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The Viability of Sovereign Development Funds in Sub-Saharan Africa

Vimbainashe Anda
Tuesday, October 11, 2016

Nigeria is the largest oil producer in Africa, producing 1,75 million barrels of oil per day.[1] Nigeria also has close to 370 times more people than Edinburgh, yet the same amount of electricity is consumed in Scotland’s capital as is in Nigeria.[2] Only a quarter of the Nigerian population is connected to the grid;[3] those who are connected to the grid can only expect to receive an average of 3 hours of electricity a day.[4] This disconnect between the abundance of energy in one form, and the sheer lack of it in another has detrimental effects on both individuals and businesses. Companies looking to invest in Nigeria have to factor in this resource’s scarcity. The overhead costs of companies operating in Nigeria are increased as the businesses rely on diesel generators for their electricity. The heaviest burden is borne by the local population, who suffer loss of opportunities and increased living costs by this reduced access to electricity.

How do we understand that there is an abundance of raw energy supply but no central electricity provision? Many[5] point to an infrastructure deficit: Nigeria needs new power stations, upgraded existing stations so that they cease to operate below capacity, and repaired pipelines to transport natural gas from the oil rigs to power stations. This deficit is not limited to Nigeria. Throughout the continent, the infrastructure gap is holding back growth and development. According to the World Bank, Africa needs to spend US$92 billion a year to bring the continent’s roads, telecoms and electricity distribution to satisfactory standards.[6] Moreover, as a continent, Africa has the fastest growing population and staggering urbanization rates. The continent’s population is set to double to 2.4 billion by 2050,[7] and the percentage of the population living in urban areas will increase from 36 to 60%.[8] If we maintain the status quo, the infrastructure deficit is only set to worsen.

In this article, I argue that Sovereign Development Funds (SDFs), a type of investment vehicle owned by the nation’s government, are a strong opportunity to narrow the infrastructure gap in sub-Saharan Africa. Confronted with such a massive infrastructure gap, SDFs have the potential to replace the foreign aid model that has been the traditional means of addressing development challenges in Africa. As we explore the viability of SDFs in sub-Saharan Africa, we should look at the challenges these new structures have faced on the continent. There are 78 SWFs around the world, among which 10 are in Africa. [9] The Nigerian Sovereign Investment Authority (NSIA) stands out among its peers by its transparency standards and measurable success. It therefore is a good source for insights about the challenges and opportunities SDFs face in sub-Saharan African countries. Beyond listing the challenges, it is a worthwhile endeavor to think of ways to navigate these obstacles. The development of the critical infrastructure in sub-Saharan African countries, moreover, the emergence of these countries as powerful global investors, is at stake.

So what is a SWF? What is a SDF? What is the difference? As mentioned above, a Sovereign Wealth Fund (SWF) is a government-owned pool of money that is set aside for investment purposes to achieve national objectives.[10] The source of a SWF’s capital span pension contributions, revenues from the privatization of public infrastructure or generated from the export of natural resources such as oil. Sovereign Development Funds (SDFs), a subset of SWFs, seek not only to generate high returns for their investment, but also to strategically invest in projects that bring about the socio-economic development of the country. SDFs have been created worldwide. For example, in India, the National Investment and Infrastructure Fund has invested in India’s roads, railways and power distribution.[11] In Abu Dhabi, Mudabala has developed a network of seven world-class healthcare providers to meet the needs of the population.[12] In Nigeria, the NSIA was also created as a Sovereign Development Fund.

To tackle the issue of electricity generation and distribution in Nigeria, in September 2014, the Nigerian Sovereign Investment Authority (NSIA) signed a deal with Seven Energy, a Nigerian energy firm, to invest US$100 million in gas processing facilities, delivery pipeline infrastructure and power plants.[13] In its four years of operation, the NSIA has signed deals with the Nigerian Bulk Electricity Trading Plc (NBET),[14] the Nigerian Debt Management Office and the multinational conglomerate corporation, General Electric[15] to address Nigeria’s critical need for power. Most recently and in spite of an economic recession, the NSIA has partnered up with Old Mutual Investment Group and UFF African Agri Investments in a US$700 million joint venture to invest in and develop Nigeria’s real estate and agricultural infrastructure.[16]  NSIA’s success in signing deals with strategic local companies and attracting big foreign companies such as General Electric, shows that SDFs have massive potential to support development across multiple sectors and bridge the infrastructure gap.

Before we explore the manner in which we can strengthen the presence of SDFs in sub-Saharan Africa, we need to ask if SDFs are well suited to the political, economic and social structure of these nations. The biggest and most significant challenge in sub-Saharan Africa is bad governance.[17] Bad governance can result in reduced investor participation and a depletion of the funds set aside for investment. Transparency is essential to overcome this issue, and the NSIA has made particular efforts on this front. By articulating and publishing its “reason for creation, origin of wealth and government ownership culture” as well as providing up-to-date independently audited annual reports, the NSIA has received a 9/10 transparency rating from the SWFs Institute,[18] a body that is recognized as the information authority on SWFs. Such a rating is on par with South Korea, France and Malaysia and some states in the USA.[19] Another way to combat bad governance is adhering to external standards of good practice. NSIA is one of the 25 signatories of the Santiago Principles, the set of guidelines that assign best practices for SFWs. As a result, the NSIA benefits from an external framework that they can build upon to fit their context. Additionally, the citizens of the nation are able to hold the NSIA accountable to a set of regulations that are immune to unilateral changes from one government. The external monitoring also provides legitimacy for the SWF, opening up opportunities for co-investment with other SWFs from around the world. In this way, direct foreign investment through partnerships with other SWFs has the potential to replace the old model of foreign aid. When interviewed, a member of the Executive Management Team at the NSIA attributed the agency’s success as a global co-investment partner to knowing the local terrain well, and being staffed with highly skilled professionals who not only seek the best returns for their investments, but are also interested in the development of the nation.

Not only do sub-Saharan African SDFs have to combat bad governance, they also have to justify the suitability of SDFs for a context that has many immediate needs. Unlike African countries, whose population is young and growing fast, countries in which SWFs have been significantly beneficial to the population they serve, for example Norway and Qatar, also have small populations. Good SWF practice is to develop internally before externalizing the fund, but if we impose the same structure on sub-Saharan African states, the sheer size and demand of the population would require that the SWFs spent decades improving their internal infrastructure. Sub-Saharan African countries with SDFs have to justify saving and investing money, sometimes in other countries, instead of spending it on acute immediate crisis such as disease outbreaks or food provision.[20] In answer to such concerns, the NSIA Executive pointed out that we must “understand that SWFs are a tool of fiscal discipline.” He likened one of the functions of SDFs to that of wanting to buy a car in five years; “today you may not be able to afford it but if you discipline yourself by setting aside money every month, every week, maybe in five years’ time you might be able to purchase a car.” Similarly, “banks give loans not necessarily to the wealthiest people; people’s credit score is not a function of how much money you have but a function of how disciplined you are.” A government setting aside money in the face of lack of power, hunger and disease outbreak may seem inhumane, but it is the setting aside of these funds that attracts investors as it demonstrates fiscal discipline. This setting aside of funds also grows the investment such that there are sufficient funds to develop innovative solutions in the future. This way of thinking may be counter-intuitive, it certainly was to me, but it demonstrates the relevance rather than the inappropriateness of SDFs in sub-Saharan Africa.  

SDFs have great potential to bring about development internally in sub-Saharan Africa. The continent has massive mineral wealth that can be used to develop the region. The NSIA has set a good example of adapting the SWF model to the African context. It effectively established and communicated its long-term vision. It sets high standards for transparency and abided by the Santiago principles. It developed a comprehensive knowledge of the local terrain, and demonstrated fiscal discipline, which in turn inspired investor confidence. In a span of four years, the NSIA has embarked on projects that have brought about socio-economic development in Nigeria. As a local agency, the NSIA was also able to cut through red tape more efficiently, but delays in getting the right approvals are still a reality. Moreover, ensuring relative independence from the government is a continual process. With prices of the commodity the SDF depends upon going down, maintaining the SDF’s autonomy might be difficult. All to say, SDFs in sub-Saharan Africa will not be devoid of challenges, and will require a nimbleness on the part of the leadership. Though it is encouraging to see the number of SDFs across Africa increase, more can be done to tackle the unique challenges faced in sub-Saharan Africa and encourage the good governance of SDFs so that they realize their potential for the development of individual countries on the continent.

Sources:


[1] http://www.opec.org/opec_web/en/about_us/167.htm

[2] http://www.economist.com/news/middle-east-and-africa/21693971-nigeria-has-about-much-electricity-edinburgh-problem-powerless

[3] http://www.huffingtonpost.com/timi-soleye/why-nigeria-generates-so-_b_5695091.html

[4] http://africa-energy-forum.com/webfm_send/1243

[6] http://www.afdb.org/en/news-and-events/article/continental-business-network-managing-investment-risks-in-public-infrastructure-15699/

[7] http://data.unicef.org/gen2030/index.html

[8] http://www.afdb.org/en/blogs/afdb-championing-inclusive-growth-across-africa/post/urbanization-in-africa-10143/

[9] http://www.swfinstitute.org/fund-rankings/

[10] https://www.pwc.com/gx/en/sovereign-wealth-investment-funds/publications/assets/sovereign-investors-2020.pdf

[11] http://www.livemint.com/Companies/lI3QqngchIvMdQ4skDqjjN/Indias-sovereign-wealth-fund-identifies-first-eight-project.html

[12] http://www.mubadala.com/en/our-impact/supporting-the-growth-of-a-thriving-society/world-class-healthcare-close-home

[13] http://www.sevenenergy.com/media/news-and-announcements/2014/23-09-2014

[14] http://nsia.com.ng/nsia-nbet-sign-350m-eurobond-fund-management/

[15] http://www.ge.com/news/company-information/africa

[16] http://nsia.com.ng/press-release-nsia-announces-partnership-with-omp/

[17] http://www.thisisafricaonline.com/Policy/Rise-of-the-African-sovereign-wealth-fund; http://www.afdb.org/en/blogs/afdb-championing-inclusive-growth-across-africa/post/the-boom-in-african-sovereign-wealth-funds-10198/

[18] nsia.com.ng/nshttp://nsia.com.ng/nsia-rated-transparent-sovereign-wealth-institute/ia-rated-transparent-sovereign-wealth-institute/

[19] nsia.com.ng/nshttp://nsia.com.ng/nsia-rated-transparent-sovereign-wealth-institute/ia-rated-transparent-sovereign-wealth-institute/

[20] http://allafrica.com/stories/201504061056.html