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Prescribed assets are the wrong answer to the right question

Private sector participation in infrastructure projects can be encouraged in the right way.
President Ramaphosa says pension funding is already being used for developmental purposes like infrastructure – and that these funds 'make good returns'. Image: Shutterstock

In replies to questions in parliament last week, President Cyril Ramaphosa said the issue of prescribed assets needs to be looked at. Prescribed assets refer to the government forcing pension funds to allocate a portion of their portfolios to specific investments, such as government or parastatal bonds.

“We need to discuss this matter and we need to discuss it with a view to actually saying what is it we can do to utilise the various resources in our country to generate growth in a purposeful manner,” Ramaphosa said. “We are facing a situation where our developmental needs are enormous, and in a number of other places pension funding is utilised for developmental purposes, for infrastructure, and quite often those pension funds make good returns out of infrastructure developments.”

Read: Ramaphosa calls for discussion on utilising pension funds for projects

The president noted that the proposal, which is contained in the ANC’s election manifesto, has the support of Cosatu. However, it is not clear that he and the country’s largest trade union federation are necessarily talking about the same things.

Ramaphosa is quite clearly referring to the funding of infrastructure projects. Cosatu, however, is on record as saying that prescribed assets could be used to support Eskom.

Contradictions

How pension fund money could be more effectively used to fund economic development is a discussion worth having. While the answer is not to force pension fund money into prescribed projects, but to make investing in those projects more attractive, at least that debate could be constructive.

Read: We don’t need prescribed assets

Looking at using prescribed assets to support Eskom, on the other hand, would create market distortions that even the short-sighted apartheid government eventually realised was a bad idea. It would also prejudice savers in those pension funds – many of whom are Cosatu members – who would undoubtedly see depressed returns.

Read: The potential unintended consequences of prescribed assets

As Peter Brooke, head of MacroSolutions within the Old Mutual Investment Group, points out, prescribing assets would also go against the kinds of steps that government has been taking over the past few years. Regulation 28, which sets the asset allocation limits for pension funds, has been significantly relaxed, not tightened.

“If you have a look at what the government has done, they have done the exact opposite to prescribed assets,” says Brooke.

“They have been freeing up exchange controls, allowing more money to go overseas, with the allowance now up to 30%. So the evidence would suggest that it’s not likely.”

He also notes that the most critical stakeholder in any discussions would be the Public Investment Corporation (PIC), which manages the Government Employees Pension Fund. Recent changes within that organisation suggest that prescribed assets would be hard to sell to what is now a far more independent body.

“The PIC has just got a reconstituted board, with a very strong chairman, where the deputy minister of finance is no longer on the board, and where labour has two seats on the board,” Brooke explains. “This is going the opposite way to prescribed assets. That is a positive signal. They are not going to vote to have their returns hurt, to give government money at a lower return.”

What is the risk?

He therefore feels that the risk of prescribed assets being implemented should probably be ‘de-emphasised’.

“Obviously there is always a risk, but the truth is South Africa is a small, open economy,” Brooke says. “We need global capital. It’s unlikely that we are going to shut ourselves away from that. In fact, the actions we have taken suggest the opposite.”

Grant Watson, head of Customised Solutions within the Old Mutual Investment Group, agrees.

“If you look at why any government would have prescribed assets, it’s typically because they couldn’t get prescription for their debt – that there are no takers,” he points out. “That’s not the case in South Africa. There are definitely people who want to buy local bonds.”

Particularly given the high yields on local bonds, they are attractive.

“So I don’t see, financially, the logic behind it,” Watson says. “I don’t see it as a near-term risk.”

The role government should be playing

For Jon Duncan, head of responsible investment at the Old Mutual Investment Group, the real issue is to have a discussion around how to encourage more private funding of projects that will support economic development in South Africa.

“Government’s role is to crowd in private sector capital to participate in big infrastructure programmes,” Duncan says. “And what we’ve seen is that they can actually do that very successfully.”

The renewable energy programme in this country is often heralded as the most successful in the world in terms of engaging private sector participation. There is no reason why a similar approach can’t be used more widely.

“Government’s role is to create the opportunity and the incentive,” Duncan points out.

“We know how to do it, we have a great case study in making it happen, and it’s just finding a way to replicate that.”

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This could be the right time for the Private Sector to insist on actual participation in the monopolies that the government hold rather than just poring billions into the Government entities that do this so badly already . Eg Rail , Energy , Water . Road .It’s only the private sector that can save this country and we all know it . As I’ve I said before Government Ministers deep down know this and hence they all use Private Medical Care and send their children to Private Schools . No faith in their own departments when it affects them directly !!

Do you think the private sector could persuade the people of Soweto to pay for services? Do you think that if a private company sent in a crew to disconnect the electricity or water the residents would not reconnect (assuming that the technicians were allowed to disconnect it without being chased away or worse)?

Yes of course. No need to panic. Trust the government. Trust us, the big insurers. Trust Eskom. Trust SAA. Trust the rand not to hit 20, 50, 100 to the dollar. We need you to leave your retirement savings with us. We have German cars and expensive whiskey to buy from the commissions and fees we make off you.

The risk of prescribed assets is that in these days global investment managers read about this on their smartphone and say SA-a no no -investment place as we can do better elsewhere with less risk. Information flow is so real time that of you do not behave-and prescribed assets will be seen as raiding the pantry-you lose investment flows. Remember foreign investors are coining it on our bonds-8% coupon with the YAR at 15,35 and stop losses for the ZAR in place-or hedged-and their return is pretty good. Increase the perceived risk…and bang -they sell!

CR where exactly is the pension fund money being used right now and what return to the pensioner is it generating?????

If the government wants my pension to fund its follies, I want a seat on the board of an SOE.

This is just again another attempt to get the hands on the available cash in the country without rendering the service it is suppose to give. Like all the SOE’s that are cash strapped this is just another vehicle to gain power for own gain by the ANC. The state capture remains the focus disguised as participation

I can’t help but wonder what is being smoked in OM’s boardroom because it must be the good stuff.
Wonder how long it is going to be before the smoke clears and they have a clear picture and a sober look at what is happening and speak the truth of that which they see, cause they are clearly under an unhealthy influence.

My guess is that they hold a lot of assets in SA in ZAR. Maybe trying to talk a good game to get a buying sucker? It is called puffery I reckon.

Another case of Politics getting in the way of common sense economics?? When will these short-sighted would-be politicians learn?

End of comments.

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