SOCIALIZING THE SOVEREIGN WEALTH FUND

LESSONS LEARNED FROM OTHER COUNTRIES

MOT CONFERENCE 2021

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Jeff DelmonSenior Infrastructure Finance Specialist,

Infrastructure Finance, PPP and Guarantees Practice

Defining the Strategic Investment Fund

Crowd in private capital to

sectors where investment is

limited

Established as pools of assets

through a # of legal structures

Provide long-term patient

capital

Seek to reconcile market returns

while ensuring economic returns

and additionality

Operate as expert

investors

Sponsored by and fully/partly

capitalized by govt(s) or govt-

owned entities

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04 05 06

1. PIF (KSA)2. Temasek 3. Oman SGRA4. Brunei 5. Khazanah

6. SOFAZ

7. Mubadala

8. PalestineInvestmentFund

9. Vietnam SCIC

10. Mumtalakat Holding Company11. Oman Investment Fund12. Investment Corp (Dubai)13. Fund for Reconst. and

Dev. of Uzbekistan

14. Emirates Investment Authority

15. Angola16. JSC Samruk

-Kazyna17. FONADIN

18. Partnership Fund (Georgia)19. National Development

Fund of Iran20. Ithmar Capital21. RDIF (Russia)

22. Fonds Gabonais d’Investissements Stratégiques

23. NSIA (National Infrastructure Fund)

24. FONSIS25. Agaciro Development

Fund

26 Ghana Infrastructure Investment Fund

27. ISIF (Ireland)28. Dussur29. Zimbabwe Sovereign

Wealth Fund30. National Investment

and Infrastructure Fund

31. Silk Road Fund32. NDSF (Malta)

33. Turkiye Wealth Fund

1. Misr Fund

1. Mauritius Investment Authority

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Tota

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Total SIFs

Do

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34 SIFs Today

From Niche to Mainstream: Since 2000, ~30 New SIFs Have Been Formed

Policy purpose: Economic development through SMEs/infrastructure; Attract co-investment; Diversify from oil & gas reliance etc.

From Niche to Mainstream: More SIFs are underway

August 2019: EU considers plans for a €100bn sovereign wealth fund, supported by member states, to finance European "industrial champions" and compete with multinational companies.

May 2019: South Africa’s ruling African National Congress proposed an SWF in its manifesto for the May 2019 election, which, if set up, is expected to invest in local firms or infrastructure.

February 2019: Kenya’s government released a draft law to establish a new sovereign wealth fund that would channel petroleum and mineral revenues to savings, budget stabilization and domestic spending and investment.

Morocco

Uzbekistan

….

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Strategic Investment Funds: Categorization

Source:

Clark and Monk

2015.

.

Strategic Investment Funds: Bring implicit commercial advantages to the table

Local knowledge to manage complexities

Reduce the cost of doing business

Unlock pipeline of strategic assets

Mitigate regulatory risk

Strategic Investment Funds: Managing Double Bottom Line is not easy

Tension between commercial and development objectives can be a source of governance challenge, and lead to risks like the politicization of investments or distorting markets by crowding out private capital.

SIF Double Bottom Line

Ireland Strategic Investment Fund 2014 • Invest on a commercial basis AND

• To support economic activity and employment in Ireland

Nigeria Infrastructure Fund (NIF – NSIA) 2011 • Invest in infrastructure to grow & diversify economy; attract and support foreign

investment AND

• Achieve positive financial return

• Allow 10% of investment in any FY on social infrastructure projects

National Infrastructure Investment Fund (NIIF)

India 2016

• No specific DBL. Commercial focus while investing in infrastructure and related

sectors.

• However, structure is set up to attract private capital

Despite commonalities, SIFs are heterogeneous in many respects

Source of funding: fiscal surplus, privatization proceeds, pension fund surplus, govt borrowing, receipts from commodity exports,

IFI investments etc.

Ownership: Sovereign or Supra Sovereign

Management: Managed by govt dept/ independent govt entity/ private fund manager/ fund manager jointly owned by private and

public sponsors

Policy goals: Economic development through SMEs/infrastructure; Facilitate SOE reforms and strengthen the management of

SOE assets; Attract co-investment; Diversify away from oil & gas reliance; Support technology transfer to home country

Invested sectors: Often infrastructure, but also Real estate, Tourism, Agribusiness, Finl Services etc.

Return expectations: Market; Sometimes Below market

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SIF NIIF, 2015[India]

Ireland Strategic Investment Fund, 2014 [Ireland]

NSIA-NIF, 2011 [Nigeria]

FONSIS, 2012[Senegal]

Ownership 49% GoI (MoF)51% Commercial Investors

100% Minister of Finance 100% owned by Federal (46%), State (36%), Local Govts (18%)

100% owned by Govt of Senegal

Legal Framework Formed under SEBI’s private equity regulatory framework (AIF regulations)

Created by ad hoc law, under NTMA (Amendment) Act 2014

Created by ad hoc parliamentary law: NSIA Act 2011

Created by ad hoc law of Senegal National Assembly: Law 2012-34,

Manager Separate legal entity (NIIF Ltd), set up under commercial law and owned 49% by GoI

Managed by state asset-liability management agency, NTMA.

No legal separation between fund and manager

No legal separation between fund and manager

Board 8 members- 2 govt; 4 other Investors; NIIF Ltd CEO; 1 independent

9 members – 3 govt/ 6 indepappointed by MoF

9 members – 3 exec/ 6 indep(from private sector)

5 members – CEO/ 4 govt reps

Investment Committee

Master Fund: 4 members -NIIF Ltd CEO; COO, ED Investments; 1 Independent

5 members – 2 non-ex officio Board members + 3 independent; Investments above Eur 150mn approved by Board

Board is ultimate approver of investment decisions based on recommendations of NSIA executive committee

Board is de facto Investment Committee and approves investments

Comparison of Key Structural and Organizational Features of Select SIFs

NIIF: Commercial Investors investing alongside Govt of India

NIIF: Innovative legal and governance model to attract private capital

NIIF Master Fund has attracted investments from AustralianSuper, Ontario Teachers Plan, ADIA, Temasek, and four domestic financial institutions – ICICI Bank, HDFC Group, Kotak Mahindra Life Insurance and Axis Bank

NIIF funds (Master Fund, the Fund of Funds and the Strategic Opportunities Fund ) are designed to mobilize commercial capital through a collaborative investment approach

01

Set up under private equity regulation

• NIIF funds are AIF Category II funds under India’s alternative investment funds (AIF) regulations, supervised by SEBI

02

Limited ownership of GoIin the funds

• Govt stake is limited to 49%

• 51% by other foreign and domestic investors

03

Independent management company

• Govt stake is limited to 49%

• 51% by other foreign and domestic investors in Master Fund

04

Co-investment rights

• Investors committing to Master Fund receive 3:1 co-investment rights in the Fund.

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Some Takeaways

• Mandate - SIF must be long term, but mandate and strategy need to be flexible and adaptable. Law should define process

to modify mandate; and should also be publicly disclosed to avoid arbitrary changes to fund mandate.

• DBL mandate - SIFs must be able to maximize policy objective while minimizing risk to commercial orientation (capital,

returns, and the integrity of investments)

• If policy objectives overly prioritized over commercial objectives, funding could go towards politically motivated

projects

• If commercial objectives overly prioritized, risk of crowing out private investors

• Preparation for a SIF

• Preliminary and feasibility studies are important to understand the long-term financing gaps/ barriers

• Rushing the process (e.g. driven by political/electoral considerations) could hamper functionality and sustainability.

• The SIF needs access to significant fund management capacity, independence, and transparency to provide

investors and co-financiers with confidence that the fund will be managed in the best interests of the SIF. Skilled staff,

project selection and autonomy.

Identifying the Trend: Govts coopting investment fund model for devpt purposes

April 2020

Annexes

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Examples of SIFs

Public Capital SIFs

• FONSIS (Senegal) (2011)

• ~$17mn from state budget + commercial credit line and donor funds

• Investments to stimulate economic growth and job creation, Infrastructure, SMEs

• Ireland Strategic Investment Fund (2014)

• $8bn, sourced by share of assets from National Pension Reserve Fund

• Investments to support Irish economy through infrastructure, housing etc.

• Khazanah Nasional (Malaysia) (1993)

• $40bn+, sourced by govt share of privatized national agencies; issues Islamic bonds

• Investments to promote devpt of strategic industries and for long-term economic interests

Mixed Capital SIFs

• Philippines Investment Alliance for Infrastructure (2012)

• $625mn (Philippines Govt Service Insurance System Fund, ADB, Netherlands Algemene Pensioen Groep, MIRA)

• Invests in greenfield and brownfield infrastructure in the Philippines

• Asia Climate Partners (ACP) (2014)

• $450mn (ADB, Robeco, ORIX)

• Invests in RE/ resource efficiency/ environmental projects in emerging Asia

Strategic Investment Funds: Require flexibility to align with national priorities

INA should require periodic review of strategy to ensure alignment with national priorities.

Ireland Strategic Investment Fund

• 2014: ISIF established by NTMA (Amendment) Act,

2014 to invest in sectors of strategic significance to

Irish Economy (Real estate, SMEs, Venture Capital,

Infrastructure etc.).

• 2015. Initial investment strategy published.

• 2017-2018. Review of investment strategy given

rapidly improving economic situation in Ireland.

• February 2019. Revised investment strategy,,

centered on 5 economic priorities: indigenous

industry; regional development; sectors affected by

Brexit; climate change; housing

Strategic Investment Funds: Patient capital of SIFs can be deployed towards

strategic challenges or riskier investments in underdeveloped sectors

Acts as project developer or co-

developer for greenfield projects

Investment horizon can extend to 25-30

years; Invests across capital structure –

senior debt to start up equity

Originate and invest in strategic projects in

under-developed and vital sectors in

Palestine

Green Growth Equity Fund, established by

NIIF and DFID, invests in renewable energy,

clean transport, water treatment, and waste

management.

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SIF Ownership Size Mandate

Asia Climate Partners

2014

[ADB, Robeco, ORIX]

Mixed Capital $450mn • Targets renewable energy/resource efficiency and

environmental sectors in emerging Asia

• Seeks to demonstrate commercial viability of green projects,

while adhering to ESG practices

FONSIS

2012

[Senegal]

Public Capital ~$70mn • Promotes the role of State of Senegal as investor and partner for

private sector to enhance direct investments that accelerate

economic and social devpt to facilitate wealth and job creation for

present and future generations

• Supports the implementation of the 2014 Emerging Senegal Plan

Ireland Strategic

Investment Fund

2014

[Ireland]

Public Capital Euro 8.8bn (capital

committed to Irish

portfolio Euro 4bn)

• Double bottom line mandate to: (i) Invest on a commercial basis

and (ii) in a manner designed to support economic activity and

employment in Ireland

Mandate of a SIF

Strategic Investment Funds: Managing Double Bottom Line is not easy

Tension between commercial and development objectives can be a source of governance challenge, and lead to risks like the politicization of investments or distorting markets by crowding out private capital.

SIF Double Bottom Line Aligning with DBL

Ireland Strategic

Investment Fund 2014

• Invest on a commercial basis

• To support economic activity and

employment in Ireland

• Financial target: > Cost of Irish govt debt

• Plus Additionality (+ Economic benefits); No Displacement;

No Deadweight (Was ISIF intervention necessary?)

Nigeria Infrastructure

Fund (NIF – NSIA) 2011

• Invest in infrastructure to grow & diversify

economy

• Attract and support foreign investment

Achieve positive financial return

• Allow 10% of investment in any FY on social

infrastructure projects

• Long term return benchmark: US CPI + 3%. (Compliance is

necessary condition to investment approval)

• Additionality – Try to finance projects that would not have

happened without NIF.

National Infrastructure

Investment Fund (NIIF)

India 2016

• Commercial focus. No specific DBL

• However, structure is set up to attract

private capital

• Does not formally track and report impact indicators

• Structurally GoI can only be 49% of the fund.

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Preconditions for a SIF

Preliminary Analysis:

• SIF vs. other relevant policy instruments to achieve same objectives? (e.g. policy/reg reform; other institutions)

• Review desired role, mandate, objectives

• Review market and investor landscape

• Are there market failures? Are they transitory or permanent

• Identify sectors for investment

• Estimate financing gaps in SIF target sectors

• Identify preconditions for SIF to operate efficiently in these sectors

• Identify how SIF can crowd in private sector, not crowd out

• Estimate Impact of SIF in sectors including environment, social, governance and economic growth

Feasibility Analysis

• Clarify the fund’s key policy features; refine the mandate

• Outline the design of the SIF’s operational features.

• Identify pipeline of fund and how it will be developed; conduct financial simulations to estimate fund returns

• Outline the most effective governance arrangements

• Articulate Investment policy and strategy

• Identify Human capital requirements

• Articulate the most effective legal framework and structure for the fund