Mineral power pushes government towards wealth fund route

2012-02-11 08:08

Globally, Sovereign Wealth Funds (SFW) have inspired awe, suspicion and fear and South Africa is the only resource-rich country without one.

Experts say it is unusual for a resource-rich country not to have sought to benefit from its mineral wealth during the resources boom and pull these into a national investment fund.
South Africa’s emerging market peers Brazil, Russia and India have SWF of differing sizes and investment mandates.

“It is a brilliant plan to have a hybrid type of sovereign wealth fund that invests domestically for developmental purposes and abroad in the best investment vehicles in the developing world, but will the ANC be able to push this through at the policy conference mid-year?” asks Lumkile Mondi, an economist for the Industrial Development Corporation.

Countries that are members of the Organisation of Petroleum Exporting Countries (Opec) run sovereign funds brimming with petrodollars.
The Abu Dhabi Investment Authority sits on $627?billion in sovereign funds, while Saudi Arabia’s SAMA Foreign Holdings has $472.5?billion and Kuwait Investment Authority boasts $296?billion.

The 47-page abridged document on resource nationalism, titled Maximising the Developmental Impact of the People’s Mineral Assets: State Intervention in the Minerals Sector, notes that: “SWFs are being used by an increasing number of countries and now collectively hold over $4 trillion in assets. Of the study countries the ANC visited in preparation for the paper (Norway, Australia, Botswana, China and Chile) all have SWFs.

Governments in emerging markets have access to about $20?trillion worth of investment funds – creating weighty leverage in global financial markets.
These funds have been deployed in the development of infrastructure in some of the Emirates of the Middle East, and other resource-rich countries have put their resource earnings towards education, infrastructure and building domestic industries.

The ANC document notes that “under the current fiscal regime our nation is clearly not getting a fair share of the resource rents generated from its mineral assets.”

It points out that in recent years the mining industry’s returns have run impressively over 100% on equity.
For commodities like iron ore, titanium and platinum, returns have gone higher than 120%, with very little accrued to the people of South Africa.

Nchakha Moloi, chairperson of Motjoli Resources, said that a sovereign wealth fund is a valuable way of pooling resource funds and investing them for future generations because mining assets are finite.

He said a clear investment mandate with a domestic development role was needed.
Moloi stressed the mandate needs to be stated upfront in the form of a fund charter.

Michael Power, economic strategist at Investec Bank, said that the ANC and South Africa were considering a sovereign wealth fund and signalled they had begun to think about it not only as a way of transferring wealth to future generations, but also as an instrument of monetary exchange rate management.

He believed the fund must be held offshore in foreign currency to insulate the country against appreciations in the rand and “Dutch Disease”.
During a boom in mineral commodities, the country could experience an influx of foreign currency that would have the effect of strengthening the rand to the point that domestic manufacturing becomes uncompetitive and the economy struggles to create jobs.

The ANC document signals a preference for an “offshore” fund even though this carries several challenges including potential security.

The ANC researchers argue that a fund held “offshore” would protect South Africa’s domestic economy from the effects of a rand that is too strong.

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