Sovereign Wealth Fund can solve mineral depletion

by Sunday News Online | Sunday, Dec 3, 2017 | 424 views

SWF

Butler Tambo

IN last week’s article I looked at the value addition matrix of platinum group metals (PGMs) and its complexities because of the global value chain ownership and I then suggested that Zimbabwe in addition to value addition and beneficiation of its mineral resources should expedite the operationalisation of its Sovereign Wealth Fund (SWF).

This is in order for the country not only to create employment and raise revenue for Government but for it to also save up and invest its wealth for future generations of Zimbabweans who might not be lucky enough to find the country’s minerals still in existence but will enjoy the rich rewards of their forefathers’ wisdom in investment decisions.

In January 2014, the Government officially tabled its Sovereign Wealth Fund (SWF) Bill, that establishes the SWF through the use of proceeds from royalties of gold, platinum, nickel and diamonds and invest them in gold bullion, stockpiles of precious stones as well as other foreign assets.

The SWF of Zimbabwe Act was subsequently enacted into law in November 2014 and a board to administer the fund was set up but no tangible work towards the setting up of the SWF has been done.

However, the country continues to lose precious minerals for various reasons as explored in my four previous articles and therefore one advocates for the speedy implementation of the legislation which is running three years late if the new era in Zimbabwe is to become a reality, especially bearing in mind that 85 percent of foreign exchange in Zimbabwe comes from five products; tobacco, gold, platinum, chrome and diamonds.
SWFs Explained

There is no consensus, in either the academic or practitioner literature, on exactly what constitutes a sovereign wealth fund. While SWFs are a heterogeneous group, most of the larger and more established SWFs evolved from funds set up by Governments with revenue streams dependent on the value of one underlying commodity and who wished to diversify investments to stabilise revenues. Accordingly, most SWFs have been established in countries that are rich in natural resources, with oil-related SWFs being the most common and largest group.

These include the funds sponsored by the Arab Gulf countries, Russia and ex-Soviet republics, Malaysia, Brunei, and Norway. A newer set of funds has recently been established in response to discoveries of major new resource endowments particularly natural gas, but also oil, coal, diamonds, copper, and other minerals.

A second important group of SWFs includes those financed out of accumulated foreign currency reserves resulting from persistent and large net exports, especially the funds based in Singapore, Korea, China, and other East-Asian exporters.

Governments can use these funds to cover budget deficits when resource revenues decline; to save for future generations; to earmark for national development projects; or to invest. The recent global Governments’ purchases of equity have been conducted mostly by state entities acting as investors rather than owners, buying non-controlling stakes in foreign and domestic companies in order to realise a long-term financial return, rather than to own and operate these businesses as state enterprises.

This phenomenon can be called the rise of the fiduciary state, and sovereign wealth funds are the single most important expression of this force, as, over the past decade and a half, their total assets have grown to exceed those of hedge funds and private equity combined.

Over the 2001-2012 period Governments acquired more assets through stock purchases (US$1,52 trillion) than they sold through share issue privatisations and direct sales (US$1,48 trillion).

Much of this state investment was channelled through SWFs. They can also be used to reduce spending volatility, in turn improving the quality of public spending, promoting growth and reducing poverty and protect oil, gas and mineral revenues from corruption.

Globally the size and number of SWFs has increased dramatically since the 1950s. SWFs started in the 1950s when the Kuwait Investment Authority fund was established to invest excess oil income.

In addition to other smaller funds, major funds Abu Dhabi’s Investment Authority, Singapore’s Government Investment Corporation and Norway’s Government Pension Fund were established in 1976, 1981 and 1990 respectively. Today, there are more than 50 SWFs and the Sovereign Wealth Fund Institute puts their value at

US$6 831 trillion at the end of September 2014.

Angola (Fundo Soberano de Angola), Nigeria (Nigeria Sovereign Investment Authority), and Ghana (Petroleum Fund) set up their own sovereign wealth funds over the past few years, managing US$5 billion, US$1,4 billion, and US$75 million worth of assets respectively.

Norway, a country roughly the size of Zimbabwe in area and with a small population of about 5,2 million people has the largest SWF in the world with assets valued at over US$1 trillion and the country can even afford to offer free tertiary education to its population and free post graduate studies to foreigners.

Reasons for global rise in SWFs

Most recently, two economic phenomena have promoted the growth of SWFs since 1999. The first is the massive accumulation of foreign (mostly United States dollar-denominated) official reserves by central banks that was prompted by the devastating 1997–98 East Asian financial crisis. As Governments have built up increasingly massive foreign exchange reserve holdings over the past 15 years reaching US$12,338 trillion at year-end 2012 and this has prompted them to reallocate some assets to SWFs, to seek a commercial return without having to convert out of dollars.

The second major force fuelling the recent growth of SWFs has been the nearly inexorable rise in the world price of oil, which increased from barely US$10 per barrel in 1998 to over US$148 a decade later, but later falling to less than US$60 for the greater part of post 2015.

Is it the right time for Zimbabwe to create a SWF?

Studies have revealed that there is opacity surrounding the existing SWF in Africa. This opacity surrounds institutional arrangements of SWF which are designed in such a manner that the objectives for setting up the fund are unclear while there is very limited public participation, if any. Without sufficient safeguards in terms of transparency and accountability it is unlikely that SWF would benefit the people.

The other key consideration is that it has been argued that it may not be prudent to create a fund if there are other critical and pressing demands that will require huge capital injections these include investments in social and economic infrastructure.

The Zimbabwe Environmental Lawyers Association, in a commentary on the SWF Act of Zimbabwe noted that, it is international best practice that SWFs be created where there is budget surplus unlike the Zimbabwean context where there are already deficits and a pressing need to upgrade social service delivery.

The creation of the SWF under such a scenario may result in the failure of the fund to meet its objectives and diversion of the fund resources for speculative and political reasons. It is, therefore, imperative to discuss whether the objectives of the fund as laid out in the Act are clearly for economic purposes. The IMF and Santiago Principles classify five types of SWFs which are; stabilisation funds, pension reserve funds, savings funds, development funds and reserve investment corporations. Stabilisation funds exist to insulate the budget and the economy from volatility and external shock that may arise from commodity price boom and bust cycles.

SWF serve multiple purposes. This is the case in Zimbabwe, where, in terms of the above classification, the SWF has a multi-function fund.

The SWF Act states the objects of the fund as being; to make secure investments for the benefits and enjoyment of future generations (general investment fund); to support development objectives of the Government, including long term economic and social development (development fund); to support fiscal or macro-economic stabilisation against fluctuating of commodity prices (stabilisation funds) and to contribute to the revenues of Zimbabwe from net returns on investment (reserve investment).

Another inherent shortcoming of the objects is that they do not make provision for the protection of the natural resources from unjustifiable and uncontrollable exploitation and depletion and with the examples given in my last articles on artisanal and gold mining and unsustainable mining of diamonds in Chiadzwa, this concern cannot be ignored much longer if economic revival and transparency is what the new Zimbabwean administration yearns for.

This defeats a fundamental understanding to the establishment of SWF for the sustainable enjoyment of the gains of a finite resource.

The funds generated for the SWF derive from wasting assets, therefore there should have been recognition of this in the SWF Act notwithstanding the existence of environmental legislation.

Butler Tambo is a Policy Analyst who works for the Centre for Public Engagement and can be contacted on butlertambo@gmail.com

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