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.”
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
“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.”
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.”