Govt using prescribed assets for funding isn’t a done deal

The country should know by June whether the ANC will consider implementing the practice of prescribing assets, which would see pension and investor funds used in projects and companies managed and owned by government.

The governing party said it was exploring the idea and how it would be implemented. The ANC’s head of economic transformation, Enoch Godongwana, set the record straight this week, saying nothing was set in stone yet.

“The resolution of the ANC says that we will explore the possibility of prescribed assets and not necessarily implement it.

“From the perspective of the ANC, we want to investigate it. We are not at the stage yet of how prescribed assets should be done,” he said.

He said this exploration would be concluded by June, but he did not want to pre-empt what would happen next.

Last week, labour federation Cosatu proposed to government and business leaders that financial institutions establish a special purpose finance vehicle to rescue Eskom by funding R250 billion of the power utility’s R450 billion debt.

The federation said this could be done by using the Industrial Development Corporation, the Development Bank of Southern Africa and the Public Investment Corporation, which manages the Government Employees Pension Fund.

Analysts and economists are against the proposal, stating that it would affect taxpayers in the long run, but Godongwana said it had contributed to the party’s debate on prescribed assets.

“As the ANC, we have not discussed [Cosatu’s] proposal … The proposal needs to be fine-tuned so pensioners can get their returns. I do not think Cosatu is proposing that this [negatively] affects the pensions of government employees.”

Chief economist at auditing firm PricewaterhouseCoopers Lullu Krugel opposed Cosatu’s proposal, saying it did not deal with the power utility’s issues.

“We are throwing good money after bad money, again. I am not a supporter of that. If they have a separate vehicle where they want to put this money in, how is it going to be monitored? How is the spending going to be watched and how is it different from any other bailouts from government?”

The Helen Suzman Foundation (HSF) also weighed in on the debate with a series of articles on the practice of prescribing assets.

Charles Collocott, HSF policy researcher, wrote that prescribing assets has in the past proven to be detrimental to fund performance, suggesting it was likely to detract from portfolio returns in future.

He wrote: “The trend in all asset returns has been downwards for some time now and especially so for local assets.

“And while extrapolating past returns is generally a poor indicator for future returns, the general consensus among market participants worldwide now is that economic growth levels globally are likely to be on the downside for the immediate future.

“Locally, the challenges to the economy are well known to the average South African. Adding further downward pressure by re-introducing prescribed assets will only exacerbate the difficulties fund managers currently face in generating sufficient returns to secure beneficiary.”

The HSF’s articles unpack prescribing assets, and some potential negative consequences are:

• Undermining government’s fiscal discipline.
• Undermining the effects of market discipline as applied to state-owned entities and government run projects.
• Misallocation of funds.
• Erosion of investment value due to lower returns.
• Fiduciary duties of fund managers being superseded by regulations.
• Asset/liability mismatches for pension funds, banks, and insurance companies.
• Defined benefit pension funds being unable to meet pension payment requirements.
• Taxpayers having to fund a shortfall at the Government Employees Pension Fund. – Helen Suzman Foundation

– rorisangk@citizen.co.za

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