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Prescribed assets: Our problem is not money

We need a new approach to the economy.

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.

Engaging

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.”

Working examples

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.

Case studies

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.”

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COMMENTS   27

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You have a customer base which by and large do not contribute to the economy , do not pay taxes and demand everything for free and burn when they do not get it!!! – economics do not work like that so – Mega Fail!!!!!

Incentives mean that somebody else, normally the taxpayer, pays for the cost of the incentives. You bring up the case of Eskom. In reality thanks to the incentives the taxpayer and electricity user pays for the increased cost. So if private capital is going to be used to build infrastructure the government (taxpayer) will have to guarantee a reasonable return. The user pays principle might end up in a mess like the toll road problem.

Absolutely, Hun. The Eskom debacle is a classic case in point. IPPs were provided “incentives” to install expensive unreliable sources of electricity. Eskom gets paid about R0.80 per kWh for the energy is produces. It pays IPPs about R2.00 to R2.50 for each kWh. Everyone is screaming that renewables are sooo cheap. Eskom thus destroys about R11 billion in wealth each year paying for energy that is sells at a loss. The ANC has gone crazy. Whoever thought that this was a good idea to destroy wealth? When you interfere with markets there are always consequences. Guess who picks up the tab for this folly?

a. Judge Judy
b. The tooth fairy
c. The man on the moon
d. The taxpayer

The problem with incentives is they cost. In the case of 12J, it costs all taxpayers. In the case of IPP, especially the early ones : it costs electricity users.

Also, money managers do not decide investment. They buy John’s shares in Acme. Acme gets zip, it got its money years ago when the shares were issued. The rest is churn among shareholders and NOT fixed capital formation!! Very very little of pension fund money invested on the JSE is invested in business per se. As in land, buildings, machines, working capital.

Most studies prove that the best governments can do is remove friction for businesses (not money managers) to choose the best new venture or expansion.

If you require private funds then allow the Private Sector to trade in your space . Allow private Railways , Power Producers and Water Suppliers . Otherwise you feeding a bottomless pit of Government ineptitude.

Investors are not stupid. Stupid people do not own capital and they do not have funds to invest. This is where the government runs into trouble. Their “sales pitch” is aimed at investors, but the product they are selling will only be bought by stupid people. Trust is the basis of a transaction between parties. The rule of law and the taking of resolute action against criminal behaviour leads to trust in the system.

The mere fact that the government has to force intelligent people to invest in government projects, proves that people do not trust the government. Prescribed assets imply that government will pass a law that forces us to trust them. Trust is a feeling. This implies that government will prescribe how we should feel. Is this freedom or liberty? This is how socialism slowly but surely takes us the road to slavery.

This. A fool and his money are soon parted. This is what will happen if you trust the ANC with your money.

Its not a matter of Trust !!!Nobody Trusts the ANC –They are however going to take your money via rigged legislation. We are now a Socialist /communist country Comrade .

edalsg, I was referring to the fund managers who have the view: the idea of prescribed assets isn’t all bad.

Of course the ANC will steal every pension penny.

The ANC have now seen that almost no one attended Mugabe’s funeral and decided that they can live with that scenario.

Firstly the need to realize that a huge shout out goes to the 5% that have kept this country going for the last 25 years. Well done TAX PAYERS.

Secondly, stop looting, simple as that. A little simple arithmetic adding up ANC wastage/stolen money from the arms deal to date is enough to drop fuel to R5/litre, free education for all, no potholes, growth, low unemployment…..

Repeat ANC stop stealing. simple, but to change DNA well that’s another thing…………..

Lovely post apart from the subtle racism in the last line.

Racism? “DNA” in this case refers to the “company culture” of the ANC, or at least that’s the way I’m reading it.

Government still has to pay no matter which way they go. It is not as though prescribed assets come for free.

They will use it as they can not borrow anymore money because nobody think they can pay it back and it is worth the risk.

So if the big business think it is not a worthwhile investment why should it be forced on the pensioner. Does it become a worthwhile safe investment?

No man. Then big business would have invested and there would have been no need for prescribed assets.

“If one thing has become abundantly clear in the world over the past few years, it’s that governments are not rational actors.”

Democracy is failing, everyone wants handouts. SA is no exception:

– Prescribed assets
– NHI
– CR telling beneficiaries of Mugabe’s policies that he was a hero.

Those few that keep the economy going are being hounded out of existence.

The use of the 70 year old approach of prescribed assets is a ridiculous idea today. It will undoubtedly lead to a loss of value for everyone.

There is a much better way to drive socialy conscious economic Investment.

By utilising technology, it is now possible to finance local economic development, AND allow investors to hedge their exchange rate risk.

The old ways will not work.

#MzansiWakeUp #LeadFromTheFront
#Mavens

“Our problem is not money”. It’s the sticky fingers that get their hands around it and steal, loot, abuse and misappropriate it. Our problem is the crime condoned and encouraged by the Corruptheid State.

Patrick, you are naive. The government is not looking for private sector investment in public infrastructure. What they are after is a new source of revenue to loot. The municipalities and SOE’s have been stolen dry and still the beast which is the ANC is not satisfied so more money is needed.

“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.

The use of the incentive – the amount collected by VCCs under Section 12J – is not proof of its effectiveness or value for money. As a recent article pointed out, a lot of these funds are sitting in cash or in property investments, not in entrepreneurial businesses. Much of the benefit flows to VCC management rather than productive activity.

The more Government meddling, the more unintended consequences.

It would be interesting to know how the total investment in VCCs compares with the amounts squandered by the PIC on faux entrepreneurs.

South Africa has a gangster-kleptocaracy running the fiscus. ‘Prescribed Assets’is just a euphemism for channeling locked up funds to the trough where the little piggy’s can get to them

Have I missed something in the comments and article or is the key point as to why prescribed assets are being investigated/implemented in the first place being missed?

Answer that question and one realizes that the talk of “transforming” the economy etc becomes pie in the sky talk.

The answer is simple: Government cannot afford to pump more money into SOE’s that were looted by the Government’s cadres since the tax payer is already squeezed. So what to do?

Here’s an idea: lets force people to investment in SOE’s that way each month there’s a replenish-able trough of money to loot. Mark my words this will happen…..

lets all hold hands and sing kumbaya while we say goodbye to one of the most destructuve forces this side of the equator, yes, I’m talking about Hurricane Mugabe. Seeing images of his coffin being carried into a virtually ampty stadium reminded me of why we are where are. The ast decade in SA saw our own giggling hurricane zuma who watched while the people who thought they owned him [but actually only had shares] robbed SA almost into junk status [which may still happen] now we listen while the commission of enquiries dig up all the dirt [why these aren’t court cases is beyond me] and NO ONE has gone to jail yet. The above article makes/talks a lot of sense – but we are now at the point where ACTIONS need to speak louder than words. Cyril is doing a wonderful job of doing nothing substantive, we don’t have the time to be spinning our wheels, we need to get into the race and win it.

Governments are always easy with taxpayers money. The ANC have created this mess, from top to bottom – and a good number of them still at the trough. I do not see a silver lining.

I can advise what is the real econo-structural problem within SA….

….but then I’d have to be politically incorrect 🙁

I would love to hear some informed opinion of the 100 year view for South Africa. i.e. what will happen when the trough is empty and the pigs are gone (everyone is so preoccupied with this). What is the prognosis for SA post ANC and long term.
Will the NDR extremists prevail in reaching their socialist outcome. Or, are other outcomes likely. What view can one take regarding investments, over the next 100 years.

The author seems to have some kind of left wing, liberal, leaning. Why is Trump’s trade policy such a bad thing for the US? Why is Brexit, in itself, a mess? Yes it’s true that the Remainers in govt (and no doubt the deep state actors in the civil service) have tried everything to scupper a deal but this notion that the private sector should fund overtly marxist ideologies, is total nonsense. What will it take for the private sector, especially big business, to stand up and be counted (civil disobedience is warranted) instead of placating these clowns? Until we do, we are merely arranging the tables on the Titanic. The weird thing is we know the iceberg is there and yet we are full steam ahead.

How about setting up a similar model to that being proposed by aspirant Presidential candidate, Mayor Pete, in the USA, inspired by the Marshall Plan introduced at the end of World War 2 to rebuild Europe? The Reserve Bank could be mandated to issue special bonds, in our own currency, for the sole purpose of rebuilding collapsed infrastructure, like roads, housing, power utilities new and existing, water treatment plants etc etc. These funds would be be earmarked for physical infrastructural rebuilding, and in the process create thousands of new jobs, rejuvenate defunct engineering and allied industries, provide skills training and kick start sustainable economic growth in the real economy, not the pseudo service industries, that at present form part of GNP instead of being regarded in their real role, being that of costly overhead which drives inflation and lines the pockets of rentiers.
The funding so raised should only be available for fundamental new infrastructural development and rehabilitation of those areas supporting essential services, that are now in the advanced state of collapse.
The advantages would be enormous, not least of which would be that a huge proportion of the funding would be denominated in Rands, unlike that of the Gauteng toll road fiasco, thus avoiding the trap of being subjected to foreign exchange denominated debt risk. Also it could lessen the opportunity for blatant corruption to thrive. All expenditure should be subject to transparent, independent professional financial oversight, so that citizens are fully appraised of how their taxes are being spent.
The approach would strengthen the countries ability to retain financial sovereignty and and avoid the dire consequences, so apparent elsewhere, where countries like Greece and others have become financially enslaved to foreign interests and control.

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