Long-term Sustainable Development in Africa: The Role of Sovereign Wealth Funds
On June 14th, 2016, the Wilson Center Africa Program held the second Signature Event of the Brown Capital Management Africa Forum. This year, the topic of discussion was sovereign wealth funds and their potential impact on long-term sustainable development in Africa.
Long-term Sustainable Development in Africa: The Role of Sovereign Wealth Funds
On June 14th, 2016, the Wilson Center Africa Program held the second Signature Event of the Brown Capital Management Africa Forum. This year, the topic of discussion was sovereign wealth funds and their potential impact on long-term sustainable development in Africa. Mr. Andrew Baukol, Principal Deputy Assistant Secretary for International Monetary Policy at the U.S. Department of the Treasury, provided the keynote address, followed by a panel that hosted Dr. Adam Dixon, Associate Professor at the University of Bristol; Mr. Amos Cheptoo, Macroeconomist and Program Manager at the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI); and Mr. Malan Rietveld, a director at Kalytix Partners and a fellow at the Center for International Development at Harvard University, which addressed general challenges, best practices, and development implications for sovereign wealth fund development in Africa. A second panel—comprised of the Honorable Mona Quartey, Deputy Minister of Finance for the Republic of Ghana; Mr. Uche Orji, CEO and Managing Director of the Nigeria Sovereign Investment Authority; Mr. Walé Adeosun, Founder and Chief Investment Officer at Kuramo Capital Management and a member of the President’s Advisory Council on Doing Business in Africa; and Mr. Andrew Baukol—discussed specific challenges, best practices, and development impacts in the experience of the Ghanaian and Nigerian sovereign wealth funds as well as other funds.
In his keynote address, Mr. Andrew Baukol touched upon the rapid increase in the number of African sovereign wealth funds, as well as the potential of sovereign wealth funds to drive development and to complement the Obama administration’s development policy. He also addressed the importance and applicability of the Santiago principles to African sovereign wealth funds, and stressed that a fund’s investments should follow financial, rather than political, considerations.
Speakers on the first panel stressed the importance of maintaining highly transparent operations and publishing comprehensive information on activities in a public space. Dr. Adam Dixon provided an overview of the global landscape for sovereign wealth funds. He credited the global growth of sovereign wealth funds since 2000 to a decade of high commodity prices and export-led growth in many countries, as well as the increasing allure of financialization. Dr. Dixon positioned African sovereign wealth fund growth in this global context, stating that African funds are quite small and young compared to many other sovereign wealth funds, and that their history is too short to judge development impact yet. He cautioned that sovereign wealth funds are not a panacea for a poorly-run economy, and that they should be created with a clear goal and specific policy need in mind, be it infrastructure development, stabilization, or saving for future generations. He also stressed the importance of sovereign wealth funds being a part of a comprehensive, integrated financial management framework to ensure their success. He concluded with several challenges African sovereign wealth funds are facing, including low commodity prices, and a tendency toward low-risk investments in an already-low-return environment.
Mr. Amos Cheptoo discussed trends and trajectories, as well as best practices in eastern and southern African sovereign wealth funds. He said successful performance and good governance can be achieved through adherence to clear fiscal rules, adoption of international practices, clear delineation and execution of duties, and international support. International support can mean peer reviews, capacity-building, and sharing of knowledge and best practices. He also argued that sovereign wealth funds need to be part of a bigger financial and economic management picture, and that in order to be successful, a well-managed sovereign wealth fund should be positioned in a well-managed economy.
Mr. Malan Rietveld provided a typology of sovereign wealth funds and their different purposes and goals. He described the challenges faced by African sovereign wealth funds and the lessons that they can learn from other countries’ experiences. First, he urged policymakers not to overestimate what a sovereign wealth fund can do, warning that a sovereign wealth fund is just one part of a full natural resource management strategy. That said, he noted that sovereign wealth funds can be powerful and flexible tools, not only for saving but for a range of purposes. African sovereign wealth funds have done a particularly good job of carefully articulating and delineating these various purposes and goals, he said. He also strongly advised against complicated, flashy investment strategies, which require substantial human resources and operational capacity backed up by strong credentials. Instead, Mr. Rietveld recommended that investments should be kept simple, particularly in the early stages of a sovereign wealth fund, citing the example of Chile and its straightforward but effective investment strategy. Lastly, he said the true test of African sovereign wealth funds’ strength is not how many funds survive, but how many African funds will contain the ‘big money’ needed for their stabilization and savings purposes.
The Honorable Mona Quartey detailed the role of Ghana’s sovereign wealth funds in assisting the country to achieve a variety of developmental objectives, including the Sustainable Development Goals, the African Union’s development goals, and Ghana’s own national development plans. The Petroleum Revenue Management Act of 2011, which was passed four years after the nation struck oil in 2007, set up two sovereign wealth funds: the Ghana Stabilization Fund and the Ghana Heritage Fund. The Ghana Stabilization Fund serves to transfer money into a contingency fund for unplanned government expenditures when oil prices are low, while the Ghana Heritage Fund seeks to achieve intergenerational equity by funding an endowment for future generations. She stressed that both funds have clearly delineated purposes and are strongly ring-fenced. While the government can and has withdrawn from the stabilization fund for certain purposes including the Ebola crisis and debt servicing, the Heritage fund is not open to withdrawals until 2026. She highlighted that Ghana has still contributed to the heritage fund, even in this period of low oil prices. Ghana has not tried to re-invent the wheel but has identified Norway as a role model and taken valuable lessons from that country’s experience. She discussed the value of assistance and knowledge sharing, and lessons learned from the Ghanaian experience, including the importance of investing conservatively, keeping rules water-tight and well-enforced, and committing to the Santiago Principles and their focus on issues such as transparency and accountability.
Mr. Uche Orji discussed the experience of the Nigeria Sovereign Investment Authority (NSIA) and its strategies for success. The NSIA is composed of three sections: the Stabilization Fund, to be used in times of economic crisis; the Future Generations Fund, which will provide for intergenerational equity; and the Nigeria Infrastructure Fund, which invests in infrastructure projects throughout the country. Yet unlike Ghana’s sovereign wealth fund, the NSIA is not part of the fiscal framework of Nigeria itself, but rather run by an independent and highly-involved board with professional capital investment experience. This structure, he said, is integral to maintaining institutional integrity and enforcing clear rules about when and how the government can request funds. Likewise, Mr. Orji stressed the importance of oversight and accountability: the NSIA publishes annual reports and quarterly audits in newspapers and on the fund’s website. Mr. Orji also offered specific lessons learned regarding investment in infrastructure through sovereign wealth funds. Investments from the Nigeria Infrastructure Fund are rigorously vetted, limited to key sectors of the national economy such as agriculture and power, and conducted with reliable partners. Sovereign wealth fund investment can complement but cannot replace government investment; the goal, he said, is to have NSIA investments serve as a catalyst, driving further investments and capacity-building in these sectors.
Mr. Walé Adeosun shared his perspective as a private capital manager involved in Africa. He noted that long-term investments are advantageous for both intergenerational equity and capital preservation. Mr. Adeosun then pointed out that investment capital can be used as catalysts and leverages for development in Africa. There’s a high perception of risk held by American businesses about investing in Africa, and many U.S. businesses place a premium on yields coming from their investments on the continent. For example, yields may have to be as much as 20 to 30 percent higher in Africa than in the United States for American businesses to invest, solely because of risk perception. Successful sovereign wealth funds, Mr. Adeosun said, can bring down this risk premium. Mr. Adeosun also provided several recommendations for successful fund management strategies. First, he said, clear principles are the best foundation. Countries must clearly articulate what funds will do, how money will be spent, and the roles and responsibilities within the organization. Second, he noted that the benefits of having a diversified, global pool of assets and a third party making investment decisions should not be underestimated. Third, Mr. Adeosun noted that benchmarking performance relative to peers in the endowment foundation world for compliance with global best practices is important for encouraging good governance. Lastly, international actors and third party providers are indispensable to increasing Africa’s capacity to manage and invest capital.
Mr. Eddie Brown, Founder, Chairman, and CEO of Brown Capital Management and moderator of the second panel, asked panelists to touch on corruption and its impact on sovereign wealth funds. While noting that corruption was a global rather than an African issue, the speakers agreed that keeping processes transparent and embracing performance benchmarks with the assistance of third parties are strategies that can limit corruption’s prevalence. Mr. Adeosun and Mr. Baukol both cited the positive effects of democratization and the privatization and public accountability it spurred as a major reason for today’s better governance environment, improved macroeconomic policymaking and greater human capacity. Another question touched on the decline in oil prices, which Mr. Orji responded to, saying that the cycle of oil prices has risen and fallen before, and that Nigeria would weather it ably.
Launched in September 2015, the Brown Capital Management Africa Forum provides a premier platform for substantive and solutions-oriented dialogue on key trade, investment, and development issues in Africa, and in U.S.-Africa relations. Convening business leaders and policymakers, as well as subject matter experts from the United States and Africa, the Brown Capital Management Africa Forum sponsors a series of public events designed to support the development of economic engagement and policy options that advance mutually beneficial economic relations between Africa and the United States. The Brown Capital Management Africa Forum is made possible by the generous support of Brown Capital Management.
This event was livestreamed and livetweeted. Follow the Africa Program Twitter account @AfricaUpClose and catch up on the conversation using the hashtag #SWFsinAfrica.
Eddie C. Brown, CFA, CIC
Mr. Andrew Baukol
Mr. Walé Adeosun, CFA
The Honorable Mona Quartey
Mr. Uche Orji
Mr. Amos Cheptoo
Dr. Adam Dixon
Mr. Malan Rietveld
The Africa Program works to address the most critical issues facing Africa and U.S.-Africa relations, build mutually beneficial U.S.–Africa relations, and enhance knowledge and understanding about Africa in the United States. The Program achieves its mission through in-depth research and analyses, including our blog Africa Up Close, public discussion, working groups, and briefings that bring together policymakers, practitioners, and subject matter experts to analyze and offer practical options for tackling key challenges in Africa and in U.S.-Africa relations. Read more