Sovereign wealth funds: Africa cashing in?

Sovereign wealth funds: Africa cashing in?

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Sovereign wealth funds offer countries with great natural resources the chance to capitalise on their reserves of wealth and establish diversity and stability in their economies. Global oil prices are making this harder than it used to be.
A number of African states have established sovereign wealth funds (SWF) as a means of managing their revenues. In particular, oil rich states such as Nigeria and Angola have invested a significant amount in their SWFs, with Nigeria’s newly established fund currently standing at $1.4bn and Angola’s Fundo Soberano de Angola (FSDEA) at $5bn.
Taking as a model Norway’s Government Pension Fund, the largest SWF in the world at $882bn, many African states which have made recent discoveries of oil and gas reserves, such as Mozambique, Uganda, Tanzania and Kenya have announced that they are planning to establish their own SWFs.
Joshua Siaw, a London and Johannesburg-based partner with US law firm White & Case, says, ‘Many African countries that recently discovered oil and gas have sought strategic advice from the government of Norway, which has, in turn, encouraged these countries to establish sovereign wealth funds in order to manage oil revenues and diversify their economies.’
The idea of SWFs in Africa is not a new one. Botswana’s Pula Fund was established in 1994 and has accumulated revenues of $7bn, mainly from the country’s diamond wealth. However, because many funds have been created to manage resource wealth, the low oil price could prevent many from ever coming into fruition.
According to Siaw, diversification is one of the key objectives of a SWF. ‘The aim among African governments would be for their sovereign wealth funds to also grow and develop over time and thus play a key role in developing and diversifying their economies.’
The focus of the fund does not need to remain within the state itself, for example oil revenues in Libya’s SWF were used to diversify the country’s economy by investing into non-oil and gas assets across Africa. In many countries SWFs could also provide revenue for much needed services.
Mara Topping, partner at White & Case in Washington DC, says, ‘In a lot of the countries where revenue streams are heavily dependent on one or a few commodities and there is a risk of fluctuating prices for those commodities, the pooling of money in sovereign wealth funds is a way to diversify revenue streams and provide some stability to offset fluctuating commodity prices.’
However, these funds are not exclusively commodity driven. Senegal has set up a non-commodity SWF in 2012, le Fonds Souverain d’Investissements Stratégiques, which was established with state assets totalling $1bn.
Nonetheless, Melissa Butler, partner at White&Case in London, points out that commodities remain the main driver of these funds. ‘The historical principle of setting these funds up is to take advantage of the positive difference between budgeted commodity prices and actual commodity prices. In countries that do not have wealth from natural resources it is hard to see where the money would come from to establish these funds.’
Luis Filipe Carvalho, partner at VCA Law Firm in Angola explains that the low oil price has had a significant impact on funds managing commodity wealth. ‘Considering that Angola draws about 70% of its income from oil, falling prices have hit government revenue strongly. This also impacted the availability of funds, namely foreign currency such as dollars.’
Topping says, ‘When you are experiencing low oil or other commodity prices then you must look for alternative revenue streams. Over the long term, sovereign wealth funds could be used to assist to diversify and stabilise budget revenue streams.’
She adds, ‘Sovereign wealth funds could have a significant impact in the market – especially when commodity prices are low. An important overall goal is to provide a buffer.’
Carvalho says that the investment strategy of the FSDEA is based on a commitment for the social and economic development. He notes, ‘Investment is especially focused on Angola, mainly in infrastructure and creating opportunities for Angolan nationals. FSDEA is looking for long term investments aiming for the development and the improvement of the current living conditions.’
Ana Ferreira da Costa, an associate at VCA Law Firm, says that sectors such as agriculture, mining, real estate and infrastructures are defined as pivotal for the FSDEA.
However, Butler says that the more newly established SWFs are unlikely to have a much of an impact, ‘One of the biggest issues is that the funds have been set up too late, missing out on a number of years of very high oil prices. Now due to lower oil prices there is the struggle to get sufficient funding to make them significant. A lot of sovereign wealth funds are actually too new to be relied upon by governments.’
The primary concerns in relation to managing SWFs are transparency and corruption. Topping states that “one important element has been to create and protect the independence of the sovereign wealth pools and their operators and advisers, to ensure the sovereign wealth fund is independent and guided by clear-cut legislated guiding principles.’
She adds, ‘Sovereign wealth funds can contribute to the stability of economies, particularly if established and operated in line with best governance practices and principles of transparency.’
Siaw explains that the Nigerian government has employed experienced professionals to manage the fund effectively – appointing international investment bank, JP Morgan, as custodian of its sovereign fund.
‘If you look at the management team of the Nigerian Sovereign Wealth Fund [which consists of three funds managed by the Nigerian Investment Authority], many individuals have considerable investment banking and private equity experience. This is possible in a big economy such as Nigeria, but it’s more challenging in smaller African countries to find the relevant expertise.’
Da Costa tells ALB that in Angola concerns regarding these funds and the risks arising from their management have been addressed through specific protocols and the implementation of international good practices. Specific measures have also been implemented, including the establishment of a supervisory board, a risk management committee, a chief risk officer and a compliance manager – while external managers are in charge of the assets.
Topping notes the tremendous commitment by local teams to push to ensure good governance, pointing out that ‘Nigeria, among others, has made a commitment to comply with the Santiago principles and meet international best practice standards.’
Carvalho says that Angola has also been developing a strategy to align with all practices regarding anti-corruption, focusing on the mitigation of corruption and exposure to influence. ‘We strongly believe that these funds – due to the exposure that is inherent to same – are and should be construed as being a standard for transparency and international rules, and therefore raising the standard in terms of compliance.’
However, warns Siaw, ‘it is important that this same spirit of transparency and accountability is reflected in the day-to-day management of the sovereign wealth fund.’
While Siaw describes SWFs as a positive trend overall, Butler states that “now is not the best time to talk about the efficacy of sovereign wealth funds in Africa as they are still very new.’
Nonetheless, she adds, ‘They are very transparent in an international best practice way. In the future we could see them as a very useful and responsible next step.’
With a general trend of diversification across many major African growth cities, these funds could prove to be pivotal in the development and the increasing drive against corruption.
Topping concludes, ‘Only time will tell as far as longer term success of the sovereign wealth pools is concerned. For some pools, success is targeted not only at commercial returns but may also include at least some element of targeted development impacts in the relevant country.’
Natasha Mellersh

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