Ideas & Debate

How will Kenya run its sovereign wealth?

There is little economic rationale why we need to establish and manage a Sovereign Wealth Fund. FILE PHOTO | NMG 

Contrary to the Sovereign Wealth Fund (SWF) 2019 Bill which explicitly seeks as a key objective to insulate expenditures under Budget estimates from volatility on resource revenues, funds for intergenerational equity are not intended primarily to be applied to plug un-attained budgetary targets of any government.

What SWFs? They are complex financial institutions that accumulate a country’s revenues from natural resources and manage them highly professionally to benefit current and future generations. Although many relate SWF to oil and gas discoveries and economic development potentials thereof, the principles apply to exhaustible natural resources generally liable to equitable management and sharing of revenues with future generations.

Early in the current administration, the Parastatal Reforms Implementation Committee (PRIC) developed the draft Kenya Sovereign Wealth Fund (KSWF) Bill (2014). The work of the blue-ribbon team stirred the interest of experts at the IMF, World Bank and the Sovereign Investor Institute (SII) who engaged in helpful comments.

Tabled and approved at the Commission for the Implementation of the Constitution (CIC), the draft and its principles encompassed domestic and global practices (such as the Generally Accepted Principles and Practices for SWFs- so-called Santiago Principles). It received a global award: Sovereign Wealth Fund Initiative of the Year (2016) at NASDAQ, New York, at a joint conference with Africa Investor.

Nevertheless, new Bills (SWF Bill-2015, and SWF Bill-2019) have appeared. The versions depart in material, significant ways from the award-winning proposal of 2014. In the interest of the country, it is important to consolidate ideas and to save time. Issues at stake are game-changers, too important to trivialise. This article briefly discusses SWFs and the accrued values government should embrace with urgency.


Collectively, some 80 countries own and run SWFs, holding a quarter of world GDP, half of the world’s population, and nearly 70 per cent of those living in extreme poverty.

Africa holds about 30 per cent of the world’s mineral reserves, 10 per cent of the world’s oil, and 8 per cent of the world’s natural gas. SWFs effectively occupy a special place in a nation’s economic and financial architecture outside the regular budget, especially to safeguard savings for future generations.

Future Generations Fund

In Norway’s success story, the Fund holds over $1 trillion, equal to $190,000 (Sh19 million) for each of the country’s 5.2 million citizens. Botswana's, like Norway's, invests its wealth. The Nigeria Sovereign Investment Authority (NSIA) puts 40 per cent of its capital into a Future Generations Fund, invested in global assets with a horizon of over 20 years.

Kenya’s Constitution 2010 properly provides for the SWF as a Constitutional Public Fund to be established by an Act of Parliament under Article 206(1)(a) categorised as “Funds reasonably excluded from National Government revenues by an Act of Parliament”.

Natural resource hosting counties that earn a part of the revenues can opt for a County SWF. The provision is in Article 207 (1), categorised as “Funds reasonably excluded from County Government revenues by an Act of Parliament.”

As such, earnings invested and operated on the intergenerational equity principle (at both national and county levels) should in Kenya never form part of the Consolidated Fund established at Article 206(1), that is subject to annual Appropriation Bills used to process the Budget approved by Parliament. Both national or county SWF are not minor administrative funds or ordinary PFM Budget Funds under National Treasury or a county, for set-ups, control or winding down. SWFs legally and constitutionally need anchors to administer and manage them entirely under Acts of Parliament that set them up outside the PFM Act, and not inside the PFM Act or inside the Consolidated Fund as Treasury proposes in SWF Bill 2019.

This is not to say that the budget cannot benefit from a budgetary allocation rule, whereby some of the audited earnings of SWF annually are allocated to the Budget. In Norway, this is set by law at 3 per cent (down from 4 per cent) since 2007.

Kenya’s proven oil reserves are relatively low, lower than Gabon, but more than Tunisia at the foot of Africa’s oil reserves tables. Kenya’s 750 mn - 1 billion barrels compare to Uganda’s 1.7 billion barrels confirmed. Yet, this comes with Kenya’s more resilient and diversified economy with far greater genuine savings and developmental potentials than say Nigeria’s or Angola’s mono-economies where oil sits at the centre.

Projects to promote industrial policies including Big Four, could raise the country’s potential output significantly. Kenya’s resource also places it in the middle of an oil and gas field on the east African coast.

Exemplary SWFs, to allow the inter-generational spread of consumption and development projects and to operate optimally in high and low price periods for natural resources, grant relative autonomy of professional management and governance. Transparent measures insulate countries from the so-called oil ‘curse’ and civil wars thereof. Most SWFs thus hold little in cash, consistent with their Fund Objectives, Investment Mandates and Guidelines. A Pool or portfolio of long term investments is held in different Asset Classes, called Strategic Asset Allocations.

In contrast, the SWF 2019 Bill sees holdings in Liquid Cash Balances and Near Cash Assets at CBK Accounts or overseas Assets. Withdrawals are by simple letter from Treasury (at 10(1)(a).

Furthermore, qualifying investments as defined in SWF 2019 allow for a savings component no different from Central Bank Investments of Official Reserves. This confusion comes from a central misconception of reserves in central banking versus investment.