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Singapore model for Africa sovereign funds

Merit-based and outward-looking approach leads to efficient portfolio growth

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January, 2019

Published in: OMFIF 10th Anniversary Publication

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"Asia is proof that you do not need natural resources to create a successful sovereign fund. Those of China, Singapore, Hong Kong, South Korea and Malaysia are among the 20 largest sovereign funds in the world, and none are funded by commodities."

Asian sovereign funds have played an important role as engines of development and economic growth over the past 50 years. In 1965, Singapore’s GDP per capita was just $500, on par with that of Mexico and South Africa. In 2017, it was more than 100- fold higher, at $56,000.


One of the factors contributing to the Singapore growth story is the savvy use of limited government resources. This was achieved through the creation of efficient investment vehicles geared towards the nation’s industrial policy and economic development objectives. As Africa’s own sovereign fund story unfolds, the examples set by Asian countries can serve as inspiration for reform.


Africa’s sovereign funds have assets under management exceeding $160bn. Apart from Botswana’s Pula Fund, founded in 1994, all were formed in the 21st century. Pundits estimate that their numbers will reach 20 in the next three years, up from 12 today. The latest addition is Egypt’s $11bn sovereign fund.


Their mandate is clear: to safeguard today’s wealth for future generations. But their relevance has been questioned. To create value, sovereign funds must invest in transformative projects. Yet, of the 12 African funds, only seven have a clear mandate to do so: Nigeria, Rwanda, Ghana, Angola, Senegal, Gabon and Morocco.

Clear objectives

It is helpful to look back at Singapore’s first steps into the world of sovereign funds. Following independence in 1965, the country faced an unemployment rate of around 10%, as well as a severe lack of capital and infrastructure. To stimulate industrialisation, the government took participative stakes with foreign investors. It also founded new companies in strategic sectors, such as trade, tourism, banking, defence and transportation.


As the scale and scope of state-led investments grew, the sovereign fund Temasek was founded in 1974 to manage the government’s investments better. Its original SGD 354m (around $250m) portfolio included 35 inherited government-linked companies, including Singapore Airlines and the Development Bank of Singapore.


Its initial goal was to free the ministry of finance from having to oversee government investments, allowing it to focus on its core policy-making activities. By the turn of the 1970s, Temasek took on a more commercial and entrepreneurial role as an engine of economic growth.

It started providing the companies in its portfolio with more capital, and gave them more management independence on a results-based reward system. Between 1974-83, the value of Temasek’s investment portfolio increased to Sgd2.9bn, comprising 58 firms with more than 490 subsidiaries.


This focus on strategic investments and promotion of government-linked companies paid off. In 1999, 25 years after its inception, Temasek managed a portfolio worth Sgd100bn, almost 300 times its original value. In comparison, Botswana’s Pula Fund, Africa’s oldest sovereign fund, financed by revenues from diamond and mineral exports, does not have a clear investment objective. The fund has grown at a much slower pace than its Singaporean counterpart: its assets have reached $5.7bn today from $2.4bn in 1999 (the earliest available measure).


Investment in local projects and companies brought Temasek where it is today, with a domestic and global portfolio worth Sgd308bn. More importantly, it helped Singapore become more investable. For example, through Singapore Airlines, the country bolstered its national branding and tourism industry.


Stakes in the Port of Singapore Authority and national trading company Intraco allowed Singapore, as an export-orientated economy, to strengthen its competitive advantage as a trade, maritime and shipping hub. Temasek’s involvement with Singapore Telecommunications led to the company’s successful initial public offering in 1993, when 1.69bn shares were sold for Sgd4.2bn. This catalysed the development of Singapore’s capital markets. The IPO turned into an opportunity for Singaporeans to benefit from the country’s economic growth when the government announced a 45% discount on shares for citizens.


Singapore is not the only Asian country where a sovereign fund made a corporate success story. In Malaysia, Khazanah’s 10-year ‘government-linked company transformation programme’ led to the tripling of market capitalisation for the country’s 20 largest companies, and 12.6% growth in shareholder returns.

Meritocracy and transparency

African governments traditionally have majority stakes in national assets in the mining, telecommunications, oil, gas and infrastructure sectors. This puts them in the best position to create future economic champions.


But Asia is proof that you do not need natural resources to create a successful sovereign fund. Those of China, Singapore, Hong Kong, South Korea and Malaysia are among the 20 largest sovereign funds in the world, and none is funded by commodities. In fact, according to the Peterson Institute for International Economics, around 20% of all countries with sovereign funds finance them from sources other than earnings from the export of natural resources or from foreign exchange reserves.

Whether or not commodities are part of the mix, pooling together state assets around a consolidated holding vehicle allows for more efficient capital raising and a stronger balance sheet base. Because of its ‘high degree of investment diversity and liquidity’ and its ‘above average consolidated financial profile’, Temasek was able to enjoy a triple-A rating for its maiden SGD 5bn 10-year bond issuance in September 2005.


This structure also brings several fiscal benefits. As a private company, Temasek pays taxes, and its sole shareholder is the ministry of finance, meaning that returns can be used as a fiscal cushion when Singapore faces budget deficits. The state investment holding company returned an average annual dividend income of SGD 7bn over the last decade.


But what makes the biggest difference in how the funds work and are perceived is their relative independence from their governments. The increasing prominence of sovereign funds in Asia over the past 20 years led to concerns about their role and impact. Some feared that political agendas could drive their activities.


Singapore’s arm’s-length and meritocracy-based approach in appointing external industry experts instead of government officials to grow portfolio companies into internationally competitive firms proved efficient. It also facilitated Temasek’s outward opening; today, only 27% of the fund’s portfolio is made of Singaporean investments.


Some African sovereign funds are already following this lead. The Nigeria Sovereign Investment Authority has won plaudits for prioritising its governance structure and transparency over financial performance. It is the topranked African country in the Linaburg-Maduell transparency index, and was hailed in the International Forum of Sovereign Wealth Funds’ most recent annual review. It was marked out as a leading example of an African fund with an ‘innovative sovereign wealth fund structure’ that ring-fences its operations and capital in accordance to different policy objectives, including savings, stabilisation and development.


Being new to the global sovereign fund scene has its challenges. It will take time for each African country to find what works and what doesn’t. But Africa can draw from Asia’s extensive experience in this field, so that it too can build sovereign funds to help create enduring growth on the continent.

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