7. Sovereign Wealth Funds and the South: Under-used potential for development and defense

Including among others, Grabel (2017), Fritz and Muhlich (2014), Barrowclough and Gottschalk (2018), Kring and Gallagher (2019), Ocampo (2014), and UNCTAD (2015).

Other mechanisms with similar functions to SWFs but which are not SWFs also exist in many countries. Timor-Leste’s Infrastructure and Human Capacity Development Fund is a multi-year account rather than an institution with its own organizational structure, staff and buildings. The difference between a State-Owned Development Bank and a SWF could be a moot point, depending on how returns are allocated. Not all countries with large current account surpluses have SWFs (Germany). In Switzerland and Japan, large external surpluses are intermediated through the private sector rather than through SWFs.

The Permanent School Fund was established in Texas, United States, in 1854 to fund public education. It currently manages $37.7 billion assets (annual report 2014 $31 billion). The Texas Permanent University Fund, established in 1876, manages $17.2 billion. The Fund supplements tax revenues to invest in and pay for public education.

EG http://​cepr.​net/​images/​stories/​reports/​IMF-voting-shares-2016-04.​pdf.

Cash includes current accounts and other cash-equivalent instruments, debt securities including bills, notes and treasury bonds and corporate bonds (Kunzel et al. 2011).

They should also include a mechanism for recapitalizing the fund when prices rise again (Venables and Wills (2016).

Annual Report on Sovereign Wealth Funds 2009, Ministry of Finance, Chile.

Annual Report Sovereign Wealth Funds 2017, Ministry of Finance, Chile.

Bolivia, Colombia, Peru and Venezuela.

Some Funds cross over both short- and long-term classifications—such as Norway’s which recently changed name from the Petroleum Fund to the Government Pension Fund, even though it is not a pension fund in the traditional sense because it is financed through oil profits rather than through pension contributions. Similarly, a Canadian fund established in 1976 in part financed from oil revenues changed focus and is now less directed to economic development and more to savings and investment, reflecting demographic changes at home.

France’s Strategic Investment Fund, established in 2008 to support French firms, was created with an initial endowment of 40 billion euros and owned 49% by the government of France and 51% by the Caisse des Depots et Consignations, the state-owned group charged to invest in development projects that serve the economic development of France. In 2013 it was integrated into Bpifrance, now Bpifrance Participations and is described as an investment bank not a fund. A similarly counter-cyclical purpose lead to Ireland’s National Pensions Reserve Fund and Miscellaneous Provisions Act 2009, which requires investments to be made into credit institutions when needed to remedy a serious disturbance in the economy, or to prevent potential serious damage to the financial system or instability. Ireland’s National Pensions Reserve Fund changed its name in 2013 to Ireland Strategic Investment Fund, reflecting its new focus on domestic investments. Italy’s Strategic Fund was established in 2011 to invest in healthy and profitable strategic Italian companies that needed capital injection in order to grow and be competitive on a global scale.

Survey Invesco Global Sovereign Asset Management Study (2015).

Some of the biggest SWF deals have been from the south to the north—including high-profile acquisitions of financial institutions and banks such as Barclays, Morgan Stanley, Merrill Lynch, Citigroup and UBS by SWFs from by Singapore, China, Kuwait and Korea. These purchases were broadly welcomed as the Funds were seen as having long-term horizons that made them less sensitive to ongoing market volatility—as compared to the protectionist concerns that blocked previous investments in non-financial activities such as Dubai and US ports, or China and a US oil company (Griffiths-Jones and Ocampo 2008).

Including Funds from the eighteenth century in the United States, New Zealand Superannuation Fund, Singapore Temasek and more recently France.

(34% investing directly and 50% investing both directly and through third-party funds (Inderst and Steward 2014: 27; and a similar finding in Preqin 2012). It can also be a significant weighting in their portfolios—the Singaporean SWF Temasek and GIC have between 10–12% of total assets in infrastructure (OECD 2016: 23).

Transport is sometimes favoured in PPPs because it offers relatively straightforward mechanisms for charging for the service through tolls and SWFs similarly favour transport. Angola’s SWF set up a dedicated $1.1 billion infrastructure fund and identified transport infrastructure (alongside hospitality) for its potential to generate a high yield, citing potential returns above 10% per year on a ten-year investment horizon (Economist 28 February, 2015). Chinese funds signed with the African Union for a network of high-speed railways to link all countries on the continent.

Small funds, with AUM less than $10b, allocated 1.2% of AUM in infrastructure. Larger projects ($10–$100b) allocated 0.7% of AUM to local infrastructure and 1.3% to global infrastructure. The largest funds (greater than $100b), allocated 0.5% to home infrastructure and 1.5% to global infrastructure.

This includes some Gulf funds, Kazakhstan’s Samruk Kazyna and Malaysia’s Kazanah. Angola (Fundo Soberano de Angola), Azerbaijan, Equatorial Guinea, Iran, Kuwait, Mongolia, Nigeria, Papua New Guinea and Russia. Others are in the making, including Colombia, Morocco, Mozambique, Sierra Leone, Tanzania, Uganda and Zambia (Gelb et al. 2014).

As Nigeria discovered, when its credit rating was raised by Moody’s to Ba3 after its establishment of a SWF (Whitehead 2012). This in turn eased Nigeria’s ability to raise funds on international markets and at cheaper borrowing costs.

E.g. Nigeria Infrastructure Fund’s cooperative agreements with General Electric, the Africa Finance Corporation and the International Finance Corporation (see Rice and Blas 2013).

These include achieving a minimal return that exceeds inflation (Finaciera Rural of Mexico, Credit Bank of Turkey); generating a rate of return that equals or exceeds the government’s long-term borrowing costs (Business Development Bank of Canada).