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The ANC is in a hurry to establish a sovereign wealth fund (SWF) before the start of the next term of government.
The SWF, an investment pool made up of money from the country’s reserves, will be one of the governing party’s flagship ideas ahead of next year’s general elections. It is used by countries to boost the economy by investing in diversified high-risk and high-return assets.
According to a report from the ANC’s national executive committee lekgotla last month, the party wants the establishment of the state-owned investment company to be high in its elections manifesto and its implementation to start immediately after the next administration takes office next year.
Questions sent to ANC head of economic transformation Enoch Godongwana were not answered, but it appeared that the party was looking at using mining and energy resource royalties to establish the SWF. It envisions that the fund will have interests in the mineral and gas sectors.
The ANC report said the SWF would enable government “to provide a steady resource for national development objectives”.
The intervention would also “sterilise inflows of mineral rents to avoid significant exchange rate appreciation during commodity booms that displace industrial and farming exports”.
The move would probably require the enactment of the Sovereign Wealth Fund Act and special appropriation of the necessary funds.
The ANC lekgotla is a gathering of senior party leaders, ministers, directors-general, premiers, MECs, heads of department and mayors, where policy for government is decided. This week, the government held a Cabinet lekgotla to process decisions from the ANC lekgotla.
While the ANC was set to “immediately investigate the modalities of a SWF to enable the appropriate regulatory frameworks”, Economic Freedom Fighters (EFF) deputy president Floyd Shivambu said his party was miles ahead.
Shivambu said the EFF had studied the experience and examples of Norway, Singapore, China and the United Arab Emirates. These countries had successfully funded the initiative variously through the balance of payment surpluses, proceeds of privatisation, government transfer payments, fiscal surplusses and receipts from resource exports.
He said there were three options that South Africa’s SWF could explore. These variables could either be implemented individually or as a combination.
Core principles should include that the company “must be relatively autonomous from political micromanagement”.
“It must directly account to Parliament, with a proviso that some of the strategic investment reports are provided in camera,” Shivambu said.
He also said that only 15% of the SWF’s gross profits should be deposited into the national revenue fund, the vehicle where all money received by the government is deposited. The rest should be reinvested.
In terms of shareholders, Shivambu said that it should be a combination of important state institutions, “and certainly not a single ministry as is the case with majority of state-owned companies”.
Wits University economist Lumkile Mondi said countries that had established the SWF “used windfall proceeds” like oil or commodity rents.
Mondi said it would be difficult for an SWF to take off in South Africa because the country had “a huge infrastructure deficit from energy, rail and road, including a collapsing education and health system”.
“With debt-to-[gross domestic product] ratio at 53%, a budget deficit of 5% and a weak revenue collection institution, an SWF is a dream that has no economic base nor justified when cash is too tight. Where will the money come from?” he asked.
Mondi said national budget remained the most appropriate tool for development. He said it was only when there was a commodity boom or a privatisation project could some assets and proceeds be preserved in an SWF.
“However, I would rather use any cash windfalls to extinguish debt,” he suggested.
Econometrix director Azar Jammine said thinking about an SWF when the country is running a budget deficit is “a bit crazy”.
He pointed out that the countries that established SWFs had big budget surpluses and therefore had a lot of extra money.
Norway was able to establish an SWF owing to its abundant oil resources and Singapore because it exported more than it imported.
“When you are running a budget deficit that you’re trying to reduce, what are you doing building a fund when you really need the money just simply not to borrow for your own sake to keep the country going?” asked Jammine.
With mining in South Africa on its knees and agriculture not doing well, he said government itself needed whatever money it can get for ordinary expenses.
“There is no room to establish an SWF when it is running a budget deficit,” Jammine said.
Shivambu said a direct appropriation of R100 billion would work for the SWF. He said the investment company should also look at investing on the African continent.
“The operational costs of the SWF should never exceed 0.5% of the total capital allocation. The fund could be allocated shares in strategic [state-owned companies] and play an important contributory role in guiding their investments,” he said.
Furthermore, he said the SWF could buy a maximum of 10% of shares in South Africa’s originated and domiciled multinational corporations that are listed on the JSE. It could also be established as a subsidiary of the Public Investment Corporation (PIC).
“As an immediate intervention, the PIC could offload assets where it is overexposed into the prudent management of the SWF,” said Shivambu.
“Lastly,” said Shivambu, “the SWF could be allocated shares in strategic minerals, coal, platinum and shale gas, and the [Mineral and Petroleum Resources Development Act] direct that shares be held in the company. The proceeds of these could be invested in different portfolios all over the world.”
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