Brief Comments on the Sovereign Wealth Fund Act
By Lyman Mlambo
The Sovereign Wealth Fund Act (SWFA) was passed in November 2014. It seeks to establish a fund to be administered by a board whose objective is to secure investment for the benefit and enjoyment of future generations of Zimbabweans. The Act is meant to support the objectives of the government which include long term economic and social development. It is also meant to support fiscal and macro- economic stabilization, and to supplement national revenue when it is low. The fund will be driven primarily by 25 percent of all royalties on mineral exports, which will be deposited, along with special dividends on the sales of diamonds, gas, granite, and other minerals through the ZMDC.
This development signifies a milestone towards ensuring that the benefits of the country’s resource endowments go beyond the lifespan of the mineral resources. The Minister of Finance and Economic Development allocated US$500,000 in the 2015 national budget in support of the initial operations of the Sovereign Wealth Fund, while exploring other measures to augment the Fund’s start-up capital.
The basic question of sustainable development is that the community which hosts the resources should benefit (which is the essence of community share ownership trusts). Outside that, a global fund needs to be created that should be distributed to other regions for equitability. Sustainability should also be considered from the industry’s perspective, where there is need for the mining industry to be supported or cushioned when prices are going down (some kind of a buffer scheme), which then requires a fund. There are also some mineral resources that are likely to be affected by technical progress (miniaturization, greater efficiency in resource use, and development of substitutes) that we may need to exploit before they are overtaken by time.
There is a need to address both intra-generational equity and inter-generational equity. Though the SWFA is viewed as a good idea, it raises a question regarding the distribution of the fund to each of the two issues above: how to share it between addressing issues of the current and future generations? It is evidently important to ensure that we do enough for current poverty alleviation before we can think of future generations. It is sometimes argued that conditions are not yet ripe for the SWF because of low savings, the need to address the country’s huge external debt and its need to attract FDI.
One argument that is advanced is that the worry about intra-generational equity is taken care of through the redistribution effected by tax and government budget – regional development programmes should address the inequities in opportunities. However, this argument does not hold when the government budget is mainly consumptive with about 80% of it going towards civil servants’ salaries. Given that we have little savings, nothing is left for future generations. Sustainability is about developing the country since this will benefit both the current and future generations. However, if the benefits are individualized it may compromise the ability of the country to address these issues.
Sustainability for the future can be in the building of skills – and knowledge-based economies. A sound economy bequeathed to an uneducated future will be destroyed. It is not about the 96% literacy rate that Zimbabwe boasts of, for this is just reading and writing, but about vocational training centers, encouraging science subjects and promoting the funding of small-medium sized enterprises. Sustainability also requires an industrial policy which speaks to development of inter-sectoral linkages. In fact, the Sovereign Wealth Fund (SWF) must receive funds from all sectors. Thus, there is need to look at sustainable development broadly, not just from the mining sector perspective.
The fund, if implemented, should be managed by a Board comprising the private sector, government, CSOs, parliament, and the community. There is need to look at the competence of individual members. The Fund must be run like a private investment company, without government interference except to ensure that there is transparency and accountability.
One thing that has not been addressed by the governance framework is the need to assess the extent to which the mineral resource base, as an asset or natural capital, is depreciating. This measure should be considered in computation of national income accounts, in the same way that depreciation of man-made assets is netted out from gross income measures to get net measures. In this exercise, the choice of the discount rate is key as it reflects preferences between current and future welfare. A large discount rate would mean that the welfare of future generations is not of priority. While incorporating resource accounts into national income statistics is not easy, several developed countries have started to make attempts, and in this regard, ZIMSTAT should start considering doing the same.(Lyman Mlambo is the Executive Director of LMS Mining Consultancy. This article is a direct extract, with small changes, of Section 3.5.3 from the author’s report on “Extractives and Sustainable Development II: Minerals, Oil and Gas Sectors in Zimbabwe”, which was funded and published by the Friedrich Ebert Stiftung Zimbabwe in 2018. The author can be contacted through email@example.com)