Incentives a better answer than prescribed assets – Elias Masilela

More interventions like Section 12J needed, former PIC head says.
Executive chairperson of DNA Economics, part-time commissioner of the National Planning Commission and former PIC CEO, Elias Masilela. Picture: Moneyweb

Creating appropriate incentives that will enable the allocation of capital to areas where it can make a meaningful difference in the lives of retirement fund members is a better answer than introducing prescribed assets, institutional investors have heard.

The problem with prescription is that it relies on a policymaker who sits in one part of the country taking a view on the economy and determining the amount of assets that need to be allocated to a specific part of the economy to benefit the country, Elias Masilela, former CEO of the Public Investment Corporation (PIC), told institutional investors during a panel discussion hosted by RisCura on Wednesday.

“I would rather have a different approach […] that says: we’ve identified these imbalances. Can we create incentives that are going to get capital to flow into those areas?”

The biggest driver of behaviour in any economy is incentives, not “a stick”, Masilela said, referring to forced adherence to more legislation in the form of prescribed assets.

“The problem with a stick is that you then have to police it and we’ve failed to police anything in this country.

“Look at BEE – a beautiful programme, but it is not working. You can pick any other policy and ask yourself: have we been able to police implementation and the answer with all of them is no.”

Prescribed assets resurfaced as a hot topic after the latest ANC manifesto proposed investigating its introduction as a means of mobilising funds for housing, specific infrastructure projects and job creation. The proposal has sparked fears that retirement fund money could in future be used to plug holes at state-owned entities or allocated to ill-advised projects to the detriment of fund members.

“I think what we need to do is [get] buy-in from the private sector about what we want to achieve in the long term and let the private sector willingly put capital in those areas. You will see how it works.”

Although Section 12J – a tax incentive aimed at helping small and medium-sized businesses to access equity finance in the hope of creating jobs – only really took off in 2015 and it may still be too early to judge its performance, Masilela said the incentive is changing behaviour.

Private sector can think for itself

“The private sector doesn’t have to be told what to do. They do it of their own accord. We need more such interventions.”

Isaac Ramputa, CEO of the Financial Sector Transformation Council, said currently government does not have the capacity to provide the market with products that are ready for investing, something that could pose a prescription challenge if the proposal is introduced.

Had such products been available – for example, to enable investments into infrastructure – prescription would not have been on the agenda.

“I think the problem in South Africa is we like sloganeering. We like ideological positions rather than practical things that can move us forward.”

He believes partnerships between government and the private sector are the way to go to enable investments into certain parts of the economy.

The Zimbabwe example

RisCura MD Malcolm Fair said that in Zimbabwe funds are required to allocate 10% to assets prescribed by the government. Against this background, those seeking capital for projects approach government in the hope that their project will be certified as a prescribed asset.

But there have not been enough of these projects. Debt instruments that have obtained prescribed asset status have been fully subscribed and liquidity has been a challenge.

As a result, many funds have not met the prescription requirements and are non-compliant, Fair said.

A softer version of prescription is used in Botswana, where an asset can obtain ‘local asset status’ and funds have been able to invest because of such classifications.

“There are other ways of going about it and I do think that we need to actually go and look at all these case studies before we take any rash decisions here,” he says.



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Sure, and our goverment has just the skills available to direct investment into areas where it’s needed, without wasting scarce capital or making losses.

Let’s see: just we’ve done in SAA, Eskom, or maybe Rea Via where billions have been spent to run a couple of empty busses around town while screwing up the traffic for everyone at the same time. This is not an exhaustive list.

Our government has demonstrated zero ability to manage money responsibility and it cannot be trusted with the so called developmental state. The previous much maligned government at least produced an Iscor, an Eskom and a Sasol, and at one time Armscor also looked okay.

Given these abject failures some humility would be in order; but no, it seems that more interference is necessary.

There is a mountain of research that says incentives rarely work. For example in the US, states and cities have huge relocation incentives – eg years of no state tax, no capital contribution to services, exemption from property taxes, etc.

They never achieve a return on their cost to taxpayers. They always end up meaning that your old businesses are subsidizing the new entrant and you robbed Alabama to benefit Georgia.

Let business go and do where business SHOULD. If locating in Koega makes sense, fine. If it only makes sense to start a business because of the incentives for locating in Koega then one must question whether the business was in any event feasible?

End of comments.




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