America plans to set up a Sovereign Wealth Fund (SWF) to rival that of Saudi Arabia. These are government-run investment funds, often based on natural resources, managing their wealth, stabilising State revenues and catering for future generations among other purposes.
Globally, SWF assets have reached $13 trillion. The US aims to buy a 50 percent stake in Chinese-owned TikTok, the same way Kenya could for a top-brand name such as Safaricom. Increasingly, strategic SWFs are used to address macro, development and development challenges.
With Kenya running out of road on access to capital markets, the government needs creative approaches to funding development.
The article How Kenya can break the shackles of debt, analysed how the country can set up a SWF collaborating with the world’s cash-rich States to fund development projects, on the argument that no African nation today is considered investment grade in capital markets; more than half fall into the category, 'highly speculative', or worse, including Kenya.
The cut in USAid assistance has just rubbed salt into the wound of scarcity of external funding in Kenya.
Kenya’s SWF model, in the Kenya National Sovereign Wealth Fund (KSWF) Bill 2014, prepared by a Sub-Committee I chaired in the 2013 Parastatal Reforms Taskforce- a global award winner for SWFs- provided ideas for mobilising funds. A reference work in universities, it was sponsored by global leader Franklin Templeton.
Kenya is on the brink of debt default, with only a slim chance of averting this in 2025. Can we think of accessing capital strategically, based on mining as a source for creating Kenya’s SWF? Some winners in natural resource exploitation fund SWFs in a two-punch strategy for economic transformation- exploitation and revenues/investment of savings in a SWF.
Newly Industrialised Countries (NICs) are an example. In One Generation (30 years) they upgraded from 3rd World (and poverty) to 1st World: e.g. China and Malaysia (from 1978) and Vietnam from 1992; Singapore, Hong Kong, South Korea, Japan from the 1960s. In each case, the State was the strategic engine and thinker guiding and directing rapid development, with strong private sector participation.
Where is Kenya’s Mineral Wealth? Possessing high-value natural resources, Kenya still misses the two-punch approach and sinks into debt while propagating erratic experiments in employment of its skilled labor. Misadvised by policy quacks for example, it tries to export labour (brain drain) to foreign countries rather than create jobs.
Yet its endowments in skills and high-value natural resources are capable of forming a value-chain base for wealth and domestic employment. Investors salivating on this wealth often term Kenyan miners ‘illegal’ misinforming the Cabinet Secretary for Mining, and the Directorate of Criminal Investigations (DCI) to carry handcuffs to Kenyans, rather than an enabling policy.
The latest mineral find in Kenya is coltan, spread across Embu, Tharaka Nithi, Tana River, Kitui, Turkana Samburu and West Pokot counties. Kenya is also the world’s 10th largest exporter of niobium, tantalum, vanadium and zirconium, key rare earth minerals exported to two lead markets, China and Spain.
Titanium and niobium (the latter find lying untapped for over 100 years) rank among Kenya’s poorly exploited natural resources. As the fourth largest world exporter of titanium, Kenya also ranks high in world deposits of niobium, of which China is the largest world consumer, using it to manufacture high-performance steels. Kenya should learn a lesson in taking control given the current turmoil in DRC, with external stakeholders fueling war.
In the meantime, earth minerals enjoy a trade boom from a recent feat of science and technology that is being dubbed a gift from heaven. Chinese astronauts made a breakthrough that will revolutionise the aerospace industry and manufacturing using niobium.
Scientists are able to develop a niobium-silicon alloy that will drive aerospace engines to speeds and operational efficiency previously thought impossible. Where does Kenya fail in preparedness to tap the potential developmental advantages?
Kenya’s lack of readiness: First, its model fails in negotiated mining contracts using Production-Sharing Agreements (PSAs). Successful countries with natural resource- Middle East, Azerbaijan and Kazakhstan etc- negotiate Service-type Contracts (SCs) that translate to far higher revenues than PSAs.
While PSAs favour mining corporations and leave many African countries tiny shares of profits (about three percent), users of the SC model may earn 40 percent and above in profits from their natural resources. Their revenues fund cash-rich SWFs. Kenya can reap only serial disadvantages from PSAs.
Its legal beneficiaries from natural resources (national government, counties, and communities at source) also face deep pocketed aggressive global investors and tech companies in high-stakes competition in Kenya. Often, the government fails even its revenue distribution role.
Earnings due to Kwale county, Kajiado County and some 32 mineral rich counties, as per the Mining Act of 2016, lie in the National Treasury.
In the example of Mrima Hill niobium deposits in Kwale, Kenya’s PSA will earn three percent royalties from the project and five percent from the rare earths mined in the same location. Under the Constitution, 70 percent of these earnings will go to the national government (that could fund a SWF), 20 percent to Kwale County and 10 percent to locals. The PSA earnings pale in comparison to SC earnings as cited above.
Second, (talk of the pot calling the kettle black) multinationals could be liable for illegal mining. Apple, Google, Dell, Microsoft, and Tesla are respondents in a landmark US lawsuit brought by DRC in the US on children and Congolese families killed or maimed while mining for cobalt trafficked to power smartphones, laptops, and electric cars.
Illegal mining often fuels civil wars and child labour, evading government oversight. Challenges similar M23 incursions in DRC could spread as the demand for rare minerals escalates.
Finally, a diversionary and dishonest global narrative blames African countries such as Kenya for corrupt uses of the scant revenues of the PSA model. Claims link misuse to poverty in Africa. Critics highlighting cases, e.g. Nigeria, like to cite squandered oil revenues, or debt, or Angola's misappropriated funds.
They overlook data showing Africa's share of global public debt is small (Africa two percent; Caribbean five percent; and Asia/Oceania 27.0 percent). Collectively the challenges divert attention and conceal the massive externalisation of wealth, as a lead cause of stunted growth and poverty.
Strategic Investment Partnerships (SIP): In the post-pandemic landscape, SWF’s strategies have evolved. Acting as strategic investment funds, they transcend domestic investments to attract or co-invest with external SWFs in foreign direct investment (FDI) for nationally identified development projects.
This is a strategy Kenya’s SWF could develop with external investors. SWFs often take long-term horizons and offer flexible financial arrangements fitted to their targeted returns for assets under management (AUM). They exert less pressure around exit than exercised by private external investors and could enhance Kenya’s trade with their countries of origin.
The main players with African countries in recent years have been the Gulf Cooperation Council (GCC)- the UAE, Saudi Arabia, Qatar, Kuwait, Bahrain and Oman. The strategic investment concept resonates with Kenya’s current predicament as it dangles on the whims of rating agencies, such as Moody’s, dodging debt default by a whisker with every rating announcement.
In the meantime, Kenyans await growth and development and a return to vibrant economic activity. Of significant strategies that grow an economy, jobs in the Middle east, etc, are not one of them. To attract capital, SIP would entail swift passage of the KNSWF Bill (2014), and the formal collaboration of Kenya SWF with other global SWFs willing to partner in Kenya’s development projects.
As an example, KenInvest, an agency under Kenya’s State Department for Investment mandated to promote and facilitate investment in Kenya from both domestic and international investors, retains a portfolio of identified bankable projects in Kenya’s various sectors.
Such bankable projects warehoused by KenIvest or even identified in the counties, can be articulated in a Kenya government-owned SWF for active collaboration with global funds, to invest in specific sectors for long-term growth and strategic goals.
As a strategy, Kenya would avert the almost imminent catastrophe of capital drying up for purposes of financing economic development and diversification. SWF capital goes beyond just maximising financial returns alone.
The funds derisk investments by deploying three strategies: Sovereign Investment Partnerships, Public-Private Partnerships (PPP) and Sovereign Venture Funds (SWF), offering alternatives to traditional private companies, which often prioritise short-term profits. Kenya has the potential to establish a successful SWF that attracts investment, drives economic growth, and glides down its debt mountain, while supporting long-term development.
The writer is a former acting chairman of the Central Bank of Kenya (CBK) and a former senior economic adviser, Executive Office of the President
