EDITORIAL: ANC plan to tap into prescribed assets is a bad idea
The governing party might unwittingly be inviting a backlash from its own supporters
The ANC’s election manifesto says it intends to investigate prescribed assets to fund social and economic development. In how many ways is this a bad idea? The short answer is a lot.
Prescribed assets, or the notion of the government forcing savers to invest in government and parastatal debt, was a feature of the apartheid regime when at a one point investment funds had to invest 75% of their funds in government or state-owned enterprise debt. The regime was essentially an act of economic desperation since SA’s capital markets were largely shunned by the world. When SA opened its capital markets in 1994, the regime was scrapped, and money flooded into SA in huge quantities, to the extent that now about 40% of SA’s R1.7-trillion in government debt is owned by non-residents.
Setting up a prescribed asset regime could be structured to exclude non-residents, just as SA’s exchange controls prejudice South Africans but not foreigners, a peculiar situation if ever there was one. But if the regime were to include non-residents, the result would almost certainly be lower returns and that would result in a large slice of those investments leaving. The same would apply to SA residents whose incentive to invest would be diminished, and therefore it would lower SA’s already dangerously low savings rate.
The EU have done it a different way by establishing a first loss guarantee fund called the European Fund for Strategic Investment that reduces the risk for investors.
The most galling thing about the proposal is that it operates off the notion that local and foreign investors don’t invest in government-controlled assets. They do, in huge quantities. These assets include the Industrial Development Corporation, Development Bank of Southern Africa and the Land Bank. What they don’t do or resist doing is investing in poorly run state-owned enterprises. Forcing investment into these institutions won’t solve the problem. Arguably, it would make it worse, by making the institutions invulnerable to the discipline that free capital allocation imposes.
There is also a huge difference between the savings industry context in which prescribed assets were imposed by the apartheid regime and the current investment context. Prior to 1990, in both SA and the world, the dominant savings instrument was the defined benefit pensions fund. Since then, there has been a massive shift towards defined contribution funds. The shift has taken place partly because it suited all parties; companies were freed from the burden of guaranteeing a proportion of a retiree’s salary, while employees were free to invest in assets that typically had higher returns which would often give them a better deal overall.
But if the government were to force pension funds to invest in assets with lower returns, there is a good chance they are not going to be happy about it. One of the common misconceptions of the economically illiterate is that capital markets are the exclusive playground of the rich. In fact, they fundamentally rest in SA and most parts of the world on the retirement savings of all employees, from the CEO to the office cleaner. Substandard returns are a concern not only for executives but also trade unions. The ANC might unwittingly be inviting a backlash from its own supporters.
We don’t know of course what the ANC might come up with; it may be a trivial amount, or it may be large. But it’s worth asking if there are options, and the answer is, of course, there are. The simplest one would be to implement a tax reduction for certain kinds of investments. This is something that has existed for years in the US, where certain bonds for states and cities are entirely tax-exempt. In the EU they have done it a different way by establishing a first loss guarantee fund called the European Fund for Strategic Investment that reduces the risk for investors into projects that may not normally attract investment.
The problem is that in fact for good projects there will always be capital. The problem is not the supply of capital, it’s the supply of fundable projects.