30 December, 2011 11:37

Evan Pickworth

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Economic democracy imperilled by bad policy

Cyril Ramaphosa got the best Xmas present of all South Africans this year after the Chinese sovereign wealth fund placed a gift-wrapped R2 billion deal in his stocking.

The private equity owners in Ramapahosa's Shanduka - which invests in resources like coal and other sectors of the economy - certainly enjoyed this largesse (they voted for it at a hefty premium), but they're out now. It is Ramaphosa who now sits with a significant opportunity to expand the business. However, while foreign shareholders and the rich elite stand out as immediate beneficiaries, what about extending this largesse to more South Africans, like the Chinese are doing for their citizens? It can be done if a sovereign wealth fund is harnessed in a transparent, democratic manner with citizens having a direct say in its functioning and dividend flows.

China Investment Corporation, of course, is possibly the world's largest fund manager with US$400 billion of assets. Whether it engenders true economic democracy is questionable, but there are working examples of funds that do, that SA could follow.

This is no chump change and there's far more to this story than the Ramaphosa empire raking in the dough. It is a sign that China means business in Africa and is a strong endorsement of the leadership abilities within some companies. There is a big growth story in the offing, and it is now anticipated Shanduka could list on the JSE - investors may well be lining up for this one in 2012 if it happens.

But for only a few to benefit would be a veritable kick in the pants to true democracy, economic expansion and poverty alleviation.

The mechanics of the deal have piqued my interest. You see China doesn't have many resources besides a massive captive labour force and decent work ethic. But what they have done is created a state-owned investment institution that is seeking out opportunities that loop back to China. This company talks in the billions, not millions, and in dollars, not rands, and it has gravitas. It is a concept that seems to be working very well: if you don't have resources at home, buy stakes in companies that do. In SA's case that equation could read: if you do have resources at home but little scope to beneficiate, invest in companies that do and reap the rewards for your shareholders, the citizens.

This is another way to skin the beneficiation cat - it is just strange SA hasn't cottoned on to the potential of a sovereign wealth fund yet. It is indeed, the ideal way to diversify an economy without needing to protect inefficient industries.

The challenge, of course, is that not enough cash will be created due to state inefficiencies - licensing problems and talk of nationalisation is driving investment and growth of mines away. But if these challenges are not met then SA's sovereign wealth will simply be left rotting in the sun.

So we need to take a step back to take a step forward - strip nationalisation talk from any discussions going forward (I would go so far as firing anyone who mentions that dirty word in 2012, but that's just me), stop protectionism in its tracks and open up the industry more (they could start by cutting red tape).

Royalty taxes in SA at 0.5%-7% of gross sales and after allowable deductions are not high when compared to other countries in Africa and using this as a mechanism with license fees to boost a sovereign wealth fund can work really well, advancing the cause of economic democracy than ever before. Total all-in taxes for a mining company in SA are close to 38%, which compares very favourably with the effective 60% of Zambia, which recently doubled its royalty tax to 6%. Zambia's 2009 mammoth 25% mining windfall tax led to so much protest it nearly crippled the industry - it is Africa's biggest copper producer. Ghana is now toying with the idea of a 10% windfall tax, while Namibia also has the concept in mind. It's a little crazy out there (even worse if you include Zimbabwe's platinum export ban) and when you look at an oil rich country like Angola, where poverty and corruption reign, it is apparent all of Africa could do would with a fund that better harnesses the mining largesse before it is dissipated and usurped by foreign shareholders and corrupt officials.

Take Norway as an example of where it can work. Here you have an oil-rich country like Angola that realised putting all your eggs in one basket will destroy the economy. To diversify they set up a sovereign fund and it has done so well they have been able to bring their marginal tax rate down! That, of course, came off a high base as they were one of the top tax regimes in the world. I know the state controls the petroleum sector there, but it seems to have worked due to efficiencies, a progressive tax regime and a well-managed wealth fund.

It's not the perfect example for SA to follow as our economy is dependent on so many different mainstream resources, not just one, but there are significant lessons to be learnt for SA and Africa. There are other examples, especially in the Middle East, but the fact is significant wealth can be created and economic democracy enhanced if a country has the will to do it. The wealth gap is simply too high at the moment, with middle income households actually seeing their share of wealth drop over the past thirty years. Something urgent needs to be done, or else the looting and riots seen in even first-world centres and in SA will continue.