JOHANESSBSURG - In April this year, Tito Mboweni, now Minister of Finance posted a tweet that proposed three urgent tasks for the National Democratic Revolution in South Africa:
- The State must own 40% of all mining companies.
- The State Must create a Sovereign Wealth Fund (SWF).
- A State Bank must be created URGENTLY.
South Africa is currently the Chair of the BRICS Business Council until the mid-term meeting in February 2019 when Brazil takes over. The South African BRICS Financial Services Working Group (FSWG) issued a concept note to the other BRICS countries propagating for the establishment of a network of BRICS SWFs.
The note was developed out of research conducted under the auspices of the Industrial Development Corporation (IDC) of South Africa. The note urged all the five countries to take the lead in organizing the discussion about the SWF network. The FSWG has established a task team comprising three people from each BRICS country.
The task of selling the SWF to the Government in South Africa has not been easy, but with the appointment of Minister Mboweni, there is hope that the idea shall be with open arms.
According to “the Balance website, "A sovereign wealth fund is an investment pool of foreign currency reserves owned by a government. The largest investment pools are owned by countries that have a trade surplus. These are the oil-exporting countries and China. They take in foreign currencies, primarily U.S. dollars, in exchange for their exports. The funds are then invested to produce the highest return possible.
Apparently, funds held by nations' central banks are not sovereign wealth funds because they have different goals. A central bank holds funds to manage the value of its currency, to stimulate the economy, or prevent inflation. In addition to funds held by state-owned companies, Government employee pension funds and Private wealth funds are not SWFs:
In the event that the Minister of Finance push for the establishment of a South African SWF, there will be sufficient support in Parliament because the African National Congress (ANC) at its 54th National Conference passed a resolution on investment and allocation of resources that stated:
Government should introduce measures to ensure adequate financial resources are directed to developmental purposes. A new prescribed asset requirement should be investigated to ensure that a portion of all financial institutions funds be invested in public infrastructure, skills development and job-creation.
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.
The Economic Freedom Fighters (EFF) have been vocal particularly in parliament on the establishment of an SWF and in fact their policy document on “Development of the African Economy” states that:
“Owing to surpluses and many sustainable-developmental considerations that will be generated as a result of the South African state’s control and ownership of strategic sectors of the economy, government should establish a sovereign wealth fund, which will prudently invest in the development of the African economy. This fund will also assist in the insulation of the South African economy whenever there are volatilities in resource-sector prices and when non-renewable resources are exhausted. Most countries, including China, the US, Saudi Arabia, Norway, Libya, Nigeria, Chile, France and many others, have sovereign wealth funds for these purposes. As we speak, despite massive resource riches, South Africa has no sovereign wealth fund, mainly because South Africans do not own their resources.”
The FSWG research indicates that the process of risk diversification and sovereign asset management entails direct portfolio investments into income yielding physical assets, such as global property, as well as directing fund allocations into growth financial assets including equities, bonds, real estate investment trusts, as well as into alternative investments consisting of strategic investments in private equity funds or into hedge funds.
The concept note also states that although Sovereign Wealth Funds may have multiple and changing objectives over time, their core strategic mandate is centered around economic development or macroeconomic stability. In economies dependent on revenues generated from mineral exports, sovereign wealth funds typically have a dual macroeconomic stabilization, as well as long-term savings mandate.
According to one researcher, there are three basic formats of sovereign wealth funds:
SWFs structured to deal with short- or medium-term macro stabilization;
Funds that are oriented toward long-term savings, including saving to support the pension system;
As well as those funds that are structured as investment funds, with a strategic mandate of maximizing returns from financial resources owned by the state.
The growth in the assets under the control of Sovereign Wealth Funds over the past years has attracted some attention as well as concern from the broader global financial services industry given the potential impact on various asset markets as SWF’s asset pool expands. Furthermore, concern has been raised that foreign investment activity by Sovereign Wealth Funds raises national security concerns as the purpose of investment activity might be to secure control of strategically important industries for political reasons, rather than maximizing financial returns. This concern is promulgated by the lack of transparency relating to the investment activity and strategies of most SWF’s, as well as investment goals, disclosure of relationships and fund holdings in private equity funds. Lack of transparency in SWF’s poses potential financial systemic risk.
To alleviate global financial industry concerns as well as to curtail potential systemic risk pertaining to the activity of sovereign wealth funds, global governments of countries with sovereign wealth funds have committed to specific strategic operational rules for sovereign wealth funds. These include:
Asset accumulation rule – agreement on the portion of revenue that can be utilized in asset purchases and/or saved;
Asset sale/withdrawal rule – implementation strategy defining when the Government can withdraw from the fund;
Investment/asset allocation rule – defines where revenue can be invested in foreign and domestic assets.
Sovereign Wealth Funds in BRICS Countries
Brazil, Russia and China have established sovereign wealth funds over the past decade, anchored by the countries’ vast foreign exchange reserves, and culminating from varying motivations. While institutional investment in Brazil is dominated by pension funds, long-term inflation and demographic risks are a key strategic concern that is justifying the establishment of a sovereign investment fund to support the country’s pension system. In the case of China and Russia, sovereign wealth funds were setup for optimal management of the countries’ asset and liabilities as well as to address macroeconomic reconstruction.
Brazil’s Sovereign Wealth Fund
Fundo Soberano do Brasil or FSB
Russia’s Sovereign Wealth Funds
The Russian Direct Investment Fund (RDIF)
The Reserve Fund
The National Wealth Fund
China’s Sovereign Wealth Funds
Investment Company of State Foreign Exchange fund (SAFE)
China Investment Corporation (CIC)
The National Social Security Fund (NSSF)
China-Africa Development Fund
Brazil’s Sovereign Wealth Fund
The Sovereign Fund of Brazil (Fundo Soberano do Brasil or FSB) was established in 2008. It is structured as a non-commodity fund which aims at supporting national companies in their export activities and to act as a counter-cyclical macroeconomic management instrument. It is positioned to promote investment projects of strategic interest to Brazil both domestically and internationally.
Russia’s Sovereign Wealth Funds
The Russian Direct Investment Fund (RDIF)
RDIF is Russia’s sovereign wealth fund with reserved capital of $10 billion under management. Working alongside the world’s foremost investors, we make direct investments in leading, as well as promising, Russian companies.
The Reserve Fund
The Reserve Fund, established in 2008, is financed by oil and gas revenues from the federal budget in excess of the amount authorized by the oil and gas transfer as well as through income from the management of the funds.
The National Wealth Fund
The National Wealth Fund, was started with an initial outlay of USD32billion and has grown its assets under management to USD89.6 billion. Compared to other countries that use export earnings from resources to create balanced SWF’s across various global asset classes.
China’s Sovereign Wealth Funds
Investment Company of State Foreign Exchange fund (SAFE)
SAFE was established in 1997 and holds the strategic mandate of managing China’s foreign exchange reserves and ranks as one of the top 10 largest sovereign wealth funds. SAFE primarily invested in safe securities, its asset allocation strategy was broadened to equities and higher risk bonds as well as making direct investments in the companies of the oil industry in Western European countries including Total, BP and Royal Dutch Shell Plc.
China Investment Corporation (CIC)
CIC was established in 2007 by the State Council and Its sources of capital are special issue treasury bonds, which generate dividend flows. The strategic mandate of the CIC is to improve the governance of key state-owned financial institutions as well as to assist Chinese enterprises in expanding their global footprint. With regards to asset allocation, the CIC has made significant investments in the global financial sector, purchasing equity stakes in major institutions such as Morgan Stanley, Blackstone and JC Flowers.
The National Social Security Fund (NSSF)
NSSF is a strategic reserve fund that aims to offer a social security solution to the problem of China’s aging population. Funding sources include fiscal allocations of the central government, capital derived from the reduction or transfer of state-owned shares, investment proceeds and equity assets and allocations from the lottery public welfare fund.
China-Africa Development Fund (CDF)
The China-Africa Development Fund was established by China Development Bank a special investment vehicle into the African continent. The fund has a mandate of investing in stocks, convertible bonds and other types of investment such as fund of funds, which will facilitate the increase in investments by Chinese companies in Africa.
A South African SWF can be used to address challenges faced by Government. This will require the transformation of the economic base and a radical move towards industrialisation. One such example is an investment in an African electricity grid covering all sub Saharan countries.
The Map of African Electricity Grid above shows the various existing interconnections and the rate of Electrification including proposed Power Pool Projects from the Global Energy Network Institute. Eskom holds the grid code and intellectual property which will enable most if not all of the components to be produced locally since South Africa has the capacity with factories and human capital in major cities.
In South Africa, we have many kilometres of high voltage transmission distribution lines, a formidable distance to inspect and maintain and this is the forte of Eskom. All overhead lines (those not buried under ground) are vulnerable to natural phenomena such as lightning, flooding, veld fires and strong winds. All the high voltage lines plus the big transformers and related equipment form the transmission system, also known as the National Grid.
Investments in an African Electricity Grid by the South African SWF can earn high returns and in the process get countries in Sub-Sahara out of the crises of increasing unemployment, poverty and inequality.
Sello Mashao Rasethaba serves on the BRICS Business Council Financial Services Working Group.