Prescribed assets may save rural areas from disappearing down potholes
Opinions are divided over calls for laws to force the pension fund industry to invest in development projects
Whenever I spend time in Butterworth, I lament in disbelief at the extent of my hometown’s fall from grace. It is a debilitated wreck compared to what it was in the 1980s, when it was a small but thriving industrial town in the middle of rural Transkei.
Butterworth, now part of the Eastern Cape, deindustrialised after 1994 when investors pulled out, and so a decline in the town’s infrastructure began. The slide into a state of despair was accelerated by corruption, incompetence, mismanagement and political infighting involving various competing ANC factions in the province.
Potholed roads greet you as soon as you enter the town. Decaying schools and a rundown hospital haunt locals, and the latest misfortune to befall the town is the taps running dry due to severe drought and years of underinvestment in water infrastructure.
Butterworth is by no means the only town in SA in this predicament. The country is littered with examples of once-productive mining and industrial towns that have been crippled by crumbling infrastructure after investors packed up and left. But these towns are established settlements that host significant populations, often poor people. Then you have townships and former homelands, which have huge infrastructure backlogs that are yet to be rolled back since the end of apartheid in 1994.
How can these infrastructure backlogs be pushed back given that the ANC-led government appears to be running out of options and finances to tackle the problem? Some economic policy gurus and politicians are proposing that the problem be financed through legislation requiring the pension fund industry to divert a portion of its investment funds towards infrastructure development in underdeveloped regions, to fire up the stagnant economy.
The calls for prescribed assets for pension funds were given impetus by media statements made in 2019 by ANC economic policy head Enoch Godongwana, who said the governing party was investigating using prescribed assets to avoid having to ask for emergency funding from the IMF to bail out cash-strapped and debt-ridden state-owned enterprises (SOEs).
Not surprisingly, pension fund managers, who manage more than R6-trillion of assets, are strongly opposed to this proposal as they see it as an attempt by the government to nationalise pensions. The two camps are making passionate arguments for and against retirement funds prescription, and given that the government clearly has its back against the wall, a middle ground will have to be found to break the impasse. The state is in a fix. The tax base is unlikely to expand in a low-growth economic environment and the government and its SOEs have borrowed to the hilt, making lenders nervous about throwing more money at these institutions.
The Treasury is projecting that the government’s gross loan debt will leap from R3.2-trillion (60.8% of GDP) in 2020 to R4.5-trillion (71.3% of GDP) in 2023, driven up mainly by higher interest rates, rising inflation and a weaker rand. During this period the budget deficit is also expected to increase to 8.2% of GDP from 7.6%, forcing the government to turn to the local bond market to finance the shortfall.
The fiscal and debt situation could worsen if global credit ratings agencies decide to downgrade SA’s sovereign debt due to policy indecisiveness in implementing long-awaited structural economic reforms, anaemic growth and shrinking tax revenue. If we are downgraded to junk status, the government’s finances are going to be strained and stretched even further as interest payments go up because of the government being deemed a risky borrower. Furthermore, there could be a flight of capital out of the country.
Prescribed assets are nothing new in SA; they were used by the apartheid government to weather the effect of economic sanctions against the apartheid policy. From 1956 to 1989, SA had a prescribed asset policy whereby 53% of all pension funds had to be invested in government and parastatal bonds.
This policy was instrumental in helping the country build the most advanced transportation and energy infrastructure in Africa, but at the same time the racist policies of the government of the day led to townships and homelands being overlooked, resulting in poor or nonexistent infrastructure in these areas. To put it bluntly, the white minority benefited from prescribed assets while the black majority did not.
Critics of prescribed assets argue that the policy could significantly reduce members’ expected pensions. They are comfortable with the current regulatory set-up, whereby 60% of the retirement savings (retirement funds, pension schemes, provident and preservation funds) are invested in SA, 30% in offshore markets and the remaining 10% in other parts of Africa. Furthermore, the legislation stipulates that a maximum of 75% of savings be held in company shares and the balance in bonds and cash.
At this juncture supporters of asset prescription have not nailed their colours to the mast and revealed what percentage of retirement savings they believe should be ring-fenced for investment in infrastructure. Whatever the figure the two camps may eventually agree on, they will have to find a compromise that allays the fears and concerns of both parties.
In this middle-ground scenario it would make sense to set up an investment company, operated by a professional team with a background in infrastructure investments, to manage the portfolio of prescribed assets. This company could be owned by both the state and the private sector and its board be made up of private sector, government and trade union representatives.
The mandate of this company should be to tackle skewed infrastructure development in SA without unnecessary risks being taken while generating healthy returns on investment. Given the high level of corruption across the state, prescribed assets cannot be left in the hands of the government, otherwise owners of the assets will get their fingers burnt. Workers should also be brought close to the process as the majority of them either hail from or live in areas that require infrastructure development, and therefore could benefit from asset prescription.
• Ntingi is founder of GetBiz.