Can SWFs Improve African Governance?

Ashby Monk

I just came across a provocative paper by Patrick J. Keenan and Christiana Ochoa entitled, “The Human Rights Potential of Sovereign Wealth Funds.” The paper is, in large part, a critique of World Bank policy. Specifically, it focuses on Zoellick’s plan to funnel 1 percent of global SWF assets into Africa through the International Finance Corporation and the Sovereign Funds Initiative.

In my view, the Sovereign Funds Initiative has merit. For starters, it will seek to generate 15 percent net internal rate of return, which means that profit seeking SWFs will be very interested (especially since African investments offer portfolio investors important diversification, as returns are typically uncorrelated with global returns). In fact, average internal rate of return on IFC’s investments over the last 20 years has exceeded 20 percent, so the above may be a conservative estimate. Moreover, the over-arching goal of the Initiative is to connect long-term commercial capital from state-owned investors with the substantial investment needs of private companies in developing countries. This is something I can get behind.

Still, Keenan and Ochoa have some concerns:

“Zoellick’s proposal and the nascent Sovereign Funds Initiative have the potential to provide real benefits to poor people in Africa if structured appropriately, but must first resolve an important and difficult problem: additional wealth can reduce welfare…African states have received influxes of wealth many times before, but this wealth has not produced meaningful economic development or improved the lives of ordinary people.”

In short, these authors worry that “unconditional” investments—like those made by Chinese entities in Africa—will destroy local welfare even if it results in some wealth creation. So, they want the Bank to set some conditions on investments made by the IFC.

I am sympathetic to these authors’ position: there is no point investing in an environment that has poor governance. The money will simply be wasted. But I have trouble understanding how the IFC Asset Management Company, which will be the steward for the Sovereign Fund Initiative, is all that different from what these authors are proposing? You simply can’t make a 20% CAGR by investing in poorly governed companies.

Nonetheless, the authors of the paper are calling for a venture capital type arrangement in which the funds are invested strategically, which is a way of saying that the investor takes direct stakes in specific companies and then engages with the companies to improve corporate governance (and profitability). The investment professionals will seek out firms and enterprises that have good governance—or are willing to make some changes to achieve good governance—so as to ensure that the fund generates wealth and welfare. In this sense, the fund will reward the firms that show promise and avoid those that don’t.

So long as the “conditions” don’t become politicized (and remain focused on creating an environment ripe for investment), I tend to agree with the above (who wouldn’t?). I used to be a consultant for a large US pension fund that wanted to expand its investments into emerging markets. In order to help the pension understand certain countries’ suitability for investment, I personally traveled to Asia and Africa to evaluate local governance (corporate and government) standards.  I saw how important receiving investment from this pension fund was to these countries; they desperately wanted to create an investment climate that met this pension fund’s internal requirements (i.e. “conditions”). It was almost a matter of pride. What I found most interesting was to watch the governance ratings of these countries improve year-over-year, as they “shaped up” so as to tap into the pension’s capital.

So, when investors set these types of governance standards and conditions, they do, in my anecdotal experience, have an effect (both on firms and governments). After all, these investors are creating a powerful incentive for change. That said, I still don’t really see how the IFC Asset Management Company is altogether different from what the authors are proposing. I can’t imagine that any commercially driven investor would kick off an African investment program (or any investment program) without some sort of internal policy dictating the “conditions” for investment, be it governance, industry, performance, or anything else. This is especially true for an investor that has had such a positive track record of making returns in developing countries…

Anyway, the paper can be downloaded here.

7 Responses to “Can SWFs Improve African Governance?”


  1. 1 Jason Mosley February 4, 2010 at 10:05 pm

    Ashby, an excellent discussion topic. It raises several questions for me:

    First, without having read Keenan and Ochoa’s paper, I wonder how they have been able to measure the impact of ‘wealth transfers’ on ‘welfare’ in African economies. My guess would be that it is measured from a macro perspective, using the familiar GDP/capita or other standard benchmarks for ‘welfare’. I wonder how useful an exercise this is, given the suspect quality of most African countries’ statistical data.

    In any case, the overall ‘can SWF investment stimulate economic activity that has benefits for African populations?’ question is still interesting and worthwhile. This brings me to my second question, which whether an important line is being blurred between investing in African companies and African countries. You’ve pointed out that the countries you interviewed were keen for investment and were willing to improve governance in order to attract investors. Doesn’t this differ from the sense of improving ‘governance’ when applied to companies? Moreover, while every country has a government and a central bank, with regulatory agencies and economic strategies (although clearly of varying capacities), the question of companies is more complicated. To what extent are there ‘African’ companies capable of receiving SWF investment — channeled by the IFC or otherwise?

    When I look at the African landscape of investment opportunities, I suppose I divide them into three piles, which would have different degrees of attractiveness for a big channeled investment by SWFs via the IFC. The first pile is plain old sovereign debt, giving countries finance to pursue whatever projects it is that they wanted to pursue. The second pile would be large, particularly regional, project finance — mainly infrastructure related, often set up as public-private partnerships, and potentially involving state-owned enterprises. The last pile would be corporate debt/equity, which I suppose would mostly be public for these purposes, if governance is an interest — which is a fairly small pile.

    If this is making sense, then my feeling is that there’s currently not much potential exposure for SWFs to the third category, and it will mainly be the second and first types of opportunities. From Zoellick’s point of view, this is fine, since the Bank wants to encourage such infrastrutural improvements. From my point of view, this is also fine (for the short term) since welfare is unlikely to improve significantly or sustainably without first seeing improvements in governance and accountability by states — and as you point out, states tend to be motivated to improve if investment is on the table. Granted, some ‘improvements’ are token, and not all countries have the potential to benefit equally from such investment. Niger’s potential seems a lot less favourable than Mozambique’s for example. And whatever the improvements in infrastructure, Angola remains highly corrupt, unaccountable and (outside the oil sector) unpredictable.

    So, I find myself asking how long it will be before SWFs or other investors can seriously consider the third pile of opportunities? And perhaps, whether there is anything that their participation now could do to facilitate it happening sooner?

  2. 2 Ashby Monk February 5, 2010 at 6:23 pm

    Fascinating comment, Jason. I think you’re right about the “third pile”. It’s the hardest one to find…

  3. 3 Victoria Barbary February 8, 2010 at 8:18 am

    I think the “three piles” is a good analogy. We published a report on developing African cities just before Christmas, and it struck me on reading you comment Jason, that while the first pile might be fine for Zoellick, I don’t think it would have as much impact in Africa as pile 2. Many African governments have thus far struggled to channel official development assistance, aid etc to the people who need it.

    To make a noticeable impact, African governments have started to harness expertise and ensure that improvements are made to infrastructure, while maintaining some influence over projects, by entering PPP-type arrangements with international companies and/or investors. In many cases there simply isn’t the capability or capacity for governments to do these alone. Given SWFs’ long-term investment horizons, they seem ideally placed to take advantage of returns from infrastructure projects.

    On pile 3, I think we might be surprised on the extent that SWFs are already investing in Africa. For Monitor Group’s new SWF update (Q3 09) we were given full access to Istithmar’s books, which might not be the best guide, but showed that they had greater-than-expected exposure to sub-Saharan African real estate and tourism assets, but these hadn’t been publicly reported. Whether this is a peculiarity of Istithmar, I don’t know, but if their investments are anything to go by, and given the drive for SWFs to diversify their portfolios along all axes, Africa currently seems like a good bet and they might be already there.

    • 4 Jason Mosley February 9, 2010 at 2:34 pm

      Thanks, Victoria — I’m going to have to have a closer read of your report, which I’ve only had a chance to skim so far.

      It’s interesting that you found Istithmar targeting the same kinds of investments as other Gulf players — logistics and real estate/tourism deals dominate FDI from the GCC into Africa, as far as I’m aware. It makes me think that maybe the third pile needs to be split into ‘portfolio’ flows, providing exposure to African equities, on one hand and (more typical) FDI involving green fields investment in tourism assets or other direct investment. Food for thought.


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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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