The $3.5 Trillion Question: How to Make Sovereign Wealth Funds Work for Citizens
Looking at SWF governance Some have helped Others have been countries escape the mismanaged, not met “resource curse.” objectives or become slush funds. • Chile • Norway Some in : • Some Persian Gulf states Central Asia (e.g., Russia) • • Several U.S. states • Latin America (e.g., Venezuela) • MENA (e.g., Libya) SE Asia (e.g., Brunei) • • Africa (e.g., Equatorial Guinea) What has made the difference are the rules, institutions and broad-based consensus.
What is a natural resource fund (NRF)?
What did we do? Identified 54 NRFs ($3.5 trillion in assets as of end-2013 ) Surveyed 22 NRFs in 18 national and subnational jurisdictions, based on institutional structure, investments, transparency, accountability and fiscal rules
What did we do? Each NRF profile includes a rating of good governance standards.
What are our findings? $3.5 trillion in AUM Huge proliferation of funds; a “must - have” for oil and mineral producers and prospective producers Some rules more common than others: more focus on management structure and operational rules than “deep” transparency or external oversight Funds becoming more transparent; yet only about half of the funds studied release audits or publish specific investments (most do not) NRFs adopting more rules, but major problems with compliance
Step 1: Set clear fund objectives Saving for future generations Stabilization What matters: clarity, consistent operational Sterilizing capital inflows rules, adapted to the needs of the economy Earmarking for specific expenditures Ring-fencing resource revenues
Step 2: Establish fiscal rules Deposit Rules National Resource Funds Withdrawal Rules Investment Rules Domestic Expenditure Foreign investment
Step 2: Establish fiscal rules Azerbaijan Alberta Chile Even when fiscal rules Lack of a Lack of a deposit withdrawal rule rule are established by law, Discretionary Between 1987 room for manipulation withdrawals and 2013 only remains (e.g., Ghana, two deposits Government Trinidad and Tobago, made of less spends lavishly Timor-Leste) . that $4 billion when oil prices combined. are high. Chile has independent Change in 2013 Leading to cuts committees to make when oil prices forecasts and fiscal have declined assessments.
Step 3: Establish investment rules Need for explicit rules that limit risk Allocation between cash, fixed income investments, equities and alternative assets Prohibition of certain high-risk financial instruments or volatile currencies Limit use of resource revenues as collateral? Domestic asset allocation by the fund or spending only through the budget? No domestic investment: ADIA, Botswana, Chile, Kazakhstan, Norway Bypass the budget: Angola, Azerbaijan, Iran, Russia
Step 4: Clarify good institutional structure Norwegian illustration
Step 5: Require extensive disclosure and audit Easy access to comprehensible legislation or quarterly reports that include: governance rules size of funds returns on investments specific assets investment strategy names of fund managers Public disclosure of internal and external audits
Step 6: Establish strong independent oversight Independent oversight promotes compliance with the rules. Managers of NRFs should be Examples: accountable to: External independent the legislature auditor in Alaska (USA) and Chile comptroller, auditor-general or other independent formal Judiciary in Timor-Leste supervisory body Supervisory Council in the judiciary Norway civil society and the press even the IMF or other policy institutes
How do Latin American countries fare? Chile Colombia Mexico Venezuela More funds coming?
Chilean system
Trinidad and Tobago system
Uses and future issues Training, capacity building and technical assistance with our government, parliamentarian and CSO partners (e.g., Full report, fund profiles, Canada, Ghana, policy briefs and Libya, Niger, Timor- interactive map: Building international Leste, Uganda) consensus on what constitutes good SWF www.resourcegovernance.org/n governance rf Strengthening SWF governance
Big Issues Can funds function well in poor institutional environments? And are they necessary in strong institutional environments? Should oil revenues be treated differently from non-oil revenues? If so, how much oil revenue should Mexico save vs. spend? If not, should Mexico save general revenues? Should the fund be allowed to invest in domestic assets? Rules vs. discretion: How much flexibility should fund managers have to buy and sell financial assets? Is building national consensus around the rules an essential component of good fund governance? How can countries ensure compliance with the rules?
Thank you. The full NRGI-CCSI report, briefs and NRF profiles are available at www.resourcegovernance.org/nrf
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