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Mutapa Investment Fund shows the importance of seeing the bigger picture

Mutapa Investment Fund shows the importance of seeing the bigger picture

Article by Kevin Tutani

Zimbabwe has ambition. If channelled effectively, this should help to break away from some critical social and economic challenges besetting the nation. As Marcus Aurelius, an ancient Roman Emperor, once stated, “A man’s worth is no greater than his ambition”- so it is with this country. It is in such a context that the nation ushered in its first Sovereign Wealth Fund, in 2014. Initially known as, the Sovereign Wealth Fund of Zimbabwe (SWFZ), the entity became operational in 2015 and received its first significant disbursement of, US$100 million, through the 2020 national budget. Although the entity has been operating largely in the background, due to funding and other constraints, His Excellency, President Mnangagwa, eventually rebranded it and is set to oversee its transformation, from a minnow to a quintessential part of Zimbabwe’s public finance system. The SWFZ was therefore renamed to, the Mutapa Investment Fund, whilst the foundations of its structures were reset in order to ensure its success. The fund will immediately take ownership of government shares in 20 state-owned entities, which are;

National Railways of Zimbabwe, Hwange Colliery Company, Kuvimba Mining House, Defold Mine, Zimbabwe Power Company, People’s Own Savings Bank (POSB), Telecel, NetOne, TelOne, PowerTel, Air Zimbabwe, Zupco, Industrial Development Corporation, National Oil Company of Zimbabwe, Petrotrade, Cottco, Allied Timbers, Arda Seeds, Silo Investments and Cold Storage Commission Limited.

There is a good chance for the entity’s success if it is placed in the custody of capable and strategic leadership.

By definition, a Sovereign Wealth Fund is a structure used by a government to determine the assignment of the government’s excess revenues, which are invested for the benefit of both current and future generations. Such revenues may be invested in local or foreign markets and can also be channelled to support the government’s development targets, which are for the good of the citizens and the overall economy. The successes of Norway’s Oil Fund, China’s Investment Corporation, and Nigeria’s Sovereign Investment Authority, plus Botswana’s Pula Fund, have drawn a number of countries towards integrating their own SWFs into their overall public finance systems. The writer’s recent article (dated 20 September) on the same topic, should serve more requisite information about SWFs.

Partial privatisation, credit or both?

In Zimbabwe’s situation, there is need to be strategic, firstly, regarding how to unlock value in some of the recently transferred entities, which are in debt or operating below capacity. In this regard, it will prove useful to partially privatise some of the indebted corporations, at a ratio of between 49% – 70%. The sooner that this can be done, the easier and quicker, for the fund to realize value out of such assets. If the government has access to major credit markets, it will also be possible to get more debt for the recapitalization of the institutions. The downside risk is however in that, such debt is typically expensive, and more so, when denominated in foreign currency. Thus, a partial privatisation seems a low-hanging fruit. Already, the government is targeting to sell a 49% stake in the Post Office Savings Bank (POSB), which will be funded through a 29% sale to private equity participants and a subsequent 20% offering on either the  Zimbabwe Stock Exchange or Victoria Falls Stock Exchange.

Apart from raising funds from the private sector, there will be an additional advantage to be gained in cooperation which will result in the culture of competing ideas (between private and public sector) and greater operational efficiency.

There is so much value in the corporations which have been transferred to the Mutapa Fund, since some of the firms have little to no competition in their fields of operation. National Railways of Zimbabwe, for instance, has access to a number of mining firms whose product can only be transferred by rail because of the nature of the bulky commodities. To be precise, there is already stock awaiting transportation in lithium, coal, chrome and coal, which will only be moved as the carrier increases its capacity. By inference, this implies that, the efficiency of the NRZ will result in more export opportunities and revenue to government through taxes, as mineral commodities are shipped out of the country to their destinations. Hwange Colliery also has limited competition and may need to ramp up its production in order to utilize the growing coal market, whose future is, ironically, uncertain, due to global climate commitments. However, the coal market is also currently burgeoning and about to reach its peak, in the next few years. Therefore, this is a vital moment for Hwange to utilize. The Coaltrans conference, in Indonesia, at the end of September, revealed the importance of engaging major consumers of the commodity in these times of peak demand. China, for instance, is expected to consume 100 million tonnes of imported coal, this year. Unfortunately, Hwange has not been able to export anything close to 200 thousand tonnes, even though it sits on ample, commercial, world-class resources. In the next few decades, however, the future of coal’s use is not certain.

Funding for the recapitalization of the 20 institutions, can also be sourced from the local money markets through the issuance of government bonds or other forms of credit. China provides a good example of why this can be so. In China, the major SWF, Chinese Investment Corporation (CIC), was financed through the issuance of government bonds to the Chinese public, through their Ministry of Finance. The proceeds from the bonds were in-turn used to establish the CIC fund. Starting with a capital of $200 billion in 2007, the CIC has grown its assets, to reach the current, $1.3 trillion. In 2009, China’s Ministry of Finance, converted the debt (bonds) to equity, thereby relieving itself of interest obligations, whilst offering debt holders greater value, in the form of a burgeoning investment corporation. In the same manner, the Mutapa Fund may imitate the Chinese example, if need be. Since  government bonds typically have low-yield, whilst SWF investments have greater returns, a spread (difference in interest rates or returns) can easily be identified and utilized.

The fund can also be funded through royalties on minerals, reinvested profits of some of the profitable entities, auctioning of some idle government assets (for example properties and vehicles), etc.

Redeeming human development goals or social protection 

Importantly, the Mutapa Fund should be clear on the development goals that its profits will focus on achieving. Income earned from the fund can be used for spending in rural education, primary healthcare, or social protection through cash transfers to the public. It is widely known that the hyperinflation of 2008- 2009 wiped out pension savings. Therefore, a growing number of people are without any social protection as they age, owing to the hyperinflation, coupled with unemployment challenges. Resultantly, the fund may prioritise cash payments to pensioners who will not have social protection in the years to come. A portion of the revenues may also be used to make cash transfers to local communities where extraction of resources is occurring. This may be particularly desirable for peri-urban and rural areas, as the additional income will ignite economic activity in the isolated regions. With substantive cash payments, such areas may become industrialised or contribute significantly towards reversing urbanization and pressures on public services in the cities. As an example, paying a monthly stipend of $2 per each individual in the rural areas, may have a direct cost to Treasury, of, $22 million per month, or less. Rural inhabitants are around 11 million; using an estimated country population of 16 million, according to the World Bank, with the rural portion making 67.4% of the figure. If commodity revenues are transformational (major), the payments seem possible. Such disbursements may be exactly what it takes to spark burgeoning rural economies. With vigorous rural economies, Zimbabwe’s overall economic potential will be fully unlocked.

Pitfalls to avoid

By and large, it is crucial to ensure that the Mutapa Fund is not an addition to the growing list of “Premature Funds”, around the world. The following pitfalls have to be avoided or carefully managed:

Poor performance, in comparison with public debt repayment costs. When the government has a debt overhang (arrears), interest on debt should always be compared to the profits of the fund. It should be the target, that the fund outperforms the country’s debt repayment costs. For instance, if the profits of the fund are 5%, whilst the cost of servicing public debt is 8%, that implies that it is better to dissolve the fund and repay debt obligations as government resources will be effectively making an annual 3% loss. However, there is a good chance that the fund will outperform debt repayment costs, if it is under competent and strategic leadership.

Undermining the budget. Some critics argue that Sovereign Wealth Funds undermine parliamentary oversight as their activities can, at times, be withdrawn from the main focus of government finances, which is the budget. They maintain that all government expenditure and incomes should mainly be channelled and pooled within the country’s national budget, as this can improve transparency and reporting requirements. Nevertheless, such complaints can be addressed through ensuring that, significant amounts (over $1 million, for example), can only be withdrawn or deposited into the fund, with the approval or prior knowledge of the Parliament.

Additionally, it is imperative to ensure that the fund is backed by ample resource revenues which can then be used for reinvestment through the fund. For example, if there are transformational (major) oil discoveries in the Cabora Bassa Basin, it will be crucial to link a portion of the commodity revenues to the fund. This should also be the same with the explorations for Coal Bed Methane and additional Lithium deposits, once resources are discovered. Otherwise, if there are limited and insufficient resource revenues, the fund may fail to have enough significant capital to utilize for the benefit of the nation.

In conclusion, the Mutapa Investment Fund shows the level of ambition which the current administration has. This is a step in the right direction. However, there is need to ensure that the board to be appointed, will be strategic, well-informed and resourceful, in order to ensure that the fund finds success and the doubtful are turned to believers. Ultimately, the fund is driven by an ability to see beyond the immediate and the commendable vision of the president. It is essential for that vision to be supported and vindicated.

Kevin Tutani is a political economy analyst- He can be reached at tutanikevin@gmail.com

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