherently more interesting to large institutional investors.
When Prince Charles convened the initial P8/P80 meetings in 2006, pension and sovereign wealth fund representatives explained that they didn't have the ability to find, evaluate, and monitor smaller scale projects. They also explained that they needed to invest relatively large chunks of money and couldn't be bothered financing a large number of comparatively small projects.
Fund-of-funds mechanisms like the IFC's Catalyst Fund and the EIB’s Global Energy Efficiency and Renewable Energy Fund (GEEREF), were developed in part to address this concern. Pension and sovereign wealth funds would invest large amounts in a fund of funds which, in turn, would invest relatively smaller amounts in a variety of smaller scale private equity funds, which at the end of the day, would invest in individual green projects. This was a disaggregation financial mechanism -- funds of funds would disaggregate large investments from institutional investors into a larger number of smaller investments. For a while, funds of funds seemed to be the dominant game in town.
However, as the green bond and Canadian pension fund examples suggest, the financial markets have been innovating and finding new ways to aggregate or bundle smaller investments into larger financial package. Moreover, instead of putting the project identification and due diligence burden on pension and sovereign wealth funds, a task for which they are singularly ill equipped, issuers are taking responsibility for identifying, preparing and evaluating projects, which independent third parties then certify meet the investors' "green criteria.
In my previous post on Strategic Planning, I noted that “disruptive technologies may face … resistance due to all the vested interests and sunk costs in old technologies, organizations, and institutions. For example, some analysts predict that electric utilities may face a so-called “death spiral” as roof top solar and wind energy displace 100% of the electricity generated from conventional sources, at least during daytime hours. This in turn, will have serious implications for the financial viability of conventional utilities and the investors who financed them.”
This phenomenon has been dubbed “stranded assets” -- a catch all phrase that is being used with increasing frequency to denote two, closely-related concepts. The first relates to existing assets – e.g., North Dakota oil fields, Australian and Kentucky coal mines, and various power plants – that soon may no longer be economically viable or environmentally feasible to operate. These assets can become stranded either as a result of competition from lower-cost, environmentally cleaner assets such as roof-top solar and wind farms or because climate change agreements will generate massive reserves of “unburnable carbon.” The second refers to the financial losses that may be looming on the horizon for investors who are financing these long-lived assets that may never generate the long-term revenues that investors expect. The Bank of England, for example, recently announced that it is “deepening and widening” its inquiry into the “financial stability risks” posed by excessive investments in stranded assets.
The recent sharp decline in crude oil prices coupled with the even sharper decline in the price of wind and solar power, technological breakthroughs in energy storage and distributed energy generation, and the rapid deployment of renewable energy technologies has generated a recent spate of articles about stranded assets in the energy sector. These phenomena have also given rise to political efforts in the US and elsewhere to gut renewable energy standards. If technological change is giving rise to stranded assets, the conservative forces supporting the status quo hope to use the power of government to hold back or slow the rising tide of stranded assets.
The following is a very short list of recent articles that explore the technological, political and financial dimensions of the stranded asset phenomenon:
A regulator’s climate nightmare: carbon bubbles and market crashes
Big Oil aims to kill clean energy target in western US states
Clues show how green electricity may be in US by 2050
Wind energy tops new US power generation – coal nowhere to be seen
Grantham: Wind, solar to replace fossil fuels within decades
Why US fracking is biggest red-herring in history of oil
An Airbnb or Uber for the Electricity Grid?
$100B in Wind or Solar Will Now Produce More Energy Than the Same Investment in Oil
The greatest business opportunity of our time
GOP Kills Florida Solar, Takes the Sun out of Sunshine State
Next legislative session could be end for Kansas’ renewable energy standard
As Coal Crashes, US Governors Push Wind Energy
Cleantech disruption to reduce annual utility revenues by up to $123 billion
Arizona Solar: So Much Potential...Under Threat
Ohio To Wind Power: Drop Dead
When Reality Smacks You In The Face: More Renewable Energy For US Navy
The UN Commission on Science and Technology for Development (CSTD) recently released an Issues Paper entitled, “Strategic Foresight for the Post-2015 Development Agenda.” The paper is an attempt to scan the horizon for emerging technologies which have the potential, for better or worse, to shape the future development trajectory of both developed and developing countries. The paper examines technology trends in the following sectors: (i) food, (ii) water, (iii) sustainable energy, (iv) climate change mitigation, adaptation and carbon offset, (v) biotechnology, (vi) nanotechnology, (vii) advanced manufacturing and materials, (viii) health, (ix) urbanization, and (x) transportation.
Strategic Foresight can be an important tool for understanding what technological changes are just over the horizon and heading our way. As the old adage goes, “forewarned is forearmed.” But horizon scanning is only a first step, albeit a critically important one. To be truly effective, strategic foresight and horizon scanning need to be accompanied by strategic vision so that policy makers, business executives and civil society more generally can discern what impact that technology is likely to have and how to respond. Specifically, what can they do, together or separately, to mitigate the potential downside and capitalize on the potential upside of these seemingly inexorable technological changes?
This question highlights a number of critical challenges and opportunities for both the business and development communities. For example:
Hats off to CSTD and UNCTAD for raising this issue to the forefront of the development agenda!
What Africa (and other Regions) Can Learn About Science, Technology and Innovation Capacity Building from the US Department of Defense
As the African Development Bank prepares to convene the Second Ministerial Forum on Science, Technology and Innovation in Africa, I am prompted to ask an unexpected question: “What can Africa learn about STI capacity building from the US Department of Defense (DOD)?”
I think it is safe to say that most STI policy makers and delegates to the AfDB conference would not normally look to DOD for relevant examples of successful STI capacity building programs. After all, when most of us think of the US military, we think of missiles, fighter jets, and tanks. The concept of military R&D conjures up images of missile defense systems and star-wars lasers, neither of which would appear to be particularly relevant to Africa’s current social and economic development challenges.
However, over the past several years, I have discovered that the US DOD operates a number of programs that are directly relevant to Africa’s STI economic development challenges. None of these programs can be copied as is and transferred directly from DOD to Africa. But they can serve as useful models for programs that, with appropriate modifications, can strengthen Africa’s existing STI capacity building programs.
Over the past several years, to my surprise, I have also discovered that DOD has sponsored the development of numerous technologies that can make a substantial dent in many of Africa’s pressing development challenges. This is not entirely by design – in supporting the development of these technologies, DOD is thinking exclusively about its needs, not Africa’s -- but it is not entirely coincidental either. For example, despite their obvious differences, a US Navy ship at sea, a US Army Forward Operating Base in a remote area, and a rural village or peri-urban settlement in Africa have more in common than first meets the eye. Most notably, none are connected to a central power grid or water purification plant and, therefore, they all need to provide these essential services via off-grid, distributed mechanisms.
The US military has made a concerted effort to develop technologies that can meet its military objectives, but it has no objection if someone – an African entrepreneur, an NGO, etc. – uses these technologies to address civilian economic development and humanitarian objectives. Indeed, via the STAR-TIDES (Sharing To Accelerate Research - Transformative Innovation for Development and Emergency Support) program, DOD is actively encouraging the transfer of these technologies from military to civilian uses.
So what are some of the programs that DOD uses to develop these technologies and embed them into local businesses and how can they benefit Africa’s STI capacity building efforts? Three DOD programs or activities seem especially relevant for Africa (and other regions).
Technology Scanning. The US Office of Naval Research has a global division, ONR Global, whose objectives are “to search the globe for promising, emerging scientific research and advanced technologies to enable the Office of Naval Research to effectively address current needs… and to investigate and assess revolutionary, high-payoff technologies for future missions and capabilities.” (emphasis in original)
To achieve these objectives, ONR Global maintains five offices around the world whose objectives are to “discover the best science,” “maintain technological awareness” and promote “science and technology partnerships and collaborations.” In other words, ONR Global recognizes that many good ideas and useful innovations are being developed outside the US. ONR Global’s objective is to make sure that the US Navy in particular and US military in general are aware of these scientific and technological developments and prepared to utilize them to solve the military’s problems.
If the US military with its much larger R&D budget feels it has no choice but to scour the world for interesting ideas related to its “current needs” and “future missions and capabilities,” it seems only reasonable that Africa, with its much smaller R&D budgets and more limited STI capacity, should emulate ONR Global and start developing its capacity to harvest global research and technological results related to Africa’s current and future development needs.
Unfortunately, this technology scouting process doesn’t seem to figure prominently in Africa’s current STI capacity building agenda. However, the Innovation and Technology Entrepreneurship Centers (ITECs) discussed in a previous blog could begin to address this issue. ITECs do not need to be free standing, new institutions. They could be housed in the Nelson Mandela Institutes and other local universities and research institutes. The key challenge, it seems to me, is to knit these institutions into a loose but coherent network or organizations and institutions that have the capacity to combine original research with global technology scouting in high priority sectors and maintain close links to local entrepreneurs as well as the African business, scientific and engineering diaspora.
Competitions to Promote Enterprise Innovation. All too often, innovation in Africa is something done by scientists in laboratories who then try, with mixed results, to transfer the results of their research to reluctant or disinterested entrepreneurs. It is rare to find private entrepreneurs who are directly involved in conducting research and developing innovative solutions to pressing problems. Research and innovation are done for entrepreneurs, not by entrepreneurs. Not surprisingly, STI policy makers frequently bemoan the fact that there is a yawning chasm between the R&D sector and the enterprise sector. At the same time, they declare that the solution to drinking water, energy access, health care, and food security problems lies in innovative public private partnerships that combine cutting edge technology with innovative private technology deployment and service delivery models.
One obvious way to close this gap is to give entrepreneurs, especially young entrepreneurs who are recent graduates of African engineering, science and business programs, an incentive to devise innovative solutions to high priority challenges. Solve For X for example, challenges participants to define a problem (X) and then devise an audacious but practical solution. Winners are selected on the basis of the relevance of the problem as well as the quality of the proposed solution.
US DOD, on the other hand, employs a slightly different approach. Via the Broad Agency Announcements (BAA) program, DOD challenges participants to find solutions to problems that DOD has defined. An example of a recent BAA is the following:
Requirement Number: 56 HQ0034-14-BAA-RIF-0001 DoD FY2014 Rapid Innovation Fund DEFENSE-WIDE Annexes NAVFAC , Requirement #: FY14-DoN-RIF-NAVFAC-01, Requirement Title: NAVFAC: Improved Expeditionary Warfighter Self Sufficiency Military System or Acquisition Program Customer: NAVFAC
Description: Joint and coalition expeditionary forces are dependent on water and energy. There is a need for advanced technologies to allow individual, squad and platoon-sized units to efficiently scavenge water (fresh, brackish, salt) and energy from resources in the expeditionary environment. Topics of interest include disinfection, filtration, desalination, maintenance reduction, waste-to-energy conversion, and reduced weight and cube. (p. 56)
In other words, via BAAs, the military defines a problem and then crowd sources proposals for innovative solutions from entrepreneurs. Although only a relatively small number of entrepreneurs actually win an award, the competition process encourages a much larger number of entrepreneurs to participate in the competition and to begin thinking about devising innovative solutions.
Pursuant to the BAA program (detailed descriptions are available here and here), any individual or organization that has a potentially solution is eligible to respond to the call for proposals. However, special consideration is given to proposals from SMEs.
“All responsible sources capable of satisfying the Government's needs may submit a
White Paper under this BAA (small businesses, non-profits, institutions, etc). However, selection preference will be given to small business proposals addressing the evaluation criteria. Awards to other than small business Offerors are allowed but ONLY after the award selection approval authority determines the award is superior to proposals received from a small business….
In submitting a response or White Paper, the applicant must describe:
(1) How the technology meets and addresses one of the topics specified in this Annex of the BAA.
(2) How and to what degree the technical approach is relevant to an Army acquisition program including how the approach enhances the military capability; accelerates the development of military capability; reduces the development costs; and/or reduces the sustainment costs of fielding systems.
(3) The current Technology Readiness Level (TRL) of the technology and/or product and how will it transition to military systems or programs. “
Needless to say, DOD’s BAA program and evaluation criteria are tailored to the US military’s needs. But there is no reason why African policy makers cannot develop a similar program which combines the best features of Solve For X and the BAA program and is tailored to Africa’s pressing challenges. The program could be administered on either a country-by- country basis, a regional basis, or a pan-African basis. Combining a BAA program with start-up weekends, access to technology scouting expertise in ITECs, links to the diaspora and international experts might be an especially powerful tool for motivating African entrepreneurs to begin developing innovative solutions to Africa’s challenges.
Science Fairs and Technology Demonstration Expos.
Finally, DOD, along with a wide range of partners organizes and sponsors a variety of science fairs and business expos. These events give innovative businesses an opportunity to display their products alongside other innovative companies. The opportunities to see what others are doing, establish potential alliances, and network with potential customers and financiers are invaluable. For examples of one very recent and one forthcoming event see here and here.
In addition to these events, ONR is sponsoring the Chaing Mai World Green City which was featured at the April GSS. For details of this expo, see here and here.
If Africa wants to use science, technology and innovation to promote green growth, one small step in that direction might be the development of several science fairs and technology demonstration expo centers along the lines of the Chaing Mai World Green City where entrepreneurs can deploy their technology in real world, model green villages.
One final note: The strength of many of these DOD programs comes from the fact that DOD not only administers these programs but is a large-scale, well-paying customer for many of the technologies and solutions generated by the programs. This is not the case in Africa, where public procurement is not as well integrated with innovation and entrepreneurship programs as it may need to be. This issue will also have to be addressed if Africa hopes to develop a well function science, technology and innovation system.
The allure of strengthening the financial ties between African investment opportunities and global pension and sovereign wealth funds is understandable.
Sovereign wealth funds currently have more than $6.7 trillion dollars of assets under management, up from slightly more than $3.2 trillion as recently as December 2007. US pension funds had $18.9 trillion of assets under management in 2013, a rise of more than 12% over the previous year and pension fund assets in the 13 largest markets totaled $32 trillion, up 9.5% over 2012.
The African Development Bank estimates that Africa must invest $95 billion per year to finance both the large scale, transformative infrastructure projects such as ports, roads, and utility-scale power generation and distribution systems that will facilitate the continent’s economic modernization and green growth and also the numerous smaller-scale projects that will provide energy, water, and health services to the hundreds of millions of people on the continent who currently lack access to some or all of these critical services.
Infrastructure investment on the African continent is currently running at a $45 billion annual pace, leaving an investment shortfall of $50 billion. As a simple arithmetic matter, that investment gap could be closed rather quickly if the managers of these global pension and sovereign wealth funds could be induced to invest even a small fraction of 1% of their assets under management in Africa’s commercially viable infrastructure projects.
That impeccable logic motivated HRH Prince Charles in 2006 to convene a meeting with the leaders of eight global pension and sovereign wealth funds (the P8) which morphed in subsequent meetings into a larger group of participants known as the P80. The objective was to develop new financial vehicles and instruments – what we have termed a new financial plumbing system -- that would facilitate pension and sovereign wealth fund investments in these commercially viable and socially beneficial projects.
Several financial innovations emerged, directly or indirectly, from these meetings. For example, pension and sovereign wealth funds explained that they were hesitant to take the risk of investing directly in unfamiliar emerging market infrastructure projects. Therefore, the World Bank, followed shortly afterwards by other financial institutions, began to issue so-called “green bonds,” generally backed by the full faith and credit of the World Bank or other issuing institution. Pension and sovereign wealth funds would buy the green bonds and the World Bank and other issuers would invest the proceeds in climate-smart investments which they had identified, prepared and supervised. The net effect was that pension and sovereign wealth funds would gain indirect exposure to, and familiarity with, this new asset class without taking the direct credit risk of unfamiliar projects in unfamiliar emerging and pioneer markets. To date, the World Bank has issued $6.7 billion of green bonds in 17 different currencies and financed 49 projects in 17 middle income countries. Meanwhile, green bonds from all issuers, including the World Bank, are expected to total close to $40 billion in 2014, on top of the $11 billion issued in 2013.
Similarly, during the P8/P80 meetings, pension and sovereign wealth funds explained that they did not have the capacity to assess country risk in a wide range of emerging and frontier markets, perform due diligence on local infrastructure projects in far flung places around the world, or make a relatively large number of smaller investments in smaller scale, local infrastructure projects. They much preferred to operate on the wholesale level, placing large chunks of money with well-known institutions that would invest the funds individual companies or projects. To address this issue, the IFC, the Asian Development Bank, and the European Investment Bank, among others were established a series of funds of funds, including IFC Catalyst Fund, Asian Climate Partners, and the Global Energy Efficiency and Renewable Energy Fund (GEEREF). Pension and sovereign wealth funds, along with other institutional investors could place their money in one of these funds. These funds, in turn, would invest the proceeds directly in smaller scale projects or they would place the proceeds with local private equity funds which have the first-hand, on-the-ground knowledge required to handle due diligence and supervise local investments.
When the initial P8/P80 meetings first convened, most participants assumed (and hoped) that Africa would be a major destination for these global pension and sovereign wealth fund investments. Virtually nobody expected African pension and sovereign wealth funds to be an important potential conduit or catalyst for financing these African projects. This assumption was quite understandable at the time. With the exception of sovereign wealth funds in Algeria ($77 billion of assets under management as of 2014) and Botswana ($6.9 billion of assets under management), the African sovereign wealth fund sector simply didn’t exist and the African pension system was at a similarly embryonic stage.
However, if those original assumptions were still prevalent today, the September 22 Africa Investor (Ai) CEO Institutional Investment Summit should have dispelled any lingering doubts about the potential vitality of the African pension and sovereign wealth fund sector. African pension and sovereign wealth funds have burst onto the global stage and are poised to play a major role in financing Africa’s development. In the past few years, sovereign wealth funds have been established in Angola, Equatorial Guinea, Gabon, Ghana, Kenya, Libya, Mauritania, Mauritius, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Sudan, Tanzania, Uganda, and Zimbabwe. As a recent publication from EMPEA, our GSS partner noted, a similar expansion of African pension funds is also underway.
The combined total assets under management of African pension and sovereign wealth funds are still rather small by global standards or relative to Africa’s investment needs. But African pension and sovereign wealth funds have grown rapidly over the past few years and are poised for continued rapid growth in the coming decades. Morgan Stanley, for example, projects that African pension fund assets, which currently total a not-insignificant $379 billion, will exceed $7 trillion by 2050.
However, perhaps even more important than their current size or future growth is the quiet work taking place to create an African financial plumbing system that can facilitate investments by Africa’s pension funds, sovereign wealth funds, and other institutional investors. The African Development Bank, for example, recently established the Africa50 Fund, headquartered in Casablanca, Morocco. The fund hopes to have an initial capital of $3 billion which will eventually be scaled up to $10 billion. The AfDB hasn’t published much financial and operational information about the Africa50 Fund on its website, except to say that there will be a pot of grant money to finance project preparation costs and a much larger pot of money to finance investments. However, AfDB President Donald Kaberuka has made it clear that the primary role of the Africa50 Fund will be to serve as a conduit or catalyst for channeling Africa’s financial resources into commercially viable African infrastructure projects. “For a long time,” he explained, “we have relied on external financing to fund our infrastructure. Now is the time for the African Development Bank to mobilise sovereign African savings – currently estimated at $1,000 billion – to build the Africa of tomorrow," Echoing those sentiments, the implicit theme of the recent Ai Summit was “Formalising Domestic African Capital as a Tool to Leverage Global Institutional Capital.”
African pension and sovereign wealth funds, in collaboration with the Africa50 Fund and other partners, are uniquely qualified to channel African and international capital to African infrastructure projects. By standing poised to invest in African projects, African pension and sovereign wealth funds may be able to serve as more effective advocates for necessary policy reforms than their international counterparts. They have greater credibility along with unparalleled access to top decision makers. Coinvesting alongside the AfDB and African pension and sovereign wealth funds may also provide a powerful form of political risk insurance. After all, if a government interferes with a project that its pension or sovereign wealth fund has supported, it will, in effect be confiscating the retirement savings of its own citizens. This should provide a strong deterrent to capricious behavior.
African pension and sovereign wealth funds still have to convince skeptics that their governance will be transparent and their capital allocation decisions will be free from undue political meddling. Perhaps not all of them will pass this test. Only time will tell. But judging from the high quality and impressive credentials of the pension and sovereign wealth fund participants and speakers at the Ai Forum, the future looks exceedingly bright.
Alfred Watkins is Founder and CEO of the Global Solutions Summit and a member of the Governing Council of the UN Technology Bank for the Least Developed Countries. Prior to these assignments, he worked for more than 23 years at the World Bank. A complete biography is available here