A number of smart suggestions have been offered to plug South Africa’s higher education funding gap. One that’s been mooted involves innovative long term development bonds.

A bond is a financial instrument issued to raise capital. Government bonds are issued by governments to finance government spending. The investors in such bonds receive periodic interest payments on the bond as well as the face value of the bond when it reaches maturity.

The development bond I’m discussing here was proposed by governance experts Danny Bradlow and Edward Webster. In their model, it would be issued by universities and backed by the government to help needy students.

In what the pair call their “sustainable autonomy model”, money raised from the sale of the bonds would be used to provide loans to graduates to fund their studies. Graduates would be required to repay the money once they have completed their studies and are employed. This money would then make up the returns to the investors.

But this leads us to a key question: who is going to buy these bonds in the first place, and why would they do so?

The answer may lie with pension funds. These are uniquely placed to fulfil the role of investors. This sort of investment would be in their own best interests. If they come on board, even with a small investment, billions of rands could become available to students. This can be done. All it would take is a small tweak to South Africa’s Regulation 28 of the Pension Funds Act.

There is ample precedent around the world for using pension funds and other large public money for economic development and to fund social or environmental causes.

As far as I’m aware, this would be the first time that at least some pension fund money is specifically directed to funding higher education.

A smart investment

South African pension funds manage a total of around R3.7 trillion in assets.

Assuming a rate of return of 10% per year on this money, that equates to R370 billion per year in interest, which is around a third of South Africa’s total tax revenue. They’re uniquely placed to fulfil the role of investors in Bradlow and Webster’s model. This is true for two reasons:

their sheer size, and

their revised mandate. As of 2011, those who manage pension fund money are required to consider environmental, social and governance issues when making investment decisions.

The fees must fall crisis is a perfect example of a social issue that would qualify for such consideration. For this to happen, a regulation in the Pension Funds Act would need to change. But this is easily done.

Regulation 28 of the act provides the upper and lower limits, in percentages, that pension funds are allowed to invest in various asset classes, from hedge funds to government bonds to shares to property.

The regulation does specify minimum percentages for government bonds, but doesn’t compel pension funds to invest specifically in tertiary education. My proposal is to alter the lower limit in Regulation 28. To be specific, I’d suggest that Regulation 28 be tweaked to prescribe a 2% investment in the proposed tertiary education development bonds. This is enforceable legislation that would guarantee pension funds’ investment.

By my calculation, this tweak would immediately make almost R80 billion available for tertiary education development bonds. Assuming this money achieves a solid return of 10%, there would be R8 billion available for students on an annual basis.

A token of good faith

Of course, this is not all it will take to make the “sustainable autonomy” model a reality. But it’s a good first step, and a sign that the government is committed to addressing university students’ needs by tapping into pension funds’ money and altering Regulation 28 to ensure they’re fulfilling at least part of their social engagement mandate.

In addition, given that graduating students will eventually become contributors to pension schemes, it is in pension funds’ own interest to use a small part of their resources to help talented and ambitious – but financially needy students – to get an education. These students can then go on to jobs in which they’ll become pension scheme contributors.

Right now, South Africa’s higher education sector is bleeding. The only way to stem the flow is to come up with practical solutions that put affordable tertiary education within everybody’s reach. The sustainable autonomy model – and a tweak to Regulation 28 of the Pension Funds Act – is one such solution.

Author’s note: this article was developed with input by Cillie Swart. He is the Director of Transkaroo Communications, a translation and editing company based in Pretoria. He was previously the Deputy Director of Financial Markets at National Treasury of South Africa and was instrumental in drafting the current Regulation 28.