Basic Considerations on Sovereign Wealth Funds

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Information culled by CRA from © 2008-2022 Sovereign Wealth Fund Institute.

Basic Considerations on Sovereign Wealth Funds

Information culled by CRA from © 2008-2022 Sovereign Wealth Fund Institute.

sovereign wealth fund (SWF) is a fund owned by a state (or a political subdivision of a federal state) composed of financial assets such as stocks, bonds, property or other financial instruments. Sovereign wealth funds are entities that manage the national savings for the purposes of investment.

The accumulated funds may have their origin in, or may represent, foreign currency deposits, gold, special drawing rights (SDRs) and International Monetary Fund (IMF) reserve position held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings.

These are assets of the sovereign nations which are typically held in domestic and different reserve currencies such as the dollar, euro and yen. The names attributed to the management entities may include central banks, official investment companies, state pension funds, sovereign oil funds, among others.

Some countries may have more than one SWF. Also, while the United States does not have a federal sovereign wealth fund, several of its constituent states have their own SWFs, and one state, Texas, has two.

In USD billion

1          China SAFE / CADF / CIC / NSSF    1,744  Non-commodity

2          France           Bpifrance/Caisse des dépôts et consignations 1,670  Non-commodity

3          Norway          GPF     1,388  Oil & Gas

4          United Arab Emirates           ADIA / EIA /MIC /Dubai Inc. /Sharjah Assets Management / Ras Al Khaimah Investment Authority / Ajman Holding / Fujairah Holding         1,363  Oil & Gas

5          Saudi Arabia PIF       1,000  Oil & Gas

6          Kuwait           KIA, GIC, Wafra          712     Oil & Gas

7          Singapore      GIC / TH          703     Non-commodity

8          Hong Kong    Exchange Fund / HKMA investment portfolio            500     Non-commodity

9          Qatar  QIA      445     Oil & Gas

10       Australia        FF / WAFF / QIC / VFMC / TCorp      297            Non-commodity

11       United States APFC / NMSIC / PWMTF / SIFTO / IEFIB / PSF / PUF / ATF / NDLF / LEQTF / CSF / WVFF 240     Oil & Gas / Non-commodity / Minerals / Public Lands

12       Russia            NWF / RDIF    191     Oil & Gas / Non-commodity

13       South Korea  KIC      157.3  Non-commodity

14       Kazakhstan   Samruk-Kazyna/ KNF / NIC  133     Oil & Gas

15       Iran    NDFI    91       Oil & Gas

16       Libya  LIA       66       Oil & Gas

17       Brunei            BIA      60       Oil & Gas

18       Azerbaijan     SOFAZ 42.4    Oil & Gas

19       Malaysia        KN / Malaysian Investment Development Authority/ Permodalan Nasional Berhad/Johor Corporation            37       Non-commodity

20       Turkey            Turkey Wealth Fund   34       Non-commodity

21       Austria           Österreichische Beteiligungs  AG     32            Non-commodity

22       New Zealand NZSF   27       Non-commodity

23       Chile  ESSF / PRF     21       Copper

24       Bahrain          BMHC  18.6    Oil & Gas

25       East Timor     TLPF    18       Oil & Gas

26       Oman OIA      14.3    Oil & Gas

27       India   NIIF, TIDCO     12.4    Non-commodity

28       Ireland           ISIF      12       Non-commodity

29       Colombia       FAEP / FLAR   12       Oil & Gas

30       Mexico           Fondo Mexicano del Petroleo para la Estabilizacion y el Desarrollo            7          Oil & Gas

31       Trinidad and Tobago The Heritage and Stabilization Fund            6          Oil & Gas

32       Indonesia      INA      5.3      Non-commodity

33       Peru   FEF      5          Non-commodity

34       Angola           FSDEA 5          Oil & Gas

35       Botswana      Pula Fund       4.9      Diamonds

36       Mongolia       FHF / FSF       4          Minerals

37       Nigeria           NSIA / BDIC    2          Oil & Gas

38       Ghana            GPF / GIIF       2          Oil & Gas

39       Panama         FAP      1.4      Non-commodity

40       Vietnam         SCIC    1.2      Non-commodity

41       Palestine       PIF       1.0      Non-commodity

42       Gabon            FGIS    1.0      Oil & Gas

43       Egypt  SFE      0.6      Non-commodity

44       Bolivia           FINPRO           0.4      Non-commodity

45       Kiribati           RERF   0.4      Phosphates

46       Senegal         FONSIS           0.1      Non-commodity

47       Mauritania     NFHR  0.1      Oil & Gas

48       Equatorial Guinea     FRGF   0.1      Oil & Gas

49       Canada          Alberta Investment Management Corporation/Alberta Heritage Savings Trust Fund/CPP Investment Board                  Non-commodity

This information was last updated on 28 November 2022, at 20:27 Phil Time.

HISTORY

The term “sovereign wealth fund” was first used in 2005 by Andrew Rozanov in an article entitled, “Who holds the wealth of nations?” in the Central Banking Journal. The previous edition of the journal described the shift from traditional reserve management to sovereign wealth management; subsequently the term gained widespread use as the spending power of global officialdom rocketed upward.

Sovereign wealth funds have existed for more than a century, but since Y2000, the number of sovereign wealth funds has increased dramatically. The first SWFs in the USA were non-federal U.S. state funds established in the mid-19th century to fund specific public services.

The U.S. state of Texas was thus the first to establish such a scheme, to fund public education. The Permanent School Fund (PSF) was created in 1854 to benefit primary and secondary schools, with the Permanent University Fund (PUF) following in 1876 to benefit universities. The PUF was endowed with public lands, the ownership of which the state retained by terms of the 1845 annexation treaty between the Republic of Texas and the United States. While the PSF was first funded by an appropriation from the state legislature, it also received public lands at the same time that the PUF was created.

Another famous American SWF is the Alaska Permanent Fund Corporation, the locus of a roughly $40 billion state fund. While small by the standards of Middle East sovereign wealth funds, the Alaska Permanent Fund is unique among states. The fund found its genesis in the state’s oil wealth and it has paid a dividend to every resident since 1982.

The first SWF established for a sovereign state is the Kuwait Investment Authority, a commodity SWF created in 1953 from oil revenues before Kuwait gained independence from the United Kingdom. According to many estimates, Kuwait’s fund is now worth at least some US$600 billion.

NATURE AND PURPOSE

SWFs are typically created when governments have budgetary surpluses and have little or no international debt. It is not always possible or desirable to hold this excess liquidity as money or to channel it into immediate consumption. This is especially the case when a nation depends on raw material exports like oil, copper or diamonds. In such countries, the main reason for creating a SWF is because of the properties of resource revenue: high volatility of resource prices, unpredictability of extraction, and exhaustibility of resources.

There are two types of funds: saving funds and stabilization funds. Stabilization SWFs are created to reduce the volatility of government revenues, to counter the boom-bust cycles’ adverse effect on government spending and the national economy. Savings SWFs build up savings for future generations. One such fund is the Government Pension Fund of Norway. It is believed that SWFs in resource-rich countries can help avoid resource curse, but the literature on this question is controversial. Governments may be able to spend the money immediately, but risk causing the economy to overheat, e.g., in Hugo Chávez’s Venezuela or Shah-era Iran. In such circumstances, saving the money to spend during a period of low inflation is often desirable.

Other reasons for creating SWFs may be economic, or strategic, such as war chests for uncertain times. For example, the Kuwait Investment Authority during the Gulf War managed excess reserves above the level needed for currency reserves (although many central banks do that now). The Government of Singapore Investment Corporation and Temasek Holdings are partially the expression of a desire to bolster Singapore’s standing as an international financial centre. The Korea Investment Corporation has since been similarly managed. Sovereign wealth funds invest in all types of companies and assets, including start-ups like Xiaomi and renewable energy companies like Bloom Energy.[6]

According to a 2014 study, SWFs are not created for reasons related to reserve accumulation and commodity-export specialization. Rather, the diffusion of SWF can best understood as a fad whereby certain governments consider it fashionable to create SWFs and are influenced by what their peers are doing.

The growth of sovereign wealth funds is attracting close attention because – as this asset pool continues to expand in size and importance, so does its potential impact on various asset markets. Some countries, like the United States, which passed the Foreign Investment and National Security Act of 2007, worry that foreign investment by SWFs raises national security concerns because the purpose of the investment might be to secure control of strategically important industries for political rather than financial gain.

Thus, the governments of SWF’s commit to follow certain rules: Accumulation rule (what portion of revenue can be spent/saved); Withdraw rule (when the Government can withdraw from the fund); Investment (where revenue can be invested in foreign or domestic assets).

These rules are now found in “The Santiago Principles” or formally the “Sovereign Wealth Funds: Generally Accepted Principles and Practices (GAPP)” designed as a common global set of 24 voluntary guidelines that assign best practices for the operations of Sovereign Wealth Funds (SWFs).

They are a consequence of the concern of investors and regulators to establish management principles addressing the inadequate transparency, independence, and governance in the industry. They are guidelines to be followed by sovereign wealth fund management to maintain a stable global financial system, proper controls around risk, regulation and a sound governance structure.

In 2016, 30 funds who formally signed up to the Principles and joined the International Forum of Sovereign Wealth Funds (IFSWF) represented collectively 80% of assets managed by sovereign funds globally or some US$5.5 trillion. By this time, Y2022, this volume of money has already reached the gargantuan sum of $10,297,083,125,066. These are funds looking to be productive somewhere among its members and in accordance with certain principles.

The principles are maintained and promoted by the International Forum of Sovereign Wealth Funds (IFSWF) whose membership have to either have implemented or aspire to implement the principles.

OVERVIEW

Some of the world’s main SWFs came together in a summit in Santiago, Chile, on 2–3 September 2008. Under the leadership of the IMF, they formed a temporary International Working Group of Sovereign Wealth Funds. This working group then drafted the 24 Santiago Principles, to set out a common global set of international standards regarding transparency, independence, and accountability in the way that SWFs operate. These were published after being presented to the IMF International Monetary Financial Committee on 11 October 2008. They also considered a standing committee to represent them, and so a new organisation, the International Forum of Sovereign Wealth Funds (IFSWF) was set up to maintain the new standards going forward and represent them in international policy debates.

According to the IFSWF, the creation of the Santiago Principles was driven by the following goals for SWFs:

To help maintain a stable global financial system and free flow of capital and investment;

To comply with all applicable regulatory and disclosure requirements in the countries in which they invest;

To ensure that SWFs invest on the basis of economic and financial risk and return-related considerations; and

To ensure that SWFs have in place a transparent and sound governance structure that provides adequate operational controls, risk management, and accountability.

THE 24 PRINCIPLES

The Santiago Principles state that SWFs need to have the following:

  1. A sound legal framework,
  2. A well-defined mission,
  3. Domestic activities coordinated with fiscal and monetary authorities,
  4. Clearly defined rules for drawdowns,
  5. Transparency to the owner,
  6. Clear division of roles,
  7. Governing bodies appointed in a predetermined manner,
  8. Governing bodies that act in the best interest of the SWF,
  9. Independence,
  10. Formal definition of accountability,
  11. Annual reporting,
  12. Independent auditors,
  13. Ethics and professionalism,
  14. Rules-based outsourcing,
  15. Ability to abide by rules of foreign countries,
  16. Operational independence from the owner,
  17. Public transparency,
  18. Clear investment policies,
  19. Commercial orientation,
  20. Restrictions against using privileged information,
  21. Shareholder rights policies,
  22. Effective risk management,
  23. Proper reporting of performance,
  24. And regular reviews to ensure its compliance with the foregoing Santiago Principles.

THE PHILIPPINE CASE

            Sometime less than a decade ago some Filipino-Swiss “Sovereign Wealth Funds” consultants came to town with the gospel of sovereign wealth. They checked out the coco levy funds but the same were just too controversial and the government was perceived as quite far from an ability to get its act together. The farmer leaders were quite suspicious that if the coco levy funds were entrusted to the Treasury and placed only in PH Government Bonds it would ultimately mean that the farmers were outsourcing to the Government the decision what to do with the money and who would benefit from it – giving up the economic potential on that money to someone else. Investing coco levy funds in government funds was a no-brainer. Those funds were being used, in such a case, merely to pay government debt. Thus the idea of setting up a sovereign wealth fund was attractive.

The Swiss consultants met with some senators and in time Senator Bam Aquino filed a bill to the end of this country establishing such a fund and joining the rich man’s club and with a view to using the incredible wealth of the club for the development of the Philippines. His bill did not fly. The idea was too good to be true.

The consultants met a few times with Finance Secretary Dominguez who took quite a while to appreciate the proposal as realistic.

            At a certain time, in the course of Senator Bongbong Marcos’ consultations with coconut farmer leaders on the coco fund, he lent his ears to the proponents of the sovereign wealth funds who tagged along the CONFED leadership. Now, it seems that BBM more than just listened. He decided to go for it. With the Santiago Principles? Some say it would be a big laugh.

            Senator Cynthia Villar was another senator who showed interest and had many sessions with the consultants. Quite a few journalists did not go so far as to study the proposal. With “Tatak” Villar they thought it could never be good.

            Some in the PDSP group of former NSA Secretary Norberto Gonzales who’ve seriously campaigned for a “First World Philippines” likewise took a good look at the SWF option, given that this archipelago is one of the most highly mineralized in the world and its long-term coconut status cannot be doubted – sovereign wealth features ideal for conversion to funds of such nature. The major predicate in all this, however, is our capability and will – our credibility -to adhere to the Santiago principles.

            Meanwhile the Manila Times has editorialized in the wake of the ongoing congressional conversation:

“THE recent bill [HB 6398 ‘Maharlika Wealth Fund’] jointly filed by House Speaker Martin Romualdez and Rep. Ferdinand ‘Sandro’ Marcos 3rd to create a sovereign wealth fund for the Philippines is an interesting enough idea, and perhaps there would be some instructional value in studying it. However, with the rather checkered history of sovereign wealth funds in general [insufficiently informed, it would seem], controversies surrounding large-scale funds in the Philippines in particular, and our unfortunate record of persistent corruption, the proposal should be shelved.

As proposed, the new fund, to be dubbed the “Maharlika Fund,” would pool resources from the Government Service Insurance System (GSIS), Social Security System (SSS), Land Bank [which has devoured the coco-levy-funded UCPB] and Development Bank of the Philippines for investments. The fund would be under the direction of a board consisting of nominees of the participating government financial institutions, as well as two independent directors. The idea has been around for a few years; two bills to create a sovereign wealth fund were filed in the Senate in 2016 and 2018, the latter supported by former Finance secretary Carlos Dominguez 3rd who had recommended pooling funds from the SSS and GSIS.

As an idea, a sovereign wealth fund promises positive outcomes for all concerned without any downsides. In practice, however, sovereign wealth funds have had mixed results, being prone to various forms of misuse. Malaysia’s 1MDB fund is a spectacular example of a failure, losing billions to corruption for which former Prime Minister Najib Razak, his wife and several others landed in prison. Even the best regional example of a sovereign wealth fund that works fairly well, Singapore’s Temasek, has not escaped criticism for a lack of transparency, and investments in projects that benefit the public less than they do well-connected interests [but who in his right mind will doubt what sovereign wealth funds have done to bring tiny Singapore to First World status?].

Here in the Philippines, high-profile scandals involving funds such as the coco levy fund and the Malampaya Fund do not augur well for the clean and efficient management of a new sovereign wealth fund. For his part, Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla did not mince words in thumbing down the idea in an interview with Bloomberg TV.

“To me, the experience of 1MDB in Malaysia is the biggest risk,” Medalla said, alluding to the massive corruption the fund enabled. “It’s a governance issue,” he continued. “Even if the current [leadership] is OK, will the guys five years from now still be OK?”

Asked if the BSP would be willing to invest its foreign reserves in the sovereign wealth fund, Medalla said, “My personal view is, unless we are compelled, we should not.” Besides the other risks associated with a sovereign wealth fund, getting involved could impact the Monetary Board’s independence, and handicap the BSP’s ability to intervene in the foreign exchange market, he explained.

We share Governor Medalla’s view that a sovereign wealth fund is too risky, more likely to fall into the same sort of corruption as 1MDB than perform well for the country’s benefit. Before the sovereign wealth fund could even be considered, its proponents must answer a number of hard questions, including but are not limited to, the exact details of the funding sources, i.e. how much funds are being contributed by the entities involved; the investments those funds are being directed to, and more importantly, how those investments are related to overall national development plans; the risk management plan for investments; and how and by whom audit oversight of the fund will be managed.

Those who are already reluctant to provide those detailed answers should be reminded that not doing so is not an option. After all, the funds that they are proposing to use belong to the people, in the form of contributions made by individuals — not the government — to the two government-run pension funds, and deposits by individuals, enterprises and local government units in the two government-run banks.

As it now stands, there is nothing in what has been said so far to indicate that the proposed Maharlika Fund would be anything other than another bloated government institution — at a time when the government is supposed to be “rightsizing” — offering too many temptations for unscrupulous officials to engage in corruption. We believe the idea is bad for the country, and potentially puts Filipinos’ future at risk.” -30-