Pension Funds: Partners - Not Pawns - In South Africa's Industrial Revival

The South African government, through the Department of Trade, Industry and Competition, seems intent on leveraging pension funds for industrial development through proposed amendments to Regulation 28.

The details of the proposed amendments remain unclear and will require thorough consultation with various stakeholders. At best, the outcome could take the form of an “allowable” capital investment to facilitate industrialisation, as done in 2022 with the introduction of the 45% allowance for infrastructure. This was a soft nudge, but a better outcome than prescription. Although this approach is understandable given the country's fiscal constraints, it ultimately misses the mark.

 A long-standing appetite for investment

South Africa's industrialisation trajectory has been hampered by a chronic infrastructure deficit, evident in its Gross Fixed Capital Formation (GFCF) rate of 15.2% as a percentage of GDP in 2023. This figure persistently lags behind other emerging economies such as China (which boasts a GFCF rate exceeding 40% over the past decade). This underscores the critical gap in investment essential for driving local industrial growth and competitiveness, as illustrated below.

Graph 1: Gross Fixed Capital Formation (% of GDP) – South Africa vs China

Source: World Bank

Change in focus

Industrialisation, formerly synonymous with the transformation of raw materials into manufactured goods, has evolved in the era of the Fourth Industrial Revolution. This new industrial landscape prioritises advanced manufacturing, technology and digitalisation, shifting focus from traditional primary sectors like agriculture to knowledge-intensive industries.

While infrastructure remains crucial for economic development - providing the backbone for industrial activity - its role differs from that of direct industrial investments. Infrastructure projects typically offer stable, long-term returns with lower risk profiles due to their contracted nature. Conversely, industrialisation, particularly in the context of the Fourth Industrial Revolution, involves higher-risk, higher-reward ventures. These investments - in manufacturing, technology, and innovation - are essential for driving economic growth and competitiveness. But these can sometimes be subject to market volatility and uncertainty.

The role and struggle of pension funds

Pension funds, as custodians of substantial retirement savings, have been instrumental in providing capital to South African industry. With trillions of rand under management, institutions have invested significantly in both listed and unlisted companies across various sectors, including mining, energy and consumer goods, among many others. Their portfolios span a range of asset classes, from traditional equities and bonds to alternative investments. Barloworld provides a prime example of accessing capital from the market in the form of both listed debt and equity.

Barloworld Equipment supplies various industrial solutions | Source: Mining Review, Barloworld Equipment

Despite their strong appetite for opportunities that stimulate economic growth and job creation, pension funds face a critical challenge: a dearth of viable investment options that meet their stringent risk and return requirements.

Prioritise bankable projects, not arbitrary allocations

Minister Tau's proposal to amend Regulation 28, which would seemingly introduce "industrial/manufacturing caps", is a misguided approach that fails to address the core  obstacles to industrial development in South Africa.

Given that Regulation 28 already allows for a maximum of 35% in unlisted assets, pension funds have ample surplus capacity to invest in industrial and manufacturing projects that reside outside the realm of the listed universe.

While initiatives such as Operation Vulindlela have demonstrated a commendable commitment to accelerating structural reforms, they do not constitute a complete solution on their own. Investors, including pension funds, are fundamentally driven by the pursuit of optimal risk-adjusted returns. Arbitrary quotas for industrial and manufacturing investments in pension fund legislation will do nothing to help cultivate a pipeline of projects capable of delivering the right returns.

Rather than imposing regulatory constraints, the government needs to create an environment that allows viable industrial projects to flourish.

This entails implementing comprehensive reforms to:

• address infrastructure deficiencies;

• reduce bureaucratic hurdles;

• enhance regulatory certainty; and

• foster a stable macroeconomic climate, including robust skills development programmes.

These initiatives align with Project Vulindlela’s goals to accelerate structural reforms and unlock the country's economic potential. By focusing on these foundational elements, the government can create an enabling environment for private sector investment in the industrial sector, thereby driving economic growth, job creation and sustainable development.

Skill-building and retention

A skilled workforce is a crucial piece of the industrial revival puzzle. South Africa's engineering capacity lags far behind that of highly industrialised nations. According to the Engineering Council of South Africa, we have approximately one engineer for every 3 100 people in this country, compared to Germany's ratio of one engineer per 200 people.

While capital invested by pension funds and others is essential, investment in education and training is equally critical. To create a broad human capital base capable of driving South Africa's industrial resurgence, we need:

• trade schools that equip individuals with technical skills for advanced machinery operation, complex manufacturing and industrial innovation;

• tertiary education that produces engineers and skilled professionals suited for industrial leadership;

• incentives to retain skilled engineers in this country; and

• incentives for talented individuals to join the public sector, where their expertise can be harnessed to address critical infrastructure and development challenges.

Skills transfer in action: Kruisvallei Hydro project | Source: Red Rocket

A call for collaboration to build a stimulating environment

Collaboration between the government and private sector will be key to galvanising our industrial revival. The government can play a crucial role by:

• Streamlining approvals: Bureaucracy and red tape are major hurdles for project development. Expedited approvals will boost private sector investment.

• De-risking projects: The government can provide guarantees or implement other risk-mitigation strategies to make early-stage projects more attractive to investors.

• Improving governance: A transparent and predictable regulatory environment – that confronts and eliminates corruption – will foster investor confidence.

Pension funds and other private investors can significantly contribute to industrial revival by actively participating in reform processes and advocating for necessary industry changes. Their involvement in both financial and non-financial aspects of development is crucial for establishing a framework to identify bankable projects. However, the onus is ultimately on the government and public sector to implement these initiatives and drive change.

Pointing the way

South Africa's industrial revival needs a multi-pronged approach centred on meaningful public-private partnerships. The rail and energy sectors offer valuable case studies of successful collaboration, where recent joint efforts will yield significant progress in infrastructure development and operational efficiency in the future.

By replicating these models across other industries, the government can create an environment conducive to private sector investment. A climate that encourages the development of bankable projects will be instrumental in unlocking the vast pool of capital available from pension funds and will propel South Africa's economic growth and job creation.

We need to oppose counterproductive measures such as the proposed amendments to Regulation 28, which don’t facilitate industrial development. Instead, the government can create an enabling environment aligned with the objectives of Operation Vulindlela. South Africa can then unlock its tremendous industrial potential and achieve sustainable investment and economic growth.