To be sovereign in wealth, deed

Dr Charles Utete
ASovereign Wealth Fund would seem an urgent necessity in the circumstances of this economy presently and for assuring its more secure prospects of development in years and generations to come.
A Sovereign Wealth Fund, as the name suggests is a Fund deliberately established by the State (i.e. the sovereign authority) into which mainly financial resources realised in given economic activities are lodged for purposes of raising investment income for the country’s overall benefit.

The sources of the funds should be explicitly defined and likewise the uses for which the fund investment income is put. I return to this issue shortly.

There are in the world today well over 60 SWF’s whether or not they go by that name.
In Africa, according to Sonangol, the Angolan oil company’s English language publication, Universo, of December 2012, there are eight such funds as follows:

Africa sovereign wealth funds
Country  SWF          Assets $bn    Inception    Origin
Libya      Libyan             65           2006               Oil
Investment
Authority
Algeria  Revenue          57.6       2000                Oil
Regulation
Fund
Botswana Pula Fund    6.9        1994          Diamond
Angola  Fundo
Soberano
de Angola        5.0         2012               Oil
Nigeria Nigerian            1            2011               Oil
Sovereign
Investment
Gabon Gabon SWF      0.4          1998              Oil
Mauritania National    0.3          2006              Oil/Gas
Fund for
Hydrocarbon
Equatorial                       0.08        2002               Oil
Guinea Fund for Future
Generations
Types of funds include those based on foreign currency (and possibly other) reserves of central banks; public pension funds (e.g. Norway); or specially created funds as in the African instances cited above.

The purposes of the funds, in the majority of existing cases, is to provide not only present, but also future generations with definite benefits and opportunities realised from their country’s non-renewable resources whether oil, gas or minerals of all sorts. Lets bring this home this way: Future generations of Zimbabwe will surely curse us if all we bequeath to them an environment pock-marked with gulleys and deep pits out of which minerals have been extracted, notwithstanding the brave efforts of EMA and similar policing organisations.

From this perspective the case for a SWF is unassailable. It should thus not surprise us that the pioneering Kuwait Investment Authority Fund (1952) based on that country’s immense oil reserves and revenues there from has blazed the trail for other oil producing countries. (Incidentally, the Nigerian SWF has a special wing or account explicitly dedicated to “future generations” which is also the name of Equatorial Guinea’s SWF as indicated above.)

Structure, Governance and Functions of a SWF
A SWF must have a structure of governance given its role and importance.
It must have a charter stipulating the administrative structure and powers (and limits thereto) of those in charge of the particular entity.
For transparency, oversight and accountability, it has necessarily to be set up by Act of Parliament.

The reach of the Fund in terms of its investment portfolio and activities should also be set up by statute, subject — as in all such matters — to more or less regular review.

Concerning governance, incidentally, an attempt to elaborate operational principles and standards was made under the IMF by an International Working Group in 2008 at Santiago, Chile. The Working Group came up with 24 so-called Generally Accepted Principles and Practices.

I need not go into these principles now, except to note two things, namely, one that implementation of GAPP was to be decided by each SWF and two that the effort to harmonise operational principles and standards arose from the perception that these funds in their totality had become so large that they exerted a not insignificant influence on the workings of the international financial system.

Hence the ground rules of their operations required harmonising, presumably within the framework of such International Financial Institutions as the IMF.

How to Fund our Proposed SWF?
I started by noting that as we in Zimbabwe did not yet have an established SWF, we could not talk of it as part of “New Funding Mechanisms”. It could, of course, be argued that since we intend to establish a SWF — perhaps very soon — it is proper to talk of it already as a New Funding Mechanism. Perhaps. But to get there you have to fund the SWF itself, i.e. you have to provide it with seed money.
Where do the resources of the SWF itself come from, at least at its inception? Taxation? A levy on mineral production or exports? Royalties on the same?

We need to have clarity on these and related issues at the start. Other issues include the principles informing the enabling statute already mentioned above and also whether at the start consideration will be given to collapsing into the SWF any of the extant funds already established by the Government of Zimbabwe.

Finally, as regards principles of establishment, it may be worth noting two of the 24 Santiago so-called Generally Accepted Principles and Practices mentioned earlier in this presentation. Here they are:
GAPP 1. Principle
The legal framework for the SWF should be sound and support its effective operation and achievement of its stated objective(s).
GAPP 1.1. Sub-principle. The legal framework for the SWF should ensure legal soundness of the SWF and its transactions.
GAPP 1.2. Sub-principle. The key features of the SWF’s legal basis and structure, as well as the legal relationship between the SWF and other state bodies, should be publicly disclosed.
GAPP 3. Principle
Where the SWF’s activities have significant direct domestic macro-economic implications, those activities should be closely co-ordinated with the domestic fiscal and monetary authorities, so as to ensure consistency with the overall macroeconomic policies.
To sum up the following aspects deserve restatement:

  • Sovereign Wealth Funds are a widespread feature of the present day global financial architecture. Numerous examples exist for study and comparison as already shown.
  • The establishment of these Funds derives from roughly similar premises and considerations, namely, the existence in the given country or countries of some commercially exploitable, but finite, non-renewable, resource tradeable internally and externally for profit to the source country.
  • The income and profit realisable from this trade should, it is generally felt, be for the development of the country long term but with particular — though not exclusive — reference to future generations of citizens.
  • It thus becomes clear that a SWF is not the same thing as a nation’s annual budget to be used at will to fund any and all activities of government. Nor is it a sort of savings account, nor yet some kind of emergency fund to be dipped into whenever the need supposedly arises.

It is, instead, a long-term investment portfolio whose income is directed to specified purposes and/or projects. This, by the way, is also why I am unable to square our prospective SWF with the new programme called ZIMPSET which has a time frame of barely two years terminating in December 2015. I doubt that any as-yet-to be established SWF will in the interim have raised such a quantum of income to make any impact on the ZIMPSET’s “New Funding Mechanisms”.

  • Finally, the funds must be administered by an administratively autonomous body of experts subject naturally to terms and conditions specified in an enabling statute or instrument.

This was a statement on Sovereign Wealth Fund by Dr C. M. Utete, Government of Zimbabwe consultative workshop on Zimbabwe Agenda for Socio-Economic Transformation, Harare, September 27, 2013

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