After the Bell: Prescribed assets — the inevitable backtrack

Deputy Minister of Finance David Masondo. (Photo: Gallo Images / Ziyaad Douglas)

22 Sep 2024

The extraordinary thing about the idea of prescribed assets — basically a legislative requirement to invest in a sector or an industry — is that everybody knows it’s been tried before in SA and it failed.

Don’t you love a political backtrack? If there is an art to it, it’s something politicians don’t seem able to master. There are many examples, but one of the most memorable was when US President George HW Bush said during a presidential debate in 1988, “Read my lips: no new taxes!” Then he raised taxes during his first year in office. Surreptitiously. Then he increased them again, and then he lost the next election.

You have to ask, how is it possible that he could paint himself into that kind of corner? Why impose on yourself — when you know you may need wiggle room — an intractable position, particularly with such a catchy phrase that people are going to remember it? At the time, his problem was that his opponent, Michael Dukakis, had said the sensible thing. He declared he wouldn’t raise taxes “except as a last resort”.

To counter this equivocal affirmation, Bush felt he had to be more definite. He won that election, but the phrase came back to bite him in the next election.

Just contrast for a moment political backtracking with economic backtracking. It’s often impossible to get an economist to be precise. Phrases are hedged. Determinations are dependent. Predictions are circumscribed. Utterances are passive-voiced.

To be fair, they are in different positions. The urgent requirement of politicians is to win this election. This one. Right now. The future, from their perspective, can look after itself. The priority is to get over the line — without that, it makes no difference. Economists know they may be wrong and probably will be wrong, but their function (hopefully) will continue. So it makes sense to hedge.

And thus it is with many of the ANC’s election promises. In the ANC’s 2024 election manifesto, there is a single reference to the idea of prescribed assets. In a section on financial sector transformation, the phrase goes like this: “Engage and direct financial institutions to invest a portion of their funds in industrialisation, infrastructure development and the economy, through prescribed assets.”

It doesn’t say what portion, or how, or when, or even why. And what is one to make of the dual-headed phrase, “engage and direct”? If there is going to be “direction”, a legislatively forced measure, why is “engagement” necessary, apart from the legal niceties for getting legislation passed in SA?

Bad idea

after the bell prescribed assets Deputy Minister of Finance David Masondo. (Photo: Gallo Images / Ziyaad Douglas)

Anyway, the election is over and the ANC has to try to somehow turn this pledge into some sort of reality. The problem is that it’s a bad idea and everybody knows it. Not only has the Financial Sector Conduct Authority — a government-appointed body, nogal — come out against it, but no less a person than the deputy finance minister, David Masondo, has shot it down.

His arguments were trenchant, but also kinda obvious. “The problem with prescription is that recipients of the prescribed funds may be incentivised not to manage the entities — for example, SOEs [state-owned entities], municipalities, etc — effectively and efficiently, as they would be guaranteed to get funds regardless of how they are managed.

“If these entities were to continue to be ineffective and inefficient, they would be boosted by prescription in the short term but would fail in the medium to the long term and fail to give any return and to repay the retirement funds, which will in turn lead to the failure of the retirement funds,” he told a recent Old Mutual investment conference.

The extraordinary thing about the idea of prescribed assets — basically a legislative requirement to invest in a sector or an industry — is that everybody knows it’s been tried before in SA and it failed. Prescribed assets were policy in SA between 1958 and 1989. And we know exactly how much they underperformed. Sanlam’s latest Benchmark Survey records that during this period the underperformance was 6.4% per annum in the 1960s, 17.2% per annum in the 1970s and 6.7% per annum during the 1980s. You have to try hard to achieve such bad results.

I suspect Masondo might be particularly sensitive to underperformance because he also serves as the chair of the Public Investment Corporation and he knows that public servants will have his guts for garters if their pensions underperform as badly for that long. He mentioned this danger, saying if the prescribed investments offered below-market returns, “it would reduce the ability of retirement funds to meet their liabilities and the ability to pay benefits in the medium to long term”. And then, government employees might have to increase their contributions. Horrors!

Alternative approach

Masondo suggested an alternative approach, which is essentially to offer a carrot instead of a stick — a positive investment environment combined with attractive, free-market inducements to invest. He cited the government’s Water Partnership Office, which is similar to the Independent Power Producers Office, which has seen billions invested in renewable energy over the past decade. All very sensible.

One of the problems with what we might call the ANC’s constant string of broken promises is that its election manifesto derives from its electoral conference; these conferences are dominated by the cadres with the biggest megaphones and the most righteous attitudes. The worst ideas tend to percolate upwards.

As they did — and this is deeply ironic — during the heyday of the National Party. The similarity between the old National Party’s economic programme and that of the modern ANC is one of the most remarkable and yet least remarked-on shared characteristics.

But, you know, there is a positive side to this. During the National Party period, brute-force decisions found their way into legislation. This measure sat on the statute book for nearly 30 years — it’s just incredible.

In the current period, we are happily convulsed by endless delays, gratifying disorganisation and continual vacillation. After all, prescribed assets were in the previous election manifesto too.

Mostly this is not good. But sometimes… DM

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Business Maverick

Bad idea

Alternative approach