A clear airing of what is needed regarding prescribed assets should be followed by a plebiscite assessing all those who are interested in putting skin in the game to save the country from a deeper socio-economic crisis. 

Let’s face it, it is fear-mongering to think that imposing a 2.5% or R200-billion prescription limit out of about R8-trillion in regulated assets would blow the house down. This is the kind of money that is easily wiped out in the equity markets in a week on the JSE.

If we are honest, investing in the equities on stock exchanges has its own dangers and all those with an appetite to spread their investment risk beyond securities must be given an option to commit their capital in social infrastructure so as to alleviate poverty and create jobs. Of course, such patriotism would have to be reciprocated with some form of incentives. 

With due respect to the policymakers and the asset managers, who are the professional custodians of long-term savings, it is high time that the real asset owners (the people on the ground) are listened to. Fund Trustees have been very silent in this debate.

Since the dawn of democracy, the ruling African National Congress (ANC) and its alliance partners have been floating a trial balloon to gauge the tantrum potential of the financial markets before introducing legislation aimed at changing the manner in which long-term savings are invested on things such as social infrastructure. 

Predictably, like a pint-sized two-year-old despot, some of the market commanders have over the past 26 years responded by pulling their faces, inflating their cheeks, banging themselves on the floor and performing the usual fit by a screaming toddler at a toy and sweets aisle. 

This is not the time to be analysing grumpiness. We all know that the balance sheets of the government and many JSE-listed companies are not strong enough, as in the past. 

You just have to look at the countless rights offers and share placements in the equity markets during Covid-19. These exceed R100-billion so far and no doubt such capital calls will be tapping into retirement savings.

The ANC government has been testing the waters for too long and the dilly-dallying has ignited uncertainty. A delay in kick-starting the economy risks boiling into a socio-economic crisis and societal instability that could destroy the same pensions that everyone is trying to protect. 

Meanwhile, the state has almost maxed its credit facilities. In the absence of capital directed at alleviating social infrastructure challenges, people must be given an opportunity to decide on a portion of their retirement savings.

The ANC government has been testing the waters for too long and the dilly-dallying has ignited uncertainty. A delay in kick-starting the economy risks boiling into a socio-economic crisis and societal instability that could destroy the same pensions that everyone is trying to protect. 

In the sixth chapter of the ANC-led Reconstruction and Development Programme (RDP) Policy Framework in 1994, the notion of prescribed assets or “socially desirable investments” was highlighted in the following manner:

“If the major financial institutions do not take up socially desirable and economically targeted investments, the democratic government should consider some form of legislative compulsion such as prescribed assets.”

The term prescribed assets has been taken to mean government compelling asset managers to invest a specified portion of pension funds and other long-term savings in state-owned company bonds and social infrastructure such as hospitals, schools, roads, housing and sanitation.

The idea of prescribed assets in the RDP document was put forward because when the ANC was voted into power, the government did not have enough resources to fund the social infrastructure needed to eradicate the inequalities bequeathed by apartheid.

Sadly, instead of approaching the prescribed assets debate in an innovative manner around a viable public and private partnership exercise, some players in the savings industry have reacted to the prospect in an uninspiring manner. 

It wanted private financial sector institutions to participate in this or else. Essentially, they were saying if piggy didn’t open the bank door then the wolf would huff and puff and blow the house down. 

In 1994, South Africa’s debt to GDP was flirting with the 50% mark (49.2%). Then the economy was sized at about $139-billion. Fast forward to 2020 and this situation has worsened. Tito Mboweni, Finance Minister at the time the article was written, predicted a debt-to-GDP of 81% at the end of 2020. South Africa’s economy is at present worth about $368-billion. In 1994 the official unemployment rate in the country was 20% and in the first quarter of 2020 it was 30% (40% including those that have lost hope in getting hired).

So, the recurring talk of prescribed assets must therefore be located in this escalated desperation. To say the fiscal position is the worst in 26 years is like saying the winter is cold — it is obvious! Due to this worsened position it is not insane to assume that the urge to enforce prescribed assets is even higher than in 1994.

Sadly, instead of approaching the prescribed assets debate in an innovative manner around a viable public and private partnership exercise, some players in the savings industry have reacted to the prospect in an uninspiring manner. 

Like the wolf-blowing-the-house-down threat, the asset managers are carrying their own spook, scaring retirement savers with the idea that their pension funds will be inserted into the sharp-toothed mouths of a financially greedy beast. What happened to the mantra of “managing risks and not fearing risks”?

That phantom is not sustainable, especially in an environment where people are losing their lives and livelihoods. 

In any case, asset managers do not have much of a moral surplus allowing them to comment on the disgusting detritus choking some of the corrupt state-owned entities. 

Asset managers have always and voluntarily deployed money in state-owned entities to generate returns, despite the known kakistocracy and crimes there. A lot of the money managers have been chasing yields, not morals. The only time there was noise was at Eskom. We all know corruption in state-owned companies was not limited to the power utility.

Added to this, asset managers are not telling the truth — that people’s retirement money did flow into the corrupt beer bellies of some parasitic executives at poorly governed JSE-listed entities. 

…corruption cannot be an excuse not to invest. The National Prosecuting Authority and the Special Investigations Unit need to have their teeth sharpened with bigger budgets in order for them to weed out a lot of the kleptocratic elements. Not even a cent of capital from prescribed assets must be transferred to state departments, especially provincial and local governments. 

This horror documentary played itself out at the broken furniture-making company Steinhoff, the rot at sugar-making Tongaat Hulett, the disconnected integrity at technology firm EOH, bad debts at the then reckless lending factory African Bank. The result was wasted billions of dollars in pensioners’ money destroyed in crashed offshore investments made by South African companies. 

Yes, we know that public infrastructure investments are prone to corruption, but we also know who stole from the taxpayers when the 2010 stadiums were built. It was some JSE-listed construction companies that were fined accordingly.

Some of South Africa’s asset managers do not want to talk about it because they over-back the equities bulldust that sometimes morphs into a roaring grizzly bear eating up pensioners’ money. On the other hand, the politically connected thugs at state-owned entities are easily bust as they loot amateurishly without an iota of sophistication. This was seen in Alibaba and the Forty Thieves, South Africa version, which nearly played itself out at 40 Church Square in Pretoria.

But corruption cannot be an excuse not to invest, though. The National Prosecuting Authority and the Special Investigations Unit need to have their teeth sharpened with bigger budgets in order for them to weed out a lot of the kleptocratic elements. Not even a cent of capital from prescribed assets must be transferred to state departments, especially provincial and local governments. 

The capital would have to be managed by a national or centralised investment command team made up of vetted investment professionals, financial intelligence agents, security-cleared technocrats from the National Treasury and Presidential Infrastructure Commission. All procurement would have to be done at that level. 

What of the statement that prescribed assets, as demonstrated during apartheid, generate sub-par inflation compared to listed equities?

A lot has been said about the 1988 Report of the Committee of Investigation into the Promotion of Equal Competition for Funds in Financial Markets in South Africa (Jacobs Committee) which cancelled prescribed assets. 

Under apartheid, about 53% of pension funds were allocated in the country’s government bonds. People have created an Excel sheet version of the Jacobs report using it to demonstrate the sub-inflation returns achieved in the prescribed asset era during apartheid.

Now, there is no prescription in South Africa. Regulation 28, which gives effect to Section 36 (1)(bB) of the Pension Funds Act, imposed an asset class investment limit of 75% equities, 30% offshore assets, 10% hedge funds and 25% in property.

It is unwise to simply compare the returns on prescribed assets to listed securities in percentage terms. When you fall into this trap you miss out on the unquantified benefits that accrue from social infrastructure and the averted risks that could boil into a full-blown social crisis. 

The asset managers’ argument discounts the fact that prescribed assets have the ability to transform the economy by training a new professional generation of civil engineers, boiler-makers, quantity surveyors, geologists, accountants and many other skilled folks. 

In the absence of infrastructure spending there is an increasing number of frustrated unemployed built-environment, accountancy and legal graduates from prestigious universities. Some of these youths’ education was paid for by the National Student Financial Scheme (NSFAS) and they cannot repay it. Others are now relying on their parents and grandparents’ pension savings to survive, eating out of the same investments that some asset managers are trying to protect. 

Let’s face it, under apartheid, prescribed assets geared towards infrastructure contributed to the skills creation of a wealthy white professional and artisanal class. 

Think of the people who were trained at the Industrial Development Corporation, Transnet, Sasol or any state entity funded through prescribed assets under apartheid. A lot of them were able to start their own businesses and have created a lot more jobs for South Africa today. 

The ANC government has not done much of this, although it is equally fair to acknowledge that a black middle class did emerge post-1994. 

The risk of not using prescribed assets in this tough self-inflicted fiscal environment is that the same pension-saver may not enjoy their benefits in the future due to pressure on their incomes caused by unskilled unemployed family members, expensive healthcare infrastructure caused by absence of quality public medicare and so on.

Already the fixation on equities has contributed to the destruction of South Africa’s competitive construction sector. There is no longer talk of big-four listed construction companies. What this means is that when the building companies faltered, pensioners’ money also tumbled like a ton of bricks. The other uncalculated threat is that in the future, South Africa risks relying on foreign construction players to service an infrastructure roll-out as a number of fortunate construction professionals are emigrating.

What must be done?

This is where creative asset managers and alternative investors like private equity players come in. A strategy could be devised to create social infrastructure that helps the poor while generating some form of financial return on pensioners’ money. For example, patients from poor families could be cared for in a privately managed hospital while those who can pay are given space in user-pay wards. Similar projects could be designed in education, transport infrastructure and so on. 

The State has got to shed some of its companies before there is a desperation to dispose of them at bargain-basement prices. There is no need for municipalities to be saddled with tens of millions of rand in costs incurred running large stadia. Municipalities must sell the stadia and keep strategic minority equity positions. 

This was done with Telkom, Iscor, Sasol. Private equity people have experience in flipping assets. They do not fall in love with assets like spouses do with each other.

The decision on the exact percentage of prescribed assets must be put out now and the retirement savers committed to assist must raise their hands. BM/DM

Hlubi Xaba is a pseudonym, adopted to avoid the possibility his current employer might be inadvertently associated with his views. His identity will be revealed in the future.