Government on blended finance neoliberal bandwagon

Out of money and unable to finance infrastructure, the government wants to use public sector money to attract private investment. But macroeconomic policy needs to change.

It was raining economic recovery plans at a special session of the National Economic Development and Labour Council (Nedlac), chaired by President Cyril Ramaphosa on 13 August 2020. The Nedlac statement after the meeting said consensus was emerging on what to do to achieve economic recovery. 

To deepen the consensus, Nedlac constituents had appointed a small team to finalise an economic recovery plan within the next few weeks. But Nedlac has not developed any macroeconomic policies since it was established in 1995, so there is no reason to believe that this time will be different.   

Nedlac – a mechanism for government, business, labour and community constituencies to address economic issues – has no power to change macroeconomic policies that are set by National Treasury. The department operates like a parallel state and has an effective veto over any decisions made through democratic processes. As a result, macroeconomic policy has been a no-go area at Nedlac since its inception. 

This has undermined Nedlac and the concept of social partner engagement, according to the Institute for Economic Justice. “As business, we are beginning to wonder whether Nedlac is a toothless talk shop,” Black Business Council president Sandile Zungu says. 

Over the past six weeks, the ANC and Business 4 South Africa, which represents the Black Business Council and Business Unity South Africa, released their economic recovery plans. The Presidential Economic Advisory Council presented its plan to the government the day before Tourism Minister Mmamoloko Kubayi-Ngubane tabled a blueprint for recovery to Nedlac on behalf of cabinet’s economic cluster of ministries. 

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Like every ANC document over the past two decades, the shortest section of its plan is the one on macroeconomic policy, which refers to policies that look at the performance of the whole economy. There are two types of macroeconomic policies. Fiscal policies, set by National Treasury, relate to government spending and include decisions on taxes and borrowing. Monetary policies, set by the Reserve Bank, include interest rates and the exchange rate. 

Central banks can create new money and influence the supply of credit in the economy. Macroeconomic policies seek to directly influence broad aggregates such as gross domestic product (GDP), the value of all goods and services in the economy, and unemployment. They determine what is possible in terms of growing the economy and creating jobs.

A leaked earlier version of the ANC’s plan, which was developed by its Economic Transformation Committee, was explicit about the financing of the plan. It said the Reserve Bank and the Public Investment Corporation (PIC), the asset manager of the Government Employees Pension Fund, should provide low-cost finance of R500 billion to development finance institutions (DFIs) to invest in infrastructure projects. But the final plan, which calls for an infrastructure-led recovery, has no targets or any explanation of how it will be financed. 

“We did not want to prescribe what the Reserve Bank and the PIC must do,” says Enoch Godongwana, head of the Economic Transformation Committee.

Calls to amend the Pension Fund Act 

The ANC document says nothing about macroeconomic policy, except two vague statements about the need to have better coordination of monetary and fiscal policies and for the Reserve Bank to use a wider range of policy tools to support economic recovery. Therefore, all the recommendations on how to transform a long list of economic sectors – from mining to tourism – are just a wish list. In the wake of the country’s largest depression in a century, the ANC document has only one new idea: it calls for the amendment of regulation 28 of the Pension Fund Act, which sets prudential limits on how much retirement funds can invest in different asset classes such as shares, property and offshore investments. 

Although the ANC has provided no details about the proposed amendments, the idea seems to be to introduce a new asset class for infrastructure. The amendment “can also help … DFIs to access private savings in order to fund long-term infrastructure”, the ANC says. Godongwana is the chairperson of the Development Bank of Southern Africa, the country’s largest DFI infrastructure financier. 

The ANC has been talking about using retirement and life insurance funds for development for at least two decades. At Nedlac, in June 2003, at the Growth and Development Summit, there was an agreement to invest “five percent of their investable income in appropriate financial instruments”. But nobody established the infrastructure to monitor implementation. 

The Association for Savings and Investment South Africa, which represents retirement funds and life insurance companies, says the industry has assets of about R8.5 trillion. It has invested about 2.5% of its assets, just over R200 billion, in infrastructure and development projects. The PIC has invested 1.2% of its assets in infrastructure projects. With a new minimum allocation, of maybe 10%, the industry could, in theory, invest hundreds of billions of rands into infrastructure projects. 

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South Africa’s banks have assets of about R5.9 trillion. Under the financial sector charter they made commitments to invest in transformational infrastructure. During 2018, Absa, Nedbank, Standard Bank and FirstRand spent R68.5 billion on such investments, according to a Banking Association of South Africa report.

At its conference in 2017, an ANC resolution said: “A new prescribed asset requirement should be investigated to ensure that a portion of all financial institutions funds should be invested in public infrastructure.” The proposed amendments to regulation 28 seek to implement the resolution without prescription. 

Since a minimum target for infrastructure would be equivalent to prescription, the amendment will probably be a “soft obligation” to invest in infrastructure, says Asief Mohamed, the chief investment officer of Aeon Asset Management. He says changes to regulation 28, on their own, will not induce more private investment in infrastructure. 

“The existing regulations allow institutions to invest in infrastructure. Private investors want guaranteed returns of at least 15% a year. They want a subsidy to invest as we have seen with the independent power producers and Gautrain.”

Saving jobs 

Cabinet’s recovery plan and the presentation to Nedlac refers to social compacts, investment, localisation, energy and food security, support for tourism and green economy interventions.  The Presidency is finalising a “mass public employment intervention” that will use R19.6 billion that was provisionally allocated in the supplementary budget to create 2.5 million jobs by the end of 2021/2022 and five million jobs by 2023/2024. 

But both documents say nothing about macroeconomic policy. Everything hinges on one idea, changes to regulation 28, which will induce the private sector to provide all the financing required for the recovery. The message is that the government is broke and cannot provide finance for infrastructure.

Although the 2018 Jobs Summit agreement has been a dismal failure, the Presidential Economic Advisory Council presentation called for a Recovery and Jobs Accord. Business 4 SA’s plan is predictably full of business-speak. It refers to a public sector funding requirement for the government and state-owned companies of R2.4 trillion over the next three years, based on projected budget deficits. It calls for microeconomic policy interventions, including regulatory reforms, policy certainty, labour market flexibility, the rationalisation of state-owned companies and measures to address crime, corruption and skills shortages. Nedlac’s labour constituency called for a R1 trillion stimulus. The community constituency supported a basic income grant and infrastructure investment.


Since he became president in 2018, Ramaphosa has launched numerous initiatives to increase investment in the economy. In April 2018, he appointed investment envoys whose target was to help attract investments worth $100 billion (R1.7 trillion) over five years. In September 2018, soon after news that South Africa had entered into a recession, he announced the establishment of a R400 billion infrastructure fund. In 2018 and 2019, he hosted two investment summits where companies made pledges of more than R660 billion. 

In November 2019, Ramaphosa appointed Kgosientso Ramokgopa to head an Infrastructure and Investment Office in the Presidency. The office evaluated 276 projects worth R2.3 trillion to assess their viability. In June 2020, Ramaphosa hosted a virtual summit, the Sustainable Infrastructure Development Symposium South Africa, where the office presented a pipeline of projects to investors. In July, the government gazetted 50 projects worth R360 billion in the human settlements, water and sanitation, energy, transport, agriculture and agro-processing and digital sectors that could create 282 000 jobs.

South Africa’s economic slump 

In August, two years after Ramaphosa first announced his R400 billion fund, a number of government entities signed the Infrastructure Fund Memorandum of Agreement. The parties to the agreement were: Infrastructure South Africa, a new agency in the Department of Public Works and Infrastructure that will be the point of entry for all projects, National Treasury and the Development Bank of Southern Africa, which will establish the infrastructure Fund through a dedicated implementation unit. 

The government says it will provide R100 billion to the fund over 10 years. The rest of the funds will come from the private sector. But in the February 2020 budget National Treasury made no allocation to the fund for the 2020/2021 financial year. 

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Despite all the public relations gimmicks and slick presentations with investment banking buzzwords such as “blended finance” that have promised projects worth trillions of rands, gross fixed capital formation, a measure of total investment in the economy, has declined for seven out of nine quarters since Ramaphosa became president. 

The main reason has been a public sector investment strike. Between 2015 and 2019, public investment by general government and state-owned companies plunged by 22.4%. Investment by state-owned companies and general government collapsed by 26.8% and 17.6% respectively. But private investment increased by 5.1% during the same period.

During the first quarter of 2020, before the lockdown, gross fixed capital formation imploded by 20.5%. Investment by the private sector and state-owned companies declined by 25.3% and 20.9% respectively. Investment by general government increased by 7.7% after eight consecutive quarters of decline. According to Nedbank’s Capital Expenditure Project Listing publication, gross fixed capital formation will contract by 27% and 4% in 2020 and 2021 respectively. The bank says 32 new projects worth R29.7 billion were announced during the first half of 2020. “The number of projects is the lowest since the listing started in 1993, while the value is the smallest since 2001.” 

The ideology that informs government’s investment strategy is flawed. Private investment responds with a lag (or delay) to rising GDP growth. It does not kick-start the economy or GDP growth. Similarly, private investment follows public investment. This means that introducing changes to the regulatory environment will not, on their own, result in an increase in private investment, especially within the context of an economic depression. 

United Kingdom economist John Llewellyn says: “The spending component that is hit hardest in recessions is investment. It is an easy item to cut: which chief executive would go to their board amid a deep recession to argue that now is the time to expand capacity?”

Blended finance

There is no point for government to be appealing for private investment, when its own contribution to gross fixed capital formation is collapsing. Under this scenario, a continuing public sector investment strike will offset any increases in private investment and result in further declines in gross fixed capital formation. In its two budgets this year – in February and June – National Treasury announced cuts worth R200 billion to government spending. In the June supplementary budget, it announced further cuts of R230 billion that will be made during the 2021/2022 and 2022/2013 financial years. 

A significant portion of these budget cuts relate to infrastructure allocations to provincial and local government. Also most state-owned companies are in intensive care and the seven largest borrowers have debts of R760 billion, according to the budget. Eskom accounts for R454 billion of this debt but the government has kicked the can of restructuring the company’s balance sheet for more than two years. The next financial crisis will be at the level of municipalities, all of which will go bust due to austerity measures and the inability of customers to pay for services.

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The government plans to square this circle through a process of financial alchemy called blended finance, which is the latest neoliberal pyramid scheme. Essentially, the government wants to have its smoothie without putting anything into the blender. The previous pyramid scheme – public-private partnerships (PPPs) – has failed after more than two decades. “Less than two percent of investment in public infrastructure has been through PPPs,’’ Ramakgopa says. Blended finance is part of  the World Bank’s “Billions to Trillions” agenda of mobilising private finance to achieve the United Nations’ sustainable development goals.

According to the United Nations Conference on Trade and Development, developing countries have a $2.5 trillion a year financing gap in their sustainable development goals. According to an Overseas Development Institute report: “Blended finance uses public sector development finance to spur additional private investment. Expectations that blended finance can bridge the sustainable development goals financing gap are unrealistic. Billions to billions is more plausible than billions to trillions.” 

A key indicator is the leverage ratio, which measures the amount of development finance that must be put into the blender to get private finance. High-leverage ratios are at the core of the argument for blended finance. The report says: “But our research shows that real leverage ratios are actually very low.” It says each $1 of development finance institution investments mobilises $0.75 of private finance. “Our estimates suggest that the public sector has on average picked up 57% of the cost of blended finance investments.” Also, the private finance mobilised through blended finance – only $1 trillion for least developed countries – is tiny compared with the financing gap.

At the end of 2019, South Africa had an investment rate of about 17.6% of GDP compared with a target in the National Development Plan of 30%. There is an annual investment shortfall of about R600 billion. Decimating public sector investment through vicious austerity and hoping to make up the difference by introducing a soft (or nebulous) obligation for financial institutions to invest in infrastructure and jumping onto the latest neoliberal bandwagon of blended finance will not close the country’s massive infrastructure financing gap. There can be no mobilisation of finance for infrastructure without a change in macroeconomic policy.

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