KEVIN TUTANI: Guidelines for a successful sovereign wealth fund

On August 16 various international media reported on the lucrative profits Norway were earned through its sovereign wealth fund (SWF). The Government Pension Fund Global (or Oil Fund) recorded a profit of $143bn in the first half of 2023 alone. Its total assets under management amount to more than $1.40-trillion, making it the largest SWF in the world.

Under the management of the Norwegian central bank, the fund invests part of the nation’s oil revenues and budget surplus balances. Its earnings are then used to balance budget deficits in times of economic crisis to stimulate economic growth, while having the ultimate objective of safeguarding the country’s wealth. The thinking is that future generations should also benefit, long after the oil resources are depleted.

The fund owns about 1.5% of all listed stocks worldwide and also invests in bonds, unlisted real estate and renewable energy projects, among other sectors. The success of the Norwegian Oil Fund, and other SWFs has led a number of governments to establish funds. According to the Sovereign Wealth Fund Institute, there are about 30 SWFs on the African continent. SA doesn’t have one yet, though former finance minister Tito Mboweni proposed in 2020 that an SA SWF be established with initial capital of R30bn ($2bn at the time).

Establishing an SWF is a good idea in theory, but not all have been successful or make economic sense. Therefore it is vital to dissect the main considerations to evaluate when establishing an SWF, to increase the chances of success.  

Sources of funds may be taxes on strategic commodities, budget surpluses, privatisation of state assets and reinvested SWF earnings. An SWF can be seen as the equivalent of a country saving and increasing its preparedness for unfortunate and unpredictable economic circumstances. 

Most of the SWF funding options are available to SA. Mboweni suggested that an SA fund could be funded through mineral right royalties, the sale of noncore state assets and budget surpluses as and when these occur. Partial privatisation of state assets can provide significant funds which could be assigned to the SWF. Establishing an SWF would by necessity initiate an audit  of the state balance sheet, including idle properties and land, and underutilised corporations, which could be worth billions in dollar and rand terms. SWFs therefore assist in streamlining the assignment of government resources. Their existence provides a clear channel for identifying and assigning surplus funds to a consolidated and profitable hub.  

Each SWF has to be clear on the preferred areas to direct investments. If a government prefers more activity in capital markets, then stocks, foreign bonds and treasury bills, or high-yielding local and foreign private debt instruments provide a viable alternative. For a government with less interest in financial products, infrastructure, agriculture, mining or renewable energy may provide suitable options.

Mitigate the risk 

To balance risks and insulate a country from global shocks, SWFs can be used to invest in domestic and foreign assets and enterprises. In the case of Norway, The Global Pension Fund is invested entirely outside the country to offset challenges that may occur in the local economy. In the case of SA, investments could be directed to Sadc, Europe, the US, or the Eurasian states. Successful SA businesses operating outside the country, and exporting entities, may also be a good destination for deploying local SWF capital. That has the potential to ignite increased forex repatriation while promoting a culture of entrepreneurship. 

Before the fund yields positive returns the question of when withdrawals can be made, and how much, would need to be settled. SA could learn from other SWFs to assist in making a suitable decision. In Norway, no withdrawals were made for two decades. After the first deposit in 1996, the first withdrawal was only made in 2016. This ensured the fund’s growth was compounded as earned profits were reinvested together with the principal amount.

The country maintains what it terms the “3% Rule”: a maximum of 3% of the fund’s value can be used to supplement the government’s annual budgetary resources. This is based on an assumption that the SWF as a whole will earn more than 3% annually. Injecting more than 3% of the SWF into the economy also carries the risk of overheating (inflation).

However, during periods of crisis the Norwegian government is permitted to exceed the withdrawal limit. Norwegians have accepted the fund is primarily intended to serve future generations, when the country’s oil resources are depleted. The organisational and strategic ability of Norway provides a worthy plan for SA to emulate. 

Administration of the fund can be assigned to the Treasury or central bank, depending on the availability of resources and expertise. An independent board of advisers may still be needed to provide specialised skills, reduce risk and maximise returns. External asset managers could be an alternative worth exploring.  

While an SA SWF is likely to start off as a minnow, incapable of offering much value on a national scale, competent management and good governance have the potential to grow it into a sizeable and successful investment vehicle. We could take a leaf from the books of Nigeria (Nigeria Sovereign Investment Authority) and Botswana (Pula Fund), which offer examples of how to manage an African SWF.

• Tutani is a political economy analyst.