After the Bell: ANC gets all tautological over prescribed assets

Here is a joke I found on the internet: A theoretical physicist is applying for a job and the interviewer asks: Why are manhole covers round? The physicist thinks for a while and says, they are not all round, there are some square ones. The interviewer says, well, just consider the round ones. The physicist says that’s a tautology: if you are just considering the round ones, they are round by definition.

So, the interviewer says — now somewhat frustrated — can you think of any physical property that round manhole covers might have? The physicist replies, well, it’s best to use round covers when you have a round hole. So, they gave him a job … in the marketing department. 

A tautology is difficult to define: it’s a statement that is true by necessity. But it’s a very useful concept, especially when it comes to politics because, oddly, many witting and unwitting tautologies find their way into political discussion. And you know what is great for any examination of tautologies? Election manifestos. Why? Because the first rule of politics is to make sure you don’t say anything specific, while at the same time appearing to say something very specific. It’s, how should we say, a tautology. 

The big tautology in the ANC’s election manifesto concerns prescribed assets. This is a big and complicated topic. Essentially, the idea is that you, the government, force the private sector to set aside a proportion of your investment assets for investment in socially minded projects. Typically, the target is retirement fund investments, or sometimes insurance funds.

It’s a kind of halfway house between free investment and the government forcibly grabbing the capital through taxation to embark on its investment enterprise. The justification is that most investment happens on a short-term basis, so forcing pension funds to invest in long-term projects counters that trend. 

That’s the investment part, but there is another utility: It can be a big help to highly indebted governments by forcing investment into government bonds, which could stabilise government finances during financial crises or downturns. It helps the government avoid having to rely on foreign capital, which can be more volatile. 

In terms of investment theory, prescribed assets are the equivalent of throwing money into the toilet. It’s that bad. If investment decisions are not made on the basis of risk and return considerations, they almost, by definition, end up being suboptimal. They distort the market — never a good thing — and they can crowd out more effective private capital. They also often involve political risk. Obvs.

For these reasons and others, prescribed assets have typically been dumped by governments after they got burnt. To find an example of this, we need to look no further than the apartheid government, which had a prescribed assets system for years.

The fact that the apartheid government used prescribed assets should be a lesson in itself. The apartheid government was so loathed by investors around the world that in its later years it struggled to cover government debt issuance. Its only option was to force SA savers to buy the debt — it was an act of economic desperation, not an act of financial planning. 

Much depends on the terms, the extent and the use, of course. Some governments still have prescribed asset requirements on the statute books, notably Malaysia and India. But they are pretty modest in their scope, and plenty of other countries tried this and scrapped it, notably the UK.

Like many left-wing governments around the world, the ANC has flirted before with prescribed assets, but before 2019 it was never a big issue for the party. In fact, in his first major address at a business conference in 1994, just before the first democratic election, the ANC explicitly rejected prescribed assets. 

The party’s then leader and soon-to-be president Nelson Mandela asked this question: “What about a reconstruction levy, prescribed assets and foreign exchange controls? The ANC does not want to be prescriptive. Our preference is that if national consensus on economic goals and a partnership between business and government take root, then government laws and policing should become redundant.”

Well, it turns out, the ANC does want to be prescriptive. In its 2019 election manifesto, the party promised to “investigate the introduction of prescribed assets on financial institutions’ funds to unlock resources for investments in social and economic development”. 

The party’s 2024 manifesto repeats this call, saying the ANC will “engage and direct financial institutions to invest a portion of their funds in industrialisation, infrastructure development and the economy, through prescribed assets”. Both also talked about a Sovereign Wealth Fund. 

So, what has changed? My guess is two things. First, the ANC is a bit more desperate (government debt is getting to be very large and very expensive). Prescribed assets pretend to be for social good, but given that they are normally introduced by governments under pressure, it’s fair to assume they are a sleight of hand. 

Second, the ANC doesn’t want to be outflanked on its left by the EFF. So, it’s putting these things into its manifesto because it knows the EFF may be doing the same. However, given that this was introduced in 2019 and never acted on, it’s presumably not a high-priority issue. I suspect it’s being held in reserve in case things do get kinda hairy. 

So, how does the tautology issue factor into all of this? Well, it’s simple: if you have spade-ready investment projects that are based on commercial principles, then finding the capital is typically a walk in the park. It’s only when you don’t have ready-to-go, commercial investment projects that you need prescribed assets. If you impose prescribed assets and use them for those spade-ready, commercial investments, then you didn’t need prescribed assets in the first place. 

What prescribed assets demonstrate has nothing to do with investment and everything to do with the mentality of the people who impose them. What it means is that the proposers don’t believe the market will produce the funding they want for projects that are by definition not viable. However, projects that are not viable cannot be made viable by virtue of the fact that the funding was forced. 

It’s a tautology. It’s like the first rule of the tautology club … is the first rule of the tautology club. Get your head around that one. DM