African sovereign funds represent only 3% of assets under management at the international level, totalling $155bn.
Africa is aiming to leverage these funds for development purposes. This is the gauntlet picked up by the African Sovereign Wealth Funds Alliance. We may recall that within Africa, it was the Libyan Investment Authority (LIA) that reached the greatest heights, with its model for sovereign funds based on its oil reserves. With its $70bn portfolio under management, the LIA hit the headlines during the 2011 Libyan crisis, when the Security Council froze its assets. The Libyan funds alone account for almost 50% of assets managed by African sovereign funds, and when neighbouring Algeria’s Revenue Regulation Fund is added, it totals more than 90% of the capitalisation value of all African sovereign funds.
However, for a number of years the Revenue Regulation Fund has had to massively compensate for the Algerian state’s loss of oil and gas revenues, and now posts barely a tenth of its $70bn value in 2013. In the recent study by Konfidants, published in part at the Accra sovereign funds summit organised by the AfroChampions Initiative, these two funds have a fairly poor transparency score, confirmed by international rankings and, notably, the assessments of a pair of researchers, Linaburg and Maduell, from the Sovereign Wealth Funds Institute. At issue are the lack of clarity about their mandate and the lack of transparency in their asset portfolios. Of the 10 criteria used, the Algerian fund fulfilled only one and the Libyan fund four. However, just like the largest sovereign fund in the world, Norway’s almost $900bn under management, sovereign funds can comply with transparency arrangements concerning their shares and investments, and have an ethical rulebook.
An African craze
Half the African sovereign funds have been created since 2011 and no less than seven further African countries have announced the creation of a fund. African rulers seem to be enchanted by the sovereign investment fund model. On a continent-wide scale, with an annual investment requirement of more than $150bn for infrastructure, the direction and transparency of these funds is obviously of paramount importance. Some funds, even modest ones, clearly have a focus and mandate to invest primarily in Africa or in particular underdeveloped regions (for example, the Nigerian fund for the State of Bayelsa). Others created recently, such as the Nigeria Sovereign Investment Authority, sitting on the Nigerian giant’s oil reserves, get remarkably high scores in the transparency rankings. Sovereign funds are not new to Africa. One of the oldest is Botswana’s, which has managed revenue from diamonds since 1994, while Gabon’s strategic investment fund has been financing major projects since 1998. One of the recent innovations is the fact that new countries have now created their investment funds without having to rely so much on their substantial raw materials resources, as in Morocco (the Ithmar Capital Fund directed towards “African development”) or Senegal before the recent discovery of gas (Senegal Strategic Investment Fund).
The African Sovereign Wealth Funds Alliance – what are its objectives?
At the conclusion of the Accra sovereign funds summit in May 2018, held with the support of the AfroChampions initiative, under the chairmanship of Mahamudu Bawumia, Vice President of Ghana, the principal African sovereign funds announced that they had formed an alliance “to provide better support for African development”. The founding members, the Ghana Infrastructure Investment Fund, the Senegal Strategic Investment Fund, the Gabon Strategic Investment Fund, the Nigeria Sovereign Investment Authority, the Rwandan Agaciro Fund and the Ithmar Capital Fund (Morocco), are appealing for investments to be concentrated on a few projects of strategic importance to the continent. Breaking with the received wisdom of portfolio investments in mature markets, these funds intend to show the way forward. Carole Wainaina, operations director of the Africa 50 fund, reminds us that “infrastructure investments in Africa can be profitable if the risks, particularly political risks, are controlled”. With an initiative like this, the message for financial operators is very clear – African states are seeking the means to develop their infrastructures. Total assets under management in the founding funds amount to capital of between $5bn and $6bn, large enough to leverage additional funds from the financial institutions. To do that, these funds will have to clarify their future plans, acquire a portfolio of collective projects, and also have high transparency standards, in order to provide a guarantee to potential external partners.
Towards critical mass
In the context of further interest rate rises expected in the coming months, the United States will easily be able to attract a significant proportion of the capital. Whether arbitrage favours the potentially more risky projects in Africa will be determined by the return on investment of these projects, and their ability to secure the commitment of sovereign funds. Also, the bounce back in oil prices will increase receipts to these funds. However, they can only be used for the continent’s future growth challenges provided that the surpluses are redirected into improvements in African economies’ connectivity and infrastructure projects to bring national markets closer together.
Paulo Gomes, President of the Africa Sovereign Wealth Advisory Group, believes that “current funds, taken individually, haven’t achieved the critical mass which would enable them to launch major projects. Therefore, we must promote partnerships for ambitious collective projects. That is what the alliance we want to put in place will be doing. ”