Tag Archives: Botswana

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/ 

Should African SWFs be investing in local infrastructure?

By Rafiq Raji


Sovereign wealth funds (SWFs) are all the rage now in Africa. Motivations range from the altruistic to the corrupt. Africa’s oldest SWF is Botswana’s Pula Fund of USD5.7 bn (40% of country’s 2013 GDP), established in November 1993[1]. Almost 20 years later in 2011, Nigeria set up its own with a paltry USD1bn assets under management (AUM), c. 0.2% of its 2013 GDP. Nigeria discovered oil in 1956, more than ten years before the huge Orapa diamond mine discovery in Botswana. Although Angola’s SWF (USD5bn AUM, 4% of 2013 GDP) is also relatively recent, having been set up in 2012, a longrunning civil war made it hitherto difficult for any meaningful development planning. Other African SWFs are Libya’s USD65bn, Algeria’s USD77bn, Gabon’s USD380mn, Mauritania’s USD300mn and Equatorial Guinea’s USD800mn funds[2]. Ghana also set up a two-part petroleum fund in 2011 with an initial USD100mn size, now bordering on circa USD0.5bn or higher when USD250mn from the USD1bn proceeds of its recent (Sept 2014) and third Eurobond are put into a planned infrastructure investment fund in January 2015. While SWFs are not a recent phenomenon – even in Africa as the Botswana case demonstrates, the current debate is about what they really are. This is in light of the relatively broader mandates of the recently set up African ones, especially those of Nigeria, Angola and Ghana. Are they extra-budgetary structures? Are they development banks? Are they conduits for corruption? Do they create a moral hazard? Are they stabilization funds? Should they be investing in local infrastructure without cash payoff prospects? Are they fiscal authorities? Many questions, and there are plenty more. I’ll focus on just one: should they be investing in local infrastructure?

My understanding of what SWFs are is simple. It is akin to a savings account. A country decides to save some of its finite wealth to ensure it remains wealthy for a very long time. It took a while before the oil-rich African countries of Nigeria and Angola decided to set up SWFs. Ghana, whose 2010 oil discoveries are relatively recent, chose to put in place a framework that it hopes would prevent it from wasting its oil wealth like its big neighbor, Nigeria, did. The SWFs that Nigeria, Angola and Ghana (to be launched in January 2015) have set up include infrastructure funds aimed at investing in local infrastructure. I can’t help but wonder about the wisdom in having a supposed nest egg invest in precisely the things it was set up not to spend money on. Of course, investing in infrastructure is a good thing. But that is what budgets are for. The whole point of setting up a savings account is to keep some money away before you spend everything. I doubt you’ll ever find someone who couldn’t find something to spend money on. This is why we save. We save so that we don’t spend ourselves to penury. When a country’s savings account – its SWF – decides to be a “special” current account, then we have a problem. The fundamental question I have about an African SWF (note emphasis on African) investing in local infrastructure is this. Where is the payoff going to come from?

Fundamentally, an SWF – no matter how complex or altruistic its philosophy – is fundamentally an investment fund. It must earn a return. And I doubt very much that the Nigerian, Angolan and Ghanaian SWFs are investing in local infrastructure for its asset class characteristics. Ordinarily, the long-term and cash flow characteristics of infrastructure investments make them suitable for some allocation in the portfolios of SWFs or any long-term horizon fund. If that were the reason for the African sovereign infrastructure funds, it would not be an issue since the return and diversification objectives would be clear. Let us assume that a country’s SWF could find as many local infrastructure projects to invest in, whether directly or indirectly through a privately-led fund. Let us further assume that these projects are properly structured – like they would in a private or PPP arrangement – to ensure investors make a return from tolls, power rates, etc. Wouldn’t this though amount to additional taxation? Essentially, you move money from one pocket to another pocket in the same pair of trousers. And any new money that enters either pocket comes from those who you are supposedly keeping the money for. Whether a government’s revenue is from a natural resource or through direct taxation of its citizen, it is still taxation. Earnings from mineral wealth that are kept in government coffers for spending on the supposed needs of the citizenry, society and the state is money that could have gone directly to citizens of the country. So it is taxation. It is their wealth after all. If a government decides to put some of this wealth away by setting up SWFs, does it then make sense that the returns that build up that wealth come from the same citizens?

The scenario discussed above assumes that these SWFs have a universe of return- earning infrastructure assets to invest in their respective countries. Well, that is not the case. African PPP projects continue to suffer tremendous pushback from local populations. Probably in realization of these, the funds in question extended their infrastructure investing mandates to include other African countries. I put these concerns to Jose Filomeno dos Santos, the chairman of Angola’s SWF and Mona Quartey, Ghana’s deputy finance minister, at the Chatham House African Sovereign Wealth funds conference held in London in September 2014. While highlighting the social imperative of investing in local infrastructure, Mr dos Santos’ answer included a description of how his country’s fund 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. Mrs Quartey’s answers were also along the same lines, albeit I got the impression Ghana simply wants to build its infrastructure. I think the reasoning behind the Nigerian case is the same as well. The Santiago principles also got mentioned a lot. My simplest interpretation of their answers (or reasons) goes like this. We don’t have infrastructure, we need to invest in infrastructure. That is all very well. But, is that the job of a sovereign wealth fund?

[1] Institutional Investor’s Sovereign Wealth Centre

[2] Financial Times

Views expressed are mine and not of any institution(s) I may be affiliated with