Opinionista Floyd Shivambu 18 April 2018

A Sovereign Wealth Fund will redistribute wealth and stimulate the economy

South Africa must within the next 24 months establish a Sovereign Wealth Fund. These funds are a mechanism to save and redistribute wealth and to stimulate the economy and lead investments in infrastructure and other critical areas that the annual budget of a state cannot reach.

Part of the Economic Freedom Fighters’ contributions to the 2018 State of the Nation Address debate was a lucid input that South Africa should establish a Sovereign Wealth Fund (SWF). The basis of this submission is based on a variety of cogent reasons, most of which will be expanded below.

Sovereign Wealth Funds have been very dynamic, important instruments and mechanisms to save and redistribute wealth in resource rich countries like Norway, Saudi Arabia, and the Emirates kingdoms. The Sovereign Wealth Fund have also been used to stimulate economic activities in countries such as Singapore.

In 2013, the Economic Freedom Fighters adopted a Founding Manifesto, which among other things 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 non-renewable resources are exhausted. Most countries, including China, the US, Saudi Arabia, Norway, Libya, Nigeria, Chile, France and many others, have sovereign wealth funds for these purposes. As we speak, despite massive resource riches, South Africa has no sovereign wealth fund, mainly because South Africans do not own their resources.”

While we had canvassed for the establishment of a Sovereign Wealth Fund when leading the erstwhile African National Congress (ANC) Youth League in 2011, the EFF is the first political party in South Africa that has a known policy position on the establishment of a Sovereign Wealth Fund in its founding manifesto. The ANC’s 54th National Conference similarly resolved, of course under the superior ideological and political guidance of the EFF to establish a Sovereign Wealth Fund. The ANC’s resolution reads as follows:

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.”

This succinct write-up seeks to explain contextually what a Sovereign Wealth Fund is, the examples of such funds in the world, and discuss what could be different options of a Sovereign Wealth Fund in South Africa.

This contribution is not hubris, and instead is aimed at generating public discourse on what should be the form and content of South Africa’s Sovereign Wealth Fund and what its role should be. Sovereign Wealth Funds are also instruments to save wealth for future generations, mostly in nation-states that are economically dependent on finite resources. Surely the establishment of a sovereign wealth fund falls into the wide category of superior logic often presented by the EFF on key issues.

There is no doubt that one of the fastest growing economies in the world over the last 30 years is China, which is destined towards the biggest economy in the world in less than 10 years. China’s growth should be squarely located within its political leadership’s superior solutions and strategies, which did not fundamentally shift from the Marxist-Leninist compass and telescope. While dynamically interacting with globalisation, the Chinese insulated land ownership and all strategic sectors of the economy such as banks, infrastructure, massive manufacturing industries, and bulk service provision from private and foreign ownership and control.

One of the greatest conceptual references to socialism was done by the leader of Socialist China from 1978 until 1989, Deng Xiaoping. Addressing the Plenum of the Chinese Communist Party Central Committee Plenum in 1984 he said,

What is socialism and what is Marxism? We were not quite clear about this in the past. Marxism attaches utmost important to developing the productive forces. We have said that socialism is the primary stage of communism and that at the advanced stage the principle of from each according to his ability and to each according to his needs will be applied. This calls for highly developed productive forces and an overwhelming abundance of material wealth. Therefore, the fundamental task for the socialist stage is to develop the productive forces. The superiority of the socialist system is demonstrated, in the final analysis, by faster and greater than under the capitalist system. As they develop, the people’s material and cultural life will be constantly improved. One of our shortcomings after the founding of the People’s Republic was that we didn’t pay enough attention to developing the productive forces. Socialism means eliminating poverty. Pauperism is not socialism, still less communism.”

This is one of the most truthful characterisations of socialism, one which has been distorted over time by bourgeois and imperialist propagandists, who after their dismal failure to physically suppress the Great Socialist Revolution resorted to a concerted propaganda war against Socialism. Socialism represented progress everywhere it is correctly led and applied, and China’s rise from being the 100th economy in 1978 to being the 2nd biggest economy if not the biggest at the beginning of the 21st century bears testimony to this observation.

We provide this basic theoretical background to dismiss those who will dogmatically disassociate our proposal for a Sovereign Wealth Fund from the Marxist-Leninist-Fanonian compass that guides the EFF.

Foundationally, the EFF agreed on the establishment of a Sovereign Wealth Fund, and we believe it is one of the most dynamic pragmatic considerations that should be made in the efforts to uplift South Africa and the African continent from the economic insignificance and marginalisation.

What is a Sovereign Wealth Fund?

The Sovereign Wealth Fund Institute (SWFI) defines a Sovereign Wealth Fund as a state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, governmental transfer payment, fiscal surplus and receipts from resource exports. In the main, Sovereign Wealth Funds have their origin in commodity exports, either through taxes or owned by the government. This was particularly the case with Sovereign Wealth Funds that were formed in the early 1950s when countries in the Middle East such as Kuwait, Saudi Arabia and others with excess oil revenues.

With financial globalisation in the late 1970s and early 1980s, through transfer of state assets from official foreign exchange reserves, non-commodities Sovereign Wealth Funds emerged and have played a major role in reshaping the world’s economy. It should be noted that majority of Sovereign Wealth Funds are either future savings funds for the future generations or fiscal stabilisation funds, or both. Oblivion of this dynamic by any nation-state is potentially catastrophic, and a sad reality.

According to the SWFI, Sovereign Wealth Funds around the world have under their management US$7.4-trillion (more than R80-trillion) assets as of September 2017, an increase from US$3.4-trillion (R40-trillion) nearly a decade ago. Rising commodity prices, mainly Brent crude oil and natural gas, have led to the drastic increase of Sovereign Wealth Funds assets, with at least 40 Sovereign Wealth Funds created since 2005. But also, even countries such as China, Singapore and Taiwan’s Sovereign Wealth Funds have drastically increased their assets through export revenues and foreign currency reserves, then reinvesting its proceeds from assets sales and dividend income with maximum investment discipline and clear strategic objectives. The largest Sovereign Wealth Funds such as United Arab Emirates, China and Kuwait have grown to the size of the largest global assets managers or biggest private equity firms.

For many non-commodities countries, Sovereign Wealth Funds particularly in the emerging markets have been at the forefront of advancing economic development and diversification to build strong national economies with solid returns. The Organisation for Economic Co-operation and Development (OECD) analysis of key financial actors of shifting wealth of nations duly noted that because of the nature, origin and the potential to reposition economies into a growth trajectory, concluded that such funds could usefully be considered as Sovereign Development Fund (SDF). Sovereign Wealth Funds lead investments in infrastructure and other critical areas that an annual budget of a state could not reach.

Sovereign Wealth Funds are largely insulated from political micromanagement, and governance structure, investment strategy and transparency requirements are central to the drastic growth in assets. In the main, a Sovereign Wealth Fund requires a robust legal framework to promote sound institutional and governance arrangements to allow for a disciplined long-term investments strategy to generate solid returns. South Africa’s recent experience at Eskom, Transnet, SAA and other entities made it clear that legal forms and structure particularly in relation to the shareholders (the government) are important not only to ensure the achievement of economic and financial benefits, but to ensure governance is intact and risk of corruption is mitigated.

In Singapore, for example, neither the President of the Republic of Singapore nor the Government of Singapore can influence Temasek’s investment decisions and Temasek recently enlarged the majority of non-executive independent private sector business leaders on its board. Others like China Investment Corporations (CIC) have now moved towards a mechanism for scientific decision-making and authorisation, put in place comprehensive risk management systems and developed sophisticated investment platforms to ensure Sovereign Wealth Funds are insulated from political micromanagement.

Proposals that aim to strengthen governance must not be mistaken for the absence of politicians with a developmental mandate for Sovereign Wealth Funds. More than 50 years’ experience of Sovereign Wealth Funds has clearly demonstrated that funds invest more heavily in their domestic markets, particularly in development of infrastructure, job creating industries and long-term investments when they have strong state-led development objectives. Sovereign Wealth Funds with strong state-led development objectives are more sensitive to the social needs of the nation, which have high social returns, not easily observable and not attractive to the private sector.

Absolute reliance on Foreign Direct Investments has proven in the history of large-scale development of nation states to be a wild goose chase. There are virtually no countries whose massive infrastructure and industrial development were absolutely dependent on Foreign Direct Investments. Sovereign Wealth Funds therefore play an important role in driving infrastructure and at times industrial developments which enhance and harness a nation state’s economy, expand revenue streams, create jobs and dents poverty levels.

What are the examples of Sovereign Wealth Funds?

Norway

Norway has the world’s largest Sovereign Wealth Fund, with over US$1-trillion in assets. The Norwegian Sovereign Wealth Fund was established through the state’s ownership and control of petroleum resources, investing in parts of the large surplus generated by the Norwegian petroleum sector and dividends from the partly state-owned Statoil. Statoil is a state-owned oil and gas company which invests in these sectors domestically and globally, and the returns of these investments are invested by the sovereign wealth fund and make direct contributions into the Norwegian budget, which is often characterised by budget surpluses.

The Government Pension Fund Global was set up in 1990 to underpin long-term considerations when phasing petroleum revenues into the Norwegian economy. Norges Bank Investment Management manages the fund on behalf of the Minister of Finance (MoF), which owns the fund on behalf of the Norwegian people. The MoF determines the fund’s investment strategy, following advice from among others Norges Bank Investment Management and discussions in Parliament. The MoF has on a regular basis transferred capital to the fund from the Norwegian state’s petroleum revenues. The fund’s capital is invested abroad, to avoid overheating the Norwegian economy and to shield it from the effects of oil price fluctuations.

In 2016, the Norges Bank Investment Management reported a total asset of US$1.1-trillion under its management, paid US$5-billion in taxes and the government of Norway was able to withdraw US$12.9-billion to stabilise the fiscus as Norway goes through low GDP growth of 1.1%. There are many developmental indicators, which illustrate that Norway’s Sovereign Wealth Fund and certainly its ownership and control of oil and gas have played an important role in raising the quality of life of ordinary Norwegians. This will be so for the foreseeable future because the assets under the Sovereign Wealth Fund are adequate to fund the country even if oil can be completely replaced as a source of revenue.

Temasek, Singapore

Temasek, incorporated in 1974 (44 years ago), is a Singapore state-owned investment company with a portfolio worth US$197-billion (R2.3-trillion) mainly in Singapore and the rest of Asia. Temasek, named after Singapore’s earlier name, holds assets and manages investments previously held by government. Under Singapore’s constitution, neither the president of Singapore nor the Singapore Government is involved in Temasek’s business decisions, except in relation to the protection of Temasek’s past reserves. Temasek was formed almost 10 years after Singapore gained its independence in 1965, and it was founded with the main objective to provide jobs and contribute to nation building when the private sector failed to mobilise capital to create jobs and build the Singapore economy.

Temasek is wholly owned by the Minister of Finance, declares dividends annually and contributes to the Singapore government’s budget via the dividends it pays to its shareholders and the tax on its profits. Temasek’s portfolio market value increased 300% over the past 20 years, non-domestic ownership of assets increased by over 22% over the last decade meaning Temasek has increased its assets abroad. In 2016, Temasek paid a total of US$593.1-million in taxes and the government of Singapore US$1.7-billion as annual dividends.

China Investment Corporation, China

The China Investment Corporation (CIC) was founded in September 2007 as a wholly state-owned company incorporated in accord with China’s Company law, with a registered capital of R2.3-trillion. The China Investment Corporation has three subsidiaries, CIC International, CIC Capital Corporation and Central Huijin Investment Ltd. The overseas investment and management activities of China Investment Corporation are undertaken by CIC International and CIC Capital. Both CIC International and CIC Capital are market-oriented commercial entities with a specialised mandate and global reach.

In a multipronged state-led development, including the strategic investment by state-owned companies and Sovereign Wealth Funds, China has been among the world’s fasted-growing economies, with real annual GDP growth averaging 9.5% through 2017. No other economy in the world has led such a fast, sustained expansion by a major economy in history, as noted by the World Bank. Through trail and error, including innovation in its economic planning through Sovereign Wealth Funds, China has made great leaps in reducing poverty and reaching its goal set out in the Sustainable Development Goals (SDGs), lifting more than 500 million of its citizens out of extreme poverty.

Ten years since its formation, China Investment Corporation has built up assets totalling more than US$800-billion, contributing more than US$3-billion in taxes and dividends to the state.

Investment Corporation of Dubai

The Investment Corporation of Dubai (ICD) is a state-owned holding company that can be characterised as a sovereign wealth fund owned by the government of Dubai. It was established in 2006 with the transfer of the government’s portfolio of investments from the Finance Department. The Investment Corporation of Dubai has interest in 44 portfolio companies, 27.9% in the financial sector, 18.8% in the transportation section, 17.2% in the energy and industrial, 17.8% in the retail estate and construction, 15.6% in hospitality and leisure, and 2.7% in retails. The majority of the major holdings in Investment Corporation of Dubai hold shares in Europe, Middle East and America (50% of all companies), and 12 in Africa, Australia and Asia.

In 2016, ICD reported US$21.4-billion of assets, contributing annually to the fiscus just under US$2-billion. It should be noted that the Investment Corporation of Dubai is one of the major equity contributors to Dubai’s massive infrastructure investments. This entails that despite earning additional revenue for the state from other parts of the world and from its oil and petroleum resources, the ICD plays an important role in the infrastructural and therefore economic development of Dubai.

What are the options for SA?

South Africa must within the next 24 months establish a Sovereign Wealth Fund, which should have South African characteristics and derive the best practices and lessons from the established Sovereign Wealth Funds in the world. Below we present three options through which SA’s Sovereign Wealth Fund could be established, and these could be implemented individually or as a combination. Whatever form is adopted, the following features must be definitive of the fund:

  1. It must be relatively autonomous from political micromanagement.

  2. It must directly account to Parliament, with a proviso that some of the strategic investment reports are provided in camera.

  3. Only 15% of the Sovereign Wealth Fund’s gross profits should be deposited into the National Revenue Fund, while the rest is re-invested.

  4. The shareholders of the Sovereign Wealth Funds should be a combination of important state institutions, and certainly not a single ministry as is the case with majority of State-owned Companies.

  5. The Sovereign Wealth Fund should develop an investment policy which brings about a delicate balance of asset management and private equity.

  1. Direct appropriation of R100-billion like CIC and guarantee its autonomy. Invest in Africa and other areas’ bots and and other strategic investments.

The first approach could be enactment of a Sovereign Wealth Fund Act and special appropriation of R100-billion allocated to the Sovereign Wealth Fund. The operational costs of the Sovereign Wealth Fund should never exceed 0.5% of the total capital allocation. The fund could be allocated shares in strategic SOCs and play an important contributory role in guiding their investments. Furthermore, the Sovereign Wealth Fund can buy a maximum of 10% of shares in South Africa’s originated and domiciled multinational corporations that are listed on the JSE.

  1. Establish it is a subsidiary of the PIC whose returns have been great and guide it on its investment policy.

The second approach could be establishment of the Sovereign Wealth Fund as a subsidiary of the PIC. The PIC is isolated because of its institutional capacity to manage large assets. The PIC manages R2-trillion of government Sovereign Wealth Fund. As an immediate intervention, the PIC could offload assets where it is overexposed into the prudent management of the Sovereign Wealth Fund.

  1. Give SA’s Sovereign Wealth Fund shares in strategic minerals, coal, platinum, shale gas; the MPRDA directed shares should be held in the Sovereign Wealth Fund.

The third option could be to allocate key shares in South Africa’s mineral and petroleum resources, as is called for in the protracted Minerals and Petroleum Resources Development Act. The proceeds of these could be invested in different portfolios all over the world.

To conclude, a South African Sovereign Wealth Fund should be established and managed properly to generate economic activity and income. DM

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