Prescribed assets? There are more productive options to spur growth

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By Busi Mavuso 

The mismanagement of South Africa’s state-owned institutions over the past decade has ruined the investment case of some of the largest firms in a portfolio of more than 700 under the ambit of the Department of Public Enterprises.

The problem for the state is that the clean out and re-establishment of governance at companies such as Eskom and SAA will take years to implement. Over that time, these companies need to be funded. If bondholders, skittish to the everyday news of discord within the governing party, aren’t convinced of government’s commitment to see it through, the more the state will be expected to come to the aid of these companies. And given the country’s fiscal position and the low growth prospects both locally and internationally because of the impacts of trade war, it’s an untenable situation.

In this light one can understand why the governing party, possibly in a sense of panic, has sought policy proposals to ease the pressure – but unfortunately they’ve latched onto a policy solution from the apartheid regime that in the end wasn’t much of a solution.

Prescribed assets featured in one line of the ANC’s 2019 election manifesto with a promise to “investigate” its introduction to “unlock resources” for social and economic development. No moves have yet been made to develop legislation, but it could be taken up by the ANC caucus in Parliament if the debt metrics of our large parastatals doesn’t improve and soon.

The apartheid government has been one of the few in recorded history that used prescribed assets as a policy solution. From 1958 to 1989, it compelled insurers and asset managers to invest in semi-governmental bonds in institutions such as the SABC and the homelands.

During our isolated apartheid years, it was perhaps necessary because there were no sources of foreign investment. However, this is not the case now with foreign investors being significant holders of South African assets. A reintroduction of the apartheid policy would have a distortionary impact on our markets and risk driving away foreign investors.

Any funding successfully directed towards developmental projects as a result of such a policy would be more than swamped by the damage to foreign and general investor sentiment, leading to wider economic weakness.

Prescribed assets primarily will divert savings from the private sector to the public sector, reducing private sector investment. It is also a challenge to the principle of property rights, effectively expropriating the savings of a certain segment of the public.

Instead of forcing investment into development through an archaic policy such as prescribed assets, markets are open to developmentally-oriented bonds such as “green bonds” or “infrastructure bonds”. These can be developed and marketed to funds with matching risk and social objectives.

Appropriate development projects are simple to fund because the growth impact of such projects improves the overall government balance sheet. The credit case is therefore clear. Infrastructure investment, for example, increases gross domestic product which improves tax revenue.

Impact investing is a growing trend worldwide where investors seek a social and not just financial return. Government could pioneer impact investment strategies that deliver welfare outcomes through a creative engagement with local and global impact investors.

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