South Africa could use mining royalties to set up sovereign fund

South African Minister of Minerals and Energy Gwede Mantashe Mantashe. Photo from Mantashe’s official Twitter profile 2018

South Africa could use mining royalties to set up a proposed sovereign wealth fund, Mineral Resources and Energy Minister Gwede Mantashe said on Wednesday.

President Cyril Ramaphosa said in an annual address to parliament last week the government had decided to establish a sovereign fund, but he did not say how the fund would work.

Many analysts are sceptical about the idea, given that South Africa does not have large oil and gas revenues, its mining industry is in decline and it has large fiscal and current account deficits.

“The president spoke to the sovereign wealth fund … Many people asked the question, ‘where will money come from?’ I can tell you that all the mines pay a royalty to the state. It can be used to start a royalty fund,” Mantashe said during a parliamentary debate, before his allotted time ran out.

Peter Attard Montalto, head of capital markets research at Intellidex, estimated the government would earn 9.2 billion rand ($614 million) from mining royalties in the 2020/21 fiscal year, too little for a fund of a meaningful size.

He said it was not clear what purpose the fund would serve.

Remarks prepared for Mantashe and circulated by his ministry on Wednesday also noted that draft petroleum legislation published for public comment in December proposed that future owners of petroleum production rights could contribute to a sovereign fund via a “resource rent tax”.

Setting up a sovereign fund is a longstanding ambition of leftist elements in the governing African National Congress (ANC) party that favour strong state control over Africa’s most industrialised economy.

The South African Communist Party, which is closely aligned with the ANC, wants the fund to hold equity stakes on behalf of the nation.

Finance Minister Tito Mboweni is expected to give more details on the fund during a budget speech next week.

($1 = 14.9822 rand)

(By Alexander Winning; Editing by David Evans)

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