Sovereign Wealth Funds have been attracting a lot of attention in recent years as more countries establish funds and invest more capital in a wide range of assets.
Nesbert Ruwo
At least US$6 trillion in assets are being held by these funds globally. But the question is, should every country set up their own and for what purpose? Is there a rationale to rush to join the bandwagon?
A sovereign wealth fund (SWF) is a fund owned by the state that is invested in various financial assets (such as shares, fixed income instruments, and properties).
A SWF is a form of a national savings account with a specific purpose(s), but mainly for the benefit of its current and future citizens.
The core purpose of a SWF is to invest a country’s excess income and to generate wealth for its future generations with a view of long-term wealth and tax smoothening. A SWF is typically funded from a national budgetary surplus.
It all started in the 1950s when the Kuwait Investment Authority fund was established to invest excess oil income.
In addition to other smaller funds, major funds — Abu Dhabi’s Investment Authority, Singapore’s Government Investment Corporation and Norway’s Government Pension Fund — were established in 1976, 1981 and 1990 respectively. The rest is history — the size and number of SWFs has increased dramatically.
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Currently, there are over 50 SWFs and the Sovereign Wealth Fund Institute puts their value at US$6 831 trillion at end-September 2014.
SWF play an important macroeconomic role and are closely linked to the operations of public finances (funding and withdrawals), monetary policy, and external accounts variations. Sovereign wealth funds are usually distinguished based on their stated policy objectives and consequent asset allocation.
Though there are many SWFs with multiple objectives, under the IMF and the Santiago Principles classifications, we can identify five types of SWFs, viz stabilisation SWF (e.g. Chile’s Economic and Social Stabilisation Fund), savings (e.g. Russia’s National Wealth Fund), development (UAE Mubadala) and reserve investment corporations (e.g. China Investment Corporation).
Some funds serve a hybrid of objectives, like stabilisation/savings (Botswana Pula Fund), saving/pension reserve (Australia Future Fund), or stabilisation/saving/development (Kazakhstan’s Samruk-Kazyna JSC). Santiago Principles are a set of International Working Group of Sovereign Wealth Funds’ generally accepted guidelines that govern governance, accountability arrangements and conduct of investment practices by SWFs.
African states have joined the frenzy in establishing their own funds and most of these funds are commodities-based as they are being established by resource-rich countries.
Given the wealth of natural resources that African countries are endowed with, it makes sense that these countries set-aside a portion of their surplus income arising from the extraction of their resources.
59,5% of global SWFs are funded by oil and gas revenues.
There were 15 African countries with SWFs, namely Algeria, Angola, Botswana, Chad, Equatorial Guinea, Gabon, Ghana, Kenya, Libya, Mauritania, Nigeria, Rwanda, Sao Tome and Principe, South Sudan and Tanzania as of end of 2013. The oldest African SWF, the Pula Fund, was established in 1994 by Botswana to invest excess diamond revenues for the benefit of future generations. It currently has assets worth US$6,9 billion.
The largest African sovereign funds are the Algeria’s Revenue Regulation Fund and Libyan Investment Authority with total assets of US$77 billion and US$66 billion respectively.
Angola (Fundo Soberano de Angola), Nigeria (Nigeria Sovereign Investment Authority), and Ghana (Petroleum Fund) set up their own sovereign wealth funds over the past three years, managing US$5 billion, US$1,4 billion, and US$75 million worth of assets respectively.
The discoveries of oil and gas around the continent is set to fuel the launch of several other funds. Mozambique and Tanzania are the most likely candidates.
Zambia is said to be considering setting up their own fund to stimulate investment in strategic non-mining industries and diversify its economy from copper mining.
In Zimbabwe, the senate on 23 September 2014, passed the Sovereign Wealth Fund of Zimbabwe Bill (H.B. 6A, 2013) that will see the establishment of a Zimbabwean SWF. The proposed SWF will be funded from up to a quarter of mining royalties in respect of gold, diamonds, coal, coal-bed methane gas, nickel, chrome, platinum and such other mineral that may be specified, mineral dividends and government grants.
The Zimbabwe fund will support fiscal or macroeconomic stabilisation, including long-term economic and social development objectives, and smoothen national income of Zimbabwe during times of commodity fluctuations.
The key ingredients to a successful SWF include transparency and accountability. Citizens, who are the ultimate beneficiaries, need to be appraised continuously before and after a SWF is set up.
Public awareness and support is of paramount importance.
The other key consideration is that there is no need to rush into creating a fund if there are other critical and pressing demands that will require huge capital injections — these include investment in social and economic infrastructure.
My research shows that most countries that set up SWFs were in a budget surplus position.
It does not make sense to create a SWF and fund it by increasing the budget deficit.
SWF should effectively be used to generate wealth for future generations, provide a buffer against external macroeconomic shocks and to support specific developmental goals. Outside of these objectives, the motives for establishing a SWF become questionable.
Countries establishing new funds can learn from those that have managed successful funds e.g Norway, which has assets close to US$900 billion.
As exemplified by Nigeria’s experience with the Excess Crude Account, it is not enough just to set money aside — there is need for SWF good governance and clear investment mandates. Adopting Santiago principles is one way to achieve that.
Nesbert Ruwo is an investment banker based in South Africa. He can be contacted on [email protected]
