Tag Archives: Wealth Management

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