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Posted on Tuesday, 16 April 2013 18:44

Africa's SWF: Investing for tomorrow

At best, Africa can invest at home rather than elsewhere. At worst, these funds could be squandered on opaque schemes that do little but reroute wealth to well-connected elites/Photo©GettyImagesThe governments of countries that produce natural resources are now trying to find a solution to the booms and busts of the commodity cycle. Over the past few years a handful of countries have set up new funds to invest assets and earn revenue for future generations.


In the past 12 months, Angola, Nigeria and Ghana launched new investment vehicles for their surplus oil money. Mozambique, Sierra Leone and Tanzania, buoyed by new hydrocarbon discoveries, want to join the club.

The markets have responded enthusiastically. Asset managers are queuing up to get involved in these funds, which are helping place Africa firmly on the global investment map.

This is money for investment, it's not just money sitting in an account that can then be used for anything else

The global financial crisis exposed the vulnerability of resource-dependent economies, encouraging African governments to think in longer-term cycles.

Critical to success is the manner in which the funds are spent.

At best, Africa can invest at home rather than elsewhere. At worst, these funds could be squandered on opaque schemes that do little but reroute wealth to well-connected elites.

World Bank Africa chief economist Shanta Devarajan warns: "In some cases, a fund was used to plug a deficit in an expedient manner. In another case, the demands by state governors to spend out of the fund was so intense that the federal government could not protect it."


Sovereign wealth funds (SWFs) are not new to the continent. Botswana's Pula Fund dates back to 1994, Algeria formed its Revenue Regulation Fund in 2000 and in Tripoli the government created the Libyan Investment Authority (LIA) in 2006.

Chad, Mauritania, Gabon, Namibia and São Tomé e Príncipe also have SWFs, though information on their assets and investment targets is harder to come by.

So, if you are an African finance minister with a windfall to invest, what do you choose?

There are three basic types of SWF: stabilisation funds with money to create buffers against commodity price shocks, inflation and currency volatility; development funds that put money aside to finance social and infrastructure programmes; and savings funds that invest in long-term and high-return assets.


The International Monetary Fund favours the stabilisation model. It has repeatedly lent money to countries in liquidity crises due to commodity price shocks, including $1.4bn to Angola in 2009.

The African Development Bank approves of development funds and the opportunities they present for infrastructure spending that helps spur regional growth.

At the African Union (AU) summit in Addis Ababa in January, AU Commission deputy chairperson Erastus Mwencha noted the emergence of African SWFs and urged governments to invest the money back into the continent.

He added that SWFs could be a good way to help the AU find funding for peacekeeping, infrastructure and education. "We need to bring them back to Africa," Mwencha said of the funds, which are largely invested in developed markets.

Ghana is a typical example. The government held substantial public debate about how to manage the new-found wealth, resulting in the 2011 Petroleum Revenue Management Act and the formation of two SWF-style entities, the Petroleum Holding Fund and the Ghana Petroleum Funds. The money is strictly to be invested outside of the country.

"The law doesn't allow us to invest in Ghana at all," says Abena Amoah, founder of financial services firm Baobab Advisors and a member of the investment committee of the two funds, which already hold more than $100m.

"Like a lot of SWFs, [it] feels like it needs to diversify its exposure."

Unlike nearly all the older African SWFs, the LIA – through its dedicated African subsidiary,the Libyan African Investment Portfolio – has invested in telecom companies in Zambia, Uganda, Côte d'Ivoire and Niger, and shares in hotels and oil and construction companies.


Ashby Monk, executive director of the Global Projects Center at Stanford University, says well-structured funds are a good way to leverage natural resources to attract investment.

"Sovereign wealth funds look like easy solutions," he says, "but it's like surgery. On the surface it sounds really good that you can, for example, just cut out a problem. But for surgery to be successful there is so much else that needs to happen in terms of preparation and post-op and all the tools and expertise that you need to carry out that surgery."

Poorly made investments, weak asset management and exposure to volatile commodities are clear risks.

The World Bank's Devarajan explains: "The lesson is that those designing funds in countries with weak governance and institutions should take these features into account in the design, lest the same weak institutions that were the rationale for the fund end up undermining the fund."

Similarly, there are some who believe African governments should be spending what money they have now to tackle poverty and social needs.

Elias Isaac, director of the Angola office of Open Society Initiative for Southern Africa, says: "Our government tells us this fund is about saving for a future generation, but how can you even think about that when more than 60% of the current generation is living in poverty?"

Given that many resource-rich African countries have governments that are at best opaque, there are also concerns about how accurately and safely revenue will be managed.

Libya's funds, while acknowledged as Africa's and some of the world's most success- ful funds in terms of asset accumulation, are highly controversial because of their formation under the Muammar Gaddafi regime.

Nigeria's Excess Crude Account (ECA), a precursor to the current SWF, was plagued by billion-dollar leakages.

Opposition parties accused it of topping up the election campaigns and personal bank accounts of ruling party members.

The Nigerian government has taken pains to clean up its fund management and in August 2012 it announced the board for the new Nigeria Sovereign Investment Authority.

It will start to manage $1bn of federal money under the Fiscal Stabilisation Fund, the Nigeria Infrastructure Fund and the Future Generations Fund, and intends to expand the funds fivefold to $5bn within three years.

"This is money for investment, it's not just money sitting in an account that can then be used for anything else," says Ibukun Awosika, a business-woman on the board of the SWF. She says that while the ECA was a "bit of a loose arrangement", the SWF has been set up by law and has strict instructions from finance minister Ngozi Okonjo-Iweala to make money for Nigeria.

The newest fund, the Sovereign Wealth Fund of Angola, has similarly pledged transparency and adherence to SWF codes of conduct like the Santiago Principles.

Civil society activists are unhappy the fund will be chaired by President José Eduardo dos Santos' secretary for economic affairs, Armando Manuel.

One of Dos Santos's sons, José Filomeno, will also be on the three-man board. Speaking at the launch, José Filomeno defended his position and denied the claims of nepotism.

He said: "I obviously hear these comments. I understand where they come from. But for most of my professional life I've been involved in business, and it's really been doing very similar things to what we are doing in the SWF, so I see this more as a progression than a consequence of being a son of a president."

Transparency concerns aside, it is clear that Africa's SWFs, new and old, are stimulating interest around the world. If managed properly, these funds may help resource-rich countries sustain their wealth for future generations●

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