By: Janina Slawski, Head of Investment Consulting – Alexander Forbes
There has been a significantly raised level of interest in the prescribed assets issue in the last few weeks. Questions are being asked on whether this would be preferable to an IMF bailout, Cosatu has come out in support of prescription, and President Ramaphosa has called for a dialogue on the issue.
The Alexander Forbes position on this continues to be that we are opposed to any regulation, including prescription, that could lead to suboptimal investment outcomes for investors, particular members of retirement funds where fiduciary duty requires that members’ benefits be safeguarded and grown.
In respect of an International Monetary Fund (IMF) bailout, countries that have had to apply for an IMF bailout have typically been countries with balance of payment issues and banking crises. South Africa has neither of these, and the South African Reserve Bank continues to play a critical role in safeguarding South Africa in these realms, ensuring that a request to the IMF is still an unlikely resort for South Africa.
The country’s fiscal position is, however, dire. It is therefore not surprising that questions are being raised about whether retirement funds and other investment pools could be used as a source of funds to meet South Africa’s budget deficit, especially if more state-owned entity (SOE) debt (specifically Eskom) has to be taken onto the government balance sheet.
It is instructive to review the responses of President Ramaphosa when asked in front of the National Assembly for a direct answer on whether he supported the implementation of prescribed assets. Whilst he voiced support for initiatives that would be good for South Africa, and that would give good returns for pension funds, he did not indicate support for implementation of prescribed assets.
President Ramaphosa’s specific response when questioned on prescribed assets was that “we will pursue policies that advance the interest of our people here in South Africa and also advance the interest of pension fund holders”. He continued: “Our policies are clear. We are pursuing a strategy of economic reform and it is seen as quite positive by the investing world.” Since prescription would be viewed as extremely negative by the investing world, we view this as support for strategies outside prescription that support developmental objectives. President Ramaphosa referred to successful developmental initiatives invested in by the Government Employees Pension Fund, and that “pension funds make good returns out of infrastructure developments”.
These comments support a strong positive stance on impact investing, which we believe could make a significant difference to the growth and job creation initiatives that the country so critically requires. If compelling investment opportunities were to be created to invest in growth and job creation, then retirement funds and other investors would be enthusiastic potential investors in these initiatives for their own enhanced returns as well as the positive effect that it could have on South Africa and the communities impacted by the investments. It is not a lack of capital for investment into initiatives that is the issue, but rather a lack of investible opportunities that is retarding investment.
The recently released National Treasury Economic Growth Strategy document raises hope that the focus will shift away from negative thoughts of forcing prescription towards growth initiatives. The document proposes extremely positive ideas that, if implemented, could lift GDP growth by 2 to 3% a year in the medium term. The challenge will be to ignite some of the job-creating initiatives that hold hope for the vast numbers of our unemployed population, before the negatives of job losses start to take hold in government and state-owned entity sectors that need to reduce costs to have a hope of returning to profitability.
The successful case studies for impact investing speak for themselves:
- The Renewable Energy Independent Power Producer Procurement Programme (REIPPP) has made a significant impact on the economy, job creation, community upliftment, economic transformation and climate change
- The Financial Sector Code (FSC) committed participants to actively promote a transformed, vibrant and globally competitive financial sector that reflects the demographics of South Africa. Opportunities were found to invest in projects that gave an attractive return to investors whilst meeting the requirements of the charter, which included investments into housing, infrastructure, agriculture, schools and SME financing.
- The Jobs Fund was launched in June 2011 with an amount of R9 billion set aside to co-finance projects by public, private and non-governmental organisations that significantly contribute to job creation. This involves the use of public money to catalyse innovation and investment on behalf of a range of economic stakeholders in activities that contribute directly to enhanced employment creation in South Africa.
- The N4 Toll Road project is a public–private partnership that includes socio-economic outcomes to empower and uplift communities along the N4. Success has been achieved through social and entrepreneurial development, job creation, and training and skills transfer in a variety of fields.
Each of these successful initiatives has been funded by investors seeking and achieving superior investment returns, within acceptable risk parameters. The investors behind investment capital were willing, superior returns were achieved, and the positive spin-offs in community upliftment have been significant.
What is required to achieve a significant growth impetus for South Africa is not prescription. It is the launch of initiatives that will ignite investor interest in attractive, risk-adjusted returns, with the potential for significant socio and economic upliftment.
But what is critical is that we move beyond the wholesome concept of impact investing and into the realm of hard investment realities. If specific projects could be put forward that are seeking investment capital, then investors would be able to evaluate these opportunities and determine whether they represent viable investment cases. Without these real, live potential investments, the concept of impact investing and the difference that it could make to the South African economy and its people will remain nebulous.
Without hard investment opportunities, impact investing will not have the opportunity to gain momentum.