Is the developmental bias of Sub-Saharan Africa’s SWFs appropriate?

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 05 Jan 2016. See link viz. http://businessdayonline.com/2016/01/is-the-developmental-bias-of-sub-saharan-africas-swfs-appropriate/ 

Sovereign wealth funds (SWFs) are a relatively recent phenomenon in Sub-Saharan Africa (SSA). Only three SSA countries are members of the International Forum of Sovereign Wealth Funds (IFSWF). Although Botswana set up its own much earlier in 1993, the other two – those of Angola and Nigeria – were operational in 2012. Both have investment policy statements (IPS) and asset allocations with a developmental bias. With infrastructure being a dominant asset class in their portfolios, they could rightly be seen as extra-budgetary structures. These two almost certainly mimic development banks. Their social focus comes with risks. In its simplest form, a sovereign wealth fund is akin to a savings account. A country – often a resource-rich one – decides to save some of its revenue for the future. Ideally, SWFs should provide fiscal relief in times of financial strain. Having only been set up recently, the Nigerian and Angolan SWFs have largely not been able to perform their stabilization function as lower crude oil prices currently weigh significantly on the budgets of their respective governments. Their relatively small size and broad investment mandates may also be why.

Botswana’s Pula Fund currently has US$ 7 billion – 46 percent of gross domestic product (GDP) – assets under management (AUM), based on data from a report by the Harvard Kennedy School in April 2015. It invests only in foreign assets. Almost twenty years later, Nigeria set up its own – Nigeria Sovereign Investment Authority (NSIA) – with a modest US$ 1 billion (0.2 percent of GDP). Nigeria discovered crude oil in 1956, more than ten years before the huge Orapa diamond mine discovery in Botswana. Although Angola’s SWF – Fundo Soberano de Angola (FSDEA) – initially set up with US$ 5 billion (4 percent of GDP) was also established in 2012, a long running civil war made it hitherto difficult for any meaningful development planning. To avoid the mistakes made by Angola and Nigeria, Ghana set up a two-part petroleum fund in 2011 just as it started earning crude oil revenues. The Ghana Stabilization Fund (GSF) and Ghana Heritage Fund (GHF) now have assets under management (AUM) bordering on almost US$ 0.5 billion as at the end of June 2015. Ghana also set up an infrastructure fund – Ghana Infrastructure Investment Fund (GIIF) – in 2015 with US$ 250 million from the proceeds of its US$ 1 billion Eurobond issue in 2014. As it would be investing entirely in domestic infrastructure, the GIIF would probably not qualify as an SWF under IFSWF criteria. The NSIA and FSDEA include infrastructure funds that invest predominantly in their domestic markets, however.

Some experts have raised concerns about the risks associated with SWFs investing in their domestic markets. They relate to whether it fits with their primary stabilization and savings purpose. Corruption is also a major concern. Additionally, there are payoff risks associated with investing in local infrastructure. Most SSA public-private partnership (PPP) infrastructure projects suffer tremendous pushback from local populations. Returns are often low and bankable deals are scarce. Probably in realization of these, the FSDEA has a broader Africa-wide infrastructure mandate. In September 2014, one put some of these concerns to Jose Filomeno de Sousa dos Santos, the chairman of FSDEA and Hon. Mona Helen Quartey, Ghana’s deputy finance minister, at the Chatham House African Sovereign Wealth Funds Conference held in London. While highlighting the social imperative of investing in local infrastructure, Mr dos Santos’ answer included a description of how FSDEA plans to ensure these investments pay off. These were along the lines of how a typical infrastructure fund makes returns and included talk of a social return. Hon. Quartey opined that the infrastructure programmes of the Ghanaian funds would not overlap with those already covered by the national budget. At that conference – perhaps the most comprehensive one to date that focused exclusively on African SWFs – Michael Maduell, the President of the Sovereign Wealth Fund Institute (SWFI), a globally recognized authority on SWFs, actually argued in favour of these views, citing how the Kuwait Investment Authority (KIA) helped rebuild its home country’s infrastructure in the aftermath of the Gulf War. The oft-cited Norwegian SWF also invested heavily in its home country’s oil and gas infrastructure in its early days. So, there are valid arguments on both sides.

There is probably a need for the relatively high infrastructure asset allocations of the NSIA (40 percent) and FSDEA (22 percent) to be reviewed downwards. The United Arab Emirates’ (UAE) Abu Dhabi Investment Authority (ADIA) – one of the best managed SWFs in the world with more than US$ 700 billion AUM – has a 1-5 percent asset allocation to infrastructure. Another fund of the UAE – Mubadala Investment Company – invests domestically and globally in industrial and infrastructure assets, however. From a diversification perspective, it is probably unwise for SWFs to invest domestically. In Nigeria and Angola, lower crude oil prices have exposed the concentration risks in doing so. The political risk is probably not worth the trouble either. There is probably going to be a need for the NSIA and FSDEA to revise their investment policy statements in due course. The Botswanan Pula Fund’s exclusive foreign financial assets focus is ideal, albeit it could probably be more transparent. At 0-4 percent of their respective countries’ GDP, the NSIA and FSDEA are too small to perform their stabilization function. The Nigerian and Angolan governments ought to increase their size. In November 2015, Nigerian authorities announced an additional US$ 250 million capital contribution to the NSIA’s funds from liquefied natural gas export proceeds. They should add more. And if crude oil prices do recover, the governing legislations for these bodies should be reviewed to ensure they are able to perform their stabilization and savings functions more effectively in the future.

Also published on my company’s website on 06 Jan 2016. See link viz. http://macroafricaintelligence.com/2016/01/06/thematic-is-the-developmental-bias-of-sub-saharan-africas-swfs-appropriate/ 

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