Putting aside billions – Africa’s sovereign wealth funds

Sovereign wealth funds are sprouting across Africa – 15 countries have created funds in the last 20 years, managing a total of $159bn at the end of September 2014.

Angola, Nigeria, Senegal and Ghana all started funds in the last 3 years and and funds are discussed, expected or being born in: Kenya, Liberia, Mauritius, Mozambique, Namibia, Niger, Uganda, Sierra Leone, South Sudan, Tanzania, Uganda, Zambia and Zimbabwe.

A key research event at Chatham House in September 2014 identified some principles of African SWF Demand, Development and Delivery.

Governance for sovereign wealth funds

Funds with strict rules should limit politicians’ discretion and they can ensure that money is earmarked for public investments. For instance Ghana has a rule that oil revenues must fund “development-related expenditures”. In many cases this funding can be done through the governments’ budget and oversight systems, which otherwise funds might undermine and bypass.

A key target is to ring-fence resource revenues to prevent mismanagement or corruption. Organizations such as the Extractive Industries Transparency Initiative had campaigned about billions of dollars being siphoned off oil and gas revenues in countries such as Nigeria and Angola, and some $10bn withdrawn from Russia’s National Welfare Fund without justification. Resource funds also offer governments greater autonomy, power and political leverage.

Sovereign wealth funds debate at Chatham House (source: Chatham House)

Sovereign wealth funds debate at Chatham House (source: Chatham House)

Africa’s new arrivals – learning from the past

Ghana has long exported gold and cocoa but in 2007 was delighted to discover large petroleum reserves. Mona Helen Quartey, Deputy Minister of Finance, said they wanted to avoid the pitfalls and asked for advice before opting for wide consultation and accountability: “We held a national forum and did a survey in all 10 regions to get the opinions of Ghanaians on how to manage petroleum revenues; it was a very, very broad consultation. The survey had thematic areas such as: revenue collection and allocation; how much to spend and how much to save; managing the fund and transparency and accountability.”

The resulting Petroleum Revenue Management Act 2011 established the Ghana Stabilization Fund which only allows withdrawals when oil revenues are low, and the Ghana Heritage Fund to provide an endowment for future generations when petroleum reserves are depleted and withdrawals only after 15-year intervals. The funds were worth almost $450m in June, according to the Deputy Minister.

Ghana is a great example of independent oversight, according to Andrew Bauer, Economic Analyst with the Natural Resource Governance Institute (NRGI): “There is public interest and an accountability committee which includes chiefs, journalists and accountants to report twice a year on whether fund rules are being followed.”

Victoria Barbary, Director of Institutional Investor’s Sovereign Wealth Center, adds plaudits: “The imperative is to think about strength of institutions, when there is a strong state, legislation and building by consensus. Ghana has done exceptionally well, making sure there is that trust element in managing money.”

Existing and Emerging SWFs in Africa. Source: Sovereign Wealth Center

Existing and Emerging SWFs in Africa. Source: Sovereign Wealth Center

New arrivals – Angola and Nigeria
Other new arrivals include Fundo Soberano de Angola, set up with an initial endowment of $5bn from oil. It has signed up to the Santiago Principles for SWF governance, and aims to diversify across various infrastructure and asset classes with one third for interest-bearing assets, a dedicated hotel fund and plans for infrastructure projects across sub-Saharan Africa. According to its chairman, José Filomeno de Sousa dos Santos, the Ministry of Finance has set up boards of directors and supervisors to look at detailed quarterly reports including bank statements, and an audit has recently been done by Deloitte.

Nigerian Sovereign Investment Authority (NSIA) set up by an Act to invest surplus income from excess hydrocarbon reserves, including the savings between budgeted and actual oil prices. It started with $1bn and has three funds: Stabilization fund, Future generations fund for long-term investments, and Nigerian infrastructure fund.

Barbary says public confidence and trust will be key for new funds: “In countries across Africa strong institutions are lacking and there is lack of public trust in politicians to manage the money well and to the benefit of the whole polity. Resource-rich countries in Africa that have just come out of civil war, for instance Liberia and Sierra Leone, are thinking of setting up natural resource funds.” However, Tanzania is working closely with the NRGI to create a resource charter and educate policy-makers and non-governmental organizations, building public accountability and trust.

Expert advice is available from many sources, including the World Bank and a team from the US Treasury which built its skills on managing US assets and then decided to share the learning. Africans are increasingly skilled at managing their financial sector, whether as diaspora members returning after star turns in the world’s financial institutions or as students of professional finance qualifications.

These skills will be particularly important when funds invest domestically, for instance trying to emulate successes of Singapore and Kuwait in bringing high-paying technology and other jobs into the country, according to Michael Maduell of the Sovereign Wealth Fund Institute. Infrastructure investment in Africa also presents challenges, although the field is developing fast. The NRGI’s Bauer warns: “It takes as much capacity to manage the manager as to manage the money.”

World Bank economist Håvard Halland says there is a risk of political meddling when fund managers are asked to trade off financial and social returns on parts of their domestic portfolios. This could compromise the independence of the fund management, the wealth objectives of the fund as well as the quality of investments. To reduce these risks, the fund should invest only in minority stakes in partnerships with qualified private investors or foreign SWFs, who can also bring additional expertise. “Only a narrow range of infrastructure investments are appropriate for SWFs under these constraints. Investments that do not have a commercial or quasi-commercial return, such as schools and hospitals, should go through the government budget. Rates of return on domestic investments need to be benchmarked against the return on foreign assets with no fixed allocation to domestic investments, and possibly allowing for a clearly defined markdown from the benchmark rate only if the investment has significant positive externalities”.

African SWFs are likely to grow fast in the short-term as countries that have oil and gas are keen to get it out and sold while world prices stay relatively high, as longer-term prospects are not good.

The funds are already a key force in building Africa’s economies, infrastructure and even capital markets. Getting their objectives, management, governance and investments right is vital for the welfare of future African generations.

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