But countries disagree about how to use them
SCRATCHING around for money to pay for free secondary schools, a government minister in Ghana last month floated an idea: raid the Heritage Fund. At least 9% of the country’s annual oil revenues are stashed there for future generations. The minister was rebuffed. But the row highlighted a trade-off: saving for tomorrow’s children makes it harder to help today’s.
Such dilemmas are acute in sub-Saharan Africa. The region has about a dozen sovereign-wealth funds, most of them established in the past decade. They have few models to emulate. A Norwegian approach—build a fund, invest abroad, and spend only the annual returns—works in places that are small, ageing and rich. Most African countries, unfortunately, are none of those things.The oldest and largest African fund, Botswana’s $5.3bn Pula Fund, was created in 1994 from diamond revenues. Angola and Nigeria, the biggest oil exporters, have both established funds in the past few years; governments from Kenya to Zambia are talking of doing the same. Even Rwanda, with no great commodity riches, is soliciting patriotic donations to build its own (civil servants coughed up $2.5m last year).
Many funds have savings mandates. Botswana’s, like Norway’s, hoards its wealth abroad. The Nigeria Sovereign Investment Authority (NSIA) puts 40% of its capital into a Future Generations Fund, invested in global assets with a horizon of over 20 years. African countries should be cheered when they save, says Uche Orji, its chief executive (pictured), since they are often chastised as spendthrifts. But others say that buying foreign equities may not be the best use of scarce capital when roads and electricity are needed at home.
That explains why the NSIA allocates another 40% of its assets to domestic projects, giving priority to sectors such as power, highways and farming. In August it teamed up with Old Mutual, an investment group, to launch a $500m property vehicle. It is not the only fund to spend locally. In January the Angola Sovereign Wealth Fund (FSDEA, from the Portuguese) announced a $180m investment in a deep-sea port, adding to a portfolio including business hotels and 72,000 hectares of farmland. “Every investment has a private-equity logic to it,” explains José Filomeno dos Santos, its chairman.
A domestic strategy could bring jobs and development. The risk is that spending is diverted from the normal budget process, dodging political oversight. In Angola critics point to the appointment of Mr dos Santos, who happens to be the president’s son. One of his former business partners chairs the advisory board of the FSDEA’s chosen asset manager, and also chairs the company that is building the port.
Even the best-designed institutions are no guarantee against government profligacy. Ghana’s twin funds (for savings and stabilisation) are much admired, but their existence did not stop politicians from a borrowing binge. For governments facing high interest costs, a better use of oil revenues may simply be to repay foreign debt. Andrew Bauer of the Natural Resource Governance Institute, a non-profit group, says it is a “myth” that “ if you have oil you need a sovereign-wealth fund.”
African funds should focus on two roles, argue Anthony Venables and Samuel Wills of the Oxford Centre for the Analysis of Resource-Rich Economies. A sudden windfall can generate inefficient spending: it makes sense to “park” cash offshore until capacity is built. And a stabilisation fund, invested in liquid assets, can bolster the budget when oil prices fall.
Governments would dearly love such a boost now. Funds such as Nigeria’s include stabilisation components, but most are still too small to have much effect. If sovereign wealth were shared out among citizens, Batswana would get a chunky $2,400 each, Norwegians a mammoth $170,000—and Nigerians less than $7. Gulf state’ funds took decades to grow, notes Mr Orji. At current oil prices, the most valued asset of all is patience.