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Conditions are ripe for a South African sovereign wealth fund based on minerals

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Francis Wilson is emeritus professor of economics at the University of Cape Town. He founded the Southern African Labour & Development Research Unit and directed the Second Carnegie Inquiry into Poverty and Development. His books include “Labour in the South African Gold Mines 1911-1969” [1972] “Uprooting Poverty: The South African Challenge” [1989] [co-authored with Mamphela Ramphele] and, more recently, “Dinosaurs, Diamonds & Democracy: A short, short history of South Africa”.

There are more than 40 sovereign wealth funds around the world, most funded by oil and gas but also by diamonds (Botswana) and some by non-commodities. Much of South Africa’s mining wealth was built on the back of migrant labour and, in the process, significantly underdeveloped our rural areas. Surely it is time for South Africa to consider a sovereign wealth fund – a mineral restoration fund?

In a year when the local mining industry has done exceptionally well, the purpose of this article is to propose the creation of a mineral restoration fund modelled on the sovereign wealth fund pioneered by the government of Norway after the North Sea oil boom of the 1970s and followed by many other countries.

The boom began with a major discovery in 1969 and continued through the 1970s, particularly after the crises of 1974, when the price of oil quadrupled, and again in 1979, when it trebled. The net result was to add enormous windfall profits to oil and gas producing countries, including Norway, Great Britain and others in Europe. 

There are now more than 40 sovereign wealth funds around the world, most, though not all, funded by oil and gas, but also by diamonds (Botswana) and some, including China and the United States, by non-commodities. Norway, which started early, has two sovereign wealth funds; the most important of which is worth just over $1,100-billion, equivalent to a little more than $200,000 per citizen.

Even small countries like Botswana, with a population of 2.25 million, have not insignificant reserves built up in this way. The Botswana Sovereign Wealth Fund is currently worth $4.9-billion, which works out at $2,072 (R34,500) per citizen. Reserve funds are then invested around the world and limited amounts can be drawn on for purposes agreed by Parliament. Where they are large, they can exert considerable influence in the market with specific policies based, as in the case of Norway, on their specially established Council on Ethics to ensure ethical investment.

With global heating and the Paris Agreement of December 2015, there is increasing concern about pollution of the environment. For Norway, this means that energy should no longer be produced by coal-fired power stations, thus all investments by the sovereign fund in major coal producing companies have been sold. Similarly, the fund is able to encourage renewable energy by investing in the production of solar power.

Turning now to South Africa, news from the mineral sector is extremely bullish. South Africa includes coal as a mineral, which many countries do not, as it is an organic product – a fossil fuel – containing much carbon, which pollutes the atmosphere and is a major contributor to global heating. Unlike diamonds, it is found relatively close to the surface of the earth. We find that the platinum group metals, which include palladium and rhodium, are the top mining revenue generators which, with coal, account for 53% of income generated by the country’s mining sector.

Gold, although much less important than it used to be, is nevertheless significant as its price has doubled in 10 years from R1,000 in 2010 to R2,000 per fine ounce in 2020. For the mineral sector as a whole,  production fell by 8% over the year, largely due to a plunge in April during the first full month of lockdown but, despite this, revenue grew by nearly 40% to the staggering sum of almost R600-billion. 

Such a fund should of course have been set up in the early 1970s when the price of gold began to rise astronomically, and so much could have been done to create liveable cities and rural areas for all in terms of the basic infrastructure needed.

As a result, profits for the sector grew 60%, the value of listed shares rose 52% and dividends paid to shareholders more than doubled from R18-billion to R43-billion. A rosy picture indeed. Good news for all those involved in mining.

But what then for the rest of society? More tax revenue for the government to spend creatively or allow to be stolen. Is there not some more effective way of sharing the windfall? 

The Norwegian experience would suggest that there is. 

Suppose that, in windfall years, profits could be shared in such a way that shareholders got 50% and a sovereign wealth fund kept 50% for everybody in society to be used for the common good.

Because of the way in which the migrant labour system worked, there was little investment in rural infrastructure and these areas became poorer. If South Africa were to set up a mineral restoration fund (excluding coal) with the specific purpose of making some of the investments that were never made, particularly in rural, but also urban areas, then some much-needed resources would begin to flow in a process that directly affected the damage of the past.

Expenditure from the interest of such a fund could begin to make a visible difference, albeit in a small way. For example, 50% of profits in the mineral fund (excluding possibly coal profits, which could go into a different fund) invested at, say 5% pa, would yield 5% of 50% of R43-billion – a little over R1-billion per annum – which could provide, for example, a subsidised network of transport. This would enable poor people (especially) in the rural areas to get to and from clinics, schools and shopping centres.

In another year, with more money, funds might be used to provide playing fields for schools in both urban and rural areas. Thus missing capital infrastructure, needed for over a century, could be covered by the  restoration fund. Similarly for clinics, parks and all the other amenities so lacking in those parts of society that became poorer as a result of the way in which the migrant labour system worked, and hence the economy as a whole.

Such a fund should of course have been set up in the early 1970s when the price of gold began to rise astronomically, and so much could have been done to create liveable cities and rural areas for all in terms of the basic infrastructure needed.

But it is never too late to harness a good idea, hence we would propose serious discussion about the idea of creating a sovereign wealth fund based on the resources from windfall profits in the mineral sector. 

One fundamental focus of such a discussion should be how to make the fund watertight so that there is ZERO corruption and neither immoral politicians nor bureaucrats with sticky hands can steal money that belongs to all the people and which can, and should, be used for the benefit of all.

This is not rocket science. Ask the Norwegians how it is done. DM

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All Comments 4

  • This is a naive column, riddled with error. Firstly, to suggest that coal should not be classed as a mineral simply because it contains carbon, is bizarre. Secondly, the suggestion that unlike diamonds, coal is found relatively close to the surface of the earth, overlooks both deeper underground coal mines and the volume of diamonds mined by alluvial and open pit methods. It may come as a surprise to Mr Wilson, but the price of gold sounds in US dollars per ounce, not SA Rand. He overlooks the fact that in addition to significant taxes, the mining industry is required to pay mining royalties (which disappear into a black hole) and major contributions through the mandatory Social and Labour Plan (which no other industry has to confront). If he really wants a wealth fund, why not ring fence the revenues from the mining royalty? Finally, the last part of his column highlights the fatal flaw: “One fundamental focus of such a discussion should be how to make the fund watertight so that there is ZERO corruption and neither immoral politicians nor bureaucrats with sticky hands can steal money that belongs to all the people and which can, and should, be used for the benefit of all. This is not rocket science. Ask the Norwegians how it is done.”

    That is the issue. The Norwegians have not mastered the art of corruption and State Capture.

    • It’s boringly easy to slag off Francis Wilson’s proposal. It’s time to explore the constructive middle ground between naivety and cynicism, like this article.