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June 3, 2020

SOUTH AFRICA: What to make of the infrastructure funding push

BY Anne Frühauf

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( 6 mins)
  • The ruling party is pushing plans for a ZAR 350bn infrastructure fund as one of the very few options available to boost South Africa’s economic recovery prospects.
  • Controversial infrastructure funding proposals, albeit at an early stage, aim to target pension funds and envisage the Reserve Bank creating a ZAR 500bn “funding instrument.”
  • As so often, these debates are very unlikely to advance quickly but will generate noise and add another layer of policy uncertainty.

The ANC’s proposals for “economic reconstruction” are at the conception stage and have not been adopted by the ANC National Executive Committee (NEC) or by the cabinet. Instead, the presentation by ANC policy head Enoch Godongwana is an opening salvo in a likely protracted policy debate. The economic proposals are broad, including a state-owned bank and a state-owned pharmaceutical company. Yet one of the most heated debates will be how to fund plans to fast-track infrastructure projects, which the ANC considers one of the few options left to mobilize public financing and stimulate the economy. Although far from new, the debate is quickly gaining new currency in the context of the state’s ever-deepening fiscal travails and the terrible economic fallout from the pandemic.

Reserve Bank expectations

One proposal for infrastructure financing is that the South African Reserve Bank (SARB) creates a “funding instrument with development finance institutions to the tune of ZAR 500bn” to enable development finance institutions (DFIs) to access funding for infrastructure projects at “favorable rates.”

This proposal will not fly with the SARB’s independent-minded leadership or Finance Minister Tito Mboweni. While the SARB has responded strongly to the crisis – by cutting the repo rate by 275 basis points so far this year, increasing government bonds purchases in the secondary market and undertaking prudential measures – it has denied that it is engaging in quantitative easing and rejected demands from the ANC’s populist faction that it purchase government bonds directly. Mboweni and SARB Deputy Governor Kuben Naidoo have been similarly quick to dismiss the infrastructure funding idea. Nevertheless, the SARB will increasingly become a target in ANC policy debates, as the fiscal situation worsens, and global economic orthodoxy is questioned.

Targeting pensions

The presentation also proposes that regulation 28 of the Pension Funds Act be amended “to increase access [to] the savings of South Africans to fund long-term infrastructure capital projects managed by [DFIs].” According to Godongwana, the goal would be to enable – rather than oblige – pension funds, which can invest in government bonds and stocks markets, to invest directly in infrastructure projects or DFIs, such as the Development Bank of Southern Africa (DBSA), which Godongwana conveniently chairs.

Yet any potential legislative change seems far off. Even if Mboweni and the National Treasury embraced the idea (an uncertain prospect), the drafting and parliamentary process would imply at least a couple of years (possibly many more) to implementation.

No prescribed assets, for now

While Godongwana’s proposals are but an opening bid, the idea of tapping pension fund assets is unlikely to die down. This was displayed by Reuel Khoza’s comments last week that the Public Investment Corporation (PIC), which manages public pensions, could convert close to ZAR 100bn of Eskom debt to equity. While Khoza’s proposal seems far from being adopted, the ANC-aligned Congress of South African Trade Unions (COSATU) has been trying to push the public pension idea in the context of President Cyril Ramaphosa’s push for a broader social compact at the National Economic Development and Labour Council (Nedlac).

For now, the ANC presentation avoids any mention of the controversial topic of prescribed assets, which would oblige pension funds (public and private) to invest a minimum threshold of assets in specific asset classes, such as government bonds or parastatal debt (possibly guaranteed and non-guaranteed). This debate has been a slow-burning one. While the apartheid regime maintained a prescribed assets regime from 1956 to 1989, the issue only really began to resurface ahead of the 2012 ANC national conference, where prescribed assets were touted as a counteroffer to demands for the nationalization of mines from the party’s radical wing.

At the 2017 national conference, the notion found its way into the ANC’s policy resolutions, again as warring factions bargained over policy: “A new prescribed asset requirement should be investigated to ensure that a portion of all financial institutions funds be invested in public infrastructure, skills development and job-creation.” The ANC’s 2019 Election Manifesto similarly pledges to: “[i]nvestigate the introduction of prescribed assets on financial institutions’ funds to mobilize funds within a regulatory framework for socially productive investments (including housing, infrastructure for social and economic development and township and village economy) and job creation….”

Admittedly, committing to “investigating” a policy option is a classic ANC tactic for stalling and ultimately quashing proposal from radical factions. Yet, the ANC is trailing behind its alliance partners, the SACP and COSATU, which are pushing prescribed assets. Most importantly, all the drivers that have informed the debate to date have intensified sharply amid the pandemic: the ballooning public debt burden, even more precarious SOEs finances, and junk-status financing challenges. This may reinforce a prevailing ANC view that the Association for Savings and Investment (ASISA) — whose members include asset managers and life insurance companies — are sitting on trillions of rands that can be readily tapped, well before South Africa has to approach the IMF.

Towards reform or populist drift?

Although such debates are unlikely to advance quickly, they may once again distract the government from concrete, quick-win reforms. The onset of the pandemic and Ramaphosa’s strong initial response generated hopes that the crisis could create political room for long-overdue structural reforms. Yet the infrastructure funding debate, particularly if prescribed assets resurface, could signal how easily policy could take a populist turn. This would add another layer of confidence-sapping policy uncertainty, on top of the slow-moving but controversial land debate.

The direction of policy debates will largely hinge on Ramaphosa’s strength within the ANC. If a month ago a second term seemed assured, Ramaphosa’s prospects could quickly decline, driven by an increasingly bungled lockdown exit and the unfolding economic fallout, in the build-up to the 2021 local elections and the 2022 ANC national conference.

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