Sources, Governance Structure And Development Contribution Of Sovereign Wealth Funds: Application Of International Experiences To Kenya

Abstract

The quest for more optimal approaches for sustained growth and development, and the harnessing of available resources is perpetual. An aspect of this is the continual search for strategies for effective development financing. This is one that achieves set goals without compromising national dignity and integrity. Economic independence is seen to go hand in hand with national self-determination, hence its pursuit by nations. Sovereign Wealth Funds have in the past 14 years increased in prominence. They are seen as an emerging strategy for relevant development financing. The term “sovereign” reflects the political economy element of the funds, as tools for economic latitude and self-determination. The creation of these funds has been globally observed as a means of seeking to effectively manage revenue from mineral resource endowments, and generally National Wealth. The study of Sovereign Wealth Funds is however still relatively new and emerging. Kenya has proposed the establishment of a mixed commodity and non-commodity Sovereign Wealth Fund. The experience of various countries indicates that such funds, of either type, can be for different purposes, and not necessarily designed in the same way. Factors important for consideration include: the general approaches used by countries to set and build them up as determined by their capital sources and social, economic and political institutional context factors; the nature of policies, laws and guidelines developed and implemented in their structuring and utilization; their general functions and contributions as instruments for national development; among others. This Research sought to investigate the experience of five countries, in view of their Sovereign Wealth Fund source and political institutional determined designs, expected economic functions and contribution to development. A critical review of Kenya’s proposed framework against those of the five countries with the goal of making recommendations for the creation of the fund was done. Secondary data was sourced from government reports and publications as well as information from other credible public and non-public entities. Primary data on Kenya’s case was collected through the administration of questionnaires to experts from the various sectors relevant to the study. The selection of the countries was informed by their ranking in terms of performance of their Sovereign Wealth Funds as well as the ease of accessibility to information on them. The study concludes that a well-designed and built Sovereign Wealth Fund can be a suitable source of development financing for the country. It recommends that the creation of the three types of funds proposed in the draft bill, should be done with an awareness of their diversity in the nature of operations. There is need to accurately project on the expected medium term and long term contribution of the extractives sector to Kenya’s economy and factor these considerations in the design. This is based on the inevitable exhaustion of minerals hence the limited time for setting up funds based on the sector. The Sovereign Wealth Fund legislation should provide for flexibility that will enable fiscal adjustments in tandem with the changing nature of contribution of the extractives sector to the economy. Reforms of state corporations considered as a possible source of revenue for one of the proposed funds will be required. The role of all the macro-economic and other national institutions relevant for various aspects of the fund should be clarified in order to inform coordination. Contribution to the achievement of the social policy objectives contained it the Kenya Vision 2030 should be weaved into the operational designs of the vi funds, based on Kenya’s defined approach towards social development. A general mapping and projection of Kenya’s Economic sectoral performance, trends and goals should be undertaken to guide in the channelling of the funds for development.