African sovereign wealth funds (SWFs) can be put to far greater use as drivers of economic growth in their own economies. The first edition of the African Sovereign Funds Index, developed by strategy consulting firm Konfidants in partnership with the AfroChampions Initiative and PG and Partners, looks at how they can be put to this use. Michael Kottoh, managing partner of Konfidants, spoke to African Business about the objectives of the Index.
What is the main objective of the African Sovereign Funds Index?
The main purpose is to focus attention on how African SWFs contribute to their continent’s development. Many of these funds invest on international markets and not locally in Africa in national projects. Their mandate is to save a portion of national wealth for future generations and stabilise public finances. But these funds could be used to invest in African economies, which are perennially in need of financing. The good news is that many African SWFs are increasing their local investments. The report explores and ranks their capacity to undertake impactful domestic investments under good governance practices.
Could you tell us more on the methodology you used for the Index?
Envisaged as a multi-year project, the Index has seven main indicators: Governance and Disclosure; Domestic Investment Mandate; Size of Fund; Diversity of Sources of Funding; Financial Performance; Economic Impact; and Sustainability. This year, the main topic of the report is “relevance”, examining how relevant these funds are to the development of African countries. On a year-on-year basis, we intend to measure through these seven criteria the extent to which the various African funds contribute to national development. Because of the lack of data available, we had to focus the 2018 Index on just the first four indicators. But we intend to use all the seven criteria in the next report.
How did you weigh these criteria?
The indicators for this year’s Index were weighted as follows: Governance and Disclosure (35%); Domestic Investment Mandate (25%); Size of Fund (30%); Diversity of Sources of Funding (10%). We put a particular emphasis on the governance issue because the more the fund is transparent in its use of money and investment, the more it will be able to invest efficiently and the bigger its impact. The second criterion is the existence of a domestic mandate for the fund. Its statutes must require the fund to finance and develop projects in the country. The third criterion is the nominal size of the assets under management relative to the size of the national economy. The last criterion is the type and diversity of funding sources. Eight of the 20 funds studied have only one source of funding – mainly oil revenues. But it is always better to have more than a single source of funding in order to reduce the fund’s vulnerability to international commodity price shocks.
The three criteria that were left out are hard to assess because a lot of the information isn’t publicly accessible. We hope we can engage more closely with the funds on these issues in the future.
Are the funds’ management teams responsive to this type of in-depth investigation?
Many of them are actually very responsive. Under the aegis of the AfroChampions Initiative, we have been been able to launch the African Sovereign Wealth Funds Alliance, and many of the funds are members. The goal is to encourage collaboration among the funds for greater impact. We have had good progress with the funds of Nigeria, Ghana, Rwanda, Senegal, Angola and Morocco, to name a few. In other countries, such as Libya, Algeria, Equatorial Guinea and Mauritania, it is still difficult to get access to information about investment activities and financial data on return on assets.
When investing in their economies, should the SWFs partner with other financial institutions or should they invest in their own projects?
We think we need a combination of both approaches. The best way is to partner with other players in order to share the risks but also to leverage new opportunities. Wealth funds should essentially play the role of “derisking” strategic national projects. In this way, they can provide guarantees that projects will actually happen. They thereby incentivise other investors to jump onboard. Furthermore, most of the funds are too small to have their own projects, but they can play a decisive role in catalysing a bigger influx of private capital.
What is the role model for African SWFs?
In terms of the kind of developmental role they are expected to play in Africa, there are not yet many success stories. Historically, SWFs have been a by-product of their countries’ economic success, not the primary driver of that success. In Africa, where most countries are underdeveloped, SWFs are expected to be engines of growth, a role that goes beyond anything that has been done internationally. Of course, we can see the Norwegian fund as a role model for transparency and accountability. We can refer to Singapore’s Temasek as a very effective fund in terms of impact. But the challenge the African Funds are expected to meet is much bigger. That is the reason why good governance, competent management and innovative, efficient investments are a must for African funds.
Are there good examples of African funds oriented to domestic needs?
The Nigerian Sovereign Investment Authority is a good example of how to approach domestic investments even if the fund is still too small for the country’s economy. Likewise, Ghana, which decoupled the Ghana Infrastructure Investment Fund from the country’s petroleum funds in order to focus exclusively on local infrastructure investments. Senegal’s Fonsis offers also an interesting model because its sources of funding for national projects are diversified even though the Fund is not financed by any major natural resource. Angola’s fund until it recently ran into accountability problems was a model in terms of both domestic and pan-African investments. Most of the African SWFs we studied have great potential. But to make the impact expected of them, they need to have more innovative approaches to investment partnerships with the private sector and other sovereign funds. They should be more transparent and accountable.