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The author is a freelance editor at the FT.
Twenty years ago, sovereign wealth funds were a rarity. Today, you can barely move for one. According to Global SWFA company that tracks public investors lists 179 funds managing $12.4 trillion in collective assets. As Britain prepares to launch its new National Wealth Fund, what lessons can it learn from experience abroad?
With just £7.3bn of initial funding, the NWF will be a far cry from the vast intergenerational savings fund that think tanks on the left and right of the British political spectrum have been calling for the state to create for decades. And rather than investing where returns look best, the NWF taskforce has recommended that it simply aim not to lose money. Its real focus will be on supporting the UK’s clean energy transformation and economic growth more broadly.
In the SWF taxonomy, this makes NWF a “strategic” fund. Strategic funds, unlike savings or stabilization funds, have non-financial goals—usually development goals. They are not unusual; they are the largest category of SWF by number, if not by asset value.
Saudi Arabia’s $925 billion Public Investment Fund is the largest of its kind. It aims to support Saudi Vision 2030, an ambitious industrial strategy to transform the economy away from oil and boost the country’s international standing. Buying up football clubs could yield lucrative financial returns, but these would be more likely to be happy coincidences than the result of cold, commercial calculations. If the NWF is to avoid becoming a universal slush fund, establishing strong governance mechanisms will be key.
Well-managed funds tend to recruit staff from outside the normal civil service channels, pay competitively and operate independently in pursuit of their clearly defined mandate. Ministers should be kept at arm's length from operational decisions for at least three reasons.
First, among SWFs, strategic funds are the most vulnerable to cronyism. The international experience is littered with high-profile disasters. The embezzlement scandal surrounding 1MDB, Malaysia’s strategic SWF, was declared “the largest kleptocracy case to date” by the US Department of Justice in 2016 and led to the jailing of the country’s former prime minister. And the Panama Papers revealed that FSDEA, Angola’s strategic SWF, paid tens of millions of dollars to close contacts of the president’s son, José Eduardo dos Santos. It would be nice to think that Britain doesn’t need cronyism checks, but the illegal use of VIP fast-tracks to award PPE contracts to politically connected companies during Covid-19 reminds us of the importance of strong institutional guardrails.
Second, given the NWF’s ambitions to attract private capital, ministerial intervention would leave Britain vulnerable to foreign governments using their vast pools of SWF capital as soft power instruments. Independent officials with unambiguous objectives are better able to manage such conflicts of interest.
Third, it is not clear that ministers are particularly suited to long-term capital allocation decisions. They are under constant pressure to provide answers to the immediate problems of the day. And without transparency of financial returns, they risk being able to assess their homework, or not at all. It seems to me that these risks are greater for elected politicians than for civil servants.
It is encouraging that a report prepared for the Labour Party by the Green Finance Institute on principles for the design of the fund recommends market-based operations, independent management and professional staff. It would be wise to follow this advice.
While Australia’s Future Fund was built on privatisation proceeds, and many resource-rich countries have built their SWFs from oil revenues, the UK has no choice but to finance the NWF by issuing debt. While this may seem risky, it is not uncommon. France, Italy and Belgium have built small SWFs despite high levels of public debt. Singapore, China and New Zealand have even shown that it is possible to build very large sovereign wealth without a resource windfall. The UK’s debt-focused fiscal rules make no distinction between a pound spent on acquiring productive assets and a pound lost behind the sofa. This may be one reason the NWF will start so small. While unlikely, shifting the focus of the UK’s fiscal rules from net debt to net worth would allow for greater ambition.
Governance design is not the most glamorous area of public policy. When it comes to creating a SWF, it is perhaps the most important area. For the UK’s new fund, it is likely to determine its success.