Proposed sovereign fund plan could work, but big doubts abound

London — SA's push to set up a sovereign wealth fund (SWF) seems like a stretch for a country with few resources to spare, but precedents show a well-managed seed fund could help attract and focus foreign investment.

The ANC proposed an SWF in its manifesto for May's election but has not explained much about how it would be financed or what its strategic aims would be.

Trade and industry minister Ebrahim Patel was nevertheless reported as saying at the recent G20 meeting in Japan that SA should immediately start the process of setting up a fund to prepare for future revenue streams.

SWFs range from intergenerational savings funds favoured by commodity-rich nations, to stabilisation funds to help plug budgetary holes, and strategic funds aimed at powering growth by supporting state-owned firms or bringing in foreign investment.

Analysts say SA could choose the latter model, often favoured by governments without oil riches or the net export dollars associated with a current account surplus.

But some experts are sceptical.

"I don't have an objection to the idea of a sovereign wealth fund per se, just in the SA context I don't think it is appropriate to be spending our time on it," Bureau for Economic Research chief economist Hugo Pienaar said.

"Given our twin fiscal and current account deficits, we don't generate excess cash to be channelled to a sovereign wealth fund."

SA contracted sharply in the first quarter while its current account deficit widened to 2.9% of GDP. The government expects a budget deficit of 4.5% of GDP for the fiscal year that began April 1.

SA relies on foreign portfolio inflows to finance the twin deficits, which have widened in recent years and are seen as a key economic weakness. The mining industry, the most likely source of revenue that could be diverted to the fund, generates about 8% of GDP, less than half of what it contributed in 1980.

"Should a fund be launched without clear objectives, and be financed by significant debt, that would be ratings-negative if it struggled to keep the country's fiscal position on track," said Rachel Ziemba, founder of Ziemba Insights.

SA has just one investment-grade credit rating left and is worried that losing it will lead to big outflows of foreign investment.

Russian and Indian models

If SA does opt for a strategic fund, it could look similar to those set up by India, France and Italy to entice foreign cash to enhance limited domestic firepower and funnel investment into local firms or costly areas such as infrastructure.

Long-term investors — often other sovereign funds or private equity — are attracted by the perceived lower risk and access to the juiciest state assets.

"India's fund has been successful in galvanising investment and could serve as a good example for SA if the government can find an initial capital contribution," Victoria Barbary, of the International Forum of Sovereign Wealth Funds, said.

India's National Investment and Infrastructure Fund invests in roads, ports, airports and power, with backers including the Abu Dhabi Investment Authority, Singapore's Temasek Holdings and Indian banks. It also oversees an India-focused fund-of-funds to which the Asian Infrastructure Investment Bank is committed.

The Russian Direct Investment Fund, established in 2011, has meanwhile become the main conduit for foreign investment into Russia, with its importance growing as US sanctions against Moscow bite.

Barbary said SA could draw on the experience of state-owned asset manager the Public Investment Corporation (PIC) to help build investment teams with the skills to identify opportunities.

With the economy frequently beset by blackouts and Eskom bleeding money, the SA's creaking power industry would seem a potential starting point.

A problem with that is that any such fund could duplicate the work of existing institutions such as the Industrial Development Corporation and Development Bank of Southern Africa, Coronation Fund Managers portfolio manager Neville Chester said.

"Very few foreign investors are going to commit real foreign direct investment (FDI) — a lot of our FDI tends to be portfolio flows rather than building factories, creating jobs — without certainty on wider government policy and unfortunately that's where we have a vacuum," he added.

Governance concerns given corruption allegations against other state-owned institutions such as the PIC and Eskom and former President Jacob Zuma, might also be off-putting for investors.

"There would need to be very stringent checks and balances in how the sovereign wealth fund is governed, what it may invest in," said Pienaar at the Bureau for Economic Research. 

Reuters