Political and financial prudence are indeed very important in maintaining a truly effective SWF.
The 2019 Sovereign Wealth Fund (SWF) Bill 2019, which was recently published by the Treasury, seeks to establish a Fund to receive, invest and disburse revenues (profits, royalties, fees ) from the two extractive resources, namely, petroleum (oil and gas) and minerals.
Resource generation and collection are governed by the Petroleum Act 2019 and the Mining Act 2014 both of which are stewarded by the Ministry of Petroleum and Mining. A Holding Account maintained by the SWF at the Central Bank of Kenya shall receive the resource revenues.
The Bill stipulates that the SWF shall comprise three components- the Stabilisation Component (minimum 15 per cent) to insulate the national budget against resource revenue fluctuations; Infrastructure Development Component (minimum 60 per cent); and “Urithi” Component (minmum10 per cent) for future generation’s savings.
Specifically in respect of the ongoing Turkana oil resource development, the SWF will receive 75 per cent of the revenues, after allocating 20 per cent to resource-host counties and five per cent to local communities. The counties and communities are expected to form Trustee institutions and systems to manage their revenue allocations.
On the face of it the proposed law incorporates most of the elements of a best practice extractive resource SWF elsewhere in the world. The intents and principles of transparent resource revenues accountability and financial management are clearly incorporated in the bill.
It is assumed that the ministries responsible for petroleum and minerals will fully and correctly account for and collect all the revenues due from the resources. The SWF is only responsible for receiving and managing what it receives from the resource ministries.
My key criticism of the draft Bill is that the composition and appointment of the SWF Board is very much “executive-centric” denying it the element of “public trusteeship” and independent oversight. The appointment of the chairman, board members, and CEO are directly or indirectly influenced by the executive (President and the Cabinet Secretary).
This gives the Treasury Cabinet Secretary (CS) who is also responsible for balancing the National Budget an overwhelming position that may be conflicted by the dual roles. Glaringly missing in the Board are independent “public-trust” representatives like the ICPAK, the LSK or even a church representative. It is important to have two board members from these institutions to safeguard general public interests and give the board a true image of a trustee, which indeed is what it is.
Another aspect of the Bill which is vague and open to confusion is the process for benefiting the future generations from “Urithi” component of the SWF. The Bill says that future generations will benefit when resources are “depleted”. Most oil resources last 20/25 years while minerals could last much longer. Further, as one specific resource asset is exhausted, others are being discovered. So the SWF may be in perpetual funding from an ever-shifting resource base.
Depletion aside, when does the current generation cease end a future one commence? What is the fairness of reserving benefits for the future generations when most of the current generation are in dire need? This “Urithi” section of the bill needs to be expounded or detailed in a supplementary regulation.
A reputable SWF anywhere in the world is as effective as the government’s commitment and discipline to strictly adhere to the intents of the Fund and preparedness to manage it as intended and stipulated by the law. However, in reality the actual SWF implementation is subject to the political-economy of individual countries.
The truth is that governments come and go according to electoral cycles. Temptations are always there for a government to maximise expenditure of all available cash including that from SWF to fulfill electoral promises. In real life, no one government will wish to hand over a fat SWF balance to an incoming government.
My honest reality check on Kenya is that for many years to come, debt repayment obligations and demands for infrastructure development will put a major pressure on the national budget. For this reason, I foresee the stabilisation and infrastructure components of the SWF reading zero balance for a long time to come as transfers are made to national budgets.
Finally, political and financial prudence are indeed very important in maintaining a truly effective SWF.
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