ANC in the hunt for infrastructure funds

• Party suggests changing regulation 28 and expanding role of central bank to cut cost of funds

The ANC has mooted regulatory reforms and an expanded role for the Reserve Bank to mobilise funds for development projects and finance institutions as part of the effort to rebuild the economy in the post-Covid-19 period.

The reforms are aimed specifically at reducing the costs of funding for development projects and infrastructure to enable development finance institutions — such as the Development Bank of Southern Africa (DBSA) — to access more competitive finance. The suggestions are contained in a comprehensive ANC presentation on structural economic reforms compiled for internal discussion.

While the controversial policy of prescribed assets — in which pension funds are compelled to invest a minimum threshold of assets in specific asset classes, such as government debt — is popularly seen on the Left as the best way of lowering government borrowing costs, this is not specifically recommended in the presentation.

Instead, it suggests amending regulation 28 of the Pension Fund Act, which sets limits on asset classes, to enable collective savings to directly fund infrastructure, which would have the effect of increasing the availability of funding to development finance institutions and other financial intermediaries at a “reasonable rate of interest”.

It is also suggested that the Bank create a R500bn “funding instrument with development finance institutions” to fund long-term infrastructure investment. This would involve “a sectoral supply-side expansion exercise” with credit provided “at a developmental yield ”— policies that, together with quantitative easing, the Bank has been reluctant to embrace.

ANC economic policy head Enoch Godongwana said on Sunday that the ANC did not have “fixed ideas on what to change” in SA’s financial architecture but was opening a discussion.

A particular focus was to increase direct investment in projects, rather than investment through asset management companies, which added an extra layer of cost to the funding.

“We are putting forward an argument that when it comes to

major infrastructure projects we remove third parties — such as asset managers – from the relationship. We are trying to mobilise resources for all infrastructure; each project must be able to stand on its own merits.”

While retirement funds do invest in bonds issued by development finance institutions and other state-owned enterprises, they have more typically done so through specialised asset managers, which have developed a line of sight over their performance.

Godongwana said this meant that institutions such as the DBSA (of which he is the chair), the Industrial Development Corporation and Land Bank must access the capital markets at best at the same rate as commercial banks.

As these institutions lend on to government entities — such as municipalities — or provide finance to the private sector, they find it difficult to do so at concessional rates.

UIF FUNDS

The ANC also suggests “engaging the Public Investment Corporation (PIC)”, which is the government-owned asset manager, to invest directly in long-term infrastructure projects.

This is already done through the Isibaya Fund, but the ANC suggests that development finance institutions be directly able to draw on the Unemployment Insurance Fund (UIF). The UIF funds, which include a sizeable surplus, are also managed by the PIC and are invested mainly in government bonds.

The policy recommendation comes as the government aims to step up infrastructure investment in the economy by pooling and centralising procurement and planning and packaging projects suitable for private sector investment.

CENTRALISING

Newly installed head of the investment and infrastructure office in the presidency Kgosientsho Ramokgopa last week conducted a two-day market-sounding exercise on potential infrastructure projects. By centralising existing infrastructure funding, the government intends to mobilise R500bn in government funding over the medium term as a stimulus to the economy.

The ANC discussions occur in a context where its allies, Cosatu and the SA Communist Party, have adopted policies to advocate prescribed assets and where the ANC, which has been ambivalent on the policy, has a standing conference resolution to investigate its feasibility.

Godongwana, in particular, has urged caution on legislating prescription, which is regarded by asset managers and mainstream economists as being bad for investment confidence and for investors, whose returns on pension savings, for instance, are diluted when prescription is applied.

The use of funds managed by the PIC to fund state-owned enterprises such as Eskom has been a politically charged issue, with pension funds, some trade unions and opposition parties vehemently opposed to such investments, which show no prospect of generating a return.

Last week PIC chair Reuel Khoza said that the PIC was considering making a proposal to the Government Employees Pension Fund (GEPF) to convert almost R100bn of Eskom debt to equity. His comments caused the GEPF board to deny that it had accepted the proposal.

On Saturday, the PIC qualified Khoza’s remarks, saying that it had developed a discussion document that sets out a wide range of possible options to dealing with Eskom’s debt.

“Whatever solution the PIC eventually supports, if any, will meet the risk and return expectations of our clients and be fully consistent with our fiduciary responsibilities,” it said.