Floyd Shivambu
Why SA needs a sovereign wealth fund
● The EFF’s proposals during this year’s state of the nation address included a submission that South Africa should establish a sovereign wealth fund to widen the non-tax revenue streams of the state and save wealth for future generations.
The Sovereign Wealth Fund Institute defines it as “a state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatisations, governmental transfer payments, fiscal surpluses and/or receipts resulting from resource exports”.
Sovereign wealth funds have played an important role in driving strategic investments in countries. The Norwegian fund — the world’s biggest — is worth more than R12-trillion and has strategic interests in the European economy and other parts of the world. The sovereign wealth funds in the United Arab Emirates are largely responsible for strategic wealth investment in political territories that used to be nonentities.
We at the EFF believe that a sovereign wealth fund is one of the most dynamic, pragmatic solutions to uplift South Africa.
The EFF’s 2013 founding manifesto said: “Owing to surpluses and many sustainable-developmental considerations that will be generated as a result of the South African state’s control and ownership of strategic sectors of the economy, government should establish a sovereign wealth fund, which will prudently invest in the development of the African economy. This fund will also assist in the insulation of the South African economy whenever there are volatilities in resource-sector prices and when nonrenewable resources are exhausted.”
The ANC’s national conference last year similarly resolved to establish a sovereign wealth fund. Experience all over the world has shown that these funds invest more in the domestic economy, especially in sectors that create jobs and build infrastructure.
Sovereign wealth funds make it easier for a government to achieve its development objectives in a sustainable manner, especially the social needs that companies which prioritise profits are not attracted to. Sovereign wealth fund investments must benefit broader society and improve the standard of living for all.
It is important that the investment strategies and management of sovereign wealth funds are transparent and beyond political interference. There is a need for robust laws that regulate the relationship between those who manage the fund and the government, so that there is a clear longterm investment strategy, supported by discipline that allows the fund’s investment goals to be achieved.
South Africa’s recent experience at Eskom, Transnet, SAA, the Passenger Rail Agency of South Africa and other entities showed that without clear and strong laws to regulate the relationship between the government as a shareholder and those that manage state-owned enterprises, it’s easy for them to collapse and for their monies to be stolen.
In Singapore, neither the president nor the government can influence sovereign wealth funds. China’s investment corporations have put in place comprehensive risk-management systems to ensure politicians do not interfere in the management of the sovereign wealth fund. But protecting the assets and management of sovereign wealth funds does not absolve the government from providing political leadership and a clear development mandate.
South Africa must establish a sovereign wealth fund within the next two years. This should have South African characteristics but take its bestpractice lessons from the world’s established sovereign wealth funds. According to the Sovereign Wealth Fund Institute, funds of this type around the world have under their management a total of R80-trillion in assets.
The following five features must be definitive of the sovereign wealth fund:
It 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;
Only 15% of the fund’s gross profits should be deposited into the national revenue fund, while the rest is reinvested;
The shareholders of the fund should be a combination of important state institutions, and certainly not a single ministry as is the case with the majority of SOEs; and
The fund should develop an investment policy that strikes a balance between asset management and private equity.
The first way of doing this would be for South Africa to allocate R100-billion through an act of parliament which would establish the sovereign wealth fund and provide for its governance. Such a fund could also be allocated shares in SOEs to build its assets.
Second, South Africa could establish the fund as a subsidiary of the Public Investment Corporation, which is wholly owned by the state. The PIC has an impressive record in managing assets and private equity of over R2-trillion, and the key investment policies and practices employed by the PIC should be applied to the fund.
The third and most viable way is to allocate key shares in South Africa’s mineral, petroleum and other strategic natural resources, as is called for in the Mineral and Petroleum Resources Development Act. The fund should be allocated free-carry equity in all strategic and profitable natural resources and, with time, shares in strategic SOEs.
These are options that must be viewed as part of a broader mandate to provide superior economic solutions to South Africa. The overdependence on foreign direct investment will not bring the needed results. As part of the strategic legislation which the EFF will table as private member’s bills in parliament, the South African Sovereign Wealth Fund Bill must culminate in an act of parliament to achieve what is outlined here.