If one thing has become abundantly clear in the world over the past few years, it’s that governments are not rational actors. The US’s approach to trade under Donald Trump, the mess that Brexit has become, and the destruction of Venezuela’s economy all point to an unfortunate truth: just because something is bad policy, doesn’t mean that a government won’t implement it.
This is important for South Africans to bear in mind when it comes to an issue like prescribed assets. There are obvious negative consequences to implementing such a policy, but the government may still feel that it’s worthwhile to do so because of the perceived benefit.
For the financial services industry in particular, this requires a response. As Elias Masilela, director at DNA Economics, said at Foursight, the Alexander Forbes Investments 2019 Indaba last week: “What is the role of money managers? Is it our role to sit on the sidelines and moan? Is it our role to fly capital out of the country? Is it our role to engage with policy?
“What is key is that we should not only criticise. We need to provide alternatives.”
The point is that government is considering prescribed assets for a reason – to get investment into areas where it is lacking and desperately needed. In particular, these are sectors with developmental benefits, such as energy, healthcare, education and water provision.
One way or another, this is going to require private capital. The private sector therefore has to accept that it is going to have to direct more money into these kinds of projects. The question is, on what terms.
“We need to think about this differently,” said Janina Slawski, head of investments consulting at Alexander Forbes.
“We need to think about achieving what the government wants to achieve, but in a positive way, not in a prescribed way.”
Masilela argued that this is the reality that the industry has to engage with.
“I would like us to spend time thinking about what we do with this agenda that has been placed in front of us,” he urged. “Because if you don’t engage it, you’ll inherit it. And there is nothing worse than inheriting something you don’t like.”
What is important to recognise is that there are already examples of how successful private investment can be in these areas – both in terms of impact and returns for investors. South Africa’s Renewable Energy Independent Power Producer programme is one, and Section 12J venture capital funds are another.
What has been critical in both instances is the incentives that have been on offer. In the renewable energy programme, government guaranteed the price that would be paid for electricity produced and sold to Eskom, and Section 12J is based on generous tax deductions for investors.
“If you look at the amount of capital that has gone into Section 12J without a stick from government, you will see how incentives work,” Masilela noted.
“Incentives work better than sticks because you don’t need to police them.”
Developing these incentives does, however, require a crucial partnership. The private sector needs to be clear on what incentives it would find attractive, and government needs to be willing, as it has been before, to be flexible in putting these forward.
What matters most here is implementation.
“We don’t need more plans,” Slawski said. “Everyone knows what needs to be done. We have to find the will and the interest to get it going.”
Making things clearer
One practical way in which government can encourage more investment is to be more forthright about where capital is needed. Here it can take a lesson from Indonesia.
“Government has to be far more specific about what is investible and where investors can put their assets,” Slawski argued. “In Indonesia, they put up a list of the projects that need financing, so investors can see that these are the risks, these are the returns, these are the business objectives. That is tangible.”
At the same time, trustees of pension funds need to spend more time giving serious consideration to the kind of impact investments they are willing to fund. Often, they can find projects that align with the interests of their own members.
For instance, the Transport Sector Retirement Fund is putting its capital to work in building a truck stop that provides secure facilities for truck drivers to rest and refuel.
“They recognised that they didn’t need to wait for their members to retire to get benefit from the fund,” noted Slawski. “They could do something now that was investible. The project is in its initial phases, but is returning in excess of 20%. So they are taking the fund’s money and investing it for the benefit for their members, and getting investment returns that will help them for their retirement.”
This is the kind of thinking that is needed from pension funds to address the country’s needs.
“There is a lot of frustration that we have the policies, the plans, the capital, and the creativity, but nothing is happening,” Slawski noted.
“If we could develop a few case studies and start to show success, then that would build more success,” she added. “That would be much better than wasting time talking about prescription. Let’s get our energies in the right place.”
At the same time, the more successes this kind of approach realises, the less reason government will have to implement a bad policy like prescribed assets. That is what the financial sector should be thinking about.
“Our problem is not money,” said Masilela. “Our problem is psyche. We need to change the way we think about the economy, and the way we do things, in order to have the impact we require.”