Tighten Sovereign Wealth Fund bill

Last week, the Treasury published the draft of the Kenya Sovereign Wealth Fund bill that will provide the framework for management of natural resources revenues and its seeking public views on the matter. So, I will use this space to give my contribution.

To start with, Sovereign Wealth Funds are state-owned investment fund’s whose source of revenue are most often balance of payments surpluses, fiscal surpluses and in particular resource revenues. According to the Sovereign Wealth Fund Institute, over 65 economies own one (majority being resource-rich countries) and in 2017 Sovereign Wealth Fund in resource-rich countries were managing assets worth more than $4 billion, with Norwegian Sovereign Wealth Fund alone having a value of more than $1 trillion.

Coming to Kenya, there is little economic rationale why we need to establish and manage a Sovereign Wealth Fund, we lack sources of revenue to run a reputable sovereign wealth fund. First, we run big balance of payment and fiscal deficits. Second, our total commercially viable oil reserves are quite low and in comparison, it is what Saudi Arabia exports in just two months and if we are to join Opec with our 80,000 barrels expected peak export per day we would be contributing paltry 0.26 percent of total crude oil production. Third, coming to the minerals sector ours is still a low growth value sector accounting for a measly 0.28 percent to the GDP, according to the Economic Survey 2018.

So, Kenya is not really a resource-rich country, although other minerals and oil reserves may be discovered and exploited later, but that remains a matter of speculation. Since we are already ahead of ourselves making progress of establishing a Sovereign Wealth Fund, we can dissect the draft bill at hand then.

Now, the general framework of the proposed Sovereign Wealth Fund seems well designed to meet the objectives of a reputable Fund but two aspects in the bill which are fundamental to the governance of Sovereign Wealth Fund are entirely flawed.

First is the functional management of the Fund. Sovereign Wealth Funds are always owned by governments and they set the general rules and guidelines of investment and evaluates the performance of the fund. However, the day-to-day activities of the fund are always made completely independent from government or any political interference/pressure. Reputable Sovereign Wealth Fund like the Norwegian Pension Fund Global actually hires independent managers to run the fund’s activities.

But in the draft bill, the entire board and chief executive officer are political appointees hired under absolute discretion of the President and Cabinet Secretary of Finance. It’s important we understand that Sovereign Wealth Funds manage large amounts of public money to fundamentally maximize income, so a politically subservient management invites political risks of money being channeled to politically-correct and white elephant projects not of economic benefit to the economy.

Second is the issue of transparency and accountability to ensure public trust. In 2008, the Sovereign Wealth Fund Institute developed what is known as the Linaburg-Maduell index to be used as a worldwide method of rating transparency of sovereign wealth funds. The index is based on a number of essential principles that ascertain the level of transparency of these funds to the public.

Looking at the draft bill, it entirely depends on the Public Finance Management Act but more tighter controls need to be placed looking at the fund’s activities.

For example, the office of the Auditor General has been lagging behind in providing up-to-date audit reports as mandated under the PFM Act which is within six months delaying prompt accountability. Even when the auditor-general releases a damning report, Parliament is always intrigued by partisanship, political loyalty and bribery when acting on the reports watering down accountability in public sector.

So how best can we safeguard the large amounts of public money under this sovereign wealth fund? Most of the answers are in the Linaburg-Maduell index.