Archive for April, 2010

The Bad Luck of the Irish

Ashby Monk

I have to say, I’ve been captivated by what’s going on in Ireland with respect to the National Pension Reserve Fund. The Irish have been facing a very tough dilemma: Do they tap the NPRF or do they face economic dislocation and potentially even a sovereign default? This may seem like a no-brainer but consider this: when the NPRF was established in April 2001, the idea was that it would not be touched (at all) for over two decades. Here is the blurb from the NPRF website:

“No money can be drawn down before 2025 and, from then on, drawdowns will continue until at least 2055 under rules to be made by the Minister for Finance.”

This was the agreement that facilitated the political deal underpinning the existence of the fund. But this ideal has taken a back seat to more pressing problems. Indeed, the government tapped the NPRF in 2009 to save Ireland’s failing banks. And now, the National Treasury Management Agency seems to view the NPRF as a ready source of capital should further bailouts be needed:

“According to a briefing NTMA gave London analysts on Tuesday, Ireland has a cushion of cash reserves of €23bn as well as €25bn in the National Pension Reserve Fund…”

Granted, tapping the NPRF is far better than an Irish default. However, by dipping into the pension pot, the government has broken its original deal with the public. Moreover, it has shown that it can—rather painlessly—get access to these assets should it find it politically expedient. In my view, these are two factors that could, over time, de-legitimize the NPRF in the eyes of the public.

Anyway, I’m not passing judgement on Ireland’s decisions (although the country’s pensioners probably aren’t all that pleased). Rather, I’m just interested to watch the governance systems of pension reserve funds flex and strain under the weight of cash-strapped governments during the crisis…

What’s on the Future Fund’s Horizon?

Ashby Monk

I noted earlier this week that Australia, as part of the Henry Review, is considering launching a new commodity SWF to help manage the country’s mining rents. It’s a proposal that has the support of a variety of stakeholders. Interestingly, a new report out by The Institute of Chartered Accountants in Australia makes a strong case for the new fund. Entitled “Fit for the Future: Challenges for the next generation of Australians” and written by Saul Eslake, the report has this to say:

A commodity fund could “provide a more politically acceptable way of running tighter fiscal policy as the economy approaches full employment of labour and capital (that is more acceptable than simply piling up cash at the Reserve Bank) and thus of reducing the burden that would otherwise fall to monetary policy to contain inflationary pressures. An Australian sovereign wealth fund could be readily administered by the Future Fund, established by former Treasurer Peter Costello to accumulate assets in order to meet future public service pension liabilities. An Australian sovereign wealth fund could also help to ameliorate public disquiet about equity investment in Australian resources projects by foreign state-owned enterprises or sovereign wealth funds, either by taking stakes in overseas enterprises or even (under clear and rigorous guidelines) taking stakes in Australian resource projects.”

In short, Eslake envisions using the Future Fund as an asset manager for the new commodity fund; much the same way NBIM is the GPF-G’s asset manager in Norway. Looked at another way, this proposal would see the Future Fund’s mandate (and size) expand dramatically. It would have two primary objectives: 1) to pay future public service pensions, and 2) to stabilize resource wealth and facilitate inter-generational savings. This would make the Future Fund the first—that I can think of—hybrid SWF; it would be part pension reserve fund and part commodity fund. The question then is how the governance system would need to be designed to ensure that both objectives are achieved. In my experience, that could be tough…but doable.

The Era of SWFs is Upon Us

Ashby Monk

I’m in the process of writing a ‘thought piece’ on the rise of SWFs based on some of the research we have done over the past two years. As part of this, I did a quick back-of-the-envelope calculation (based on a variety of sources) showing the number of new SWFs launched per decade. While I’ve seen different tallies than the one I came up with (due to alternative definitions for SWFs), the implication is always the same: the number of new SWFs has been accelerating over time.  It’s really quite remarkable.

This then begs the question as to why SWFs have jumped in popularity. In my view, the market turmoil of the past few decades has served as an important catalyst for the rise of SWFs. Since these funds exist to stabilize and legitimize global market forces at the local level, the onslaught of financial and economic crises has driven governments to SWFs for a variety of reasons (self-insurance, stabilization, etc. ). More and more governments now see SWFs as an important buffer against the depredations of global capitalism.

The era of SWFs appears to be upon us. How can you conclude any differently after looking at this chart?

Will Henry Propose A New Australian SWF?

Ashby Monk

The Australian Government will soon release the results of its review of Australia’s tax system, which has been headed by Treasury Secretary Dr Ken Henry. Apparently, Henry is interested in taxing mining revenues in an innovative manner to set up a new commodity fund:

“Henry…has floated the idea that [the new mining taxes] could finance a Norwegian-style sovereign wealth fund to generate income when the mining boom ends and provide another instrument for managing Australia’s business cycle. The Australian Industry Group, whose director Heather Ridout sits on the Henry review, says such a fund could invest budget surpluses offshore to reduce the mining boom pressures that are driving the dollar higher…Get it? A resource rent tax on mining could be used not only to fund the soaring national health budget but also to ease the competitive squeeze on eastern states’ manufacturing.”

Interestingly, the mining union (CFMEU) has come out in support of the idea. According to union head Tony Maher:

“It is only fair and it is the smart thing to do. Other countries have sovereign wealth funds…This is an opportunity for the Australian people to have a sovereign wealth fund that can pay dividends after the minerals are gone.”

So the idea of a new Australian SWF appears to be gaining steam. Perhaps the new SWF will be announced at the May meeting of the International Forum of SWFs in Sidney?

The Resource Rush: India vs. China

Ashby Monk

In almost all cases, commodity funds are set up to stabilize and diversify resource revenues stemming from exports. This helps to avoid the nasty effects of Dutch disease and facilitates long-term fiscal stability. Recently, India flipped this idea on its head by proposing a SWF that would try to manage and stabilize resource imports.

Specifically, India wanted a SWF to better compete with China for the world’s resources — China spent upwards of $32 billion on a variety of resource investments last year, while India only managed $2.1 billion.

However, while it was a very interesting idea, India’s overtly strategic SWF may not materialize. News out today suggests that India may forego the SWF and put the onus directly on state-run companies for resource acquisitions:

“Oil & Natural Gas Corp., India’s biggest explorer, and Indian Oil Corp. are set to get approval from the government to spend five times more on acquisitions, giving them greater freedom to compete with China for assets.”

This is probably wise. An Indian SWF with an articulated mandate to ‘compete with China for strategic investments in resources’ probably wouldn’t go over too well within the international community. That is pretty much the exact type of behavior that inspired all the concern about SWFs in 2007…

CADF Expands African Operations

Ashby Monk

China’s strategic, economic toolkit appears to be expanding. The China Africa Development Fund has opened a new 0ffice in Addis Ababa, Ethiopia, which will give the Fund a new base of operations for Eastern Africa.

The CADF has been very busy over the past three years; it is reported to have invested over $3 billion in 30 projects across Africa. As it looks to expand its African operations–it is set to receive another $2 billion from the China Development Bank–Ethiopa has strategic importance:

  1. The CADF already has close to $800 million invested in Ethiopia. So the new office will give the Fund the opportunity to keep an eye on some of its biggest projects.
  2. The new office is uniquely placed for political influence, as it will allow the CADF to cultivate relationships with a variety of African countries. Indeed, Addis is a “one stop shop for influence and access; it’s the Geneva of Africa” (according to a friend in the region). It is the home to several international institutions as well as the African Union Headquarters.

Here is what the CADF had to say about its location choice:

“…it is convenient for us. We can establish a communication scheme with [the AU] in order to reach the remaining countries of the region. So we think we will take full advantage of this office to facilitate investment to Ethiopia and other African countries.”

Interesting, but not surprising that the Chinese Fund would associate commercial success in the region with political relationships at the AU.

News Roundup

Ashby Monk

Today was a very busy news day; I managed to put nine stories of interest up on our Twitter feed. I think that’s a record for us.

For our readers who don’t know, I’ll typically tweet 2-5 items per day that I think our most dedicated and impassioned SWF wonks (i.e. people like me) will appreciate. See them here.


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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