‘No one will force retirement funds to do anything’

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This interview was originally aired on RSG Geldsake (in English). The Afrikaans introduction has been translated in this transcript.

RYK VAN NIEKERK: The ANC recently launched its 2024 election manifesto, and one of the proposed policies of the ruling party is that it wants to engage and direct financial institutions to invest a portion of their funds in industrialisation, infrastructure development and the economy.

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This practice is commonly known as ‘prescribed assets’, where the government compels pension and retirement funds to invest in infrastructure projects.

The party first mooted the idea of prescribed assets in its 2019 manifesto, stating that it would investigate the possibility of implementing this policy – and it seems to have now become official ANC policy.

Zuko Godlimpi is on the line. He’s the deputy chairman of the ANC’s Economic Transformation Committee. Zuko, thank you so much for your time. Please explain what the ANC intends with this policy. What is it aimed at?

ZUKO GODLIMPI: Okay. Thank you very much, Ryk, for having us this afternoon. The context of course is the point that you were making.

As lifted from the text, the objective of this policy is to increase the levels of investment in the South African economy in line with our ambitions to revitalise our industrial capabilities, boost manufacturing output, and create mass employment. So that’s essentially what we are trying to go for.

That depends on raising the aggregate investment level that is available in the economy and directing investment capital to specific sectors of the economy which are critical for the industrialisation agenda.

RYK VAN NIEKERK: But is the way to do that to force pension funds to invest in this project?

ZUKO GODLIMPI: I want us to fix the ‘forcing’ part. No one is going to force anybody to do anything. We will reopen the conversation with the pensions industry, as has happened before, including the latest amendment to the Pension Funds Act – which was in 2022.

The intention is not to arbitrarily take a decision about which class of assets should be invested in, or to even design those, but it is to have a broad conversation with all the relevant stakeholders to pose the question about whether the ambition for national growth that we all share could be better realised with an increased threshold of domestic investment from our pension-fund sector.

Before you raise it, the question would be: ‘Why did you allow Regulation 28 to be amended the way it was in 2022?’

-And the answer is, given what I just explained as our industrial ambition, the lifting of the threshold that happened in 2022 was a bit counter-intuitive, but it was done as an attempt to respond to the excision movement that arose as a product of the unimagined Covid-19 lockdown – [which] it did – and the impact that it had on investment; so an attempt to sort of stabilise everyone’s portfolio growth.

But we are now saying, okay, that has happened. Why are we not having another conversation about this that is in the interest of South Africa’s long-run growth. So that is what we’re doing. It’s not to compel anybody, but to reignite the conversation about how best to improve South Africa’s prospects going forward.

RYK VAN NIEKERK: Yes, Regulation 28 of the Pension Funds Act was changed in 2022, as you’ve said, and it allows pension funds to invest up to 45% of the funds in infrastructure projects. Of course there are many private-sector projects which are really attractive for pension funds to invest in.

You say the intention is not to compel or force funds to invest in these projects. But clearly the policy in the manifesto states the ANC will engage and direct financial institutions to invest a portion of their funds – and I think many people see that word ‘direct’.

So can you maybe just describe exactly what you mean [by] ‘The ANC will engage and direct financial institutions to invest in these projects’?

ZUKO GODLIMPI: Okay. I want us to read that word in context. It says to ‘engage and direct’. So the point about direction is, for instance, if you lower the threshold of how much domestic money is allowed to be invested offshore, if that agreement of engagement is found, and then an amendment is placed again on Regulation 28, that is where the ‘direction’ is, because it’ll be putting a ceiling [on it].

So as long as you have a prescription, even if that prescription is arrived at as a function of negotiation and compromise, once it is a matter of law it essentially says as a directive that this is the prescribed amount that is allowed to do this and that.

But that ‘directive’ must not be read to mean an arbitrary compulsion. It will be direction as a function of an amendment in law arrived at as a product of engagement.

So the text must be read as ‘engaged’ and then eventually ‘direct’ as a function of that agreement out of negotiation with the pensions industry’.

RYK VAN NIEKERK: But the pensions industry is quite alarmed at this, because it seems as if the economy is in the state it’s in because of government mismanagement, and there is definitely apprehension to invest in Transnet and Eskom, for example, because there’s been a lot of mismanagement and corruption. Then it becomes really uncomfortable for the industry when there are words used like ‘direct’, because it may imply forcing these funds to invest in Transnet and Eskom if they don’t want to.

ZUKO GODLIMPI: Again, that’s one of the misinterpretations that has been trending since the manifesto.

The conversation is not even about forcing people to exclusively invest in government bonds as such.

We’ve been trying to explain this point that it’s not just about an infrastructure class of assets related to SOEs, but it’s a conversation about including other privately held assets that are critical to South Africa’s long-term growth.

Let me give an example about the current status that Regulation 28 does allow pension funds to pursue, and some of the sentiment that has been raised by industry. If you recall, before the 2022 amendment the ceiling on offshore investments, the 35%, was hiked to 45% now. That’s the first point.

One of the sentiments raised by people was that will allow that 45%, that increase, that 10% change, to happen so that portfolios can then go towards global industries, many of which are in the technology and innovation platform.

Now, flip that on its head and say: If South Africa is to improve its economic structure and performance in the long run we need an increase in investment in technology and innovation as well. Not just … assets held by the state, but also held by the domestic private sector that is diversifying towards those areas.

But central to that then will have to be an availability of capital to sustain those innovations, and that is what the conversation is about.

It’s not just about government bonds, but it is about availing an increased quantity of capital, including [from] the South African emerging private sector, in critical technology.

So that is why I was saying we will still have to have a broad conversation with the pension industry to arrive at a common understanding about which asset classes we’re talking about, so that we clarify this confusion that it’s about Eskom and Transnet. It’s not just about those, it is about a wide range of asset classes, including asset classes that are privately held.

A different conversation would have you understand that currently the bulk of South Africa’s investment capital from pension funds is actually directed to a concentrated number of JSE-listed firms, which are usually bigger. And then the smaller private-sector firms as well, which are looking for diverse sources of capital, are unable to maximise their access to South Africa’s pensions portfolio.

So that’s part of the broad conversation that we’re having. It’s not just about Eskom and Transnet, and it might not even be about those two.

RYK VAN NIEKERK: Minister of Finance Enoch Godongwana made similar remarks a while ago and said it was unfortunate that South African funds are investing offshore, and that money could have been used here more productively. But it’s a function they’ve … in many ways. But do you foresee a change to Regulation 28 to reduce the foreign exposure local funds may have?

ZUKO GODLIMPI: Yes. Sitting where I’m sitting, I think it’s a necessary conversation that we should have, to re-evaluate our position in that regard. I think it’s in the interest of the domestic economy for us to increase the availability of South African savings for South African domestic investment.

And in any case – and this is the point that we usually don’t have – it doesn’t stand to reason that domestic investment does not have a relationship with global economics as well.

South African firms that we invest in are also engaged in global trade and they increase their global footprint.

We essentially therefore benefit from global economic dynamics as well, in much the same way that we would if we were saying ‘let’s invest directly in foreign-owned assets’ – except, when we invest directly in foreign-owned assets,we forego the possibility of building South African employment and therefore growing South Africa’s income-distribution capacity as well.

So we have to have that conversation and consider another amendment to Regulation 28.

But here is the point that must be understood. The pensions industry is not going to wake up one day and be told that there’s been an amendment to Regulation 28. It’ll not be some arbitrary movement. It’ll be a conversation, a painstaking conversation that will not happen overnight, but a conversation that must be had, and a reform [where] people must be willing to understand the logic underpinning it.

RYK VAN NIEKERK: Do you appreciate the concerns of the industry? Because the South African economy is really, really going nowhere fast at the moment – we’ve got electricity problems, we’ve got logistical problems. If those problems could be addressed and the economic growth rate increase to 3%, 4%, where I think many economists believe it could be, don’t you think that environment will actually attract those investments because of the commercial viability of those projects?

ZUKO GODLIMPI: Two things I agree with you [on]. I think the manifesto must be read in its totality and the sequencing of logic must be understood, and this must not be read in isolation.

The manifesto does make the concession that the problems that we’re confronting in the energy sector and the logistics sector undermine South Africa’s growth prospects, and that is where an urgent area of focus will have to go.

In fact, we even make the point that our industrial ambitions will not take off unless and until those binding constraints are dealt with. That’s the first thing.

And I agree with you, if we can stabilise Eskom and get rid of load shedding, if we can improve the efficiency of our freight logistics network without even having done anything different, we would find ourselves back up at about a 3.5% to 4% growth rate. And I think most economists agree with that.

But let’s also locate that in context. Even when South Africa was growing at an average rate of 5.5% or 5% in the previous two decades, South Africa still had a particularly structural brand of unemployment because it did not have a robust industrial sector or a manufacturing sector on which you could build employment. That’s the first thing.

The second thing is that it is then in the interest of all of us to think about a restructuring of South Africa’s productive capabilities and the manner of capital flows in the economy to make it possible for manufacturing capabilities to be brought back into life.

And that will not happen if the investment patterns in the economy are disproportionately biased towards the retail – or basically tertiary – sector as a whole, which is what we see now if you make an assessment of the proportional flow of investment capital in the economy.

And the reason for that is that in the short to medium term, it does look like higher returns can be realised in those sectors because they’re the ones that are most stable and most developed.

But South Africa’s long-run growth prospects and therefore the prospect for growth, including investment portfolios, will be better supported if South Africa has a robust manufacturing industry.

That’s the conversation that we are having.

I do think that the conversation will be better and less fraught with panic once we’ve stabilised the energy sector and the freight logistics sector. People would understand the strategic logic that underpins what we’re trying to do.

RYK VAN NIEKERK: We’ll have to leave it there. Zuko, thank you so much for your time. That was Zuko Godlimpi, the deputy chairman of the ANC’s Economic Transformation Committee