Sovereign wealth fund crucial for investment, says Ebrahim Patel

The proposed sovereign wealth fund, the establishment of which was announced by President Cyril Ramaphosa in his state of the nation address (Sona) recently, will be key in the drive to promote investment and economic growth, trade and industry minister Ebrahim Patel said on Tuesday.

But the proposal to establish the fund, a state-owned investment tool pooling the country’s reserves so as to benefit the economy, raised eyebrows, not least because of SA’s weak economic growth and uncertain revenue.

There are also concerns that establishing such a fund before the corruption crisis is decisively dealt with will simply be opening up another avenue for those seeking to milk the state.

“A sovereign wealth fund is a key issue for the long term to give us a resource base to be able to promote investment,” Patel told lawmakers on Tuesday. The minister and his department were briefing MPs on their plans to implement some of the proposals raised during the Sona, and the budget speech.

“The sovereign wealth fund does many other things besides promoting investment. It is also a critical mechanism used in societies with a significant resource base to moderate the commodity cycle,” Patel said.

“When you have a boom you get a massive inflow of resources into the economy, your exchange rate strengthens, but your industrial performance goes down because your currency is too strong. When you have a bust then you have no industry left,” he said of the challenge that commodity-based economies such as SA face. “It’s trying to think of the strategic use of the fund.”

The success of Norway, Chile and other countries’ sovereign wealth funds, which primarily use oil and gas revenues, has emboldened the government to push for a state-owned investment house. Though SA does not have significant energy deposits, it boasts a large but struggling mining industry.

In his budget speech last week, finance minister Tito Mboweni said SA will use funds from the sale of broadband spectrum and mining royalties to establish a R30bn sovereign wealth fund.

“A sovereign wealth fund is an important long-term tool for saving and investment for future generations ... It can also contribute to strengthening the fiscal framework,” Mboweni said then.

The state collected almost R8bn in royalties from mining houses in 2018. However, mining royalties, which are meant to develop communities, have not been spared from plunder with Corruption Watch previously highlighting that their management has been characterised by corruption and maladministration, rendering the system mostly ineffective. ​

phakathib@businesslive.co.za