SA’s post-Covid revival: why harnessing pensions for infrastructure may just work

Forget prescribed assets. They’re a diversion from the potentially solid proposal now on the table that seeks a social compact through retirement funds, representing millions of South Africans’ long-term interests, for investment in growth and employment-generating infrastructure projects.

The introduction of prescribed assets would have been the government’s blunt instrument to force a proportion of retirement fund assets into the dark holes of virtually unaccountable state expenditure. The state would have been raiding pension assets while simultaneously, and in contrast, urging retirement provision.

Instead, what seems now to be emerging is the opposite. If the state isn’t to force the markets, it must be friendly towards them. At least the latest proposal has sparked formal discussion, in contrast to talks that were previously conducted inelegantly, to resolve longstanding contentions about the deployment of retirement fund assets.

On the one hand there’s a state desperate for investment. On the other there are retirement funds screaming for a broader range of investable opportunities. The crisis over Covid-19 brings the issues to a head:

• How to fund SA’s huge infrastructure requirements when the fiscus has no money; and
• How the mega-billions of rand in retirement funds can be put to more productive use in SA’s real economy. There would be alternatives to hedging against the rand (by investing offshore or piling into large-cap giants on the JSE whose revenues are earned primarily outside SA) and being trapped in the ever-shrinking pool of domestic mid-cap JSE-listed equities (especially when the post-Covid scenarios for many old favourites range from speculative to sombre).

To dispense with the political wrap, the ground is being prepared for retirement funds to invest much more heavily in the unlisted space than the limits at present allowed under the Regulation 28 prudential guidelines. The principle is well and good, so long as established rights, enshrined by the Pension Funds Act for the protection of fund members, remain inviolate.

What is unclear is the origin of this new proposal, which is quickly generating heat and suspicion over its intentions. ANC transformation head Enoch Godongwana, in the role of spokesperson, happens also to chair the board of the Development Bank of Southern Africa, which is centrally involved. His comments follow an address in London at end-May by ANC treasurer-general Paul Mashatile.

At the same time, with detail yet to be hammered out, none of the dribs and drabs to have emerged looks contradictory to the laments in the 2020 Budget Review that finance minister Tito Mboweni tabled in February.

Neither is it clear whether sweeping amendments to Regulation 28 are required. However, there would need to be a shift in the emphasis from listed securities so that funds will be able to invest in designated “development finance institutions” such as the Development Bank. These will in turn create and offer proposals, mindful of targeted take-up, for retirement funds’ direct investment in identifiable projects rather than generic instruments.

Their acceptance or rejection by retirement funds could depend, among other things, on whether the government will guarantee the returns forecast. Another issue is the interest rate applied for feasibility projections. Retirement funds might divert from their traditional role as lenders or holders of liquid assets to become co-owners of bridges, dams or whatever. The illiquidity of such assts would need to be reflected in the risk-reward ratio.

Who then will negotiate and evaluate the projected yields? Few funds have the in-house capability even to decide their asset allocations. They engage asset consultants and managers under mandate.

But these are precisely the adviser categories that the draft proposal wants excluded from involvement, ostensibly for the costs of intermediation to be reduced. Yet it can be argued that retirement funds will either have to absorb the cost or fly blind in breach of their fiduciary duties, inclusive of governance oversight.

Moreover, independently of government a number of asset managers have significantly cut their teeth in infrastructure projects. They have experience to share. Additionally, they’re fiduciary stewards for retirement funds. As such, in the absence of the funds themselves having a single collective voice, they are positioned to play a representative role in negotiations with the government and the assessment of feasibilities. They’d also guard the henhouse from the fox.

Unlike prescribed assets, on a benign interpretation this latest proposal looks encouragingly market-attuned. Part of the conversation must be about sharing in the costs of social infrastructure, in the interests as much of the state as of retirement funds. Both have putative commitments to the UN Sustainable Development Goals.

Numbers involved are hard to define. Mashatile has mentioned a $20,5bn infrastructure programme “after talks with the private sector and multilateral lenders as part of an attempt to recover from the coronavirus epidemic”. It may be assumed that the “private sector” is partially a euphemism for retirement funds.

Prior to Covid-19 the Budget Review noted that government had committed R100bn to the Infrastructure Fund mainly from the “private sector”. The fund’s implementation unit, housed within the Development Bank, “aims to build a pipeline of potential projects worth over R700bn over the next 10 years”.

There follows in the Budget Review a list of 30 major projects, only one of them ready for implementation. The National Treasury admitted that the value of the government’s infrastructure budget “is eroded by insufficient capacity and skills” so it is introducing reforms “expected to improve the effectiveness of infrastructure spending and develop a project pipeline for funding by the government and the private sector”.

Maybe this time it’s serious. It must be, because time isn’t on its side.

• Allan Greenblo is editorial director of Today’s Trustee, a quarterly publication mainly for principal officers and trustees of retirement funds.