How Sovereign Wealth Funds can erase Africa capital graveyard narrative

Kenya’s SWF Proposals: Sovereign Wealth Funds (SWFs) are special-purpose, state-owned mechanisms used to enhance national savings and development by making strategic wealth-creating investments on super-long-term plans. Norway’s SWF surpasses US$1trillion in assets under management (AUM). It owns 1.4 per cent of global stocks in over 9,000 firms, wealth from saving and investing earnings in commodities, mainly oil. A SWF hugely makes sense for Kenya in place of borrowing.

Kenya’s concept and pledge on SWF were embedded in the Jubilee Manifesto, 2013, and in the revised version of 2017. The Parastatal Reforms Implementation Committee undertook its work in 2013-2014 under the SWF sub-Committee that I chaired at the Office of the President.

In the wake of new reappraisals of Kenya’s natural resources, such as titanium in Kwale and oil in Turkana, it took a deep dive into potentials for a Kenya National Sovereign Wealth Fund (KNSWF), culminating in the KNSWF Bill (2014). The expert team of the National Treasury Cabinet Secretary and Principal Secretary, Central Bank of Kenya, Office of the Attorney-General, and the Kenya Revenue Authority ran validation sessions with the IMF and World Bank.

The IMF contributed to the development of the Santiago Principles, the international yardstick harmonising SWFs’ legal, governance and institutional structures. The team engaged reputed SWFs – Singapore, Malaysia, Qatar, Mauritius and Dubai. After scrutiny by the Commission on the Implementation of the Constitution (CIC), under Articles 201 and 206 (1) (a) of the Constitution, the Bill’s publication garnered widespread attention. At a joint NASDAQ Stock Market/Africa Investor Conference in New York in 2016, it won a global award as Africa’s Sovereign Wealth Fund Initiative of the Year. The proposals highlighted SWFs as the ultimate bridge for unlocking non-debt-creating capital inflows, de-risking projects and partnering with external SWFs and pension funds to invest in Africa. The Kenyan model has been in vogue, featured at conferences, roundtables and panels of experts in Washington, New York, London and Singapore, probing new frontiers for SWFs.

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Franklin Templeton of the United States, the world’s largest SWF Funds Manager – with AUM of US$1.53 trillion – teamed up with the International Forum of Sovereign Wealth Funds (IFSWF) in London in 2020, inviting a world-wide forum anchored in its Dubai Office, where the author provided a deep dive into Kenya’s framework (https://www.ifswf.org/general-news/sovereign-wealth-fund-kenya-why-why-now).

A high-level panel I attended in August 2022 at the Woodrow Wilson Centre in Washington DC, a top US think-tank, brought together the who’s-who of SWFs under the banner ‘Strengthening the Role of African Sovereign Wealth Funds in the International Financial System: Interplay between Policy, Governance, and Sustainability’.

Surprisingly, KNSWF remains on paper. Potential beneficiaries complain periodically, specifically poverty-ridden counties like Kwale and Turkana with notable mineral resources. Yet, the dynamic of potential savings, investment and developmental opportunities of SWF would drive growth and employment. Why are we lethargic towards implementing solutions to our debt crunch and sub-par growth? Estimates from a survey show 970 types of minerals in Kenya, including copper, graphite, manganese, iron ore, coltan, base metals, nickel chromite, lead, zinc, rare earth elements, uranium, thorium and nickel cobalt. Kwale County (home of base titanium and one of the five top rare earth deposits in the world, with niobium valued at US$35 billion, also has rutile, ilmenite and zircon. Turkana County has oil.

Counties are entitled to specific locational amounts from mining revenues in line with the Mining Act (2016): ratios are 70 per cent to the national government, 20 per cent to counties and 10 per cent to communities. Kenya, nearing fiscal collapse and taking dictation from the IMF, is the main loser of the unimplemented KNSWF. Even the revenues under the Mining Act (2016), remitted to the exchequer (KSh14.7 billion to date) notably lack an allocative mechanism to drive development and financial soundness, either at national or county level.

SWF Concepts

A key facet of SWFs is to spread consumption and economic transformation from natural resources over generations. Natural resources such as oil, titanium and gas are finite, providing countries a runway to transform and diversify their economies. Under SWF rules, skilled funds managers invest the revenues for targeted returns, at targeted uses and risk tolerance for the investments (conservative-to-high), and apply disbursements, liabilities matching and liquidity concerns.

Read: Kwale: Sea of poverty amid titanium riches

SWFs re-invest the revenues and earnings, acting as a bridge to diversification and a richer future. They grow wealth in shares, bonds and property, and strongly influence global financial markets in investment and capital flows. They are often in the spotlight as they search for returns on their management of investment portfolios. Significantly, Central Bank changes in interest rate policies trigger re-alignments in asset holdings. SWFs now co-invest and partner in domestic or foreign projects.

Kenya’s start-up initially envisaged allocations from the exchequer in the annual budget. After set-up, the KNSWF law and institution would transition to funding from several sources: (a) capital from privatisation proceeds; (b) oil, gas, and mineral revenues due to the national government from the Mining Act (2016); (c) dividends from state corporations; (d) revenue from other natural resources; and (e) funds from any other source.

It proposed three operating windows: Stabilisation – insulating the budget and economy from commodity price volatility and external shocks; Infrastructure and Development – allocating resources that promote inward investment and growth of sectors, targeting diversification with investment partners; and Future Generations – sharing wealth across generations.

Africa’s SWFs: The challenge of Geopolitics

Kenya’s proposal joins a growing number of African countries recognising the multiple defects of the global financial system, against the non-debt-creating benefits of SWFs in circumventing them, as a bridge and mechanism for global saving, investment and growth. Africa holds about 30 per cent of the remaining global supplies of mineral reserves, 40 per cent of gold and 90 per cent of chromium and platinum. Curiously, rich industrial countries and even scholars of SWF potential in Africa exert peculiar direct and indirect pressures that Africa should conserve its natural resources, leaving them untouched in the name of climate change. Critics often conclude glibly that poor governance and shortfalls in Africa’s financial and investment skills preclude SWFs.

It is a diversionary concealment avoiding eminent research into illicit flows that former South Africa President Thabo Mbeki revealed at the Africa Union summit in 2015. He cited US$1trillion (equal to Norway’s SWF assets) siphoned from exploiting Africa over 50 years by foreign interests in commercial, tax evasion, trafficking and mining activities. This exceeds by far the assets held by Africa’s SWFs.

In climate change metrics, a brutal paradox is perpetuated. Though estimates show little cumulative impact attributable to Africa, rich countries exploit their mineral resources at maximum speeds (such as Norway or Saudi Arabia for oil) and grow their SWFs with massive accumulations and economic diversification domestically and abroad, unshackled by climate change.  The takedown on Africa not to engage their natural resources and SWFs to pull out of poverty mixes disingenuous standards with inequality. Recent cases of the Uganda-Tanzania oil pipeline and DRC projects highlight the paradox: the DRC’s plans to exploit 30 oil and gas blocks to fight underdevelopment raised a storm by rich countries powering their economies to an even richer future with mining wealth and growth of SWFs already at commanding heights. Pressure takes extreme forms, with the rich north funding African lobby groups and NGOs to hog placards, marching against projects with an African face.

A final puzzle suggests Africa is held captive in the geopolitics of savings and investment. An asymmetry in financial calculations is perpetuated on investing in Africa’s projects versus the rich world. With Africa’s domestic savings low, scarcity of capital ensures financial rates of returns are high in successful projects. Yet, the continent is painted as high-risk in business perceptions, branding African projects with high returns or elevated risk profiles. Investments in rich countries are profiled with lower returns (based on greater availably of capital)/lower risk profiles.

This mentality of Africa as a graveyard for capital can be turned on its head through SWFs. It allows for pivotal strategies that should: (a) de-risk investments in Africa with SWFs as catalysts of capital flows, anchoring external partners who speak the skilled language of SWFs into bankable projects; and (b) create pipelines of bankable projects and become co-funding frontrunners in funding and implementing them. Africa’s SWFs have formed the African Sovereign Investors Forum (ASIF), driving debate on partnering and non-debt-creating investments to unlock capital flows. ASIF held its first Annual Meeting in Morocco (2022) and the Second in Rwanda (2023). The largest by far is the Libyan Investment Authority (LIA) at US$66 billion. Angola (US$5 billion) and Botswana (US$4.9 billion) follow.

Under ASIF, SWFs will function as magnets to foreign direct investors in collaborative projects, crowding in external SWFs and pension funds as investment partners in bankable projects. A lead example is the International Financial Corporation’s co-investment with FONSIS, Senegal’s SWF. Their project is developing 20,000 houses, acquiring homes from developers and managing them on a rent-to-own scheme.

Dr Wagacha, an economist, is a former Central Bank of Kenya chairman and adviser of the Presidency