Sovereign Wealth Funds and Long-Term Development Sovereign Wealth Funds and Long-Term . Development

download Sovereign Wealth Funds and Long-Term Development Sovereign Wealth Funds and Long-Term . Development

of 30

  • date post

    19-Mar-2020
  • Category

    Documents

  • view

    1
  • download

    0

Embed Size (px)

Transcript of Sovereign Wealth Funds and Long-Term Development Sovereign Wealth Funds and Long-Term . Development

  • Policy Research Working Paper 6776

    Sovereign Wealth Funds and Long-Term Development Finance

    Risks and Opportunities

    Alan Gelb Silvana Tordo

    Håvard Halland with Noora Arfaa and Gregory Smith

    The World Bank Poverty Reduction and Economic Management Network Public Sector Governance Unit & Sustainable Development Network Oil, Gas and Mining Unit February 2014

    WPS6776 P

    ub lic

    D is

    cl os

    ur e

    A ut

    ho riz

    ed P

    ub lic

    D is

    cl os

    ur e

    A ut

    ho riz

    ed P

    ub lic

    D is

    cl os

    ur e

    A ut

    ho riz

    ed P

    ub lic

    D is

    cl os

    ur e

    A ut

    ho riz

    ed P

    ub lic

    D is

    cl os

    ur e

    A ut

    ho riz

    ed P

    ub lic

    D is

    cl os

    ur e

    A ut

    ho riz

    ed P

    ub lic

    D is

    cl os

    ur e

    A ut

    ho riz

    ed P

    ub lic

    D is

    cl os

    ur e

    A ut

    ho riz

    ed

  • Produced by the Research Support Team

    Abstract

    The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

    Policy Research Working Paper 6776

    Sovereign wealth funds represent a large and growing pool of savings. An increasing number of these funds are owned by natural resource–exporting countries and have a variety of objectives, including intergenerational equity and macroeconomic stabilization. Traditionally, these funds have invested in external assets, especially securities traded in major markets. But the persistent infrastructure financing gap in developing countries has motivated some governments to encourage their sovereign wealth funds to invest domestically. This paper proposes some basic elements of a conceptual framework to create a system of checks and balances to help ensure that the sovereign wealth funds do not undermine macroeconomic management or become a vehicle for politically driven “investments.” First, the risks and opportunities of domestic investment by sovereign wealth funds are analyzed. Central issues are the relationship of sovereign wealth fund financing to the budget process and to the procurement systems of sector ministries, as well as the establishment of appropriate benchmarks and

    This paper is a product of the Public Sector Governance Unit, Poverty Reduction and Economic Management Network; and the Oil, Gas and Mining Unit, Sustainable Development Network. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at hhalland@worldbank.org.

    safeguards to ensure the integrity of investment decisions. The paper argues that a well-governed sovereign wealth fund, with a sound mandate and professional management and staffing, can possibly improve the quality of the public investment program. But its mandate should not duplicate that of other government institutions with investment mandates, such as the budget, the national development bank, the investment authority, and state-owned enterprises. Establishing rules on the type of investment (for example, commercial and/ or quasi-commercial) and its modalities (for example, no controlling stakes, leveraging private investment) is one way to ensure separation between the activities of the sovereign wealth fund and those of other institutions. The critical issue remains that of limiting the sovereign wealth fund’s investment scope to that appropriate for a wealth fund. If investments that generate quasi-market returns are permitted, the size of the home bias should be clearly stipulated and these investments should be reported separately.

  • Sovereign Wealth Funds and Long-Term Development Finance: Risks and Opportunities

    Alan Gelb, Silvana Tordo, Håvard Halland with Noora Arfaa and Gregory Smith1

    JEL classification codes: E00, E02, E03, E61, E62, H40, H 43, H44, H54. Keywords: Sovereign Wealth Fund, (SWF), Macroeconomic Policy, Fiscal Policy, Public Finance, Public Investment, Domestic Investment, Wealth Management, Intergenerational Equity, Project Evaluation, Public Private Partnerships, Capital Stock, Infrastructure Investment

    Sector Boards: Public Sector Governance (PSM), Energy and Mining (EM)

    1 Alan Gelb (agelb@cgdev.org) is a Senior Fellow at the Center of Global Development in Washington, DC. Silvana Tordo (stordo@worldbank.org) is Lead Energy Economist for the Sustainable Energy Department, Extractive Industries of the World Bank. Håvard Halland (hhalland@worldbank.org) is a Natural Resource Economist for the Poverty Reduction and Economic Management (PREM) Network of the World Bank. Research support and comments were provided by Noora Arfaa (narfaa@worldbank.org), Operations Officer, and Gregory Smith (gsmith@worldbank.org), Young Professional, both at the World Bank. The authors are grateful Ekaterina Gratcheva (egratcheva@worldbank.org), Lead Financial Officer, World Bank, Financial Advisory and Banking Products, Treasury and Christian B. Mulder (cmulder@worldbank.org) Senior Manager, World Bank, Reserves Advisory and Management Program, Treasury, for providing extensive comments and material. The comments of peer reviewers Shanthi Divakaran, Roberto de Beaufort Camargo, Carlos B. Cavalcanti, and other reviewers Jeffrey D. Lewis, Jeff Chelsky, Nadir Mohammed, Michel Noel, Marianne Fay, Sudarshan Gooptu, Harun Onder, William Dorotinsky, and Axel R. Peuker are gratefully acknowledged. The views in this paper are entirely those of the authors and do not necessarily represent the views of the World Bank, its executive directors, or the countries they represent.

    mailto:agelb@cgdev.org mailto:stordo@worldbank.org mailto:hhalland@worldbank.org mailto:narfaa@worldbank.org mailto:gsmith@worldbank.org mailto:egratcheva@worldbank.org mailto:cmulder@worldbank.org

  • 2

    2

    I Introduction

    Sovereign Wealth Funds represent a large and growing pool of savings. Many are owned by natural resource exporting countries and have long-term objectives, including inter- generational wealth transfer. Traditionally these funds have invested in external assets, especially securities traded in major markets for a number of reasons including sterilization and lack of domestic investment opportunities.

    Over time, and in part reflecting low returns in developed countries after the financial crisis, their investment holdings have broadened to include real property and investments in developing economies. Potentially competitive returns in developing economies and the sharp reductions in traditional sources of long-term financing after the financial crisis have contributed to fuel a growing interest among national authorities in permitting, and even encouraging, the national SWF to invest domestically, in particular to finance long-term infrastructure investments. Such pressure is inevitable, considering the fact that many countries with substantial savings, several of them recent resource-exporters, also have urgent needs. A number of existing SWFs now invest a portion of their portfolios domestically and more are being created to play this role.

    Is it appropriate to use SWFs to finance long-term development needs? Does it matter whether these investments are domestic or foreign? This paper considers these issues, in particular the controversial question of using SWFs to finance domestic projects motivated, in part, by their perceived importance for development. In particular, the paper focuses on commercial or quasi-commercial domestic market investments by SWFs in resource-driven countries and explores the conditions that affect their ability to be an efficient and prudent investor while fostering local economic diversification and the mobilization of private capital.

    At first sight the fit between the long-term goals of the SWF and the long-term investment needs of developing countries appear to align. As a specialized investor, a high-capacity SWF might also be able to bring appraisal skills to the table to help improve the efficiency of the investment program. However, domestic investment by the SWF risks to: (i) de-stabilize macroeconomic management and (ii) undermine both the quality of public investments and the wealth objectives of the fund. The source of these risks is essentially that the SWF is owned by the same entity – the government – that seeks to promote the domestic public investments. These risks may be mitigated but not eliminated.

    Naturally no approach is risk-free. For example, the level of fiscal spending can be benchmarked by fiscal rules that emphasize s