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Rennie Parris, CFA
Understanding the principles of a well-managed Sovereign Wealth Fund (SWF) to that of Guyana’s Natural Resource Fund is essential. For this reason, I will provide an in-depth illustration regarding these principles in this and subsequent articles.
In 2008, in response to investors’ concerns over the opaqueness of SWFs, members of the International Working Group of SWFs descended upon Santiago, Chile to create solutions to enhance transparency and establish international standards for managing SWFs. The group crafted The Santiago Principles – twenty-four (24) principles for establishing and managing a SWF. One such Santiago Principle is the legal framework for SWFs.
There are three legal frameworks that describes the relationship and governance structure between the SWF and the government:
- The State-Owned Entity
- The Pool of Assets
- The Separate Legal Entity
The State-Owned Entity: This SWF legal framework is government controlled and is guided by the country’s company laws. The government appoints the SWF’s board to administer the fund’s investment mandate, to select the SWF’s executive team and to delegate investment management responsibilities to the executive team.
Singapore’s GIC is a state-owned SWF, its board is appointed and removed by the Singaporean President and it is supervised by the Ministry of Finance. The board creates the GIC’s investment policy and delegates daily investment management responsibilities to an executive team. The board and the executive team are advised by international investment professionals. Despite being highly influenced by the Singaporean Government, GIC is transparently managed, the country’s civil service is highly skilled and Transparency International ranks Singapore as the world’s 4th least corrupt country. However, this state-owned SWF legal framework should be discouraged in countries that have a corruption culture, an inexperience workforce and institutions not insulated from day-to-day political whims of the political class.
The Pool of Assets: This type of legal framework for SWF does not consist of a legal entity but rather is a gathering of assets into a fund that is used for investment purposes. The pool of assets SWF is generally controlled by the country’s Ministry of Finance who usually delegates investment management responsibilities to the country’s central bank.
The Government Pension Fund Global, the world’s largest SWF with over US$1.1 trillion assets under management, is a pool of assets SWF. The Norwegian fund is managed by investment professionals and is one of the world’s most transparently run SWF. Transparency International ranks Norway as the 7th least corrupt nation in the world.
The Separate Legal Entity: This type of SWF is created by legislation, which establishes a separate and legal entity to manage the SWF. The separate and legal SWF operates at arms-length from the government and its board is made-up of mainly investment professionals. The board and executive body are reasonably insulated from political interference because their responsibilities and tenure are laid out in law.
The Korean Investment Corporation (KIC) is a case of a separate legal entity SWF. The Korean Investment Corporation Act, created by the country’s legislative body, gives KIC full investment independence and operational autonomy from the Korean Government. KIC’s steering committee, board and management team consist of mainly financial services professionals. Monthly and annual audited reports are provided to the Ministry of Finance & Strategy and to the Bank of Korea.
The Natural Resource Fund (NRF)
Established by Guyana’s Natural Resource Fund Act, The Natural Resource Fund (NRF) is a pool of assets SWF. The Ministry of Finance is responsible for:
- The overall management of the SWF
- The SWF’s investment policy
- Fund withdrawals
- Creating the SWF’s financial reports
- Entering into an operating agreement with The Bank of Guyana
Enshrined in the Natural Resource Fund Act, the Public Accountability & Oversight Committee (PAOC), which consists of 22 nominees from various Guyanese civil societies and all regions, is responsible for the oversight of the NRF. In addition, the Investment Committee advises the Ministry of Finance on the NRF’s investment policy and the Macroeconomic Committee advises the Ministry of Finance on the appropriate fund withdrawal factors.
The current structure of the NRF is vulnerable to undue government influence and inadequate oversight. Like the oil and gas industry, the investment management industry is new to Guyana, therefore, having sufficient human capital to effectively manage and supervise the NRF is required. In the absence of the relevant experience and expertise in investment management, risk management, financial accounting and governance, the PAOC’s authority and the Bank of Guyana’s operational effectiveness could be severely weakened.
Given the focus on autonomy and professional management, I opine that the separate legal entity is the most appropriate legal framework for newly formed SWFs. The government should seek out competent investment professionals and investment regulators to provide SWFs with sound advice and effective oversight, to create a robust capacity development program and to manage, without political interference, the SWFs’ assets.
Establishing the appropriate legal framework is necessary to successfully managing a SWF. Equally important is to establish appropriate objectives for the SWF. What are these objectives and why are they important to SWFs? In the next article I will illustrate the importance of these objectives.
About the Author
Rennie Parris is a financial management professional with over 15 years’ experience in the financial services industry and is a Chartered Financial Analyst (CFA) Charterholder. He led a team at APG Asset Management in developing innovative investment strategies and products for the company. While working at S&P Global, Rennie was responsible for analyzing investment risk factors for financial services companies and for assigning financial strength ratings to these companies. His responsibilities also included assigning counterparty credit ratings to these companies’ fixed-income instruments. Rennie was an Investment Advisor at JP Morgan Chase and managed multi-million-dollar investment portfolios. He earned a BBA in Finance and a MSc (Hons) in Real Estate from The Zicklin School of Business. He is currently pursuing an MBA at the Wharton School of the University of Pennsylvania.