Understanding Sovereign Wealth Funds: How Oversight Committees Ensure Accountability?

Introduction

The South African National Treasury in its Discussion Document titled ‘What is the Most Appropriate Tax Regime for the Oil and Gas Industry?’ considered whether South Africa should establish a Sovereign Wealth Fund (SWF) to cultivate its resource revenue receipts. In 2024, President Cyril Ramaphosa, responding to a question on how the South African government would develop a sustainable SWF, responded and said;

“We are committed to create a Sovereign Wealth Fund and we believe that the architecture that we are putting together now will be able to assist us in building a Sovereign Wealth Fund. This we will be doing for future generations because it takes quite a while to build a facility like a Sovereign World Fund. While conditions do not currently exist for the immediate establishment of a Sovereign Wealth Fund, this is an objective which we should continue to work towards. Such a fund could help to ensure that the national wealth of our country is effectively used to support economic and social development for years to come”.

SWFs have enjoyed great success in resource rich countries. One such country being Norway, whose asset value sits at USD1.8 trillion and recently posted a USD222 billion profit. The Norwegian SWF thus serves as a successful SWF comparative case study from which South Africa can draw lessons. There has been much debate on whether SWFs are feasible at all for countries experiencing constant economic shocks and budgetary deficits. This has been the argument for the case against introducing SWFs in the United States of America (USA), where commentators on the subject have argued that the USA is currently experiencing a considerable budgetary deficit. South Africa finds itself within the same financial position, if not worse, where it is currently experiencing a considerable budgetary deficit and has even ran the risk of failing to adopt a budget due to political instabilities within the newly found ‘Government of National Unity’ (’GNU’). On the other hand, Norway has not been contending with any of these issues. When asked in an interview with Bloomberg Television, Norges Bank Investment Management Chief Executive Officer, Nicolai Tangen, remarked that he does not think Norway would have adopted a SWF had the Norwegian government been dealing with a budgetary deficit.  

However, with the massive profit boasted by Norway, the question of SWFs’ feasibility remains a crucial one. This is particularly important within the South African context, as the country is a resource rich country that has a thriving mineral resource sector. Given the finite nature of mineral resources, prudence advises us that the resource project proceeds should be invested in an investment vehicle that will cultivate the revenue to sustain future generations when South Africa’s mineral resource reserves have been depleted.

This blog post will deal with the issue of Public Accountability and Oversight Committees (PAOCs). Being the first of its kind in South Africa, it is appropriate to outline the intricate workings of PAOCs, particularly in a society that has suffered from violations of the Public Finance Management Act 1 of 1999.

What are SWFs? 

SWFs are government-owned investment vehicles that typically serve three key financial objectives. Firstly, SWFs may be established by governments to serve as ‘savings funds’, allowing them to save their resource revenue receipts for the future when the country has depleted its resources.  Secondly, SWFs may be established by government to serve as ‘stabilisation funds’ that serve the purpose of holding resource revenue inflows so as to use same in the event that government experiences a budgetary deficit or encounters an economic shock. Lastly, SWFs may be established by government to serve as ‘strategic funds’ that serve the purpose of traditional investment vehicles, wherein the government invests in companies who have strong financial returns. Governments use these strategic funds to build a high investment grade portfolio which is typically diversified, thus minimising the risk of investment failure. These portfolios will typically yield financial returns in the form of dividend payouts and cash distributions from the listed portfolio companies. It is therefore observed that these SWFs are ideal for cultivating a country’s national fiscus or budget. As such, SWFs could be beneficial for resource rich countries. 

To ensure responsible investment and management, governments will adopt committees that are tasked with ensuring that the portfolio manager(s) managing the SWF are subject to oversight and accountability measures. These committees are better known as ‘Public Accountability and Oversight Committees’ (‘PAOC’).

What Structure is Responsible for Safeguarding the Country’s SWF Investment? 

PAOCs provide focused and detailed oversight over the SWF. This is done by either parliamentary commissions, already existing governmental ‘watchdog’ bodies tasked with government oversight or even independent non-governmental committees. In South Africa, this would be the Standing Committee on Public Accounts (‘SCOPA’). Practice has seen the emergence of independent non-governmental committees due to their decentralization from government affairs, thereby avoiding potential conflicts of interest and propensity of corruption. Taking from some of the renowned well-established resource revenue funded SWFs, from emerging economies, such as those of Timor-Leste, Sao Tome and Principe and Guyana, the composition of the PAOC typically involves an odd number of committee members who are;

• Government officials;
• Civil society individuals, either from a religious background or public interest activists;
• Individuals from the organised labour sphere, and
• Professionals in the financial management and oil industries.

There are five principal functions that the PAOC serves.

1. To manage and invest resource revenues as per the investment mandate of the SWF.
2. To ensure transparent governance and management of the SWF, as well as to enforce international transparency best practices.
3. To adhere to International Accounting Standards and international accounting best practices in maintaining the SWF’s accounting records.
4. To ensure that the SWF’s accounting records are audited by an external auditing firm.
5. To prepare and present an annual report of the SWF’s performance in the preceding fiscal year to Parliament.

These functions vary from country-to-country. For example, in Guyana, the PAOC is merely tasked with an oversight function, to ensure the Board of Directors operating and managing the SWF discharge their fiduciary duties ethically. Whereas in Sao Tome and Principle, the PAOC serves both an oversight and management function – that is, it is tasked with executing the investment mandate of the SWF and ensuring that the SWF is managed ethically.  

Key Takeaways for South Africa

Public accountability and oversight committees are oversight governance structures that ensure that the SWF is managed and operated ethically. These governance structures are important as they help curb corruption and reckless use of resource revenues. They function to ensure; responsible resource revenue investment, transparent governance and financial reporting of investments and preparation and presentation of the SWF’s annual report to parliament.