Kuwait Investment Authority - Resource Fund for Future Generations. A Sovereign Wealth Fund (SWF) Case Study By Dr. Fouad Al-Salem Department of Business Administration GUST 2013 Introduction Sovereign Wealth Fund (SWFs) are becoming increasingly important in the international monetary financial system. SWFs are government-owned investment funds, set up for a variety of macroeconomic purposes. They are commonly funded by the transfer of foreign exchange assets that are invested long term, overseas. SWFs are not new, and some of the longer established funds-for example those of Kuwait, Abu Dhabi, and Singapore-have existed for decades. However, high oil prices, financial globalization, and sustained, large global imbalances have resulted in the repaid accumulation of foreign assets particularly by oil exporters and several Asian countries. As a result, the number and size of SWFs are rising fast, and their presence in international markets is becoming more prominent .SWFs have been receiving increased scrutiny due to their growing presence in global financial markets. Their total assets are currently estimated at about $3 trillion (Table 1). Experts are expecting that their assets will increase rapidly to over $10 trillion in the next 5-10 years.(1) Table 1 Market Estimate of Assets Under Management for SWFs Based on latest Available Information (As February 2008) (In Billions of U.S. Dollars) Name of Fund Assets Range Lower Upper 1. Oil and Gas Exporting Countries UAE (1976) Norway (1996) Saudi Arabia Kuwait (1953) Russia (2003) Libya (2005) Qatar Algeria(2000) USA(Alaska) Brunei (1983) Kazakhstan Malaysia Canada Nigeria Iran (1999) II. Asian Exporters Singapore China Singapore Korea Taiwan, Province of China Total Abu Dhabi Investment Authority Government Pension Fund- Global No designated name Reserve Fund for Future Generations Reserved Fund National Welfare Fund Libya Investment Corporation State Reserve Fund/Stabilization Fund Reserve Fund/Revenue Regulation fund Alaska Permanent Reserve Fund Brunei Investment Authority National Fund Khazanah Nasional BHD Alberta Heritage Saving Trust fund Excess Crude Account Oil Stabilization fund 250 380 289 213 125 32 50 30 43 40 30 21 19 16 11 9 875 380 289 213 125 32 50 50 43 40 30 21 19 16 11 9 Government China Investment Corporation Temasek Holdings Korea Investment Corp. National Stabilization Fund 100 200 108 30 15 2,093 100 Q 108 30 15 2,968 GCC Countries Many countries with sovereign funds manage their investments through government -owned companies. For example, Singapore owns Temasek Holdings and the government investment foundation. Other countries such as Canada, France, and U.S.A and several European countries own private companies for the purpose of managing retirement funds. Several US universities established their own companies for investment purposes, such as the Harvard Fund, one of the largest university funds in the USA. However, the GCC countries adopt a different approach because government employees manage investment through ministries or government agencies, but not companies . A former high ranking senior manager at the Kuwait Investment Authority thinks that the result is a decline in professional and productivity in managing investments in the GCC sovereign funds. The net outcome is weak performance in managing investments.(2) A former high ranking senior manager at the Kuwait Investment Authority thinks that the result is a decline in professional and productivity in managing investments in the GCC sovereign funds. The net outcome is weak performance in managing investments.(2) Kuwait Investment Authority(KIA) The Kuwait investment Authority (KIA) traces its origins to the Kuwait Investment Board which was established in 1953.In 1982,KIA was established by Law No. 47 as an autonomous government agency responsible for managing the assets of the country. Its mission is “To achieve a long term investment return on the financial reserves entrusted by the State of Kuwait to the Kuwait investment Authority providing an alternative to oil reserves, which would enable Kuwait's future generations to face the uncertainties ahead with greater confidence". Structure and Governance KIA's investments are "completely transparent to the State of Kuwait", which is responsible for protecting the interests of KIA's beneficiaries-the citizens of Kuwait. The KIA believes that its structure and governance represent a high standard of excellence and accountability. KIA is an independent public authority managed by its Board of Directors . The Board is chaired by the Minister of Finance, and includes the Minister of Oil, the Governor of the Central Bank of Kuwait, and the Undersecretary of the Ministry of Finance, as well as five other Kuwaiti nationals from the private sector appointed to the Board. The KIA provides periodic reporting to several parties, including the Chairman of the Board of Directors, the State Audit Bureau, the National Assembly, and the Council of Ministers. The transformation of the Kuwait Investment Authority a company will enhance its capabilities to react quickly to market changes and developments, and strengthens its competiveness in attracting qualified and talented human resources. Good corporate governance of SWF's is a key issue for domestic stakeholders. It provides the checks and balances that ensure that organizations are run efficiently and in accordance with the stated objectives of their owners. A clear relationship between the authorities and the SWF will also help improve the coordination and management of domestic economic policies. Many features of good corporate governance are universally applicable. For instance, general principles regarding the rights of the shareholder and key ownership functions, the role of stakeholders, disclosure and transparency, the flow of information between management and the governing board, and the competition and responsibilities of the board are all relevant for SWF's. Also internal risk managements of SWF's would need to address various specific risks. These include for instance general operational risks- which tend to be especially high in new organizations and in developing countries with capacity shortages- and reputational risks, which may arise when high profile investments incur temporary losses and threaten to dent the reputation of the fund's management Internal risk management must also provide adequate oversight for outsourced functioned (including external fund management, custodians, fund administration) in order to prevent and minimize misstatements or misappropriations by external services provides. SWF'S need to ensure that adequate risk management processes and human and systems resources are present to correctly measure and monitor the financial and operational risks, including those arising from external fund managers. 31. For policymakers, the Fund, and other users, it is important that sufficient data on SWF's activities are captured in the relevant macroeconomic datasets. The absence of SWF data can hinder economics analysis and potentially mislead policymakers, market participants, and other commentators about a country's economic performance. The flows and positions of SWF's should be covered in national accounts, fiscal, monetary and financial.(4) Appendix The Government Pension Fund Norway It was recognized early on that the large revenues from the petroleum sector are not income in the normal sense, but to a large degree involve the extraction of a non-renewable resource. Accordingly, to ensure long-term balance in the economy, it was important to limit the use of state oil revenues. This implied that, at times, it would be necessary to invest some of the revenues from the petroleum sector outside Norway. Until the mid-1990s, a large proportion of the revenues from the petroleum sector were used over the national budgets, and to repay national debts. The state Petroleum Fund was established by legislation in 1990, and the first allocation to the Fund was made in 1996. In 2006, the Fund was renamed the Government Pension Fund Global (GPFG). The prospects of large revenues from the petroleum sector and a strong increase in fund capital since the year 2000 indicated a need for guidelines to ensure a long-term and systematic use of oil income. The extraction and sale of Norway's petroleum resources generates large revenues to the state on an ongoing basis. The part of these revenues which is not used in the national budget is invested in financial assets held by the GPFG. Over time, therefore, the state's wealth will become less dependent on developments in oil and gas prices. Experience shows that Norway has succeeded in facilitating long-term, good management of the country's petroleum wealth, so that it can benefit both current and future generations. A third of the total value of the state's net income from the petroleum sector consists of residual petroleum resources on the Norwegian continental shelf, on third is invested aboard through the investments held by GPFG, and the remaining third has either been used over the national budget or saved in some other form. At the end of the year, the fund capital amounted to over NOK 3,300billion. The Government is emphasizing safe, long-term management of the Norwegian people's joint savings, so that Norway can release its vision of a qualitatively better society that protects individuals and delivers inter- generational solidarity. Transparency is a prerequisite for securing widespread confidence in the management of the government pension fund. The risk which is assumed in management activities must be presented properly. The Ministry of Finance wants to ensure that the Government Pension Fund is the best managed fund in the world. This requires the identifications of identify international best practice with regards to all aspects of fund management, and strive to implement it. The objective for the investments of the government pension fund is to achieve the highest possible return over time, given a moderate level of risk. The investment strategy is based on the principle that taking risk gives a pay-off in the form of higher expected returns, or risk premium, over time. The ministry is giving emphasis to exploiting the Funds ability to bear risk by building on its special characteristic as a large, long-term investor.
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