The ANC’s economic transformation committee, which generally takes a more considered and prudent approach to economic policy than the wider leadership, has tried in its latest discussion paper to head off the demand for prescribed assets from more populist quarters with a decoy: regulation 28 of the Pensions Fund Act.
Unfortunately, the decoy is not real and sooner or later will have to be exposed as such. The discussion paper released last Friday is the ANC’s proposal for economic revival. Its cornerstone — like the paper released by Business for SA on the same day — is an infrastructure programme, which would have a stimulatory and catalytic impact on the economy. It is encouraging that they have come up with similar solutions independently of each other.
The big difference is the question of how to pay for it. There is a realisation, including within the ANC for the first time, that the government will not be able to do so alone. The proposed solution from business is that the private sector should be permitted to build and operate economic infrastructure in a regulated environment.
Business also warns that the government’s borrowing requirement over the next three years will consume the entire domestic savings pool. This means funding will have to be mobilised overseas, which means that SA must clean up its act and put its best foot forward to compete against the rest of the world for funding that, post-Covid, everyone will want.
The ANC’s paper does not confront this reality. The party continues to believe there is an easier way out. This is where the pension funds come in. Cosatu and many on the left of the ANC have long advocated a policy of prescribed assets. This would mean the government, through the Pension Funds Act, would set a minimum level of investment in government stock. This would be done through regulation 28, which at present sets maximum limits on investments in the various asset classes to ensure diversification.
Asset prescription will have negative consequences. Among them are skewing returns on investment for pension holders and diverting capital away from productive sources such as listed companies or even private equity, which also require funding for investment. With this in mind the ANC’s economic transformation committee is looking for an alternative that would have the same effect. Committee head Enoch Godongwana says regulation 28 should be amended to enable pension funds “to invest directly in infrastructure.”
But if you look at regulation 28 it is clear that pension funds can already invest in infrastructure — and statistics show they do. A pension fund or long-term insurer can invest 100% of its portfolio in government-guaranteed debt should it wish to. It could invest 50% of its portfolio in the debt instruments of public entities such as Eskom, Sanral and the Development Bank of Southern Africa in a combination of listed or unlisted instruments. Right now the collective savings industry holds R202bn in government bonds.
So what then does Godongwana mean? Perhaps rather than buying bonds, what he is after is to get funds to invest directly in stand-alone infrastructure projects. But this too is possible under the existing regulation 28. A fund can invest in immovable property, both listed and unlisted.
It would also be easily possible to design bonds for specific infrastructure projects in which a fund could invest, also with no regulatory change. The perfect example of this last category already exists: the renewable energy independent power producer programmes were so popular in the market that original financiers easily sold them on to other investors.
Godongwana has also mentioned he would like to enable funds to invest directly in infrastructure or bonds without the intermediary of an asset manager, which adds to the cost of the money raised. How practical would this be? While there are funds that have done this — the Government Employees Pension Fund and Eskom Pension and Provident Fund — it requires a lot of expertise in project finance. Few pension funds would be able to do this.
It appears then that once dissected regulation 28 does not have much to offer. But its allure seems to have stuck for now, so much so that the idea to amend it even found its way into a draft of finance minister Tito Mboweni’s supplementary budget speech before being removed at the eleventh hour.
So, as is often the case in ANC policy debates, we have come full circle. There are no easy fixes or silver bullets waiting to be discovered. The choices are the obvious ones: to stick with market rules and hold on to investor confidence, or to damn it all and introduce mandatory minimum holdings. That is the decision to be made.
• Paton is editor-at-large.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.