Both the ruling ANC and its political counterparts in red overalls and aprons, the Economic Freedom Fighters (EFF), have expressed support for the creation of this sovereign fund. And if recent voting alliances in Parliament between the two parties are anything to go by, legislating a SWF won’t be a barrier to its initiation.
In most nations who’ve developed SWFs, these funds are financed by windfalls from privatisations, budget surpluses and commodity rents such as licensing fees. The ANC has proposed, in the resolutions of its 54thNational Conference, that the financing of this fund come from mineral rents: “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.”
“Free-carry” refers to unencumbered (debt-free) access to equity or shares in mining companies. Conversely, stakes like this are seen to be “funded by the companies” themselves. The choice of free-carry mining interests being fed into an SWF is informed by the international experience of most SWFs being linked to mineral or commodity interests. Even here on the African continent, 13 nations have SWFs funded by oil and gas profits. The reason for this is simple – commodity sectors are subject to volatile prices of their underlying assets, but in good times they also have lucrative pay-offs that can finance such a scheme.
“I call the mining industry an industry of long, cold winters and short, beautiful summers,” Seriti Resources CEO Mike Teke quipped in a conversation in May this year. When economies like SA’s rely on the price performance of commodities, experiencing boom and bust cycles, those summers arrive for the traders, senior management and others, but seldom arrive for those in rural labour-sending areas and the dormitory townships many retrenchments and mine closure leave in their wake. Examples are numerous: Carletonville, Orkney and the devastation wrought many of the labour-sending areas.
These “boom and bust”cycles are one raison d’être for a SWF, alongside many others: intergenerational savings, fiscal stabilisation, investment in strategic sectors and fulfilling long-term capital investment needs which can’t be met through the budget.
SOVEREIGN WEALTH FUNDS 101
For what purpose would a country like SA consider establishing a SWF? EFF MP Floyd Shivambu suggests that SWFs are about ensuring there’s something left for the country and mining-affected communities once the last shaft is closed. “SWFs are also instruments to save wealth for future generations, mostly in nation-states that are economically dependent on finite resources,” he declared.
A common misconception is that “finite resources” refers only to minerals on and below the ground. However, other limited resources could include spectrum, shale gas and even prime land.
There are numerous reasons for a nation establishing a fund of this kind. It serves as a platform for intergenerational saving and the stabilisation of public funds (especially in instances of low tax receipts or under-collection of revenue).