SOCIALIZING THE SOVEREIGN WEALTH FUND
Transcript of SOCIALIZING THE SOVEREIGN WEALTH FUND
SOCIALIZING THE SOVEREIGN WEALTH FUND
LESSONS LEARNED FROM OTHER COUNTRIES
MOT CONFERENCE 2021
1
Jeff DelmonSenior Infrastructure Finance Specialist,
Infrastructure Finance, PPP and Guarantees Practice
Defining the Strategic Investment Fund
Crowd in private capital to
sectors where investment is
limited
Established as pools of assets
through a # of legal structures
Provide long-term patient
capital
Seek to reconcile market returns
while ensuring economic returns
and additionality
Operate as expert
investors
Sponsored by and fully/partly
capitalized by govt(s) or govt-
owned entities
01 02 03
04 05 06
1. PIF (KSA)2. Temasek 3. Oman SGRA4. Brunei 5. Khazanah
6. SOFAZ
7. Mubadala
8. PalestineInvestmentFund
9. Vietnam SCIC
10. Mumtalakat Holding Company11. Oman Investment Fund12. Investment Corp (Dubai)13. Fund for Reconst. and
Dev. of Uzbekistan
14. Emirates Investment Authority
15. Angola16. JSC Samruk
-Kazyna17. FONADIN
18. Partnership Fund (Georgia)19. National Development
Fund of Iran20. Ithmar Capital21. RDIF (Russia)
22. Fonds Gabonais d’Investissements Stratégiques
23. NSIA (National Infrastructure Fund)
24. FONSIS25. Agaciro Development
Fund
26 Ghana Infrastructure Investment Fund
27. ISIF (Ireland)28. Dussur29. Zimbabwe Sovereign
Wealth Fund30. National Investment
and Infrastructure Fund
31. Silk Road Fund32. NDSF (Malta)
33. Turkiye Wealth Fund
1. Misr Fund
1. Mauritius Investment Authority
0
10
20
30
40
Pre
-19
99
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
Tota
l Fu
nd
s
Total SIFs
Do
t-co
mB
ub
ble
Glo
ba
l Fi
na
nci
al
Cri
sis
34 SIFs Today
From Niche to Mainstream: Since 2000, ~30 New SIFs Have Been Formed
Policy purpose: Economic development through SMEs/infrastructure; Attract co-investment; Diversify from oil & gas reliance etc.
From Niche to Mainstream: More SIFs are underway
August 2019: EU considers plans for a €100bn sovereign wealth fund, supported by member states, to finance European "industrial champions" and compete with multinational companies.
May 2019: South Africa’s ruling African National Congress proposed an SWF in its manifesto for the May 2019 election, which, if set up, is expected to invest in local firms or infrastructure.
February 2019: Kenya’s government released a draft law to establish a new sovereign wealth fund that would channel petroleum and mineral revenues to savings, budget stabilization and domestic spending and investment.
Morocco
Uzbekistan
….
5
Strategic Investment Funds: Categorization
Source:
Clark and Monk
2015.
.
Strategic Investment Funds: Bring implicit commercial advantages to the table
Local knowledge to manage complexities
Reduce the cost of doing business
Unlock pipeline of strategic assets
Mitigate regulatory risk
Strategic Investment Funds: Managing Double Bottom Line is not easy
Tension between commercial and development objectives can be a source of governance challenge, and lead to risks like the politicization of investments or distorting markets by crowding out private capital.
SIF Double Bottom Line
Ireland Strategic Investment Fund 2014 • Invest on a commercial basis AND
• To support economic activity and employment in Ireland
Nigeria Infrastructure Fund (NIF – NSIA) 2011 • Invest in infrastructure to grow & diversify economy; attract and support foreign
investment AND
• Achieve positive financial return
• Allow 10% of investment in any FY on social infrastructure projects
National Infrastructure Investment Fund (NIIF)
India 2016
• No specific DBL. Commercial focus while investing in infrastructure and related
sectors.
• However, structure is set up to attract private capital
Despite commonalities, SIFs are heterogeneous in many respects
Source of funding: fiscal surplus, privatization proceeds, pension fund surplus, govt borrowing, receipts from commodity exports,
IFI investments etc.
Ownership: Sovereign or Supra Sovereign
Management: Managed by govt dept/ independent govt entity/ private fund manager/ fund manager jointly owned by private and
public sponsors
Policy goals: Economic development through SMEs/infrastructure; Facilitate SOE reforms and strengthen the management of
SOE assets; Attract co-investment; Diversify away from oil & gas reliance; Support technology transfer to home country
Invested sectors: Often infrastructure, but also Real estate, Tourism, Agribusiness, Finl Services etc.
Return expectations: Market; Sometimes Below market
9
SIF NIIF, 2015[India]
Ireland Strategic Investment Fund, 2014 [Ireland]
NSIA-NIF, 2011 [Nigeria]
FONSIS, 2012[Senegal]
Ownership 49% GoI (MoF)51% Commercial Investors
100% Minister of Finance 100% owned by Federal (46%), State (36%), Local Govts (18%)
100% owned by Govt of Senegal
Legal Framework Formed under SEBI’s private equity regulatory framework (AIF regulations)
Created by ad hoc law, under NTMA (Amendment) Act 2014
Created by ad hoc parliamentary law: NSIA Act 2011
Created by ad hoc law of Senegal National Assembly: Law 2012-34,
Manager Separate legal entity (NIIF Ltd), set up under commercial law and owned 49% by GoI
Managed by state asset-liability management agency, NTMA.
No legal separation between fund and manager
No legal separation between fund and manager
Board 8 members- 2 govt; 4 other Investors; NIIF Ltd CEO; 1 independent
9 members – 3 govt/ 6 indepappointed by MoF
9 members – 3 exec/ 6 indep(from private sector)
5 members – CEO/ 4 govt reps
Investment Committee
Master Fund: 4 members -NIIF Ltd CEO; COO, ED Investments; 1 Independent
5 members – 2 non-ex officio Board members + 3 independent; Investments above Eur 150mn approved by Board
Board is ultimate approver of investment decisions based on recommendations of NSIA executive committee
Board is de facto Investment Committee and approves investments
Comparison of Key Structural and Organizational Features of Select SIFs
NIIF: Commercial Investors investing alongside Govt of India
NIIF: Innovative legal and governance model to attract private capital
NIIF Master Fund has attracted investments from AustralianSuper, Ontario Teachers Plan, ADIA, Temasek, and four domestic financial institutions – ICICI Bank, HDFC Group, Kotak Mahindra Life Insurance and Axis Bank
NIIF funds (Master Fund, the Fund of Funds and the Strategic Opportunities Fund ) are designed to mobilize commercial capital through a collaborative investment approach
01
Set up under private equity regulation
• NIIF funds are AIF Category II funds under India’s alternative investment funds (AIF) regulations, supervised by SEBI
02
Limited ownership of GoIin the funds
• Govt stake is limited to 49%
• 51% by other foreign and domestic investors
03
Independent management company
• Govt stake is limited to 49%
• 51% by other foreign and domestic investors in Master Fund
04
Co-investment rights
• Investors committing to Master Fund receive 3:1 co-investment rights in the Fund.
12
Some Takeaways
• Mandate - SIF must be long term, but mandate and strategy need to be flexible and adaptable. Law should define process
to modify mandate; and should also be publicly disclosed to avoid arbitrary changes to fund mandate.
• DBL mandate - SIFs must be able to maximize policy objective while minimizing risk to commercial orientation (capital,
returns, and the integrity of investments)
• If policy objectives overly prioritized over commercial objectives, funding could go towards politically motivated
projects
• If commercial objectives overly prioritized, risk of crowing out private investors
• Preparation for a SIF
• Preliminary and feasibility studies are important to understand the long-term financing gaps/ barriers
• Rushing the process (e.g. driven by political/electoral considerations) could hamper functionality and sustainability.
• The SIF needs access to significant fund management capacity, independence, and transparency to provide
investors and co-financiers with confidence that the fund will be managed in the best interests of the SIF. Skilled staff,
project selection and autonomy.
Identifying the Trend: Govts coopting investment fund model for devpt purposes
April 2020
Annexes
14
Examples of SIFs
Public Capital SIFs
• FONSIS (Senegal) (2011)
• ~$17mn from state budget + commercial credit line and donor funds
• Investments to stimulate economic growth and job creation, Infrastructure, SMEs
• Ireland Strategic Investment Fund (2014)
• $8bn, sourced by share of assets from National Pension Reserve Fund
• Investments to support Irish economy through infrastructure, housing etc.
• Khazanah Nasional (Malaysia) (1993)
• $40bn+, sourced by govt share of privatized national agencies; issues Islamic bonds
• Investments to promote devpt of strategic industries and for long-term economic interests
Mixed Capital SIFs
• Philippines Investment Alliance for Infrastructure (2012)
• $625mn (Philippines Govt Service Insurance System Fund, ADB, Netherlands Algemene Pensioen Groep, MIRA)
• Invests in greenfield and brownfield infrastructure in the Philippines
• Asia Climate Partners (ACP) (2014)
• $450mn (ADB, Robeco, ORIX)
• Invests in RE/ resource efficiency/ environmental projects in emerging Asia
Strategic Investment Funds: Require flexibility to align with national priorities
INA should require periodic review of strategy to ensure alignment with national priorities.
Ireland Strategic Investment Fund
• 2014: ISIF established by NTMA (Amendment) Act,
2014 to invest in sectors of strategic significance to
Irish Economy (Real estate, SMEs, Venture Capital,
Infrastructure etc.).
• 2015. Initial investment strategy published.
• 2017-2018. Review of investment strategy given
rapidly improving economic situation in Ireland.
• February 2019. Revised investment strategy,,
centered on 5 economic priorities: indigenous
industry; regional development; sectors affected by
Brexit; climate change; housing
Strategic Investment Funds: Patient capital of SIFs can be deployed towards
strategic challenges or riskier investments in underdeveloped sectors
Acts as project developer or co-
developer for greenfield projects
Investment horizon can extend to 25-30
years; Invests across capital structure –
senior debt to start up equity
Originate and invest in strategic projects in
under-developed and vital sectors in
Palestine
Green Growth Equity Fund, established by
NIIF and DFID, invests in renewable energy,
clean transport, water treatment, and waste
management.
18
SIF Ownership Size Mandate
Asia Climate Partners
2014
[ADB, Robeco, ORIX]
Mixed Capital $450mn • Targets renewable energy/resource efficiency and
environmental sectors in emerging Asia
• Seeks to demonstrate commercial viability of green projects,
while adhering to ESG practices
FONSIS
2012
[Senegal]
Public Capital ~$70mn • Promotes the role of State of Senegal as investor and partner for
private sector to enhance direct investments that accelerate
economic and social devpt to facilitate wealth and job creation for
present and future generations
• Supports the implementation of the 2014 Emerging Senegal Plan
Ireland Strategic
Investment Fund
2014
[Ireland]
Public Capital Euro 8.8bn (capital
committed to Irish
portfolio Euro 4bn)
• Double bottom line mandate to: (i) Invest on a commercial basis
and (ii) in a manner designed to support economic activity and
employment in Ireland
Mandate of a SIF
Strategic Investment Funds: Managing Double Bottom Line is not easy
Tension between commercial and development objectives can be a source of governance challenge, and lead to risks like the politicization of investments or distorting markets by crowding out private capital.
SIF Double Bottom Line Aligning with DBL
Ireland Strategic
Investment Fund 2014
• Invest on a commercial basis
• To support economic activity and
employment in Ireland
• Financial target: > Cost of Irish govt debt
• Plus Additionality (+ Economic benefits); No Displacement;
No Deadweight (Was ISIF intervention necessary?)
Nigeria Infrastructure
Fund (NIF – NSIA) 2011
• Invest in infrastructure to grow & diversify
economy
• Attract and support foreign investment
Achieve positive financial return
• Allow 10% of investment in any FY on social
infrastructure projects
• Long term return benchmark: US CPI + 3%. (Compliance is
necessary condition to investment approval)
• Additionality – Try to finance projects that would not have
happened without NIF.
National Infrastructure
Investment Fund (NIIF)
India 2016
• Commercial focus. No specific DBL
• However, structure is set up to attract
private capital
• Does not formally track and report impact indicators
• Structurally GoI can only be 49% of the fund.
20
Preconditions for a SIF
Preliminary Analysis:
• SIF vs. other relevant policy instruments to achieve same objectives? (e.g. policy/reg reform; other institutions)
• Review desired role, mandate, objectives
• Review market and investor landscape
• Are there market failures? Are they transitory or permanent
• Identify sectors for investment
• Estimate financing gaps in SIF target sectors
• Identify preconditions for SIF to operate efficiently in these sectors
• Identify how SIF can crowd in private sector, not crowd out
• Estimate Impact of SIF in sectors including environment, social, governance and economic growth
Feasibility Analysis
• Clarify the fund’s key policy features; refine the mandate
• Outline the design of the SIF’s operational features.
• Identify pipeline of fund and how it will be developed; conduct financial simulations to estimate fund returns
• Outline the most effective governance arrangements
• Articulate Investment policy and strategy
• Identify Human capital requirements
• Articulate the most effective legal framework and structure for the fund