New sovereign wealth funds are burgeoning in Sub-Saharan Africa. But they need to be given more cash if they are to flourish
For Africa’s Sovereign Wealth Fund industry, 2012 is set to be a bumper harvest. Non existent until recently, the sector now counts four new, prominent institutions: Ghana’s Stabilization Fund and Heritage Fund, Angola’s Sovereign Fund, and Nigeria's Sovereign Investment Authority. Another one should soon be added to the crop, with Tanzania’s own Sovereign Fund to be launched before the end of the year.
Such initiatives were sorely needed. Graft, theft and underinvestment are said to be eating away billions of these nations’ export revenues every year, leaving little or no savings in the state’s coffers. Safeguarding a fixed proportion of oil revenue for future generations could go a long way in restoring the trust of disillusioned populations, weary investors and international observers in their ability to forge a sustainable future.
The new funds face a rather daunting task, however. They will have to grapple with rather ambitious mandates: nurturing the nation’s wealth, financing infrastructure development, and insulating the country from macroeconomic shocks. The Nigerian Sovereign Investment Authority, for example, will be made of a future generations fund, a stabilization fund, and an infrastructure fund, each of which set to constitute at least 20 per cent of the total. The Tanzanian, Angolan and Ghanaians Sovereign Funds will also be assessed on how they can help achieve these three distinct objectives.
And yet they don’t look very well equipped to do that. In Nigeria, for example, seed capital is limited to a total of $1bn. By comparison, the country's fuel subsidy cost the government close to $8bn last year alone. But even if Nigeria boosts its fund by $100m a month, as its finance minister contends it will eventually do, it will account to no more than $6bn in 2017 - or 2 % of Nigeria's Gross Domestic Product. Ghana, Angola and Tanzania do not fare much better. When the average ratio of fiscal savings to GDP in big oil economies is close to 65 %, such figures question how much of a safety net Sub Saharan sovereign funds really represent for their hosting nations.
Neither is everyone supportive of these initiatives. More money ring-fenced by federal governments means less money for other, regional entities. There is also little trust in its ability to manage money wisely, given the federal governments’ often-paltry fiscal history. In Nigeria, for example, the fund is set to replace the current Excess Crude Account, an opaque cash pool repeatedly raided by ministers to honour debts or campaign promises. But many remain unconvinced that the new institution will operate better, and more transparently, than its predecessor; they will probably oppose further attempts to boost Investment Authority’s firepower.
A lot will thus depend on whether federal governments will manage to reassure sceptics and win over the opposition. In practice this will mean setting up transparent procedures and reward systems; build or acquire the relevant management and investment expertise; channel a significant portion of funds to the domestic market, whilst keeping an eye on lucrative opportunities overseas; and adequately redistribute the proceeds of successful investments. And above all, it will mean being patient. Whilst the funds' initial resources look rather modest at the moment, they could grow into much more substantial kitties in the long run – and bear handsome fruit for their early backers.