By Rob Rose

Barely a week after finance minister Enoch Godongwana delivered a message of sane fiscal prudence, his political party, the ANC, put out an election manifesto which seemed to do precisely the opposite.
It’s the kind of the dissonance that has hurt the country’s economic credibility, underscoring an impression that the ANC will say whatever it must to win votes, ahead of the May 29 election.

Prescribed assets

The flash point is the re-emergence of a plan that many thought had long been torched: prescribed assets. This is a policy that forces retirement funds to invest a percentage of their assets in a specified way, such as in state-owned entities such as Eskom, or in infrastructure projects.

In the ANC manifesto launched last week, the ANC says it will “direct financial institutions to invest a portion of their funds in industrialisation, infrastructure development and the economy, through prescribed assets”.

There are many other terrible ideas in that ANC manifesto which, like prescribed assets, have been raised repeatedly before and gone nowhere – such as the idea of a “state bank”, and running an “expansionary fiscal policy” in a country battling to keep its debt-to-GDP ratio below 80%.

But it’s prescribed assets – a populist move designed to force the private sector to inject cash into state entities or projects which, left to their own devices, would struggle to make a compelling investment case – that gives the lie to the cotton wool assurances that President Cyril Ramaphosa’s government has given to the business sector.

Predictably, this raised red flags for asset managers, who pointed out that, if these infrastructure projects aren’t able to provide compelling returns, and are able to attract funding only by virtue of state fiat, this compromises the savings of all South Africans.

“It’s an election year, and this may garner votes,” Asief Mohamed, chief investment officer of Aeon Investment Management, told Today’s Trustee.

“South Africa has a deteriorating infrastructure that needs funding. Unfortunately, government seems bent on taking workers’ deferred wages to fund needed infrastructure investments, which have been held back by government bureaucracy, poor government leadership and red tape.”

Nonetheless, Mohamed believes this revival of “prescribed assets” is a red herring, and he doubts the government will be able to implement it.

A better way to lure private-sector investment, say asset managers, is for government to demonstrate that its infrastructure projects can deliver viable returns on time, and on budget.
As Allan Gray’s Sandy McGregor wrote in 2020, a year after the notion of prescribed assets was again floated in the ANC’s 2019 manifesto, it’s the wrong debate to be having.

“The problem is not – nor has it been – the availability of funds, but a lack of suitable projects. During the past decade, state institutions tasked with infrastructural development have been crippled by gross mismanagement and endemic corruption,” he said.

Fix those state institutions, he said, and this will allow those firms to launch viable projects which can be financed, whether by banks, pension funds or other institutions. “Usually non-viable projects should not proceed in the first place, but if they are judged to be in the public interest, they should be financed by the state,” he said.

McGregor said prescribed assets is tricky for trustees, since any change to regulation 28 to accommodate this policy “will not relieve trustees of their fiduciary obligation to act prudently in the interests of their fund’s members”.

Trustees also have the historical example of the National Party government, which implemented a policy of prescribed assets during the apartheid era, to fund its state entities, which did serious harm to pension savings and business confidence.

“Pension funds already hold SA government bonds, and enjoy really size-able real returns as a result,” said Razia Khan, head of research for Africa and the Middle East at banking group Standard Chartered. “Where does this talk of prescribed assets come from? What did I miss?”

It’s a valid question. This talk of prescribed assets, other than a dog whistle for those who ideologically favour state intervention to collar free markets, doesn’t seem a vital intervention at this point. Transnet, on the verge of getting a new CEO and under the astute chairmanship of Andile Sangqu, has reported some impressive reversals of its ill fortunes at the ports in recent weeks, which would make it more bankable. Eskom has had the benefit of a R254bn debt relief package to strengthen its balance sheet.

But as an election gambit, this would appeal to some who would otherwise vote for the EFF, while allowing it to sell the idea of a “plan” to reverse decay in state entities to its voters.

Still, it seems deeply cynical, coming days after the budget, which was presented by a finance minister who, in his previous incarnation, was the ANC’s head of economic policy.

Francois Stofberg, a senior economist at Efficient Wealth, summed up this contradiction. The budget, he wrote in Moneyweb, “rang a perfect pitch in the ears of anyone who believes in market efficiencies; in other words, capitalism”, but this was completely at odds with the ANC’s manifesto, which spoke of policies that all require vastly more spending, higher taxes and less free markets.

“It was almost the exact opposite of what we heard during the budget,”

Francois Stofberg

There was certainly little to fault in Godongwana’s budget, which confirmed that the two pots system would be implemented in September. Dipping into the forex reserves, accumulated in a special fund in the Reserve Bank which had grown to R507bn, allowed Godongwana to target a lowering of the country’s debt-to-GDP ratio to 75% by 2025/26.

The ratings agencies were appeased, the business sector breathed a sigh of relief at the absence of election gimmicks, and economists praised the sanity of it all. Then three days later, the ANC messes it all up again.

What does it say about future policy-making that the governing party doesn’t seem to be speaking to those occupying pivotal roles in the government it leads?

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