Thursday, April 09, 2015

Sovereign Funds---to have or have not

Norway has one, Chile has one, Qatar has one. Sovereign wealth funds (SWF)seem to be the new must-have accessory for African governments—especially those with freshly discovered oil and gas reserves. In the past three years Angola, Ghana and Nigeria have all set up funds. A string of other countries including Kenya, Liberia, Mozambique and Tanzania are planning to follow suit. Generally, the goal is to put aside and invest surplus revenues, a bit like a pension fund, so they can be used when finite resources such as oil and gas run out. SWFs also act as fiscal stabilisation mechanisms, giving governments access to liquid assets they can draw on in times of need—crucial for resource-dependent countries vulnerable to commodity price shocks. They can also channel investment into specific projects like infrastructure development. A well-managed SWF boosts credit ratings and lowers borrowing costs. It also raises a country’s profile: where there is money to invest, bankers and financial publications will queue up to know more.

But can countries like Angola and Nigeria, with high child mortality rates, low life expectancy and entrenched poverty, justify holding oil revenues out of their state budgets to put them into separate funds for a rainy day?
“Our government tells us this fund is about saving for a future generation,” said Elias Isaac, director of the Angola office of Open Society Initiative for Southern Africa. “But how can you even think about that when such a large portion of the current generation is living in poverty without access to basic services?”

What are the guarantees that SWFs will be insulated from the endemic corruption found in resource-rich African countries? Without full transparency and oversight, he warns, funds set up to benefit a country can turn into vehicles for patronage, corruption and squandered wealth. The Libyan Investment Authority (LIA), set up in 2006 by the country’s former dictator, Muammar Gaddafi, and run by his inner circle including his sons, is often cited as an example of how a mismanaged SWF can do more harm than good. Full details of what went on at the fund have never been disclosed. (Accounting firm Deloitte valued the LIA assets at $66 billion, according to an April 2014 Bloomberg news article.) However, accounts published since Mr Gaddafi’s death have reported a costly mix of corruption and incompetence by fund officials as well as external managers hired to invest its assets.

Angola’s fund was launched in 2012 and claiming assets of $5 billion, it is sub-Saharan Africa’s second largest after Botswana’s Pula Fund. From day one, the inclusion on the board of José Filomeno de Sousa dos Santos, the eldest son of Angola’s president of 35 years, has overshadowed the Fundo Soberano de Angola (FSDEA). Angolan opposition parties are not only displeased with the involvement of Mr dos Santos, who is now chairman, and his close business associates, but also with the lack of public consultation that preceded the FSDEA’s formation. “Members of Parliament were not given an opportunity to discuss the political scope of the fund or view its legal framework,” lamented Alcides Sakala, a spokesman for Angola’s largest opposition party, the National Union for the Total Independence of Angola. “The result is a lack of transparency in the management of public affairs,” he added. “While there is no separation of powers these abuses of power will continue, encouraging corruption, embezzlement of public funds, and money laundering.”

The most pressing issue for all African funds is the plummeting price of oil. After years of surplus, Angola is staring at a deficit of as much as 14% of GDP for 2015 due to the collapse in the price of crude, the country’s main source of revenue. In January the government in Luanda announced a public hiring freeze and other austerity measures. It has ignored calls from the IMF to include a stabilisation tool within the FSDEA. So, while Angola has a hotel school that promises to create jobs in the long-term, for now it must borrow on the global markets at elevated prices to control its deficit.

Does it make sense to borrow money at a higher cost than the return on investment? Or is it wiser to put cash aside for future generations while slashing public spending for those in the present?


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