Prescription vs Impact Investments
The issue of prescribed assets has been raised several times as a potential source of funding in relation to both State Owned Entity (SOE) debt, as well as in respect of investment to support developmental imperatives for South Africa. A great deal of focus in this debate has been on retirement funds, and this is therefore where this paper will focus. The paper sets out who are the potential losers in a prescribed assets programme, and sets out support for the alternative of an impact investment programme where there are opportunities for wins across the board.
Background to the Prescribed Assets Issue
The current discussions around prescription date arose out of the ANC’s 2019 manifesto which listed “the investigation of the introduction of prescribed assets to mobilise funds from financial institutions for socially productive assets” as one of its priorities. Prescribed assets are referenced under the following two sections in the manifesto:
Investing in the Economy for inclusive growth
Investigate the introduction of prescribed assets on financial institutions’ funds to unlock resources for investments in social and economic development
Transform and Diversify the Financial Sector
Investigate the introduction of prescribed assets on financial institutions’ funds to mobilise 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 while considering the risk profiles of the affected entities
No detail has been provided in terms of the form that the prescription could take, but it would be expected that it would involve a required minimum investment by investors into specified assets. Whilst the references to investments into “social and economic development”, “socially productive investments” and “job creation” are encouraging, there is concern that this could be applied to mean investment into SOEs and municipalities that have social and economic development as a part of their mandates (such as Eskom), with a potential lower investment return versus that sought by investors.
Previous Prescribed Assets (“PIGs”) Programme
South Africa previously had a prescribed assets programme that affected retirement funds, insurance companies and the Public Investment Commissioners (now Public Investment Corporation - PIC) from 1956 to 1989. The Prudential Investment Guidelines (PIGs) required that 53% of retirement fund assets, 33% of assets of Long Term Insurance Companies and 75% of the PIC’s managed assets be invested into government and SOE bonds. What is stark is the opportunity cost that these investors suffered versus the equity returns that they could have achieved due to investment into these prescribed assets as is illustrated in the table below.
1960s: Inflation averaged 3.0%; whilst prescribed assets earned positive real returns, they earned -6.4% p.a. versus equities over the decade
1970s: Inflation averaged 11.3%, prescribed assets earned 7.3%, equities returned 24.5%; the opportunity cost of investing in prescribed assets versus equities was -17.2% p.a.
1980s: Inflation averaged 14.5%, the opportunity cost of investing in prescribed assets versus equities was -6.7% p.a.
Defined Benefit versus Defined Contribution Funds
The retirement funds that were affected by prescription during the PIGs period were mainly defined benefit funds. This means that it was the employers who had to pay the “balance of cost” of these funds who suffered from this opportunity cost, rather than the fund members who continued to receive the defined benefits as promised to them in terms of fund rules. There has been a significant shift in the intervening period away from defined benefit and toward defined contribution funds. If prescription were to be applied today, it would generally be the members of funds that are now mainly defined contribution in nature that would suffer, and not the employers. Every member of a defined contribution fund that earns poorer returns due to prescription will retire or leave their funds with less money than they would have had in the absence of prescription.
This is why Alexander Forbes is opposed to any imposition of prescription that prevents investors from investing in assets that meet their risk and return profiles. If investors are being forced to invest in assets through prescription, this suggests that the investments will give suboptimal investment outcomes that will not be in the interests of investors, and specifically the members of defined contribution retirement funds who rely on investment returns to build up their retirement savings, and pensioners who are reliant on investment returns to support their pension increases.
Alexander Forbes is however extremely supportive of the development of viable investment opportunities that will attract a wide investor base including the many remaining defined benefit as well as defined contribution funds. We are therefore particularly excited by initiatives arising in the development impact space as set out below.
Sustainable Infrastructure Development Symposium (SIDS) initiative
Large South African institutional investors and their representative organisations have recently attended sessions organised by the Investment and Infrastructure Office (IIO) in the Presidency. The sessions have been held to introduce investors to the Sustainable Infrastructure Development Symposium (SIDS) initiative that seeks to bring investors together with entities seeking investment into infrastructure projects to bridge South Africa’s infrastructure funding gap.
Sustainable Infrastructure Development Symposium
The IIO was directed to convene SIDS in order to identify key projects in selected sectors that can be unlocked to attract investment, drive economic growth, and ensure development impact and job creation. Ultimately, SIDS seeks to serve as a platform for government and private entities to present their infrastructure projects for funding.
Representatives of ASISA, Batseta and large pension funds attended an initial engagement session with the IIO on 14 May 2020. At the session, the IIO positioned South Africa’s significant underspend on infrastructure, with the country being far from the National Development Plan (NDP) targets. It is estimated that infrastructure underspend across all spheres of government was R147bn between 2014/15 and 2018/19.
SIDS has developed a database of projects with a value of R2.1 trillion for investment over the next few decades. While these were in the pipeline before the current economic crisis worsened by COVID-19, there is an urgency to fast-track these where possible to lift South Africa’s economic trajectory toward a post-COVID-19 environment.
The SIDS sectors have primarily been drawn from the NDP and include:
Network industries or economic infrastructure, that are enablers for other sectors in the economy:
Water and Sanitation
Agriculture and Agri-processing, and
Human Settlement Infrastructure sectors, due to their job absorption capacity and addressing spatial inclusivity.
In the build-up to the launch of SIDS, Technical Working Groups (TWGs) for the above sectors were established to review, prepare and package projects that required funding. Approximately 207 projects were submitted across the identified sectors and were classified into projects that are ready for investment, and those that require additional project preparation and/or donor funding.
Selected projects were presented to potential funders through SIDS “pitching sessions” that took place virtually on 28 and 29 May 2020. Participants in the sessions included government stakeholders and project owners alongside select Private Sector Institutions, Multi-lateral Development Banks, Development Finance Institutions, Institutional Investors and Donors.
Other Impact Investment Forums
Given the imperative for success in the impact investing space, there are several initiatives that are seeking to engage public and private resources to mobilise funds for infrastructure investment, including the South African Impact Investment Forum (SAIIF), the Asset Owners Forum initiative set up under the auspices of Batseta, and other initiatives in which organisations such as ASISA have participated. SAIIF provided inputs and guidance to the Presidency in respect of the Investments Conferences held in 2018 and 2019, and the objectives of the Asset Owner Forum were presented on behalf of Batseta at the 20 May 2020 IIO interaction with pension funds.
Voluntary Investment into Impact Investments
For some time, Alexander Forbes has been taking a strong stance against prescription, and for efforts to drive voluntary mobilisation of monies to support developmental objectives. Our view has been that it has not been a lack of capital for investment into initiatives that has been the issue, but rather a lack of investible opportunities that has retarded investment. We therefore regard the SIDS initiative as a significant opportunity to enable investors to engage with a potential pipeline of investment opportunities that meet their risk and return objectives, whilst at the same time making a real difference to the growth and job creation initiatives that the country so critically requires.
We believe that the SIDS initiative is of a scale so significant as to make a real difference to South Africa’s future. The scale of the projects envisaged dwarfs any potential contribution that could be considered (whether through prescription or voluntary investment) from South Africa’s mainly defined contribution funds who face restrictions (not least in terms of Regulation 28 to the Pension Funds Act) in respect of the portion of assets that they could consider for investment into the longdated, illiquid investments that these projects entail, especially when the funds require liquidity for benefit payments (specifically for payments for employees losing their jobs during the COVID-19 crisis), as well as the ability to provide daily unit pricing and to facilitate members switching between any available fund investment options.
The scale of the SIDS initiative will require significant commitments and support from International Development Finance Institutions, and well as large international institutional investors such as Sovereign Wealth Funds, Infrastructure Funds, Endowments, Foundations and Family Offices. These investors will view any possible prescribed assets programme as invasive and contrary to an environment that they would consider as viable for investment. Alexander Forbes therefore sees significant alignment between the success of the SIDS programme and the turning away from any concept of prescription.
Alexander Forbes will be an enthusiastic participant in the development of the SIDS process, and we will assist where we can to enhance the probability of the success of this initiative.