South Africa could unlock as much as R5-trillion in new investment for gross fixed capital formation (GFCF) and for its Just Energy Transition if it undertakes sweeping reforms to its financial system, according to a report drafted for the National Planning Commission (NPC).
The document, to be launched on Tuesday, argues that the country must redesign its monetary architecture — how South Africa’s financial system is structured and how money is channelled into investment — to revive growth, boost infrastructure spending and meet the goals of the National Development Plan (NDP), the long-term blueprint for eliminating poverty and reducing inequality by 2030.
More than a decade after the plan was adopted, its targets have slipped out of reach as unemployment sits above 30%, public infrastructure has deteriorated, fixed investment is at historic lows and inequality remains among the world’s highest.
“The report draws on original empirical mapping, historical analysis, expert background papers and a novel conceptual framework, arguing that South Africa’s postapartheid growth model has failed to reconfigure the deep-seated structural inequalities embedded in the inherited monetary architecture,” the NPC said before the launch.
“Instead, the current system continues to produce patterns of financial exclusion, underinvestment in fixed capital and economic extractivism, while rewarding short-term profit-taking over long-term productive investment in gross fixed capital formation.”
Structurally misaligned
The report, commissioned by the NPC, the custodian of the National Development Plan 2030, warns that three decades into democracy, South Africa’s financial ecosystem remains structurally misaligned with the country’s development needs.
Despite being one of Africa’s most industrialised economies, the country has suffered a persistent collapse in public investment, declining productivity, entrenched unemployment and widening inequality.
At the heart of the problem, the report says, is the absence of a coherent governance framework to manage the complex web of balance sheets that underpin the economy.
The monetary architecture is described as “a web of interlocking balance sheets in which the assets and liabilities of banks, development finance institutions, pension funds, households and state-owned enterprises interact in ways that either support or constrain fixed investment and inclusive growth”.
In the current system, the balance sheets pull in different directions, reinforcing fragmentation and stifling long-term investment, the report says.
One of the most far-reaching reforms proposed by the NPC includes placing the country’s major development finance institutions, such as the Land and Agricultural Development Bank of South Africa (LBK), Industrial Development Corporation (IDC) and the Development Bank of Southern Africa (DBSA), under the supervision of the Reserve Bank’s Prudential Authority.
“The resultant collective balance sheet expansion could reach R1.4-trillion, directly addressing underinvestment in [gross fixed capital formation].”
Risk management
Aligning development finance institutions with central bank oversight, it argues, would strengthen risk management and enable co-ordinated deployment of long-term capital.
Another recommendation includes reforming regulation 28 of the Pension Funds Act to reduce the 45% offshore allocation, which encourages capital flight at the expense of domestic infrastructure.
“A key reform might be to require pension funds to draft ‘annual infrastructure investment plans’ and to include reporting against these plans in their quarterly reports to the regulator. Redirecting 20% of pension fund assets could unlock a R1-trillion project pipeline, especially if supported with sovereign guarantees and stock exchange-listed instruments,” the report says.
These co-ordinated balance sheet reconfigurations aim to unlock at least R5-trillion in new investment in [gross fixed capital formation] and the Just Transition.
— NPC document
For SOEs, the report notes that the proposed holding company, which would house state-owned companies under one entity, is likely to deter investment. The proposed holding company, to be established under the National State Enterprises Bill, is under consideration in the National Assembly.
“It might be appropriate to consider diversified shareholder models to leverage SOE balance sheets worth R1.3-trillion to attract R650bn in capital without diluting overall public ownership beyond 60%,” the report says.
“These co-ordinated balance sheet reconfigurations aim to unlock at least R5-trillion in new investment in [gross fixed capital formation] and the Just Transition. This could result in reduced inequality and an accelerated Just Transition and foster inclusive economic growth without requiring fundamental changes to monetary or fiscal policy.
“However, it would be unwise to ignore the constrained institutional capacity to absorb additional investments, including weak accountability and procurement mechanisms. If not attended to, increased capital mobilisation will result in strong upward pressures on inflation.”
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