Sovereign wealth fund - in tune with global trend

Published: February 22, 2017 18:46:48 | Updated: October 23, 2017 11:47:20

When the World Bank (WB) cancelled the US $2.0-billion loan for the construction of the Padma Bridge on the spurious ground of corruption the Government of Bangladesh (GoB) felt not only shocked and humiliated, the mega project of crucial economic importance had to be delayed until alternative sources of financing could be firmed up. Had the country its own fund in the form of foreign exchange the bluff by the WB could be easily and promptly called by utilising it without any loss of time. But at the time - 2012 - the country's foreign exchange reserve was not large enough to transform a portion into a development finance fund. Growing at a robust rate the foreign exchange reserve crossed the threshold of $30 billion plus within two years making the GoB confident enough to go for the setting up of a sovereign wealth fund (SWF) to finance major development projects, mostly in the infrastructures sector. 
However, the resources for implementation of the stalled Padma Bridge had already been mobilised and the construction of the mega project had already been underway. 
The decision to constitute the SWF can be traced back to this bitter experience over the peremptory cancellation of the loan by the WB wallowing in its characteristic hubris. The kudos for upholding the self-respect of the country are in the main deserved by the dynamic exporters of the country earning hefty foreign exchange and the migrant workers sending their hard-earned wages in growing volume year-on-year. Unlike most of the SWF that came into existence over the last 50 years in the Middle Eastern, African and Nordic countries Bangladesh did not enjoy the bonanza of increasing revenue earned from natural resources like oil to generate foreign exchange reserves large enough to set up a SWF. 
Perhaps Bangladesh is the only developing country, a LDC (least developed country) to be more precise, that has been bold and confident enough to go for a SWF on the basis of foreign exchange earnings from sources other than mineral resources. Though small in size to begin with and puny compared to its peers, the proposed SWF will be the symbol of the progress the country has achieved in macro-economic management and robust optimism about sustained growth of its economy. It is, therefore, rich with symbols, both political and economic.
According to the decision taken by the GoB, a sovereign wealth fund is going to be established soon with $10 billion utilising the present $30 billion plus foreign exchange reserves lying with the Bangladesh Bank (BB). The hedge against possible risks for BB the contribution from its reserves will be spread over five years with five equal tranches of $ 2.0 billion. This indicates that a very prudent and cautious strategy has been made to utilise BB's foreign exchange (FX) reserve so that the central bank is not exposed to any shock or volatile situation caused by sudden depletion of its FX and unforeseen increase in demand (e.g., payment for imports). 
The proposed $10-billion SWF managed by the Ministry of Finance (MoF) will mainly (nay, almost exclusively in the near future) be utilised for implementation of major projects in the infrastructures sector covering highways, bridges, ports, power plants, railway, etc., preferably under Public-Private Partnership (PPP). This will make it unnecessary to borrow FX from abroad (capital markets or multi-lateral institutions like WB) that will entail repayment with interest. Of course, the MoF will have to repay to BB but the interest charge will be less than that fixed by foreign investors. Apart from ready availability of required FX for implementation of major projects low interest payment will reduce the cost of the projects. Secondly, when implemented under PPP, the FX will not be required to be forthcoming from GoB; half or a reasonable portion of the investment cost will be borne by the private sector. Thirdly, the possibility of attracting fund from insurance companies and pension funds in the country and from Bangladeshi expatriates abroad to augment the SWF will minimise the requirement of increasing contribution from BB.
THE CYNICS VERSUS GLOBAL PRACTICE: It has been pointed out by some observers having apprehensions about the viability and safety of the SWF when investment is made domestically that most of the SWF in the world (over 50 in number) is invested in equities or other assets abroad to earn a secured return. 
It is forgotten by these cynics that most of the Middle Eastern SWFs have stakes in domestic state-owned enterprises (SoEs) and capital market. They also hold substantial assets in public equity markets at home. According to a recent analysis by the think tank GOVERN, the states in the Middle East are significant shareholders in 89 of the region's 100 largest listed firms and a majority share holder in 34, thus debunking the scare about domestic investment. Sovereign investors, including social security and pension funds, are the largest institutional investors in most Arab stock exchanges, holding 40 per cent of the total market capitalisation in the region. 
The Chinese Investment Corporation (CIC) is the country's SWF which was established in 2007 with $200 billion and now has assets over $740 billion investments both at home and abroad. The CIC has gradually shifted emphasis from foreign investment to domestic ones, indicating the future trend for the Chinese SWF. According to a recent statement of its spokesperson, 'any investment must be closely tied to Chinese industry and serve in its economic transition'. 
Even the SWFs in the Middle East are now investing in greater volume domestically in SoEs and equity markets owing to fiscal austerity at home induced by falling hydro-carbon prices. 
In neighbouring India, the newly set up SWF, known as National Investment & Infrastructure Fund (NIIF), has so far invested in eight infrastructure projects in the country including power, railway and roads even without PPP arrangement. 
The SWF of Singapore, known as Tomasek, invests mostly in equities in the domestic capital market. Except Norway, almost all the countries having SWF invests significantly for the development of their domestic economy.
One of the critics of the proposed Bangladesh SWF has pointed out that to the extent the GoB is unable to repay the fund payable to BB due to budgetary constraints, BB will end up remaining stuck in the proposed SWF without having any control over its use. Supposing this Dooms Day vision becomes real (it is not inevitable, though) BB will not suffer any loss as long as the interest on its fund is paid by MoF. The track record of MoF shows that it has never defaulted in payment of interest to investors and deferred payment of the principle amount indefinitely. The debt servicing record of GoB is exemplary.
The same critic has pointed out that though prospective power projects may generate revenue and are bankable, the past experience shows that under PPP private corporate partners end up reaping lion's share of benefits at the cost of the GoB and the consumers. Given a well crafted agreement the possibility of this kind of alleged rip-off can be removed with due diligence on the part of GoB. The past experience, if true, need not be ineluctable in future, rather it can and will act as a lesson.
GOVERNANCE OF THE SWF: Finally, doubts have been expressed about the governance of the proposed SWF under the management of the MoF, citing the history of state-owned and managed enterprises and financial institutions. To obviate this from occurring in respect of the proposed SWF it has been suggested that instead of the MoF, the BB should own and manage the Fund. 
The apprehension is far-fetched as the management of any SWF will have to comply with the guidelines adopted in the Santiago Principles in 2008 under the auspices of the International Monetary Fund (IMF). These guidelines provide for transparent and sound governance of SWFs and ensure that these adequately account for investment risks. The practice of governance can be extended from the SWF to the implementation and management of the projects financed by it. If the SWF has its representatives in the implementation and management committees of the projects then regulation, oversight and all the other accoutrements of good governance can be ensured. 
The apprehension about poor governance on the part of the proposed SWF is, therefore, not only exaggerated but also based on pessimism. The GoB has become mature enough to address all the issues related to financing and management of mega projects. The Jamuna multi-purpose bridge is a case in point. The Padma Bridge, when completed, will be even a bigger example because it is going to be the symbol of pride for the country and the reputation of the government will be in the line.              

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