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SA’s Sovereign Wealth Fund remains a pipe dream

Government appears to be missing the ball in terms of seizing the opportunity to use the Solidarity Fund as a catalyst to establish a long-lasting SWF. Photographer: Nadine Hutton/Bloomberg

Government appears to be missing the ball in terms of seizing the opportunity to use the Solidarity Fund as a catalyst to establish a long-lasting SWF. Photographer: Nadine Hutton/Bloomberg

Published Mar 28, 2022

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TWO unrelated events that occurred this month have raised the question whether South Africa’s long professed ambition to create a Sovereign Wealth Fund (SWF), is just a pipe dream?

The Independent Communications Authority of SA (Icasa) concluded its radio frequency spectrum auction, raising more than R14.4 billion for the national fiscus.

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This inaugural radio frequency spectrum auction is one of the most important structural reforms to reduce the cost of communication and encourage investment in the digital economy.

Meanwhile, the Solidarity Fund also wrapped up its operations after two years, with under R3.8bn in relief funding having been received while just under R3.3bn was disbursed.

The Fund was set up with a very specific and limited mandate and was never intended to be a long-term solution, rather an urgent, interim intervention in augmenting the government’s response to the unfolding Covid-19 crisis.

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There will be no further fundraising and no new interventions or funding will be considered, and the remaining funds should be spent by September’s closure.

That is where the government appears to be missing the ball in terms of seizing the opportunity to use the Solidarity Fund as a catalyst to establish a long-lasting SWF.

South Africa has had more than a decade of economic stagnation and the existence of the Public Investment Corporation (PIC), Africa’s largest asset manager, really does not do much for the man on the street.

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The PIC will not even shoulder a portion of Eskom’s R400bn debt in spite of the power utility remaining the country’s single biggest risk to investment.

The International Forum of Sovereign Wealth Funds (IFSWF) last year noted in its report that the mandates of Africa’s sovereign wealth funds centred on social impact, but the challenge for investors was to ensure that the impact of their investments was felt by the public.

Royal Bafokeng Holdings, an African community investment company with a net asset value of R29bn for the Bafokeng Nation, is providing amazing development for rural communities in the North West.

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How come then Africa's most industrialised economy does not have a SWF when there are at least 25 Wealth Funds across the continent, albeit with distinctive performances and results?

In a 2020 report, economic development specialist at the SA Institute of International Affairs (SAIIA) Chelsea Markowitz, said that countries often establish SWFs if two prerequisites are met.

Markowitz said countries must have a national budget surplus and low debt levels, and South Africa meets neither of these.

However, development partners such as the International Monetary Fund (IMF) and the World Bank (WB) have increasingly advocated for governments in developing countries to establish SWFs to manage and invest resource revenues to help combat the resource curse.

In Africa, Botswana’s Pula Fund has perhaps been the most successful as it has helped to stabilise the budget and avoided arbitrary depletion using proceeds from diamond mining.

Globally, Norway runs one of the world’s largest sovereign funds having invested part of the resource rent from its share of the North Sea oil to the Oil Fund, and using interest and dividends to pay for the budget deficit.

These are lessons that the South African government seems hellbent on ignoring while it keeps pumping money into the Jobs Fund, Infrastructure Fund and the Innovation Fund.

During his famous Aloe Ferox Budget Speech in 2020, former finance minister Tito Mboweni announced the formation of the South African SWF with a target capital amount of about R30bn.

Mboweni said there were a variety of possible funding sources, such as the proceeds of spectrum allocation, petroleum, gas or minerals rights royalties, the sale of non-core state assets, future fiscal surpluses and money set aside.

The winding down of the Solidarity Fund, instead of extending its scope and widening its mandate, is an unfortunate calamity for a country that declared to be starting a SWF not so long ago.

We know that the lion’s share of more than R200bn tax windfall mainly from the mining sector due to higher commodity prices, will be used to support social spending, especially the Covid-19 Social Distress Grant for another year.

The rest of the revenue offshoot will be used to lower the government’s R4.3 trillion debt burden as debt-service costs are averaging R330bn annually, and also pay salaries.

What we do not know at this point is what the government plans to do with more than R14bn raised from the auctioning of the spectrum.

The less said about funds being raised through the sale of State assets such as SAA and Eskom’s properties and distribution assets, the better as all these are mired in secrecy.

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Related Topics:

IcasaTito Mboweni

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