Zimbabwe Sovereign Wealth Fund

A Zimbabwe African National Union-Patriotic Front billboard calling for land and sovereignty. Mugabe won re-election on July 31, 2013., a photo by Pan-African News Wire File Photos on Flickr.

Sovereign Wealth Fund: Zimbabwe’s brave new world

Sunday, 17 November 2013 00:00
Sunday Mail Reporter

For a country that has bountiful mineral resources, as confirmed by yardsticks such as the International Monetary Fund’s Natural Resources Per Capita Index, posterity will either spit on our graves, or do worse, if we fail to translate our rich endowments into tangible results.

Happily, with the imminent enactment of the Sovereign Wealth Fund Act - the legal instrument that will naturally create a structure to aggregate profits from the exploitation of local non-renewable resources - Zimbabwe now has an opportunity to buck the trend of resource-rich countries that have the dubious distinction of being “poor”.

The extent of the country’s mineral wealth is well documented. Some even regard the country as the richest on earth with respect to untapped natural resources per capita, or per person. It is believed that Zimbabwe has similar terrain to that which has yielded significant resources in Canada and Australia, and official statistics from the Reserve Bank of Zimbabwe seem to vindicate the same.

The central bank estimates that the country’s gold production per square kilometre is one of the highest in the world, with reserves estimated at 13 million tonnes.

Local platinum deposits in the Great Dyke, which are estimated at 2 800 million tonnes, are the second largest in the world after the Bushveld Complex in South Africa.

Also, over 80 percent of the world’s resources of metallurgical quality chromite are hosted in Zimbabwe.

We have not even considered diamond deposits yet, which were once described by Mark van Bockstael of the Antwerp World Diamond Centre as the largest in the world. But the country has not been subjected to thorough modern exploration techniques necessary to discover large deposits.

Cabinet adopted the Sovereign Wealth Fund of Zimbabwe Bill on Tuesday last week. The Fund is cited as a key success factor of the Government’s economic blueprint Zim Asset (Zimbabwe Agenda for Sustainable Socio-Economic Transformation). The nation will now develop the capacity to pool resources for key socio-economic development interventions.

Section 13 to Section 14 of the draft Bill interestingly outlines the mechanics of how Government intends to build this resource chest.

A portion not exceeding 25 percent of royalties payable in accordance with Chapter VII (Mining Royalties, Duty and Fees) of the Finance Act (Chapter 22:04) in respect of minerals such as gold, diamonds, coal, methane, nickel, chrome and platinum will be pooled in the Fund. Also, 25 percent of the “special dividend on the sales of diamonds, gas, granite and other extractable minerals by or on behalf of the Minerals Marketing Corporation of Zimbabwe that is payable by the Corporation to the Consolidated Revenue Fund pursuant to section 33 of the Zimbabwe Mining Development Corporation Act”, will be harvested for the Fund.

Profits and proceeds from strategic investments will also accrue.

By re-inventing the State into a corporate persona that is an active and aggressive player on both the domestic and international markets, the Sovereign Wealth Fund will have a positive impact on the health of the local economy.

Section 16 of the Bill makes it clear that the Fund will make investments in gold bullion, stockpiles of precious stones and other precious metals and foreign assets.

Over the years, the country has suffered significant haemorrhaging of its minerals, especially of gold. The liberalisation of the gold sector has seen most of the yellow metal being destined to the Rand Refinery in South Africa.

Making investments in gold will have the material effect of creating buffer local reserves, at the same time offering competitive prices for local producers. Crucially, the architecture of the local economy needs to be aligned to make the Sovereign Wealth Fund both efficient and effective.

Zim Asset emphasises the fact that Government has to do away with the silo approach to issues and instead create a harmonised ecosystem through which Government projects can thrive.

For example, not much is accruing to the fiscus from royalties. Third quarter statistics from the Zimbabwe Revenue Authority (Zimra) show that royalties for the three months to September underperformed, with US$39 million being collected from a targeted US$63 million. But considering that Delta Corporation managed to pay more than US$90 million in taxes in the six months to September, such stark anomalies really need to be addressed if anything meaningful is to be contributed to the national purse.

Maybe much of the funds will come through the special dividend from diamond sales where Government has joint venture partnerships with foreign firms. By being entitled to more than 50 percent of the sales, Government will definitely collect reasonable funds.

So Government must not relent in indigenising entities in the extractive industries.

Numbers will never lie. Much is being generated in the platinum sector, but due to the obtaining ownership structure Government is being denied an opportunity to make this resource work for the local people. Despite low platinum prices on the international market, the three major platinum producers — Mimosa, jointly owned by South African companies Implats and Aquarius Platinum; Zimplats, controlled by Implats; and Unki, which is under the influence of Anglo Platinum Mines (Amplats) — managed to generate about US$220 million in revenues in the three months to September.

Zimplats managed to gross the bulk of the funds at US$145,5 million, followed by Mimosa at US$56 million and Unki at US$18,7 million.

Granted, operational costs are steep in the industry at the moment, but if Government managed to replicate the ownership structure in the diamond sector in the platinum industry, it would be able to derive the maximum possible benefit from the mining of this resource.

Aquarius indicated in its financials that about US$18 million was paid in dividends from Mimosa during the three-month period, and this must be read against royalties of US$39 million paid to Zimra from all minerals mined in Zimbabwe during the same period.

Sad. The same verve with which the new Government has shown in directing the resumption of operations at Chisumbanje ethanol plant, blending fuel, and beginning the journey of expanding Kariba South Hydro power station, should be equally applied to attending to the mining sector.

If the previous deals in the platinum sector are to be reviewed, then by all means this must be done with the urgency it deserves. However, there is also an urgent need to establish and exploration company to establish the true value of local minerals and also develop new projects. The time has come to make this a reality.

Harvard-educated Garikai Chengu, who previously worked for one of America’s premier investment banks, noted some time ago that exploration was vital for Zimbabwe.

“As Zimbabwe slowly depletes its major existing mines, discovery of new mines becomes increasingly important to meet ever-growing global demand for natural resources. For a local community or a nation, successful mineral exploration and development can lead to numerous opportunities. Some of these opportunities include new jobs — often well paying — which otherwise would not exist; new infrastructure, such as roads and electric power supplies, which are catalysts for broader, regional economic development; and increased Government revenues that, in turn, can be invested in social priorities such as healthcare, education and poverty alleviation,” he said, adding: “Exploration is not only important on personal, business, local and national levels, but also is crucial for Zimbabwe’s international economic and geopolitical strength.

“Put simply, knowing the value of what lies beneath this nation’s feet increases the nation’s worth; increasing its worth subsequently increases its wealth and power.

“The impending creation of a State Exploration Company is an appreciation of this real-politik and is certainly a step in the right direction that will estimate mineral reserves on a national level. However, funds must also be made available to small miners to explore their claims at a local level.”

Government, though, has shown an appetite to develop new projects from idle claims where it hopes to maximise benefits. Early this year, it reposed 27 948 hectares of excess ground with platinum reserves held by Zimplats in the hope of allocating it to new investors under the template of the new ownership structure. It is believed that Zimplats occupies two thirds of the Great Dyke and could deplete the platinum deposits in three years.

It is only fair that Government demands a chunk for the sake of the nation’s well-being. But such undertakings should be expeditiously implemented if the SWF is to make sense.

The new Government should leverage on Zim Asset, which ties time-bound targets to various ministries and departments, to ensure that all these noble policies are implemented in tandem. Time is of the essence, especially considering that the country has a huge infrastructural deficit and a biting liquidity crunch that is threatening to scupper national projects and programmes. At a time when international finance institutions such as the International Monetary Fund and the World Bank are frowning upon Zimbabwe, the country has to pursue policies that are within its sphere of influence to try and fund critical projects, especially the quick-wins that are identified in Zim Asset.

Agribank, the Infrastructure Development Bank of Zimbabwe and the Small Enterprises Development Corporation need to be capacitated to play meaningful roles in the economy.

Encouragingly, other countries that are walking the same route are gradually making progress in unlocking value from their resources.

Angola’s state fund, which was set up in October last year, now boasts of more than US$5 billion and Nigeria now has more than US$1 billion.

Sierra Leone, Tanzania, Mozambique and Uganda are actively considering the same. Africa is slowly catching up with many Asian and Middle East countries that over the years have benefited from state funds.

In order to diversify their wealth, much of the sovereign funds have been making strategic investments in the West. In other parts of the world, SWFs have even grown to frightening proportions. Norway, for instance, has over the years grown its fund to more than US$1 trillion mainly from its huge oil reserves.

Because of its strength, Norway has become one of the most expensive countries where the price of a loaf of bread is more than US$6.

The onus is on the new Government to effectively implement that which it has set out to achieve.

Key highlights of the Sovereign Wealth Fund Bill of Zimbabwe

The Act will establish a 16-member board with the chairperson and the chief executive officer being ex-officio members of the board;
At least half the board will be women;
The board will have representatives from Government and representative members from industry, mining agriculture, indigenisation, including finance, investment, asset management and banking;
Investment managers will be engaged either as employees of the board or as independent contractors;
The Sovereign Wealth Fund will be aligned to the Santiago Principles, a set of voluntary guidelines on best practices for operations of such funds that were issued at a meeting in Santiago, Chile, in September 2008;
25 percent of royalties payable to Government, including 25 of the special dividend from the sale of minerals, will be fed into the Fund;
Government will set up Sub Funds or segregate accounts from the Fund such as General Investment Sub Fund, Infrastructure Development Sub-Fund and Stabilisation Sub-Fund specifically designed for key macro-economic outcomes;
The Reserve Bank of Zimbabwe will be the custodian of the Fund;
The board will ensure that its investment mandate is available for inspection at all reasonable times by members of the public;
The board will establish a general reserve which may be appropriated from a surplus of income over expenditure of the Fund at the end of its financial year; and See also B
The Zimbabwe Mining Development Corporation Act (Chapter 21:08) will be amended by repeal of section 33.