Properly managed, Sovereign Wealth Funds (SWFs) are a powerful tool to accelerate development and create prosperity.
Asian sovereign wealth funds (SWFs) have played an important role as engines of development and economic growth in the past 50 years. In 1965, Singapore’s GDP per capita was just $500, on par with that of Mexico and South Africa. In 2017, this figure had increased more than 100-fold, reaching $56,000. One of the important factors contributing to the Singapore growth story, is the savvy use of limited government resources, namely through the creation of efficient investment vehicles geared towards the nation’s industrial policy and economic development objectives.
As Africa’s own SWF journey evolves, I believe the examples set by Asian countries such as Singapore and Malaysia should serve as an inspiration for reform. Compared to the rest of the world, Africa’s SWFs are fairly young. Collectively, Africa’s SWFs have assets under management (AUM) exceeding $160bn. Apart from Botswana’s Pula Fund, founded in 1994, all of them were created in the 21st century. But they are growing in popularity. Their numbers are estimated to reach 20 in the next three years, up from 12 today. The latest addition is Egypt, with a $11bn SWF.
Their mandate is clear: to safeguard today’s wealth for future generations. But their relevance has been questioned. As Konfidants notes about its inaugural African Sovereign Wealth Fund Index, “what future generations really deserve to inherit is not a few billions of dollars’ worth of foreign assets held in their trust per se”. In order to create value, SWFs have to invest in relevant, transformative projects. Yet out of the 12 funds currently in operation, only seven have a clear mandate to do so: Nigeria, Rwanda, Ghana, Angola, Senegal, Gabon and Morocco.
Let’s look back at Singapore’s first steps into the world of SWFs: Following independence in 1965, the country faced an unemployment rate of about 10%, and a severe lack of capital and infrastructure. In order to stimulate industrialisation, the government took participative stakes with foreign investors. It also founded new companies in strategic sectors, such as trade, tourism, banking, defence, and transportation.
As the scale and scope of state-led investments grew, Temasek was founded in 1974 to better manage the government’s investments. Its original S$354m portfolio included 35 inherited government-linked companies (GLCs) such as Singapore Airlines and the Development Bank of Singapore.
Its initial goal was to free the Ministry of Finance from this task, allowing it to focus on its core policy-making activities. But by the turn of the 1970s, Temasek took on a more commercial and entrepreneurial role as an engine of economic growth for Singapore.
It started providing the companies in its portfolio with more capital, and gave them more management independence on a results-based system of reward. Between 1974 and 1983, Temasek’s investment portfolio value increased to S$2.9bn, comprising 58 firms with over 490 subsidiaries.
This focus on strategic investments and promotion of GLCs paid off: 25 years after inception, Temasek already had a portfolio of S$100bn, almost 300 times its original value. In comparison, Botswana’s Pula Fund, the oldest SWF in Africa, funded with revenues from diamond and mineral exports, does not have a clear investment objective, and has grown at a much slower pace: its assets went from about $2.4bn in 1999 (the earliest measure available) to about $5.7bn today.
Investment in local projects and companies brought Temasek to where it is today, with a domestic and global portfolio worth S$308bn (about US$225bn). But more importantly, it helped the country become more investable. For example, through Singapore Airlines (ranked today as the world’s best), Singapore was able to boost its national branding and enhance tourism, especially amongst business travellers.
Stakes in the Port of Singapore Authority (PSA) and Intraco (a national trading company) allowed Singapore, as an export-oriented economy, to strengthen its competitive advantage as a trade, maritime, and transshipment hub. PSA today participates in around 40 terminals globally. Temasek’s involvement with Singapore Telecommunications (Singtel) led to its successful IPO in 1993, when 1.69 billion shares were sold for S$4.2bn. This huge IPO catalysed the capital markets development of Singapore. The Singtel IPO also turned into an opportunity for Singaporeans to benefit from the country’s economic growth when the government announced a 45% discount on shares for citizens.
Singapore is not the only Asian country where a SWF promoted a corporate success story: in Malaysia, Khazanah’s 10-year GLC Transformation Programme led to the tripling of market capitalisation for the largest 20 companies, and 12.6% growth in shareholder returns. Under the programme, companies in key sectors significantly improved their performance. In agribusiness, for example, Sime Darby increased profitability and expanded through new businesses or activities. African governments traditionally have majority stakes in national assets in the mining, telecommunications, oil & gas and infrastructure sectors, which puts them in the best position to create future economic champions.
Governance best practices
Asia is proof that you do not need natural resources to create a successful SWF: those of China, Singapore, Hong Kong, South Korea and Malaysia are some of the 20 largest of these funds in the world, and none of them are funded by commodities. In fact, according to the Peterson Institute for International Economics (PIIE), about 20% of all countries with SWFs fund them from sources other than earnings from the export of natural resources or from foreign exchange reserves. Whether or not commodities are part of the mix, pooling together state assets around a consolidated holding vehicle allows for more efficient capital raising and a stronger balance sheet base. Because of its high degree of investment diversity and liquidity, and its implicit ownership by the Singapore government, Temasek was able to enjoy a AAA rating for its maiden S$5bn bond issuance.
This structure also brings a number of fiscal benefits: as a private company, Temasek pays taxes, and its sole shareholder is the Ministry of Finance, meaning that returns can be used as a fiscal cushion when Singapore faces budgetary deficits. But what makes the biggest difference in how the funds work and are perceived is their relative independence from the government. The increasing prominence of SWFs in Asia in the past 20 years led to concerns about their role and impact, and fears that their activities could be driven by political agendas. Singapore’s arm-length and meritocracy-based approach in appointing external industry experts instead of government officials to grow portfolio companies into internationally competitive firms proved efficient, and led to Temasek’s outward opening. Today only 27% of the fund’s portfolio is made of Singaporean investments.
Some African SWFs are already following this lead. The Nigeria Sovereign Investment Authority (NSIA), for example, has been hailed for its governance structure and transparency over financial performance. It is the top-ranked African country in the Linaburg-Maduell transparency index, and was recently hailed in the International Forum of SWFs’ annual review, as a leading example of an African SWF with an “innovative SWF structure” that ring-fences its operations and capital in accordance to different policy objectives (i.e. savings, stabilisation, and development). Being new to the global SWF scene has its challenges, and of course it will take time for each African country to find what works and what doesn’t. But Africa can draw from Asia’s extensive experience in this field, so that it too can leverage SWFs and create durable growth on the continent.