Why caution is need as pension funds step into PPP space

The Kenya National Highways Authority recently announced that it had received a Privately Initiated Proposal (PIP) for the construction, financing, operation and maintenance of the Nairobi-Nakuru- Mau Summit road from a consortium comprising of the China Road and Bridge Corporation (CRBC) and the National Social Security Fund (NSSF).

While mobilising local capital for essential public infrastructure is a positive step in reducing over reliance on external debt, it also exposes retirement funds to a range of risks that must be carefully weighed.

The first caution is around risk-return alignment. Infrastructure investments, especially of the scale of the proposed project, often come with significant risks such as construction delays, traffic or usage shortfalls, political interference, land acquisition disputes among others.

On the contrary, pension funds, are designed to pursue conservative, diversified, and liquid investments that safeguard members' savings over the long-term.

To safeguard the investment, pension funds must ensure that an efficient risk allocation framework with adequate management mechanisms is in place to provide the requisite cushions should the risks materialise during the tenure of the investment.

Secondly, when pension funds are drawn into mega, State-led infrastructure projects, especially through the unsolicited route, the lines between commercial investment and political agenda can blur. Pension funds should ensure that there is a robust governance framework underpinning decision making on PPP projects.

The Board of Trustee together with the different committees must undertake independent due diligence before making a decision to invest in public infrastructure projects.

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The due diligence, conducted by competent infrastructure consultants, should explore various areas including legal, technical, economic, commercial, social, environmental, land requirements and the fiscal implications of the PPP contract on the government books.

For the NSSF, whose governance has faced scrutiny in the past, any large-scale investment in infrastructure must be guided by transparent decision-making, independent oversight, and rigorous due diligence.

A third issue is capacity and expertise. Infrastructure investments are complex, long-term and subject to a myriad of risks. It requires an understanding of long-term infrastructure dynamics, performance risk, maintenance regimes, and exit strategies.

Most pension funds, particularly in the public sector, do not have in-house teams with deep experience in infrastructure project finance and PPPs.

This often forces them to rely heavily on the lead developer or external advisors which in turn diminishes their ability to negotiate favourable terms or monitor performance independently. Building internal capacity is not optional but an essential element to taking up a more involved role in the PPP space.

Another caution is portfolio concentration and liquidity. Infrastructure assets are by nature illiquid and long-term. Committing a large portion of a pension fund’s assets to one mega project or one consortium limits diversification and reduces the fund’s ability to respond to economic shocks or benefit from market opportunities.

A prudent infrastructure investment strategy should ensure that exposures are spread across sectors, geographies, and risk profiles, and that there is a clear path to liquidity if needed.

One of the most overlooked risks is precedent. When the national pension fund is used to finance one major infrastructure project, particularly one perceived as politically important, it sends a signal that the fund is a viable fallback for government projects when donor or private capital proves elusive.

This undermines the principle of investment independence and risks turning pension savings into an unofficial fiscal reserve. It also emboldens future administrations to seek similar funding arrangements, regardless of the financial soundness of the proposed project.

Over time, this could erode public trust, weaken voluntary contributions, and destabilise the very pension system meant to protect Kenyans in old age.

None of this is to suggest that pension funds should avoid infrastructure altogether. In fact, with the right frameworks, such as blended finance structures, de-risking instruments, and co-investment platforms with private capital, there is significant potential for well-managed infrastructure investments to benefit both national development and pension fund performance.

But the starting point must be caution, discipline, and the unwavering principle that pension assets exist to serve contributors first and not governments, contractors, or agencies.

As Kenya explores how to build and finance its future, it must ensure that its pension system is not left exposed. Infrastructure is important but it should not be at the cost of the hard-earned savings of its citizens.

The writer is ENV SP | Founder & Chief Executive Officer