PRESCRIBED ASSETS: A DRIVER FOR CHANGE?

More than two decades since the idea was proposed by the ANC, it has become clear, as the RDP and COSATU realised, that the massive developmental challenges the country faces cannot be addressed with the form of regulation that currently prevails. There are massive backlogs in school infrastructure – for example, 88% of schools have no laboratories, 93% have no libraries or libraries are not stocked, and we have a shortage of 210 000 educators. Health infrastructure and services are also strained – there is a shortage of 200 000 nurses and at least 15 500 physicians. Water infrastructure is also crumbling (e.g. canals and tunnels) and it requires more than R300 billion to fix; road infrastructure is facing problems, with 70% of South African roads in need of urgent repair and 58% still being gravel roads. These are just some of the examples to demonstrate the scale of the problems. The more there are delays in addressing these challenges the more compounded they become for future generations.

A PRESCRIPTIVE HISTORY

Asset prescription is a regulatory mechanism that specifies the percentage of assets that pension funds must hold. Section 19 of the Pension Fund Act (the Act) of 1956 prescribed that registered funds should hold at least 40% of their assets in specified asset classes. Some of the asset classes that were specified by the Act were bills, bonds or securities issued or guaranteed by Government, local authorities authorised by law to levy rates upon immovable property, Rand Water Board or the Electricity Supply Commission or by any institution which is, in the opinion of the Registrar, financially sound and which has been approved by the Registrar.

An amendment of the Act in 1957 shifted the power to prescribe assets from the Registrar of Pension Funds to the Minister of Finance. Later versions of the Act were not as prescriptive. They gave the Minister of Finance powers to limit “the amount which and the extent to which a fund may invest in particular assets or in particular kinds or categories of assets, prescribing the basis on which the limit shall be determined and defining the kinds or categories of assets to which the limit applies” (Section 36(bB), as amended). As can be seen there is no longer any prescription as to the proportion of assets that should be held by registered funds, nor is there a specification of public sector liabilities that should be held by these funds.

IN THE DEMOCRATIC ERA

In the ANC, the idea of prescribed assets found expression in the 1992 Ready to Govern document. Though the document does not explicitly mention prescribed assets, it refers to mechanisms to encourage private-sector financial institutions to channel resources into productive investment. Prescribed assets are explicitly mentioned in the Reconstruction and Development Programme (RDP), where it is mentioned that “government cannot fund the RDP without support from the private sector”. The RDP recommends that “the democratic government must modify regulations…it must attempt to mobilise a significant proportion of contractual savings, within an appropriate regulatory and financial framework, for socially desirable investments, without affecting the risk profile or decreasing the returns on investment. 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 Congress of South African Trade Unions (COSATU), in its Growth Path document of 2010, stated that “this growth path [towards full employment] will not succeed unless there is a specified percentage of assets that are prescribed by legislation to be invested in priority areas”.

STRIKING A BALANCE

From a fiscal point of view, prescribed assets are a mechanism to fund an expansionary developmental fiscal policy while at the same time maintaining debt-sustainability. The financial returns on longterm infrastructure and human development may be relatively low and they take time to be realised. However infrastructure and human development are the foundation for long-term social cohesion and sustainable economic growth. Prescribed assets, if they are well designed to strike a balance between risk-adjusted returns and long-term socio-economic development, can go a long way in addressing the funding challenges the country faces.

Today, debt-service costs are projected to increase to 15% of budget revenue by 2021. In the context where the real interest rate paid by government on public debt exceeds the growth rate, there is an inherent pressure for the debt-GDP ratio to climb. Prescribed assets could make funds available at a growth-linked real interest rate to promote fiscal sustainability while opening space for government to pursue an expansionary developmental fiscal stance to address the very long term socioeconomic challenges that the country faces. At the heart of the discussion about prescribed assets is the need to design a new financial policy framework that is responsive to the socio-economic hardships faced by all South Africans.

AUTHOR

MXOLISI MBEKWA AND PROF CHRIS MALEKANE

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