Budget 3.0: a look at South Africa’s plan to use pension funds for building infrastructure

FINANCE Minister Enoch Godongwana delivered the third iteration of the 2025 national budget speech last Wednesday. As citizens, we all hoped this time would bring positive changes. The latest version of the 2025 budget appears more reasonable within our current economic context and paints a vivid picture of South Africa’s finances.

“I believe this budget supports economic activity while enhancing future economic prospects, directs spending towards the social wage, and invests in state capability and critical infrastructure,” said Godongwana.

The budget revises several key areas, including the country’s economic status, growth projections, substantial debt servicing costs, the withdrawal of the controversial VAT increases, and the continuation of the social relief grant.

Although there were no VAT hikes, financial experts warn that public relief may be short-lived. Rising fuel levies and unadjusted tax brackets to account for inflation mean households could still face financial pressures.

Godongwana noted that, despite sluggish growth over the past decade, South Africa’s economy is expected to expand by only 1.4% this year, a reduction from the 1.8% projected in March. This decline is primarily attributed to increased trade tensions, geopolitical issues, and policy uncertainty.

Additionally, the new budget sets the national borrowing requirement at R588 billion for 2025/26, approximately R6 billion more than planned in March.

The 2025 Budget Speech, especially in its 3.0 version, emphasizes infrastructure investment and explores alternative financing mechanisms, such as infrastructure bonds. These mechanisms aim to involve various stakeholders in the investment process. The budget also includes structural reforms to improve access to basic services, particularly in network sectors. As the minister stated: “The reality, however, is that the decision to eliminate the VAT increase, without a viable alternative source of revenue, significantly reduced our ability to fund additional government programs and projects to the extent we had deemed necessary.”

Infrastructure, the fourth pillar of our economic growth, necessitates the exploration of alternative financing arrangements. Therefore, the government is investigating options allowing pension funds, commercial banks, development banks, and international financial institutions to participate in financing the country’s infrastructure plans.

While South Africa has relatively developed core infrastructure, disparities and inequalities exist in areas like transport, power, communications, and water/sewage systems. These aspects of infrastructure are crucial for enhancing the country’s commercial competitiveness. The minister hopes that by seeking alternative financing instruments, the government can leverage infrastructure investment to alleviate supply-side constraints on the economy and improve citizens' access to social services.

As citizens, it is essential to understand the rationale behind this proposal. The current budget aims to reduce our reliance on external borrowing and the revenue needed to service this debt. This strategy addresses South Africa’s infrastructure deficits and stimulates economic growth. However, it also raises important considerations regarding the implications for pension fund members and the broader economy.

The idea of using pension funds to invest in infrastructure is not new. However, we can be assured that the South African government cannot directly seize or take pension fund money without following proper legal processes. Although there have been proposals for pension funds to invest in government-backed assets or infrastructure, regulations and legal frameworks restrict the government’s ability to utilise these funds.

Regulation 28 of the Pension Funds Act limits how much pension funds can invest in various assets, including government bonds and infrastructure projects. No mandated investments or “prescribed assets” require pension funds to invest in specific government-backed projects. The government’s primary role is ensuring a stable and sound financial system while creating a framework that prudently allows pension funds to invest.

Therefore, we can rest assured that no legal mechanism permits the government to take pension fund money without adhering to proper legal procedures and respecting the rights of pension fund members.

To implement this strategy, the government is seeking to amend Regulation 28 of the Pension Funds Act to allow retirement funds to allocate up to 45% of their assets to infrastructure investments, an increase from previous limits. This aims to support the government’s intention of mobilizing domestic capital for infrastructure development, thereby reducing reliance on external borrowing.

If this proposal is adopted, it could bring significant benefits to our country’s economy. First, infrastructure growth will stimulate economic activity, create jobs, and enhance service delivery, contributing to overall economic growth. By attracting private investment into infrastructure, the government can relieve fiscal constraints and allocate resources to other critical areas of the economy. It could also allow pension funds to diversify their investment portfolios and potentially achieve long-term returns.

As a fellow citizen, I understand the concerns surrounding the implementation of this proposal and the cause for alarm. The primary goal of a member’s pension fund is to secure their financial future during retirement. Additionally, we live in a country where we cannot rely on social grants for support in our retirement years.

Recognising the various risks that could impact this proposal and potentially reduce our retirement savings is essential. Infrastructure projects are complex and may carry risks that could affect their returns. Therefore, ensuring transparency and accountability in selecting and managing these projects is crucial for protecting pension fund assets.

The initiative to utilise pension funds presents both opportunities and challenges. Transparent governance, prudent risk management, and a clear focus on protecting pension fund members’ interests are imperative for the success of this strategy. The government must first ensure that a sound, well-regulated financial system is in place to ensure pension fund members’ investments are not at risk.

Our honourable minister stated in his speech, “…we are not deaf to the public’s concern about wasteful and inefficient expenditure … It must be matched by much stricter oversight that quickly identifies problems and provides timely solutions when things go wrong.”

As citizens, we must hold him accountable for his promise.

Jennifer Reddy is the chief executive officer of Morar Incorporated, a leading national accounting and advisory firm with a footprint across South Africa. She is a qualified chartered accountant, registered auditor, certified fraud examiner, and holds an MBA.

** The views expressed do not necessarily reflect the views of IOL or Independent Media. 

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