Do we need a sovereign wealth fund?

HARARE - What is a Sovereign Wealth Fund (“SWF”)? Is there a need for it? What is the relationship between the Fund and indigenisation?

On Wednesday, March 9, 2011, Indigenisation and Empowerment minister, Savior Kasukuwere speaking at an investment conference held in Harare said the government of Zimbabwe was to create a fund that was to take control of 51 percent of the country’s mines to finance development.

This is what he said: “We have been careful to implement this....We need 51 percent (equity) to come into our sovereign wealth fund. We all agreed as a government.”

He further said: “"We are not moving back on the 51 percent equity for our people.
 
“We can't allow foreigners to give us a raw deal. They are milking our wealth while we suffer."

Tapiwa Mashakada the minister of Economic Planning and Investment Promotion, was also of the view that the establishment of the SWF should not deter investors.

He said in agreement to the position laid out by Kasukuwere not on behalf of Zanu PF but the government of Zimbabwe: “This is not about grabbing foreigners' equity.  As a country, we need this fund to develop. It is a reserve fund to bankroll our developmental projects.”

Mashakada informed the conference that the funds from the mines were meant to go towards infrastructure and other growth efforts.

Zimbabwe is well endowed with minerals such as diamonds, platinum, gold, coal, nickel, chrome, asbestos, uranium, and iron ore among others.

A SWF is defined as a state-owned investment fund composed of financial assets such as stocks, bonds, real estate or other financial instruments funded by foreign exchange assets.

The last 33 years of independence has seen the establishment of a number of state-owned institutions whose performance should give an indication of where Zimbabwe is likely to go with the deepening and strengthening of the intervention of the state in the economy.

It is significant that the government’s position at the time Kasukuwere was speaking was one on the need to establish a SWF and that his ministry should take the lead.

It would appear that prior to this announcement by Kasukuwere, cabinet must have met to review the progress on the indigenisation and economic empowerment programmes and how shares were to be allocated among competing indigenous players.

There is no doubt that a left wing leaning cabinet would find favour in any proposal that seeks to entrench the role of the state and the success stories of other SWFs would no doubt support the proposition that the hijacking of the indigenisation programme by a state-led initiative can be best trusted to deliver the promise of an equal and prosperous society.

In the case of diamonds, it would appear that the Zimbabwe Mining Development Corporation (“ZMDC”) has taken the role that Kasukuwere was describing as that of a SWF.

The performance of the ZMDC is well established to give anyone comfort that it can be a reliable bridge that a SWF is meant to provide.

It holds 50 percent of the shares in the companies that operate in Marange and already disputes exist as to whether the earnings from diamonds that ought to flow to Treasury are fully and transparently accounted for.

The indigenisation and economic empowerment deals that have so far been completed do not reflect the sentiments expressed as an agreed government position by Kasukuwere that the new policy thrust on mining was that shares should be held by one entity in the form of a SWF in indigenised companies.

What is now in place is a 10:10:31 deal in which three entities as follows: employee trust; community trust; and the national indigenisation and economic empowerment fund (“Nieeff”); respectively are the players.

It would seem that there was a change of mind from what Kasukuwere had advanced as a government position in that the Nieef, an entity wholly owned by the government, holding only 31 percent of the shares is the only party that can be construed as closer to a SWF.

To get the 51 percent that the government has agreed to one has to assume that the community and employee trusts are mere fronts for the government and, therefore, their holdings are just in name only.

Does it mean that there is now consensus in government that the Nieef is the vehicle through which shares in mining companies are going to be held? What are the implications to the ZMDC and its holdings?

Anyone who has followed the evolution of the empowerment debate would inevitably be confused.

What started as an attempt to facilitate the entry of a particular class of indigenous persons to enter the economic mainstream with the assistance of a law has now been transformed into a nationalisation programme without any attempt to reformulate the legal and constitutional framework.

There is no doubt that the implementation of an indigenisation programme in terms of the Act has its own implications and more specifically that many in government would not support the outcomes that a market-led programme may produce in terms of income inequalities.

What seems to be the consensus is that in the absence of any rational programme that can eliminate favouritism in the selection of persons to take up shares in mining companies, the state through its various organs will always be a preferable route.

We already have a precedent in the SMM matter where President Robert Mugabe is his wisdom evidently without verifying the facts decided to place SMM under the control and management of ZMDC while Justice minister Patrick Chinamasa still maintains that the company remains under reconstruction.

The president when faced with a choice of whether to approve the proposal by a Chidawu-led consortium to acquire from the administrator the shares in SMM, he felt that it would be in the national interest to place the company under ZMDC.

ZMDC is a product of independence and, therefore, its lack of performance cannot be blamed on imperialists let alone the late Ian Smith.

By now, ZMDC should be a shining star in the battle against poverty, unemployment and inequality.

Regrettably, even Kasukuwere could not trust the institution in his version of indigenisation.

There would have been no need to set up Nieff to acquire shares in Zimplats if ZMDC could do the same job effectively and efficiently.

When one analyses the Zimplats deal, it is important to read what is not said or written.  There is no trust between government departments.

In any normally functioning democratic constitutional order one would expect the minister of Finance to be involved in the establishment and funding of state-owned institutions that seek to operate as SWFs.

In the case of Zimbabwe, it is clear that people in government do not trust indigenous people to promote the perceived national interest.

More importantly, state actors do not trust one another.  

As a result the true intention of the Act seems to have been abandoned and what has replaced it is now confusion.

The need for clarity cannot be overstated.

The country now has two competing entities representing the same government to acquire shares in mining companies.

ZMDC would seem to be more relevant as it is deemed to be a specialised vehicle for state intervention in the mining sector.

However, it will be impossible to convince Kasukuwere that the shares so far allocated to Nieef must be transferred to another entity like ZMDC.

The need for ministers to create their own kingdoms cannot be understated.

This tendency is not unique to Zimbabwe as human beings naturally want to distinguish themselves.
 
Kasukuwere would like any human being, want to be remembered for being not only the champion of indigenisation but someone who delivered.

Zanu PF would also want the credit to be reserved for the party.
 
Although the government is inclusive, the credit must always be on party lines because the nature of the democratic dispensation requires it to be so.

Individuals are organised in parties and join government representing their party affiliations.
 
For one to win elections, one must demonstrate value and no rational human being would want credit to be conveyed to political enemies.

The execution of the indigenisation programme necessarily has to have a political element to it and its implementation so far confirms that citizens will never get the deal they deserve as long as the political systems are designed the way they are.

The recent deals concluded including the controversial Zimplats transaction reflect the politics at play and the seemingly universal consensus among state actors that indigenisation programmes must not be allowed to produce black “superstars” or “icons”.

Against the above backdrop, it is important that the issue of SWFs be discussed in an objective manner.
 
In countries where such institutions have worked, a study must be undertaken to determine the kind of morality that supports such interventions.

In many developing countries state institutions have failed to deliver their mandates and it cannot be legitimately asserted that a SWF let alone Nieef can swim against the tide of failure and corruption. - Mutumwa Mawere

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