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Deputy Minister of Finance Dr David Masondo briefs the media on the areas of cooperation and mutual benefit between the two economies, to further the already fruitful ties between the two States at the office of Treasury in Pretoria.Picture:FREDDY MAVUNDA
Deputy finance minister and Public Investment Corporation chair David Masondo has dismissed talk of prescribed assets, which would have a negative effect on investor confidence and capital market efficiency (“PIC chair stands firm on prescribed assets”, September 18).
Yet there is another approach to accessing some of the considerable assets held in pension and other long-term funds. This approach would assist in financing expenditure on infrastructure, without the negative consequences mentioned by the deputy minister.
This approach would entail offering government infrastructure bonds at a low guaranteed rate of, say, 5%, with upside potential expressed as a function of the real increase in national revenue — that is total taxation. For example, let’s assume we reach a real annual GDP growth rate of 3%. As tax buoyancy is positive, tax should increase by a greater percentage, say 4%.
If the formula to calculate the additional interest were 150% of the annual tax rise the infrastructure bonds would pay interest of the guaranteed rate of 5% plus 1.5×4% = 11%. This is slightly in excess of current long-term bond rates. Should taxation increase by a greater percentage, say 6%, the total interest rate would rise to 14% — considerably in excess of current market rates.
This formula therefore splits the risk between the state and the funds. Should taxes grow strongly, the ensuing higher interest rate should be affordable to the state, and would also reward the funds for their risk. Consider for example that our roads rehabilitation backlog is estimated at about R400bn.
This sum is at the same time large in terms of our available state resources, but small (4%) in relation to the total holdings of all funds (which are some R10-trillion). These investments would not be prescribed, but would be purely voluntary so as not to distort markets.
Yes, they would entail risk, but would also hold considerable upside potential. This approach should therefore create a virtuous circle of increasing investment in infrastructure, reflected in favourable, above market, returns to the funds.
Willem Cronje
Cape Town
JOIN THE DISCUSSION: Send us an email with your comments to letters@businesslive.co.za. Letters of more than 300 words will be edited for length. Anonymous correspondence will not be published. Writers should include a daytime telephone number.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
LETTER: Alternative take on infrastructure bonds
Deputy finance minister and Public Investment Corporation chair David Masondo has dismissed talk of prescribed assets, which would have a negative effect on investor confidence and capital market efficiency (“PIC chair stands firm on prescribed assets”, September 18).
Yet there is another approach to accessing some of the considerable assets held in pension and other long-term funds. This approach would assist in financing expenditure on infrastructure, without the negative consequences mentioned by the deputy minister.
This approach would entail offering government infrastructure bonds at a low guaranteed rate of, say, 5%, with upside potential expressed as a function of the real increase in national revenue — that is total taxation. For example, let’s assume we reach a real annual GDP growth rate of 3%. As tax buoyancy is positive, tax should increase by a greater percentage, say 4%.
If the formula to calculate the additional interest were 150% of the annual tax rise the infrastructure bonds would pay interest of the guaranteed rate of 5% plus 1.5×4% = 11%. This is slightly in excess of current long-term bond rates. Should taxation increase by a greater percentage, say 6%, the total interest rate would rise to 14% — considerably in excess of current market rates.
This formula therefore splits the risk between the state and the funds. Should taxes grow strongly, the ensuing higher interest rate should be affordable to the state, and would also reward the funds for their risk. Consider for example that our roads rehabilitation backlog is estimated at about R400bn.
This sum is at the same time large in terms of our available state resources, but small (4%) in relation to the total holdings of all funds (which are some R10-trillion). These investments would not be prescribed, but would be purely voluntary so as not to distort markets.
Yes, they would entail risk, but would also hold considerable upside potential. This approach should therefore create a virtuous circle of increasing investment in infrastructure, reflected in favourable, above market, returns to the funds.
Willem Cronje
Cape Town
JOIN THE DISCUSSION: Send us an email with your comments to letters@businesslive.co.za. Letters of more than 300 words will be edited for length. Anonymous correspondence will not be published. Writers should include a daytime telephone number.
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