Sovereign Wealth Funds and Long-Term Development Finance : Risks and Opportunities
Sovereign wealth funds represent a large and growing pool of savings. An increasing number of these funds are owned by natural resource exporting countries and have a variety of objectives, including intergenerational equity and macroeconomic stabi...
| Main Authors: | , , , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2014/02/18930592/sovereign-wealth-funds-long-term-development-finance-risks-opportunities http://hdl.handle.net/10986/17313 |
| Summary: | Sovereign wealth funds represent a large
and growing pool of savings. An increasing number of these
funds are owned by natural resource exporting countries and
have a variety of objectives, including intergenerational
equity and macroeconomic stabilization. Traditionally, these
funds have invested in external assets, especially
securities traded in major markets. But the persistent
infrastructure financing gap in developing countries has
motivated some governments to encourage their sovereign
wealth funds to invest domestically. This paper proposes
some basic elements of a conceptual framework to create a
system of checks and balances to help ensure that the
sovereign wealth funds do not undermine macroeconomic
management or become a vehicle for politically driven
"investments." First, the risks and opportunities
of domestic investment by sovereign wealth funds are
analyzed. Central issues are the relationship of sovereign
wealth fund financing to the budget process and to the
procurement systems of sector ministries, as well as the
establishment of appropriate benchmarks and safeguards to
ensure the integrity of investment decisions. The paper
argues that a well-governed sovereign wealth fund, with a
sound mandate and professional management and staffing, can
possibly improve the quality of the public investment
program. But its mandate should not duplicate that of other
government institutions with investment mandates, such as
the budget, the national development bank, the investment
authority, and state-owned enterprises. Establishing rules
on the type of investment (for example, commercial and/or
quasi-commercial) and its modalities (for example, no
controlling stakes, leveraging private investment) is one
way to ensure separation between the activities of the
sovereign wealth fund and those of other institutions. The
critical issue remains that of limiting the sovereign wealth
fund's investment scope to that appropriate for a
wealth fund. If investments that generate quasi-market
returns are permitted, the size of the home bias should be
clearly stipulated and these investments should be reported separately. |
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