Sovereign Wealth Funds (SWFs) are State-owned investment vehicles, primarily funded with revenues from exhaustible natural resources, designed to benefit current and future generations. Alongside pension funds, SWFs are significant in global investments, savings, and infrastructure projects.
With assets totalling around $8 trillion, equivalent to about 10 per cent of global GDP, they strongly influence financial markets. For instance, Norway’s Government Pension Fund Global manages $1.63 trillion in assets, holding 1.4 per cent of global stocks, and has generated substantial wealth for its citizens over the past 25 years, equating to $178,000 (about Sh23,140,000) per citizen. Given the growing number of newly created SWFs, Kenya should revisit the model for benefits from such a fund as a strategic tool of the state. In this article, we reflect and recommend for Kenya to establish a Strategic Investment Fund.
Africa’s struggles with SWFs
Africa has 18 SWFs, with two-thirds dedicated to domestic economic development. Major challenges have hindered the continent in fully leveraging these funds. First, the failure to capture value and revenue from natural resources has resulted in significant wealth leakage to multinational corporations like Shell, Exxon, Apple, Google, Microsoft, Dell, and Tesla. They convey profits to shareholders in the global North, impoverishing Africa which play minor roles in production.
Second, African nations often lack the expertise to negotiate favourable contracts, leading to disadvantageous production-sharing agreements (PSAs) with natural-resource multinationals which avoid more profitable Service-type Contracts (SCs). The PSAs favour the corporations, leaving African countries with a smaller share of the profits. In contrast, countries like Azerbaijan and Kazakhstan have successfully accumulated wealth in powerful SWFs by negotiating SCs. Third, multinationals frequently engage in illegal activities, such as fuelling civil wars and child labour, to evade government oversight, as seen in the Democratic Republic of Congo (DRC). The exploitation has led to landmark court cases in the United States against major technology companies. Similar challenges may arise in Kenya as the demand for rare minerals like niobium and coltan escalates.
Finally, a global narrative points blame to Africa for the misuse of the limited revenues left after resource exploitation. It ignores external factors contributing to poverty in Africa. Critics highlight cases like Nigeria’s squandered oil revenues, and debt, Angola’s misappropriated funds. They overlook data showing Africa's share of global public debt is relatively small. Collectively the challenges conceal massive externalization of wealth, a major cause of stunted growth in Africa.
Overcoming the challenges
Despite these challenges, some African countries have made strides in escaping the SWF trap. Ethiopia, for instance, has established Ethiopian Investment Holdings (EIH), with assets exceeding $150 billion, making it the top African SWF. EIH represents Ethiopia’s long-term commercial and investment interests, including projects like the expansion of Ethiopian Airlines and agreements with the UAE's Masdar for solar projects. Libya's Investment Authority and Botswana's Pula Fund are also leading examples of successful African SWFs. Nigeria's Sovereign Investment Authority (NSIA) dedicates 40 per cent of its assets to the Future Generations Window, which proved invaluable during the Covid-19 pandemic.
SWFs invest professionally, adhering to fund objectives, mandates, and guidelines, and avoiding unethical economic activities. Their portfolios, known as Strategic Asset Allocations (SAA), are carefully managed to achieve long-term goals. As key drivers of capital markets, SWFs are increasingly collaborating across borders on strategic investments. This collaboration helps attract capital to bankable development projects in Africa that are often overlooked due to perceived risks.
Kenya had an opportunity to establish a SWF with the Kenya National Sovereign Wealth Fund (KNSWF) Bill in 2014. The bill was a result of extensive consultations and received global recognition, winning an award at the NASDAQ/Africa Investor Conference in 2016. It is carried in the International Forum of Sovereign Wealth Funds- IFSWF (London) sponsored by Franklin Templeton. Despite its potential, the bill has not yet been passed into law, delaying Kenya's ability to harness the benefits of a SWF. Delay, coupled with Kenya's current economic challenges, necessitates a vital reframing of the country’s strategy.
In the post-pandemic landscape, new forms of SWFs have emerged. Acting as strategic investment funds, they transcend domestic revenues to attract foreign direct investment (FDI) for large projects. The funds de-risk investments by deploying three strategies: 1) Sovereign Investment Partnerships (SIP), 2) Public-Private Partnerships (PPP), and 3) Sovereign Venture Funds (SVF). The strategies offer alternatives to traditional private companies, which often prioritize short-term profits.
SIP is useful where substantial levels of capital are required ($100m to $1billion+) by a host country; attracting SWFs as investors will have multiple benefits as some are cash rich, have no direct liabilities such as shareholders and have a long-term investment horizon with a higher risk tolerance. This makes SIP a useful alternative to private companies that have a short-term profit outlook. Egypt, for example, has successfully used its SWF to engage in SIPs with Middle Eastern SWFs like the Public Investment Fund (PIF) of Saudi Arabia, Qatar Investment Authority (QIA), and Mubadala of Abu Dhabi. Thus far, it has secured over $30 billion in SIP to boost its State-owned enterprises, enhancing its agricultural sectors and infrastructure.
Across the continent, several African SWFs are being used to anchor investments from reputable but large private companies via PPP. For instance, FGIS has established ‘Gabon Power Company’ for investments in electricity and water sectors, while FONSIS uses ‘KAJON Capital’ to finance affordable housing for workers from both the formal and informal sectors. NSIA has created the ‘Nigerian Mortgage Refinance Company’ for similar purposes and partnered with private developers to provide affordable housing.
African SWFs are also being used for innovation and growth through investments in entrepreneurial sectors of their domestic economies. There are African SWFs that have created SVF to enhance their entrepreneurial sectors. NSIA has established a $200m ‘Innovation Fund’ to catalyse the technology ecosystem in Nigeria with commitment to Seed state funding of $25m. It provides prizes for innovation which includes both cash, investments, and resources to technology start-ups. FONSIS has also created a $106m fund to support SMEs, the fund also aims to strengthen Women’s economic empowerment, investing in projects that drive greater female participation. The SWF of Gabon has created ‘Okume Capital’ to support National Champions. It also provides a credit guarantee to banks to obtain finance for entrepreneurs.
These approaches could serve as a model for Kenya to attract capital for bankable projects across various sectors, including real estate, telecommunications, extraction, and manufacturing. Kenya’s economy has several advantages attractive for SWF investment. These include a skilled and affordable workforce, a dynamic private sector, stable industrial relations, easy market access, and high returns on investment. By establishing a government-owned but independently run strategic fund, Kenya could partner with other well-endowed SWFs to invest in a variety of projects. This fund could focus on agriculture, energy, infrastructure, manufacturing, and mining, (Ruby, Coltan, Oil, etc., all tapping Kenya's abundant natural resources).
In 2023, Kenya exported 200,000 barrels of oil with full production expected by 2026. A SWF could help manage and invest the revenues from these resources, ensuring long-term economic growth. The fund could work with organizations like the Africa Investment Forum of the African Development Bank to package bankable projects for SWF funding. For example, reconfiguring the Kenya Investment Authority (KenInvest) under the Strategic Fund to support development of the ‘bankable projects’ inventory could further enhance Kenya's ability to present and engage with SWFs and other external investors.
Kenya has the potential to establish a successful SWF that attracts investment, drives economic growth, and glides down its debt mountain. By leveraging its natural resources and strategic advantages, it can build a SWF that supports long-term development, reduces dependency on debt, and enhances the country's global standing. A Strategic Investment Fund for Kenya can not only attract investments but create jobs, address climate risk issues, tackle inequality and increase overall economic activity. The fund can also be used to accelerate resource extraction to boost income for the treasury, discarding the pattern of waste, borrowing, and exploitation by transnationals.
