Is it extreme to suggest a country with immense poverty should establish a national savings and investments pot, or a Sovereign Wealth Fund (SWF)?
No.
It is another tool in the box to navigate the turbulent 21st century. And there is no freedom like financial freedom.
In resource economics, Hartwick’s rule states that resource rents should be invested in other assets. The proceeds of non-renewable capital should be invested in human and productive capital.
Academics Hamilton, Ruta and Tajibaeva stated in 2006 that:
“How rich would resource-abundant countries be if they had actually followed the Hartwick Rule (invest resource rents in other assets) over the last 30 years? … Venezuela, Trinidad and Tobago, and Gabon would all be as wealthy as South Korea…”
Terry Lynn Karl writes of the ‘Paradox of Plenty’; how resource wealth has frequently led to weak institutions and corruption.
Indeed, Zimbabwe’s reserves of gold, diamonds, chromite, tantalite, coal, nickel, copper, lithium, tin, phosphate, and iron ore have only served to enrich and safeguard a tiny elite.
Upgrades to the neighbours’ houses
Yet there are quieter examples of sound management. There is also growing awareness of the need to generate long-term economic value from minerals beyond a few jobs for foreign engineers. The real benefit is investments that can be made from bolstering the fiscus.
Next door to Zimbabwe, Botswana has managed its diamond wealth well. The Government of Botswana and private player De Beers both co-own 50% of joint venture Debswana, the country’s largest producer of diamonds. This ensures significant portions of the revenue generated from reserves stays within the country.
Earnings from mining have also contributed to Botswana’s “Pula” SWF currently worth around US$4 billion.
Namibia established a SWF named the Welwitschia Fund in May 2022. Under the umbrella of the Bank of Namibia (BoN), the fund is centred on:
“… insulating the socio-economic structure against cyclical shocks while promoting intergenerational prosperity for all Namibians through the distribution of benefits flowing from … the country’s natural resource endowments.”
The purpose is to stabilise the economy during periods of volatility. It does so through ensuring that surplus revenues from mineral exports are saved and invested, particularly when mineral prices are high (counter-cyclical).
The fund has ballooned since inception to US$23 million.
Much of the proceeds will come from what European oil majors assess may be some of the largest offshore oil and gas fields ever discovered, in Nambian waters. That same basin borders South African waters.
Similarly, Mozambique’s Council of Ministers greenlit legislation in March 2024 establishing a SWF managing vast earnings from natural gas exports.
If managed with a 3% real return on investments (ROI), Mozambique’s fund could reach approximately US$63 billion by 2055. During the first 15 years of building the fund’s assets, 60% of the annual taxable revenues will be allocated to the state budget, with the remaining 40% going to the SWF.
Odd one out
In a sense, then, South Africa would be the odd one out if it does not create a SWF. South Africa could also be on the cusp of major windfalls through a mineral renaissance, from oil and gas offshore Northern Cape, to platinum in Limpopo.
South Africa’s mineral second coming would this time be safeguarded against ‘Dutch Disease’ where natural resource endowments can lead to a decline in other areas of the economy.
The creation of the South Africa Wealth Fund (SAWF) is in fact an imperative. Learning from the successes of others, this is a fresh chance to prioritise long term value-add economic activity.
Not a pipe(line) dream
The ANC established a commitment to a SWF at its 54th national conference at Nasrec, in December 2017.
“A Sovereign Wealth Fund should be set up to ensure that the free-carry shares in mining and other resource sectors be retained by the state, acting as the custodian of the people as a whole.”
In 2022, SA scholars Mzukisi Qobo and Mills Soko examined the prospect of a SWF in SA, ‘Can South Africa Establish a Sovereign Wealth Fund?’.
I had the opportunity to access their work:
“During the 2020 Budget Vote, the [then] South African Minister of Finance, Tito Mboweni, signalled a commitment to this end [a stabilising SWF]. Mboweni set a target capital amount of $2bn … from petroleum, gas or mineral rights royalties…
“Some changes will require legislative or policy shifts, some … are in the tax policy domain… the country has limited fiscal space to realise a SWF and … the country’s debt burden hobbles it from … engaging in activities that are expansionary in nature.
“… in addition to stabilising the macro-economic fundamentals, formulating a long-term plan and setting out institutional building blocks for a SWF should be the first step …
“Legislative instruments such as … the Upstream Petroleum Resources Development Bill (2021) lay the basis for the state to … extract value for broad-based economic development.”
On 18 July 2024, President Cyril Ramaphosa reiterated this desire on the opening of the 7th parliament:
“The establishment of a state-owned SOE holding company will give us greater capacity to build a sovereign wealth fund.
“This has been done successfully by other countries whose sovereign wealth funds have built up capital from the high performance of the state-owned enterprises rather than from the fiscus.”
In 2025, then, Ramaphosa should say:
“We are tabling legislation to enable the creation of the South Africa Wealth Fund (SAWF). This will begin with a team of 50 investment and management professionals … Our initial target will be USD 4bn and reviewed annually thereafter.
“Proceeds will come from various sources. These will include surpluses and taxes on profits of private entities who are now playing a role in state-owned enterprises (SOEs), such as ports and railway operators. Other sources will include royalties from mineral extraction, taxes on profits for mining and oil and gas companies, and budget surpluses.
“Twenty five percent of each year’s annual profits of the fund will go towards four areas: A fund for black entrepreneurs (5%); rural development and townships (5%), a fund for research and development (R&D – 5%), the treasury (general purposes – 5%), and interest on debt (5%).
“For full transparency, it will be overseen be an independent board which will in turn report to parliament. Its mandate will be to ensure that a specified portion from rents is fully collected.
“Two non-state financial investigators will rotate an audit of the fund’s operations every six months.
“There will also be an informal board of international advisors.
“The fund will hold a six-monthly session where it will report on progress to the public and answer questions. A scoreboard will be published, detailing which companies have contributed most to the fund throughout the year.”
A unifier? South Africa’s financial prudence
The idea of a SWF is in fact found across the spectrum of South Africa’s political parties, bringing together the most unlikely, some from within the newly formed Government of National Unity (GNU), and some from outside of it. For the left, it tempers profit hungry foreign corporations, for the right it represents fiscal responsibility.
It is a safety net with which the GNU can show the socially responsible side of investment. It could be sold as ‘we-welcome-foreign-investment-and-privatisation-in-South-Africa-but-those-actors-will-contribute-more-than-their-fair-share’.
Entities within the GNU could well find each other in the inception of the SAWF. In Ashor Sarupen, the centrist DA was given the position of Deputy Minister of Finance. This is a bedfellow for Enoch Godongwana as the Minister of Finance from the ANC, who follows a line of fiscal prudence within that party.
At the Medium-Term Budget Policy Statement (MTBPS) in November 2023, under enormous pressure to bail out failing State-Owned Enterprises (SOEs), Godongwana first suggested a roadmap to recovery for the SOEs, stating “not a cent until then”.
Rating agency Moody’s noted it was encouraging that the National Treasury, ‘held the line’ on spending, and that the deficit will narrow to 3.6% by 2026-2027.
South Africa has shown itself to be financially savvy, with foreign exchange reserves of US$62 billion at around 15% of the economy. Robust financial management has meant that negligible amounts of South Africa’s debt is USD-denominated, guarding against runaway liabilities.
South Africa boasts a solid central bank in the South African Reserve Bank (SARB), and good watchdogs and regulators. South Africa’s banking sector ranks within the world’s top 20.
With around 18 banks and 370 private equity outfits in the country, there is no shortage of skills to run the fund. Add to that the drive of South Africa’s industrious diaspora in the financial industry, willing to return, and the ball is rolling.
The moment it is ‘gamified’ to ‘how-big-the-pot-is’, interest grows in expanding it further and a culture of prudence can be further cultivated.
Perhaps one day, the SAWF could compete with oil-rich Kuwait which has in some years made more money from the returns of its SWF than the treasury has reaped from hydrocarbons taxes and royalties.
Opposition
One way or another, South Africa is likely to proceed with oil and gas production. (The-above mentioned prolific orange basin in Namibia basin flows into SA waters).
To not have a savings and investments pot at the time of its exploitation, would be to create a giant offshore Kimberley, where wealth is extracted and often sent abroad, as elucidated by political economist Professor Patrick Bond, an advocate of a SWF for South Africa.
This will meet with opposition, as seen from various responses to Mboweni’s announcement in 2020.
At the time of the 2020 announcement, analyst Khaya Sithole highlighted issues including the low likelihood that it would be well administered, and that it is many years too late to create one in South Africa.
I contend strongly with the latter point. Oil and gas is a pre-sunrise industry in South Africa and mineral exploration licenses have been on the backburner for many years now.
The fund can then be in place by the time these industries rejuvenate or mature so that the resource is not squandered.
Furthermore, as in other countries, environmental standards could be set to take advantage of swift advances in the technology around Carbon Capture Utilisation and Storge (CCUS). That would significantly reduce any project’s carbon footprint.
Similarly, the South African Institute for International Affairs (SAIIA), responded to Mboweni’s announcement by publishing a paper detailing pitfalls that other countries have experienced in this area.
Two prerequisites are a budget surplus and low debt levels. Those are two things which South Africa did not have at the time of writing. Yet in 2024, SA reached a primary budget surplus (excluding interest on debt), despite enormous financial pressure.
And that is precisely why one is needed – to bank revenue from resurgent sectors is to find income that would not otherwise have been uncovered, increasing the size of the fiscal pie.
Among its other findings, it states that African countries’ SWFs have experienced mixed results in fulfilling mandates, including poor planning, political interference and loose rules preventing savings. It suggests structures that increase difficulty of funds misuse and limit the discretion of fund managers.
Forward
Resource-naked Singapore boasts a diversified long-term returns base with two of the world’s largest SWFs. Established in 1981 – the Government of Singapore investment Corporation (GIC Private Limited) – manages the country’s foreign reserves of around US$770 billion.
Founded in 1974, Tamesak Holdings, focuses on Singapore’s assets and stakes in various firms such as port operators at around US$284 billion.
Those are acts of a benevolent, muscular, developmental state. One wonders if South Africa could pull off anything similar. Yet that is no reason not to proceed. Small savings are better than none.
The North Sea between the UK and Norway holds an interesting lesson for SA.
Norwegian waters hold approximately the same reserves as the UK. Norway created a SWF in 1990 to bank to the benefits of hydrocarbons. The ‘Oil Fund’ has now grown to the world’s largest at US$1.62 trillion. This translates to around US$300 000 per Norwegian citizen.
In his 2015 book ‘The Almost Nearly Perfect People’, author Michael Booth writes on Norway’s fund:
“The Oil Fund is arguably modern Norway’s single greatest achievement – the ultimate expression of Nordic self-discipline … and a paragon of responsible fiscal stewardship. This brilliantly managed, tightly controlled wealth fund, is the envy of every … nation … in the world.”
Across the water, the UK never established such a fund, nor even a National Oil Company (NOC) It deemed tax breaks for oil majors more beneficial. The country’s oil and gas reserves are now well into the twilight zone and the UK’s fiscus struggles to this day.
Untold opportunity lies under the earth. Creating the SAWF would be an act of wisdom and foresight; that is South Africans’ birthright.
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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Image by Pete Linforth from Pixabay