Optimal SWF Design: Privatization?

Ashby Monk

Jamus Lim of the World Bank has a provocative article out this morning on the optimal design of SWFs. The premise for the article is to consider innovative commitment mechanisms to keep SWFs focused exclusively on their mandate. In other words, Lim wonders how SWFs can be set up to prevent politicians from raiding the funds when they see it politically useful.

Lim and I agree on this one: it’s all about governance. However, he has a pretty quirky idea on how to irrevocably discipline and tame politicians. He proposes to privatize SWFs. Yes, you read that correctly. He is talking about private SWFs. I’ll let him explain it:

“…one (admittedly risky) strategy is to provide such institutional independence by privatizing the SWF. There is a fundamental difference between a public institution that has been granted independence, versus a private institution. For one, the privatization option is far more irreversible. Raids on a privatized SWF would essentially entail the seizure of private assets followed by their nationalization; in contrast, thefts from a nominally independent SWF is mainly a matter of accounting changes made to the books of two relevant government entities…

But how would a privatized SWF be responsible to its original mandate, which is to serve as a stabilization fund for the country? Through a contractual arrangement. Just as utilities companies are obliged to continue to provide their services after they have been privatized, a privatized SWF will be obligated to fulfill their contractually-agreed mandates (whatever those may be). But being private entities, they will be generally freer from political interference…”

Kudos to Lim for raising my eyebrows this morning; I have to say I’m intrigued by the notion of privatizing a SWF to facilitate commitment to the mandate over the long-term. In a sense, this is close to (but not quite the same as) what Canada’s CPPIB has done. Still, while interesting in theory, I’m very skeptical that “privatized SWFs” will ever be roaming the world. In fact, I’m pretty sure a “private SWF” would no longer fit the definition of a SWF…

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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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