This page considers overseas sovereign wealth funds and
It covers -
As the preceding pages of this note indicate, sovereign
investment by national and provincial governments -
in variety of forms, uses different resources (eg petroleum
revenue, tax revenue and privatisation
proceeds) and for different purposes
be at an arm's length from the government of the day
(typically reflecting the independence of the central
bank) or instead operated as a part of government
be driven by commercial advisers of varying honesty
and expertise (with Nauru for example dissipating the
'national nest egg')
be restricted to investment within the particular jurisdiction
or to particular types of investments.
following paragraphs illustrate some of those variations.
Norway's national Government Pension Fund (Statens pensjonsfond)
has two components: a taxpayer-based fund and the Government
Pension Fund~Global. The latter, formerly the Government
Petroleum Fund (Statens oljefondet) and often characterised
as the prototype resource-based fund, was established
in 1990. The expectation was that it would provide a long-term
savings mechanism underpinning pension, health and other
expenditure on the country's aging population. The Fund
would also alleviate 'Dutch disease', ie negative impact
of petro-revenue on other parts of the economy through
loss of exports because of the rise in the exchange rate
resulting from resource sales.
The Fund is managed
by a specialist arm of the central bank. Importantly,
all investment is offshore: revenue from sale of North
Sea oil/gas is contributed to the fund and invested outside
Norway, with that capital outflow causing depreciation
of the exchange rate and offsetting a rise in the exchange
rate resulting from oil exports. There is a statutory
cap on transfers from the fund of 4% percent of the capital
per year, reflecting the estimated long-term real rate
of return on investment.
The fund has been promoted as a tool to ensure transparency
in identification and use of Norway's petro-revenue. Investment
is subject to ethical guidelines, with the Finance Ministry
identifying businesses in which the Fund cannot invest
(eg because they are involved in arms manufacture or,
famously in the case of WalMart, are considered to engage
in human rights abuses). A maximum of 5% of shares in
an enterprise may be held by the Fund.
A perspective is provided in Alan Gelb's Oil Windfalls:
Blessing or Curse? (Oxford: Oxford Uni Press 1988)
and Martin Skancke's 2003 'Fiscal Policy and Petroleum
Fund Management in Norway' in Fiscal Policy Formulation
& Implementation in Oil-Producing Countries (Washington:
International Monetary Fund 2003) edited by Jeffrey Davis,
Rolando Assowski & Annalisa Fedelino.
France's national Pensions Reserve Fund (FRR) aims to
supplement the public pension system. It was established
in 1999 and has been the subject of recurrent criticism
regarding complexity, lack of transparency and alleged
under-contribution. A more telling criticism has been
that the Fund does not represent a successful effort to
rationalise the nation's fragmented and inefficient pension
The Fund draws on contributions from a range of sources,
including cash injections (notably through privatisations
and 3G network licenses), taxes on private assets, money
from savings banks (eg the Caisse des Dépôts
et Consignations) and expected surpluses from the Old
Age Solidarity Fund and the National Old Age Insurance
Fund for Wage Earners. Disbursements, from 2020 onwards,
would be made through existing occupational pension schemes.
The target is contribution of €4.5 billion per year
to reach an aggregate €152 billion in 2020. As of
2004 the Fund had assets of €19.2 billion.
The FRR is governed by a supervisory board (legislators,
business and union representatives). The Fund does not
have a geographical restriction but is limited to "socially
responsible investment", an area of contention with
criticisms of dirigisme commenting that there will be
a tendency to bail out ailing national champions.
The Kuwait Fund for Future Generations (FFG), formally
established in 1976 but variously tracing its history
to informal investment from 1953 or 1962 onwards, is managed
from London by professional advisers under the supervision
of the Kuwait Investment Authority (KIA).
The latter is estimated to hold US$200 billion of assets,
including major Australian and UK commercial property
under the St Martins banner.
As of 1976 it had investments of around US$8 billion,
derived from petro revenue and accumulated returns. From
1976 some 10% of all revenue from all government sources
must be placed in the fund. It was estimated in 1987 that
assets were around US$35 billion. Kuwait is reported to
have a strongly diversified portfolio, with substantial
equity stakes in public companies in the US and elsewhere,
major property holdings (eg in Australia) and investment
in hedge funds.
Edwin Truman notes that as of August 2007 the Saudi Arabian
Monetary Agency reporting holdings of US$27.0 billion
in foreign exchange reserves, US$205.7 billion other international
securities on its balance sheet and $51.3 billion in holdings
(on behalf of other government entities) that are not
on its balance sheet.
Nauru and Kiribati
Micronesian statelet Nauru
drew on royalties from the mining of phosphates (for fertiliser)
in establishing the Nauru Phosphate Royalties Trust (aka
Long-Term Investment Fund under s 62(1) of the Nauru Constitution)
in 1968. That fund is now regarded as the major example
of a sovereign wealth fund gone wrong.
Investments reportedly peaked at US$800 million in 1991,
adequate to support a then national population of 4,000.
Assets included a landmark office tower in Melbourne,
a shipping line and an international airline. Large-scale
corruption and mismanagement
- accompanied by reckless borrowing by the government
- saw major erosion of the Fund, with property assets
in Australia being sold for $339 million and reported
debts of around $240 million. By 2004 earnings from phosphate
exports (at that time US$640,000) failed to cover the
cost of production and Nauru now depends on foreign aid.
The restructured Fund was claimed to have $60 million
assets in 2007, supporting a population of 10,000 people.
The Nauru experience is discussed in Investing for
Sustainability: The Management of Mineral Wealth
(Norwell: Kluwer Academic 2001) by Rognvaldur Hanneson.
A contrast is provided by the Kiribati Revenue Equalisation
Fund (RERF), also based on phosphate revenue, and estimated
as worth around US$520 million in 2006. It is discussed
in Teuea Toatu's 'The Revenue Equalisation Reserve Fund'
in Atoll politics: the Republic of Kiribati (Christchurch:
Macmillan Brown Centre for Pacific Studies, University
of Canterbury 1993) edited by Howard Van Trease.
The New Zealand Superannuation Fund (NZSF) is intended
to underpin the future cost of the national pension system,
reflecting aging of New Zealand's population (similar
demographics to those in Australia) and restructuring
of the country's tax system.
The New Zealand government expects to draw the equivalent
of 15 to 20% of the annual cost of superannuation payments
beginning around 2025, with the net fiscal impact of the
NZSF expected to exceed 30% of payment costs for several
The government expects to provide the Fund with $NZ2.2
billion per year over 20 years, with capital contributions
ceasing in 2026. Some contributions may come from further
privatisation. As of mid 2004 the Fund's assets were around
$NZ4.0 billion, with plans for growth in nominal terms
In contrast to Singapore's Temasek and GIC the NZ Fund
may not borrow and may not control another entity (in
practical terms this limits it to holding no more than
20% of an entity's voting capital).
Investment by the NZSF is undertaken by external fund
managers. The Fund is governed by the Guardians of New
Zealand Superannuation, a discrete government entity.
The Alaska Permanent Fund was established in 1976 through
a constitutional amendment requiring
least 25 percent of all mineral lease rentals, royalties,
royalty sales proceeds, federal mineral revenue-sharing
payments and bonuses received by the state be placed
in a permanent fund, the principal of which may only
be used for income-producing investments.
The Fund is managed by the Alaska Permanent Fund Corporation
a state-owned entity supervising external managers, with
most spending from the Fund being made through the Permanent
Fund Dividend Division (independent of the APFC)
as dividends to qualified Alaska residents.
The Fund aims to achieve a real rate of return of 5% per
year, with a diversified investment portfolio. As of 2007
publicly-traded shares comprised 53% of the Fund's total
market value, bonds were at 29% of value (primarily US
bonds), 10% US real estate (industrial, residential, office
and retail), 4% in hedge funds and 4% in private equity.
Eire's National Pensions Reserve Fund (NPRF), similar
to the New Zealand Fund, is intended to meet part of the
costs of social welfare and public service pensions from
The national government is required under legislation
to contribute 1% of GNP in the NPRF. It may also make
additional contributions where circumstances allow. The
value of the NPRF as of 2002 was €7.4 billion. The
NPRF cannot be drawn on until 2025.
The Fund is free to invest in all classes of asset, other
than Irish government bonds.
The Fund is controlled by the National Pensions Reserve
Fund Commission, which has discretionary authority to
determine and implement an investment strategy "based
on commercial principles and subject to prudent risk management".
Operation involves the National Treasury Management Authority.
Development of the Singapore economy has featured growth
of what, in practice, are now two sovereign funds.
The Government Investment Corporation (GIC),
established in 1981, invests internationally in equities,
fixed income, money market instruments, real estate and
special investments. As of 2006 those assets were estimated
at US$100 billion. GIC notes that it manages assets owned
by the Government of Singapore (GIC's parent) and the
Monetary Authority of Singapore. It has extensive retail
property investments in Australia (eg a stake in the $1
billion redevelopment of the landmark Myer site in Melbourne's
The government also wholly owns Temasek,
an unwieldy conglomerate (with assets estimated at over
US$100 billion) with substantial offshore holdings that
include a controlling stake in Australia's Optus
and Thailand's Shin telecommunications and broadcast group.
It is promoted as "an Asia investment house headquartered
in Singapore". Temasek's chief executive is Ms Ho
Ching, wife of prime minister Lee Hsien Loong (son of
Singapore's first prime minister Lee Kuan Yew). It announced
in November 2007 that it would avoid investing in "iconic"
companies, instead taking minority stakes and seeking
local partners in making acquisitions.
The Alberta Heritage Savings Trust Fund (AHSTF)
was established in 1976 and like the Alaska Permanent
Fund drew on mineral royalties (around 80% of oil and
gas production occurred on Crown land). The expectation
was that returns from the fund would support economic
restructuring as the province's non-renewable resources
were depleted, would encourage diversification of the
economy and would enable "quality of life improvements"
that Alberta otherwise could not afford.
The Alberta Heritage Savings Trust Fund Act was
passed in 1976, with the fund receiving an initial US$1.5
billion contribution from the government. Investment proved
to be controversial, with loans to Alberta Crown corporations
("not necessarily a commercial return" and often
indirectly covering shortfalls in government revenues
from ailing state owned enterprises), loans to other provincial
governments or government agencies at concession-level
interest rates through the Canada Investments Division
and spending on physical and social infrastructure projects
that were to provide long-term social or economic benefits
to Albertans without consideration of financial return
(notably the Alaska Heritage Foundation for Medical Research,
Prior to 1997, when the Fund was restructured, there was
little attention to investment for commercial returns
in Canadian stocks and money market securities.
From 1976 to 1983 some 30% of the province's non-renewable
revenues (mostly oil and natural gas) went into the Heritage
Fund. That contribution was then halved and ceased altogether
in 1987 with the collapse of world oil prices. Overall
contributions were around US$12 billion, with the Fund
growing to US$12.7 billion in 1987 (and total income for
government by 1998 amounting to US$22 billion). The Fund
eroded from 1987 to 1995 as the government drew on capital
for funding of social services and other programs.
Restructuring in 1997 saw a new business plan aimed at
earning income to support the government's fiscal plan,
maximize long-term financial returns through the Endowment
portfolio, and improve Albertans' understanding of the
fund. The government contributed capital on an irregular
basis to offset inflation; the Fund reached C$15.4 billion
in late 2006. Assets at that time comprised public equities
45.0%, fixed income securities 30.0%, real estate 10.0%,
hedge funds 5.0%, private equity 4.0% and timberland 4.0%.
UAE and Qatar
The Abu Dhabi Investment Authority (ADIA), invests the
Abu Dhabi government's oil and gas revenues, primarily
offshore. It is reported as controlling assets of around
US$1.3 trillion as of 2007. Dubai International Capital
with US$80 billion assets was established in 2004 as the
international investment arm of Dubai Holding, the conglomerate
almost wholly owned by Dubai's ruler. DIC appears to concentrate
on industrial investments, complementing the focus on
shares and real estate by Dubai Investment Group (DIG).
The Qatar Investment Authority is reported as controlling
some US$50 billion assets.
In 2007 Libya announced establishment of a discrete SWF,
the Libyan Investment Authority (LIA), consolidating six
existing 'extra budgetary funds' financed by petro revenue
(the Oil Reserve Fund (ORF), Long-Term Investment Portfolio,
Libya Africa Investment Fund (LAIF), the SEDF, Libya Financial
Investment Company and Oil Investment Company). As of
2007 Libya's foreign reserves were estimated at US$70
billion; the target for the SWF was US$40 billion.
In 2001 it claimed an offshore investment portfolio of
US$8 billion, of which US$6 billion involved stakes in
EU businesses - including 5% of Banca di Roma and US$1
billion in UK real estate - and US$1 billion of interests
in overseas banks (through the Libyan Arab Foreign Bank).
Libya had attracted attention for opportunistic high-profile
offshore investment (notably a 9.8% stake in Italy's FIAT
conglomerate, later increased to 14% before being sold
back to the Agnelli family and associates), for use of
revenue on some of the local dictator's zanier projects
and for criticisms that much 'investment' was a device
by a rogue state and its allies.
Russia and Kazakhstan
Russia caught the SWF bug in 2007, announcing that in
2008 its US$109 billion Oil Stabilisation Fund (established
in 2004) would be split into a Reserve Fund and a Future
Generations Fund. The former will be invested like official
reserves. The latter would operate as a SWF, initially
with with US$30 billion but growing through contribution
of some US$40 billion per year from oil and gas revenue.
Income from Kazakhstan's oil-based SWF has been recurrently
diverted, consistent with levels of corruption in that
autocracy. Concerns are highlighted in Victorovna Progunova's
2006 Transparency, Accountability and Public Participation
as Foundations for Effective Operations of Natural Resource
Funds: Implications for the Russian Stabilization Fund
The Central Huijin Investment Company was established
by China's central bank in 2003 with US$67.5 billion of
its foreign exchange reserves to recapitalise four state-owned
banks. Central Huijin tacitly served as a SWF. In 2007
Beijing established the China Investment Corporation (CIC);
it is expected to absorb Central Huijin and China Jianyin
Investment with an initial capital of US$200 billion.
The Brunei Investment Agency (BIA) was established in
1983 under the Brunei Investment Agency Act (PDF)
after the sultanate withdrew its oil-based investment
portfolio from Britain's Crown Agents, traditional custodians
for many UK colonies and native rulers. The BIA has invested
most assets offshore, consistent with the nation's small
The Sultan's brother Prince Jefri - finance minister and
head of the BIA - established Amedeo Development Corporation
as a corporate umbrella for diverse investments. Amedeo
collapsed in 1997, with the Sultan subsequently suing
his brother in the UK amid claims that between US$20 billion
and US$28 billion had been lost or misappropriated. In
an out of court settlement Jefri agreed to hand assets
worth US$15 billion to the BIA; litigation over fulfilment
of that agreement dragged on until 2007. Amedeo was wound
up in the Brunei High Court in 1999 with debts of US$3.5
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