A collection of Futuregrowth thought leadership pieces, media articles and interviews.

STUART THEOBALD: Money of activist investors and taxpayers finds its voice to oppose state capture

14 Aug 2017


‘The lesson is — if you lose that respect [for the revenue service] then you lose’


There is a saying about money having a voice, while excrement is shown the door. In SA, investors and taxpayers have the money.

That has big consequences for the fight against state capture; the funding needed to sustain it, including taxes and borrowing, can speak up. And it can choose to say "enough" by taking an activist stance.

Activist investing can take many forms. It can be positive, by backing firms that are aiming to make the changes you want to see in the world, and it can be negative, by withdrawing funding from those that harm your social objectives.

The clearest example of negative activist investing was the disinvestment campaign against apartheid, which applied huge pressure on the state, leading to its 1985 bankruptcy.

There is some stirring of activist investing in the face of state capture. The first clear voices have come from lenders in withdrawing funds from captured institutions. Institutional asset manager Futuregrowth shocked the market and took a lot of heat when it suspended all lending to state-owned enterprises (SOEs) a year ago. It later reversed its decision partially after engaging with some SOEs.

Last month, the Development Bank of Southern Africa, chaired by former deputy finance minister Jabu Moleketi, told Eskom that its qualified audit was unacceptable and its financial director had to go or it would recall a R15bn loan.

There is also scope for positive activist investing. Sygnia CEO Magda Wierzycka, who has stridently decried corruption, has now launched a money market fund where all fees go to nongovernment organisations fighting corruption. It is a good place for your cash balances, with a risk and return profile similar to bank deposits, and anyone can use it. Her firm also fired KPMG after it failed to adequately explain the work it had done for the Guptas.

Activist investing of the social kind usually comes at the expense of profits, at least in the short term. There is little doubt that targeting corruption and state capture is crucial to SA’s long-term economic success.

Corruption destroys service delivery, blunting the ability of the state to use its resources to achieve the society that South Africans want. Activist investing in SA is, therefore, a form of enlightened profit maximisation.

The problem is that there is a temptation to hitch a free ride, to hope that enough other investors will do the work while you pick up the extra yield on bonds that SOEs are forced to pay to attract funding.

That is why activist investing cannot be motivated by profit alone. It has to have a moral imperative too, in which shirking is condemned. Being clear and public in your activism builds the moral condemnation of those who do nothing.

Much more can be done to make activist investing feasible. The government issues billions in bonds every fortnight to fund the budget deficit. If you need fixed-income exposure, as just about every pension fund and insurance company does, there is little way to avoid it.

The debt issued by the government and SOEs makes up the vast majority of fixed-income assets available in SA, but the banks and other large corporates also issue bonds that could be used as an alternative.

A "state capture-free bond fund" would send a clear signal that some investors are not interested in funding a government that refuses to fight against the undermining of institutions of oversight.

Taxes are a much more difficult front. Suggestions of a tax strike are not feasible, given that it is illegal. But the South African Revenue Service’s loss of public esteem, and the loss of moral legitimacy of the state, is affecting tax compliance levels.

No one likes paying tax, but the belief that it is the right thing is one incentive to comply. Faith that your taxes are going to be used to improve the country helps lessen the sting of deductions from your payslip.

But then hearing about the R5.2bn in kickbacks paid to the Guptas by Transnet, or the hundreds of millions of rand Eskom paid a consulting firm for doing nothing or the countless other horror stories of misspending by SOEs, reignites the resentment.

Seeing the police and National Prosecuting Authority display no interest in confronting the corruption adds fuel to the fire. From a macro point of view, that moves the dial of overall tax compliance levels.

The great success of the revenue service after 1994 was to shift the whole country’s attitude to tax compliance. While still finance minister, Pravin Gordhan showed earlier in 2017 he knew exactly what the consequences would be in an interview with the Huffington Post: "The lesson from elsewhere in the world is that if you lose that respect [for the revenue service], then you lose tax compliance."

This is not activism, but it has a similar consequence for the government. The voice of money is getting louder, from both investors and taxpayers.

Read the original article here.