BEE through Sovereign Wealth Fund would be more equitable
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In his budget speech the Minister of Finance announced the formation of the South African Sovereign Wealth Fund (SWF) with a target capital amount of about R30billion.
He touched on a variety of possible funding sources, such as the proceeds of spectrum allocation, petrol, gas or minerals rights royalties, the sale of non-core state assets, future fiscal surpluses and money set aside.
Although the risks are very high, the potential growth in the SWF in the long run, especially on the back of oil and gas royalties, is huge. Apparently, oil and gas companies have to pay a royalty of around 5percent on sales of all oil and gas produced in South Africa.
In the first quarter of 2019, the then Energy Minister Jeff Radebe signed an exploration and production sharing agreement on an oil block in South Sudan to invest $1billion or R15bn to secure crude oil supplies. From an outsider’s point of view the deal is very risky, given South Sudan’s history, but sources indicate that that the upside could be huge.
In November last year, South Africa’s Central Energy Fund announced a partnership with Saudi Aramco to build a new 300000 barrel per day crude oil refinery at Richards Bay to come on stream by 2028 at a cost of $10bn. This coincides with Bloomberg reporting on Friday that Eskom is making preparations for a 3000 MW gas-fired plant proposed for Richards Bay. Will the crude oil produced in South Sudan be refined in Richards Bay?
In February last year Total announced the discovery of a massive gas find with a potential 1billion barrels of “wet” gas off the coast of South Africa. The gas can be converted into petrol at PetroSA’s gas-to-fuel refinery in Mossel Bay or converted into electricity.
Apparently the SA government is likely to be entitled to participate directly in the operation through partnership.
All the said oil and gas projects have long lead times and in the absence of petroleum and gas royalties, the question is where the rest of the money will come from.
South Africa has no surplus money, nor fiscal surpluses. South Africa at this stage cannot afford to transfer the current minerals rights royalties of around R10bn per annum to the proposed SWF as it is a much needed income for the State to balance the books.
The auction of key frequency ranges of spectrum - all wireless technologies use certain bands of spectrum to operate - will definitely be a once-off bonanza for the government. It makes sense that the proceeds be invested for future generations, but the potential proceeds of the auction is unsure.
The sale of non-core state assets is the last funding option the Minister referred to. The only substantial none-core state assets that come to mind is the state’s holding in Telkom and Safcol, while the SARB’s 50percent stake in African Bank is currently for sale. Some prime property holdings in the government’s fold could also be considered.
Telkom is a non-core holding. Government’s holding in Telkom was up for sale from December 2017 to November 2018, but withdrew it from the market.
The collapse in Telkom’s share price relative to the FTSE/JSE Financial & Industrial index is such that Telkom trades at a third of the index’s price-to-earnings ratio. Perhaps government hedged its entire holding in Telkom but, if not, serious consideration should be given to move government’s entire holding in Telkom to the SWF.
The government’s holdings in Safcol is worth just above R3bn as measured by shareholder’s interest. Over the past two financial years Safcol’s loss before interest and tax amounted to more than R100million per year. Whether a price tag of R3bn will be achieved is therefore questionable.
Government’s indirect holding in African Bank through the SARB is 50percent and the latter has indicated that the holding is for sale. The SARB acquired its 50percent shareholding in African Bank in 2016 as part of the restructuring of African Bank and provided a capital injection of R5bn.
According to African Bank Holdings’ financial statements for the year ended September 30, 2019, shareholders’ interest amounted to R10.6bn.
It seems to me that if African Bank Holdings was listed, the company would not have deserved a superior rating. The aggregate market capitalisation of selected listed banks (Capitec, FirstRand, Nedbank Group, Absa and Standard Bank) is about twice the aggregate shareholders’ funds. The ratios of the individual banks are, however, highly influenced by their return on equity metrics.
African Bank Holdings’ return on equity is by far the lowest compared to the selected banks and its market capitalisation could probably be equal to the value of the shareholders’ funds. However, it is possible that the SARB could get substantially more for its stake as a control premium will come into play. So, yes, the “profit” on the sale of African Bank Holdings may find its way into the SWF.
But where will the funds be invested?
It is the typical nature of a sovereign wealth fund to venture into projects which others view as too risky. It is therefore possible that government’s venture in South Sudan to invest R15bn could end up in the SWF.
More importantly, the creation of a sovereign wealth fund, first proposed by the SACP, was aimed to hold equity stakes in companies on behalf of all South Africans instead of individuals doing so as a result of BEE. It is a fact that some individuals became super rich and their companies scored immensely through BEE while the rest of the nation and specifically the poorest of the poor got left behind.
There are various ways BEEs are done, but two principles come to mind. Firstly, stakes in listed companies are acquired at a discount to prevailing share prices and, secondly, some forms of funding are put in place to fund the BEEs. I see no reason why it could not be done in the SWF, where shareholdings are acquired in listed and unlisted companies and funded partially or in total by the said companies and/or financial institutions.
The assets of most sovereign funds comprise inter alia listed and unlisted equities. Yes, I see the red flags going up about who is going to manage it. The PIC is ideally placed to manage such portfolios. It has the capacity and skills to analyse, monitor and manage the individual investments and the fund as a whole.
If all future BEEs are done through the SWF such a move will change South Africa’s corporate landscape as corporates should accept the fact that the nation via the SWF will have representation on their boards of directors.
The composition of the SWF’s board of directors will be a tricky, if not sticky, challenge. Ideally, the board should consist of champions of the various industries, labour and government to ensure that hands are kept out of the cookie jar.
In my humble opinion, BEEs through the SWF would be more equitable than the current BEE workings while at the same time offer significant upside over the long run. It should not be a drag on the country’s current finances though.
Ryk de Klerk is analyst-at-large. Contact [email protected] His views expressed above are his own. He has no direct interest in any company mentioned in the article. You should consult your broker and/or investment adviser for advice.