We continue and conclude today on what is known as Sovereign Wealth Funds, essentially special purpose state-owned investment funds to achieve financial objectives using investment strategies, tools and instruments. We noted last week that there is no single model of SWF’s and that each is determined by the objectives which the relevant government seeks to achieve. As would be obvious from last week’s column I find the Singapore model particularly attractive and one which Guyana will do well to consider as a model, modified of course by Guyana’s national objectives and its state of development.
A reason for my preference for Singapore’s two SWF’s is that they had their origin in an era when that country’s economy was not significantly dissimilar to that of Guyana. Importantly too, while Singapore is somewhere about No. 40 in the world measured by size of the economy, and it is clearly not blessed with natural resources, it ranks way above many of the world’s richest countries that have chosen to invest in sovereign wealth funds. In fact, when its two funds are added together, it has the third largest SWF in the world.
Unlike most of the countries with SWF’s, Singapore, recognising the open nature of that country’s economy subject to the vagaries of international trade, began its fund as an instrument of savings to provide a cushion for a rainy day, should the economy fall into a period of prolonged difficulties. Interestingly enough, while most former colonies complain about the social, infrastructural and economic deficit of colonial rule, Singapore saw the very small sum of foreign reserves at Independence as an inheritance from British colonial rule.
What I think is most impressive about Singapore and its attitude to SWF’s was that the state was prepared to give the Fund wide latitude and independence. Once a conscious decision was taken to build a Fund, it operated with one clear underlying objective: a real return over global inflation of about 4% to 5%.
According to a former CEO of the Fund, the government gives the Fund an investment mandate which spells out the investment objective and risk tolerance while leaving all investment decisions to the Fund. The only other involvement of the government in the affairs of the Fund is the appointment of members of the Board of Directors. That is not to say that politicians are not involved – Prime Minister Lee Kuan Yew was the chairman of the Fund since the time when he was prime minister, with his deputy being the then current prime minister.
For all the influence and power which such a combination was capable of exerting, the Board of Directors had one primary responsibility – to approve the asset-allocation policy, i.e. the asset classes that the Fund could invest in and the proportions of the portfolio that should be allocated to each of those asset classes.
In the Singapore model, the Board relied for the proper discharge of its responsibilities for asset allocation policy on an investment committee which comprises not only a subset of the directors but also external advisors.
The challenge for us in Guyana is that our politicians just do not seem to be wired this way. They want to be involved in everything. But it is more than just micromanagement. If the investment objectives of the Fund are not consistent with and support government‘s fiscal objectives, confusion and failure are almost unavoidable. Unfortunately, the problem for us is that the current administration has still now worked out its economic policies way past its midterm.
It is a matter of conjecture whether the problem lies with the Ministry of Finance or the Ministry of Natural Resources and whether the matter is being treated as important by Cabinet. Whatever it is, it is surely time that some lead be taken in this matter. Failure to act can unwittingly lead to the Dutch Disease appearing earlier rather than later.
Getting on track
Fortunately, Guyana does not need to reinvent the wheel. Apart from observing the various Funds around the world operating in disparate environments and levels of economic development, Guyana also stands to benefit from all the literature and studies on SWF’s, driven largely because of their impact on the global economy. More specifically, Guyana can benefit from what is known as the “Santiago Principles” – generally accepted principles and practices (GAPP) – which should underpin as the guiding objectives for SWFs, the following:
i. Maintenance of a stable global financial system and free flow of capital and investment;
ii. Compliance with all applicable regulatory and disclosure requirements in the countries in which they invest;
iii. Making investments on the basis of economic and financial risk and return-related considerations; and
iv. The establishment of a transparent and sound governance structure that provides for adequate operational controls, risk management, and accountability.
The GAPP covers practices and principles in three key areas – (i) legal framework, objectives, and coordination with macroeconomic policies; (ii) institutional framework and governance structure; and (iii) investment and risk management framework.
Certain GAPP principles stand out for their relevance and it makes sense for those in governance of the economy and the sector in Guyana to pay heed to them. For example GAPP 2 requires that the policy purpose of the SWF should be clearly defined and publicly disclosed. GAPP 3 provides that where the SWF’s activities have significant direct domestic macroeconomic implications, those activities should be closely coordinated with the domestic fiscal and monetary authorities, so as to ensure consistency with the overall macroeconomic policies.
And on the question of Governance, GAPP 6 requires the governance framework for the SWF should be sound and establish a clear and effective division of roles and responsibilities in order to facilitate accountability and operational independence in the management of the SWF. GAPP 8 imposes some semblance of fiduciary obligations on the governing body(ies) of the SWF, requiring that they should act in the best interests of the Fund, and have a clear mandate and adequate authority and competency to carry out its functions. Sounds like Singapore.
While the principles are easily stated, there will be issues in implementation and flexibility and prudence must be watch words. Yet, this is not beyond the capacity of Guyanese and if the Government is serious about acting in the best interest of Guyana then it needs to start addressing its mind to the “what” and the “how” of the proposed SWF. In this regard, there can be no substitute for widespread consultation and a careful balance between spending and saving.
Next week will be the fiftieth column in this series and will offer some recap of the road travelled by Guyana since June 2015 when the first commercial oil discovery was announced.