We don’t need prescribed assets

We need better incentives for private sector investment.
There are far more elegant ways to achieve the same result, particularly when it comes to funding the developmental assets that South Africa needs, such as schools, roads and energy projects. Picture: Waldo Swiegers, Bloomberg

The ANC’s decision to include in its election manifesto that it would investigate the reintroduction of prescribed assets has caused a great deal of consternation in the investment industry. This is because of the negative impact it would have on asset prices and therefore investor returns.

“We are opposed to anything that could lead to suboptimal outcomes for investors,” says Janina Slawski, principal investment consultant at Alexander Forbes Investments. “Particularly for members of retirement funds, there is a fiduciary duty that members’ assets must be protected and grown. That is not supported by prescription.”

There are many reasons why forcing pension funds to invest in particular assets or asset classes would be detrimental to members of those funds. Most obvious is that if pension funds are forced to invest in one asset class, they will be forced to disinvest from another. This leads to an opportunity cost, since returns from prescribed assets are by definition suppressed.

“Because of this forced investment, you are going to create an artificial demand for that asset, which is going to lower the return,” says Isaah Mhlanga, executive chief economist at Alexander Forbes Investments.

“This will ultimately impact on our portfolios and on pension fund members’ objectives of retiring with enough income.”

There are also wider concerns around how enforcing prescribed assets would affect the wider economy.

“The introduction of prescribed assets would distort how capital allocation happens,” Mhlanga notes. “The consequences are not just for pension fund members, they are also for the macro economy in terms of our ability to attract foreign direct investment and to fund our current account deficit.”

Read: The potential unintended consequences of prescribed assets

Right question, wrong answer

That is not, however, to say that there isn’t a problem that needs addressing. To many people, forcing investment into prescribed assets is the wrong answer to the right question.

As the graph below shows, fixed investment in South Africa is always led by the private sector. The level of investment has however deteriorated sharply over the last decade.

Fixed investment in the SA economy

Source: Alexander Forbes Investments

“It almost seems that prescription is seen as a way to force the private sector to invest,” Mhlanga says. “It’s a short-term solution to a big problem that we have in the economy.”

It is, however, an extremely blunt, inefficient solution, with numerous potential negative consequences. There are far more elegant ways to achieve the same result, particularly when it comes to funding the developmental assets that South Africa needs, such as schools, roads and energy projects. And, notably, these are already happening.

“We already provide incentives to the private sector to choose assets that benefit the economy and the social objectives the country wants to meet,” Mhlanga points out. “We have blueprints that already work.”

Established successes

The most obvious and most important has been the Renewable Energy Independent Power Producer Procurement Programme (Reippp). Over eight years it has mobilised more than R200 billion in private sector capital, created more than 40 000 jobs, and had a material impact on surrounding communities.

“Ultimately it was a competitive tender process to facilitate the development of renewable energy in South Africa,” says David Moore, head of alternative investments at Alexander Forbes Investments. “Why did that work? There was a clear, transparent competitive process run, where bidders could bid for projects at a fair market price. It was enabling to getting private sector capital moving.”

Government also provided a guarantee that the electricity produced would be bought by Eskom. That gave investors a high level of comfort.

“Development can be had where you can demonstrate a commercial, sustainable return,” Moore points out.

Similar successes have been achieved on a smaller scale in a number of other areas. SA Taxi, a subsidiary of listed company Transaction Capital, has provided more than R21 billion in loans to the taxi industry over the past decade. This has created an estimated 130 000 direct jobs, and 220 000 indirect jobs for drivers, taxi rank managers, vendors and other micro and small businesses.

“They are targeting commercial returns, but also creating developmental impact,” Moore notes.

These types of initiatives work best when government provides some sort of underpin to the investment. For instance, in the development of low-cost housing, subsidies can ensure that people are able to afford the houses being built, reducing the risk to the developer.

Plenty of money available

Schooling is similar. If school fees at private schools in areas that offer quality education can be subsidised, that again lowers the risk from a commercial perspective. Private capital won’t be directed towards a school project if pupils can’t afford to attend it once it’s built.

The Jobs Fund, which was launched in 2011, specifically targets co-financing projects that will lead to job creation. The fund can provide early stage capital that provides some level of guarantee to commercial investors and, again, reduces their risk.

This is the kind of thinking that will ultimately be far more productive than prescribed assets. There is plenty of private money available, and even eager to finance these kinds of projects, both locally and from foreign funders. It just needs the right incentives.

“The more we can create opportunities for impact investing, the less the need for prescription,” says Slawski. “It’s not that there is a lack of capital to access these investments – it’s a lack of opportunities.”



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Government doesn’t need to reinvent the wheel here.

The IMF, UN and World Bank have vast resources, expertise & oversight and proven track records on how to fix inequality in failed states. They’re a phone call away.

But as we already know, a plundered prescribed asset in the hand is worth more than two IMF loans (with T’s & C’s) in a bush.

Not sure you want to knock on that door, those resources come at a high cost in that your sovereignty is questionable after a large IMF bail out.

In a situation with a functioning, efficient gov, I may not be fully against the idea. With the ANC it’s like flushing money down the drain, in essence a much larger tax on investments.

They won’t do it but I’d be more interested if the money was used to buy out SOE’s from the gov at say R1 and then the money put in used to recapitalize. The public would then own the thing like a listed share and have a say on what happens.

“The state is that great fiction by which everyone tries to live at the expense of everyone else.” Frederic Bastiat (1801-1850)

The term “prescribed assets” is a misnomer, a smokescreen. It should be called “prescribed liabilities” or nationalization of assets. They give you a tax-incentive of a certain percentage to motivate you to save, then they force you to lend that same percentage of your pension fund to Luthuli House by “investing” in unmanageable government debt. They will tell you that “it is for your own good because it lowers your risk” and that “you are a patriot”, while you are in fact only enabling and supporting incompetence and looting.

The ANC is a socialist organization that drives the National Democratic Revolution. It has a redistributive tax policy. They raise funds to buy votes, by taxing those who do not vote for them. The ANC has already nationalised assets like mineral rights, rental properties, and labourer’s housing on farms by means of ESTA and security of tenure laws. They are stealthily nationalizing all residential properties through high distributive municipal rates and taxes.

Prescribed assets, or more accurately, “prescribed liabilities” will only be one more step in the same direction. Prescribed assets is an alternative term for “A nation stealing from itself.”

Essentially correct. It is just another wealth tax- this time on your pension funds. Mike or Magnus recently commented that the ANC doth covet your retirement fund. And they do. This is simply a surreptitious way of plundering it. What is does is create artificial demand and force down the return on prescribed assets (bonds). The difference between the free market bond return (high) on the bond and the prescribed bond return (low) is the investors loss. In a zero sum game, is the regimes gain as it gets to borrow at below market rates.

We have to ask ourselves what the alternatives to prescribed assets are? The right option will be to for Ramaphosa to turn into a “Margaret Thatcher” overnight. That won’t happen because, without those socialist policies and the tripartite alliance, the ANC is basically the same as the DA. We do need a regime change.

Without any free-market solutions, the alternatives to prescribed assets are either an IMF bailout or devaluation of the currency. The demands and conditions from the IMF will turn Ramaphosa into a Margaret Thatcher overnight, so that option is off the table for now. That leaves us with either prescribed assets or devaluation. These two alternatives will have the same effect, namely a loss of purchasing power. So, under the ANC, even if we win, we still lose……

SA has a jobs fund?
It hasnt been very succesful has it?

Before it is even talked about surely all possible ” prescribed assets” in SA needs to be fixed first. They are all corrupt and rotten to the core.

If it’s not fixed first and the crooks locked up it’s just theft. What else?

No one will loan insolvent SOEs more money to pay the salaries of redundant employees.

That is why pensions have been earmarked to pay those salaries.

It will be interesting to find out which entity (or who) came to Denel’s rescue. PIC, Patrice Motsepe?

Gavin Watson / Radovan Krejcir / Atul Gupta / Lynne Brown

“Disintegrating state companies imperil SA’s finances” – the latest story on Moneyweb. Is this where the prescribed investments are supposed to earn a return?

Just think what it would have done for our country if Luthuli House had written this article.

Could have saved a large number of employers from going out of business.

Rather than invite a million lingering words on the moral and legal flaws of prescribed assets, why not just legislate a once-off tax on retirement savings? That, in truth, is the true nature of prescription, a wealth tax on savers, even on those who have little of it.

Such a strategy would be politically expedient as the government’s support base largely excludes investors. And syphoning off just 5% out of a R3tn retirement savings pool would ‘liberate’ R150bn. That can feed a lot of white elephants.

Retirement investors already incur heavy indirect taxes on their retirement savings, in the form of market-hostile government policy, poor service delivery, corruption and high inflation. In the big scheme of things, a once-off 5% levy would barely register.

The retirement industry would be outraged, of course, but the outrage will ring hollow. Given its willingness to charge retirement investors up to 3% in fees – not once, but every year – the more apt response would simply be to blush at the announcement of such a gratuitous wealth transfer. Imitation is, after all, the sincerest form of flattery.

Unfortunately there is no “once off” in this part of the world. Zim is printing money again. Do they learn? They wont stop until they took you for everything you own.

All logical discussion points and all will be ignored fully when the time comes to pull the trigger. We are not dealing with moral or competent people here, SA politicians and the ANC in particular are friends of friends and prescribed assets is a nice way to effectively increase the tax rate on investments significantly.

Personally will have cashed in my retirement funds, hopefully well before they bring this in and deposit them overseas.

The unfortunate fact that will likely come from this is going to be the severe harm done to the retirement industry. ANC seem to love tearing down any industry that does ok.

SA has already a workable system of prescribed assets:

….it’s called INCOME TAX!

Regulation 28 + Prescribed assets = worst possible investment ! This will decimate pensions which will lead to increased need for govt grants for pensioners. Good thinking ANC !

Watch this space. It is time to put pressure on company pension fund administrators to offer employees an option to opt out of Regulation 28 pension funds. Instead the contributions will go into a portable pension. Downside of course is that the tax break will be forfeited.

“We are opposed to anything that could lead to suboptimal outcomes for investors,” says Janina Slawski, principal investment consultant at Alexander Forbes Investments. “Particularly for members of retirement funds, there is a fiduciary duty that members’ assets must be protected and grown. That is not supported by prescription.”

You mean like Reg 28?

Reg 28 does nothing more than protect the local asset management industry. Given unlimited choice would end in pretty much all of them going bust.

Patrick, your excellent article ends with this quotation from Janina Slawski: “It’s not that there is a lack of capital to access these investments – it’s a lack of opportunities”. I would add the words
“änd confidence because of a hostile investment climate created by misguided and misinformed people in South Africa who see free enterprise as an enemy of the state.”

End of comments.



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