(Repeats story from Friday)
* Inward focus differs from model of investment abroad
* Aim is to borrow against assets, attract co-investors
* Risk of spending on vanity projects, lack of oversight
* TABLE-SWFs from the large to the small:
* GRAPHIC-SWF assets under management: tmsnrt.rs/2mQPbS5
By Claire Milhench
LONDON, March 20 Once the preserve of rich oil
exporters or nations with trade surpluses, like Norway, Kuwait
and Singapore, an unlikely new breed of sovereign wealth fund is
emerging - in countries with large deficits and deep debt.
Sovereign wealth funds (SWFs), which first emerged in the
1950s, are traditionally associated with huge financial
firepower. They control about $6.5 trillion, according to data
provider Preqin, and have transformed the global investment
landscape by snapping up stakes in multinational companies and
landmark real estate in cities from London to Melbourne.
Now Turkey, Romania, India and Bangladesh are launching
sovereign funds - but for very different reasons than usual, and
with very different methods.
Traditionally, wealthy nations use SWFs to invest their
surplus billions overseas to prevent inflation at home,
diversify income streams and accumulate savings for the day when
commodity revenues run out.
In stark contrast, the countries launching the new funds,
burdened by large current account deficits or external debt, are
using them as vehicles to get their economies moving in the face
of a global slowdown and lower trade volumes. And rather than
splashing cash abroad, the plan is to attract finance from
overseas and invest it at home to stimulate growth.
"Sovereign wealth fund is a term that's used very loosely in
the labelling of some of these new entities, they are more like
sovereign holding companies," said Elliot Hentov, head of
research for official institutions at asset management firm
SSgA. "They need to lever up – they need private sector
co-investment to work."
There are both potential benefits and risks to this strategy
- and only time will tell whether it will be effective.
One of the advantages of having an SWF, apart from the
cachet it bestows, is the fact it opens the door to industry
associations and peer group networks that offer guidance and -
crucially - contacts in the investment world.
Turkey runs an annual external financing deficit of around
$30 billion, so it must attract foreign money to plug the gap.
By putting the government's stakes in big companies into a
sovereign fund, Turkey hopes to attract external funding, by
borrowing against the companies and tapping other SWFs for
Similarly, Romania plans to finance roads and hospitals by
raising debt against the value of the government's company
stakes, or selling them via public listings.
India and Bangladesh want to kick-start infrastructure
projects via new sovereign funds, with India seeking
co-investors amongst SWFs and pension funds for its National
Investment and Infrastructure Fund (NIIF).
Other funds have been mooted in countries like Lebanon
Guyana, but have yet to be established.
Such plans have had a varied reception depending on the
country. Economists and industry experts have also warned of
potential pitfalls that need to be avoided.
Critics worry that domestic-focused funds in general can
fall prey to a misallocation of resources or outright
corruption, citing the example of Malaysia's 1MDB, which is the
focus of money-laundering probes in at least six countries.
"The danger with (this model) is that in many cases normal
budgetary procedures don't apply, so they are a way of getting
around parliamentary oversight and ministry scrutiny of
projects," said Andrew Bauer, senior economic analyst at the
Natural Resource Governance Institute.
Any lack of transparency can mean there is little way to
verify how the money is spent, he added. One risk is that
unviable "vanity projects" get funded.
However in many ways it is in the interests of countries to
ensure funds are free of political interference, have a robust
legal framework, a clear mandate and professional management -
as these are likely to improve decision-making and, ultimately,
Grouping state company holdings into a professionally
managed fund can improve the performance of the assets - with,
for example, Bahrain's Mumtalakat considered a success in this
regard. Abu Dhabi's Mubadala is also cited as a fund that has
helped diversify the UAE economy by developing industries in
In Romania, separating company ownership from policy-making
should improve transparency and accountability, said Greg
Konieczny, fund manager of Fondul Proprietatea, a
Romanian investment fund created by the state to compensate
those who lost property under the former communist regime.
"Right now these companies are under line ministers that
also set policy and strategy for the sectors they are
responsible for - that never works," Konieczny said.
Similarly, in India, where infrastructure projects are
hobbled by red tape, a dedicated state fund may offer a way to
accelerate the process, said Nikhil Salvi, a manager at Aranca,
an investment research and analytics firm.
A major sticking point will be assessing performance -
railways and ports may boost economic growth, but won't show up
on the fund's balance sheet. The social benefits of new schools
and hospitals can take years to come through.
"Many of these (inward-focused) funds do not publish a
return benchmark," said Sven Behrendt, managing director of
consultancy GeoEconomica. "Whether or not investments are
profitable ... often remains unclear."
The new funds also need to avoid the fate of those in poor
countries such as Suriname and Zimbabwe, which failed to get off
the ground due to a lack of capital.
India's NIIF has been allocated $150 million for the
2017/2018 fiscal year, and plans to tap strategic partners to
raise $1.2 billion in the coming fiscal year.
Bangladesh's planned $10 billion fund will be seeded from
foreign exchange reserves over the next five years.
"The fund will be used for mega projects, including
repayment of any loans taken by the government in dollars," said
Jalal Ahmed, additional secretary at the ministry of finance.
Turkish fund head Mehmet Bostan told Reuters last month he
would finalise a strategy plan and present it to the cabinet
soon. The government has already transferred company stakes
worth billions to the fund, and hopes it will be managing $200
(Additional reporting by Ruma Paul and Rajesh Kumar Singh)