A National Sovereign Wealth Fund for Kenya
A National Sovereign Wealth Fund (NSWF) is a state-owned investment vehicle that draws funds from certain profitable ventures undertaken by the state. These proceeds are invested in financial markets around the globe in order to generate returns indefinitely for the state thereby ensuring intergenerational equity, with future generations being able to benefit from the gains made today. This model has been used by many countries that are rich in depletable mineral resources so that gains made from the natural resources can be invested to benefit future generations through the returns of the investments.
The Strathmore fraternity, through the Centre for Research and Applied Economics, was on the 17th of October, privileged to host Dr. Mbui Wagacha, a seasoned macroeconomist and policy expert who chaired the Committee on Kenya’s Sovereign Wealth Fund (SWF Bill, 2014) in the Office of the President. He shared his insights on how Kenya can expedite its efforts in order to come up with a NSWF that can ensure intergenerational equity for all Kenyans. Having worked for international organisations around the world and served as Acting Chair of the Central Bank of Kenya, Dr. Wagacha was the ideal speaker to lead the discussion with colleagues, faculty and students.
NSWFs are used mainly to manage the transition of commodities into financial wealth that benefits future generations. By investing in equities, debt, real estate and alternative investments such as hedge funds, returns from commodities can be transformed into financial assets that generate wealth for the state indefinitely. Many countries have successfully developed through NSWFs. Most notably is Norway, whose NSWF is valued at over USD 1 trillion, meaning that every Norwegian is worth KES 20 million at the time of birth.
The African context is particularly interesting. Africa holds about 30% of the world remaining mineral deposits. However, Africa only owns about 2.3% of the value of the world’s NSWFs. Historically, Africa’s mineral wealth has been plundered through the signing of dubious contracts meant to benefit only a small section of the population as most of the people continue to live in abject poverty. This calls for a drastic shift in how we handle our mineral wealth to ensure that its benefits are not only seen today, but also in the future.
Kenya has recently suffered from missed tax revenue targets as well as an increasing budget deficit. Its dependence on commercial and foreign debt has also significantly increased since the promulgation of the new constitution. This has increasingly had a negative effect on economic performance and even the credit rating of the nation which may lead to spiral effects that could cause an economic downturn. There has been some good news however. With recent discoveries of deposits of oil, titanium, coal and rare earth, Kenya can extract these resources and empower the population economically. However, drawing lessons from other African countries such as the Federal Republic of Nigeria, Kenya must move with speed to protect its resources from exploitation without the maximum benefit to its people. The Kenya Sovereign Wealth Fund Bill 2014 seeks to do exactly this.
The model seeks to pass an act of Parliament that establishes a NSWF to undertake a diversified portfolio of medium and long-term local and foreign investment, to build a savings base for the purposes of development and the stabilisation of the economy at all times. Sources of financing for the fund include capital from privatisation of state corporations, dividend from state corporations and oil, gas and mineral revenues that have been allocated to the national government. This pool of funds constitutes the principal investment sum that cannot be used for a government’s day-to-day operations but is instead invested to generate returns for the state. Only interest generated from the fund can be used to assist the government with budgetary requirements. A council chaired by the President will exercise supervisory authority of the fund setting goals that the fund should achieve annually as well as reviewing what the fund’s proceeds can be used for (funding windows). The funding options include stabilisation of the economy, infrastructure and development, and a Future Generation’s Fund.
Kenya’s model for the NSWF was critiqued based on structure, governance, and transparency and accountability. The SWF Bill 2014 has been handed global awards based on the robust model to secure Kenya’s mineral resources as well as to provide maximum benefits to its citizens. The use of Service Contracts as opposed to Production Sharing Agreements (PSAs) and the preservation of principal funds particularly stand out in this bill as opposed to other suggestions that have been made on how to run the NSWF. With a provision for this fund in the Constitution of Kenya 2010 under Article 206 (1.a), Parliament can act quickly to realise the dream of securing our nation’s future.
We should therefore take advantage of the newly discovered resources and sign exploitation agreements that protect the interests of Kenyans and future generations. Universities should also then move with speed to train future fund managers who will manage state wealth professionally and ensure the stability of the economy and guarantee the future generations of Kenyans some of the returns from their nation’s present-day wealth. By building capacity, Kenyans will be able to negotiate well on behalf of their country and its future population.
This article was written by Kenneth Kirumba.
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