Storm over Pension Fund Investments: South Africa Seems Poised to Follow the Example of Other Emerging Economies by Dipping into Civil Servant Pension Funds to Finance National Infrastructure Projects. This Has Caused Considerable Controversy as the Private Sector Fears It Might Be Shut out of Lucrative Government Contracts. Tom Nevin Reports
Nevin, Tom, African Business
The South African Government Employees Pension Fund (GEPF) will invest in infrastructure development some R28bn ($4bn) of the over R800bn ($101bn) fund it manages. Arthur Moloto, GEPF's chairman, says the fund will swing its attention to energy and clean technology projects and those others that offer employment opportunity. The fund's portfolio was worth $117bn at end of March this year.
Facing chronic power shortages and bottlenecks at major commodity exporting hubs, South Africa plans to spend nearly one trillion rand ($130.7bn) over the next five years in both building new infrastructure and upgrading ageing, mainly transport and energy installations, to spur economic growth and stimulate employment.
A controversial decision in March this year will lead to the deployment of up to 5% of private retirement savings to finance government-led development programmes. The intention to use state employees' pension funds to underwrite government works caused an outcry by some in the private sector when the intention was mooted by South Africa's Minister of Economic Development, Ebrahim Patel, in his medium-term strategic plan.
Others in private capital markets thought it might actually be a good idea, and some went as far as saying it would be a better investment risk than many in the private sector.
"Some of the negative sentiments are driven by the view that the state is a poor decider of good investments," says Saliem Fakir of the South African Civil Society Information Service. If infrastructure is to be owned and managed by the state, then its competency to do good with these assets is always questioned.
The National Energy Regulator for South Africa, Thembani Bukula, stoutly defends the prospect of investing GEPF deposits in infrastructure projects. He worries about the public perception that investments in a state-owned entity won't get adequate returns but maintains that government projects are a sound investment bet.
But, says Fakir, the kinds of risks that come with infrastructure projects relate to construction risks, such as the project not being completed on time, incurring cost overruns; operational risks (where an asset is managed poorly); business risks where competitors undercut to provide the same service; debt risks, where too much debt subject to interest rate hikes is accumulated; political risks such as corruption and regulatory risks where tariffs do not rise to accommodate inflation and operating costs.
"In South Africa, some of these risks are real. We have witnessed delays in the building of new power plants; we experience the problem of corruption; at the same time, some assets are poorly managed. All this has served to caste a pall of doubt," he says.
The positive side
There are, though, also some good reasons why public sector pension funds can aid the development of public goods. Appreciably, they can make capital available on more preferential terms than private investors are likely to. Internationally, especially in emerging economies, there are precedents aplenty. Two years ago there was a heated debate in India but in the end a strategy was put in place to use pension funds to boost infrastructure development. Sri Lanka has already tapped into public pension funds to partially fund its new power stations, while Latin America has a long track record of employing pension funds for critical and targeted infrastructure. …