Prescribed assets, a calculated risk

SA's policy options are narrowing as lower commodity prices and talk of “stranded assets” reflect an epochal global shift toward knowledge-driven sectors and away from resource-intensive industrial operations. Thus the nation's debt and transformation obligations compound ominously as the economy's growth trajectory flattens.

A long-standing over reliance on mining was matched by imprudent dependence on domestic consumption to where SA's hectically indebted consumers now face rising prices and higher interest rates amid broad mining sector job losses.

The prospects for attracting direct foreign investment or expanding value-added exports are set back by poorly designed and managed transformation programmes. This was never going to be easy. The politics of transformation invites abuses while its complex economic trade-offs encourage short-term thinking. As the ANC's grip on power suffers amid economic disappointments, the long-term commitments necessary to build capabilities erode.

Thus temptations are revived, with fresh appeal, to require investment managers to invest in ways which ease government's funding pressures while benefiting ANC supporters. Such a prescribed asset strategy would invite profound risks upon all South Africans who aren't aged ANC executives. On the other hand, SA's current path is not viable as both political and economic requirements must be mutually accommodated.

Internationally lauded corporate governance guidelines are not easily synchronised with SA's mix of transformation-focused regulations. Well-reasoned prescribed asset legislation could trigger a resolution of conflicted responsibilities among the nation's financial services executives. Prescribed asset legislation could make it easier to incorporate “patriotic” responsibilities amid corporate governance structures and guidelines.

Prescribed assets are a dangerous option but wisely structured such policies could help to achieve growth and transformation objectives. However, four fundamental failings need to be acknowledged.

First, SA's BEE costs have long been destined to exceed benefits for all groups. That point is now fast approaching.

Second, the nation's public and private sector economists, analysts, and decision makers remain wilfully ignorant of the value to be created by combining commercial savvy with economic development insights. This statement is no less true across the West and Africa – though reasons differ. Conversely, in East Asia leaders have witnessed decades of successes at accelerating economic development through aligning public and private sector initiatives.

Third, non-collaboration is not an option yet SA's political-economic schism is well entrenched. The ANC, the SACP and the unions still promote the view that nearly all of the nation's economic ills can be traced back to apartheid. The tripartite alliance continually seeks to disparage big business and the leading opposition by associating them with apartheid and each other. While these views are convenient and overdrawn, they contain sufficient truth to incite counterproductive state interventions in the economy.

Fourth, patronage exists everywhere but in SA it has become an existential threat.

Legislating prescribed assets is becoming increasingly alluring to senior ANC leaders as it can reduce the influence of credit agencies and markets. More interestingly, it could also lessen reliance on the communists in senior government positions whose policies are becoming far less easy to support.

Unfortunately however, SA's financial services sector has not meaningfully cracked the elusive-but-accessible art of generating adequate investment returns while advancing transformation objectives on a meaningful scale.

If the economy can't achieve prolonged high growth, transformation gains will be halted then reversed. This phase has begun and neither the public nor private sector has the expertise to both grow and transform SA's economy. That the governing party's key alliances and constituency connections are cemented by hostility to big business interests is a primary impediment.

Shifting government's intervention vectors from patronage-deepening tendering and hiring to prescribed assets regulations could accommodate a desperately needed transition from adversarial to collaborative business-government relations. A solutions focused phase might then emerge.

Over the past two decades, the public and private sectors have been undermining their shared interests. For instance, SA has been connecting exceptional banking skills with a massive number of poor households - while many have been transitioning to lower middle class.

Low financial literacy amid a lax regulatory environment was confronted by sophisticated marketing teamed with shrewd credit management. Thus debt burdens on fledgling households spiked, sharply limiting SA's prospects. This is a pox on all our houses.

Funding initiatives for small and medium-sized businesses have also tended to be excessively expensive thus proving to be ineffective given the nation's massive development needs. Taxi industry funding was quick to achieve a highly distributed benefits across the national transport sector yet similar large-scale or industry-wide examples are lacking.

SA's banks and capital markets seem resilient but the “real” economy is in real trouble while both the public and private sectors lack the strategies and tools to spur adequate growth and jobs. In SA as elsewhere, when policy makers are unable to imagine a workable economic vision, they advocate for expanding small businesses.

Yet SA's public and private lending initiatives for SMEs struggle to blend attractive transformation and investment characteristics with the potential to scale meaningfully. With both lending to SMEs and unsecured consumer lending, prohibitively expensive capital undermines economic development, thus political tensions ratchet. To remedy such ills the current political-economic schism must be transcended.

SA investment houses already see transformation costs as political taxes on their returns. A perception prevails that investment principles must be relaxed and money must be “spent”, that is “redistributed”, rather than “invested” to create SMEs. The number of SMEs which can be funded on commercial terms is nearly limitless whereas SA's current SME models are bounded by the volume of soft funding that can be mobilised. Given the magnitude of SA's economic development needs, this approach will always be woefully inadequate.

As the nation's current economic trajectory risks large scale political upheaval, prescribed asset requirements could be an acceptable option as the private sector would likely rise to the occasion. Interestingly, this is seen as a threat by some in the ANC. Private sector driven transformation successes would undermine ANC efforts to vilify big business and to perennially link inadequate opportunities to apartheid.

Thus legislating prescribed assets is less appealing to the ANC next generation of leaders than it is to the aged executives who are currently in charge. They can see no safe options while voter loyalty is being eroded along with economic prospects.

Shawn Hagedorn is a strategy adviser. He can be followed on Twitter here.

This article first appeared in Business Day.