Don’t shoot me: Prescribed assets may not be a bad thing
Instead of putting your money in the bank, why not be able to invest it directly in government-underwritten prescribed assets, at a retail level?
Don’t knock it until you’ve tried it, again, in a different form, in very different circumstances. Prescribed assets have been given a rough time ever since it was suggested by the ANC in their manifesto that they investigate their re-introduction. Handled properly by experts, under a proper mandate, fit for purpose prescribed assets may prove a better solution than the alternatives.
The composition and extent of SOE liabilities is clearly inappropriate and not sustainable. The problem has got so big that it is not easily soluble within the current system, within our own capital resources, given the state of our sovereign balance sheet and the prospects for our income statements. Some of the funding has to be spent on the past, and that requires force, it seems.
Eskom has been characterised as too big to fail – of course it is, but so is the whole integrated state machinery, obviously, so we have to solve everything – not just to avoid failure, but to invite the prospect of success.
Raising capital outside of the system is part of the solution, but it comes at a price and its not without its unintended consequences.
Privatisation is the common outcry. I am not convinced. If we introduce equity capital (either local or international) we’ll have to offer a market risk return. In an economically polarised society it is not that simple. SOEs, by their very nature, have a mixture of commercial and public service mandates. We can’t simply maximise return on shareholders’ funds. Whether those mandates are being efficiently executed now or not is a separate matter – we’re arguing funding here, not management. If they were indeed well managed, how should they be funded?
Foreign direct investment is required. We need capital from outside the ecosystem, but we shouldn’t really sell state assets to foreign investors, we’ve learnt that lesson. We need to create state capacity, not entrench dependencies, that much is obvious.
We could increase taxes – passing the burden from the electricity users (or whatever service we’re talking about) to the taxpayers at large. Given the skewed tax base, I wonder how different the effect would be on the pool of capital that prescribed assets would indirectly target anyway?
We could prescribe a 15% per annum increase for the next three years and watch how that ruins the economy and broadly erodes the tax base.
Whichever way we solve it will require an imposition on the natural market forces of asset allocation. The solution must address the cause.
The current system isn’t the answer either. The government takes all the risk and established financial capital gets all the returns, further entrenching inequality.
Essentially, established commercial banks lend money to SOEs against a National Treasury guarantee. Completing the circle, you’ll find that these same banks take deposits from the public to fund their assets (loans), including those risk free, government underwritten loans to SOEs, at a substantial margin, not justified by the risk.
The net result is a transfer of value from the relatively poor citizens of SA to the rich owners of capital, underwritten by the state. With something like R500bn of government guarantees in issue (albeit not fully utilised) there is a lot of money in the mix. We need to think about it differently.
Instead of underwriting the banks, or the capital market investors (who are surely clever and capable enough to look after themselves), why don’t we underwrite the savings of our people directly? Instead of putting your money in the bank, why not be able to invest it directly in government-underwritten prescribed assets, at a retail level? There is more than enough space in the retail interest rate structure to substantially increase the “deposit rate” to individuals while simultaneously lowering the cost of funding to the SOEs. The risk to the state is no different, it would just cost less.
More asset managers than you’d expect would welcome this asset class as part of their investment portfolios, given the problems it will solve for the very companies they choose to invest in anyway, and the blended risk-return it adds.
If pension funds don’t want the prescribed assets then they could simply unitise them into the retail market and make some extra money providing liquidity. We have the national infrastructure to do this.
It is obvious that this capital should be raised and managed into properly costed, specifically identified projects which will be professional managed, in an accountable way.
Let’s do it?