Overview of Strategic Investment Funds
DOUBLE BOTTOM LINE MANDATE The SIF’s mandate establishes the policy-defined boundaries within which it has the liberty to operate as an independent commercial (or near-commercial) investor,6 at arm’s length from the government or other sponsor. What follows from articulating the rationale for a SIF is the expression of a double bottom line mandate that moors the SIF’s raison d’être (see table 2.4 for illustrative examples of SIF mandates). The first bottom line is the financial return on the investment, and the second bottom line refers to the expected impact on economic productivity and growth or on environmental and social variables. This mandate should be clearly defined and publicly disclosed,7 and it should be directly based on the findings from detailed preliminary studies for the SIF. As one of the intrinsic traits of the SIF, the double bottom line mandate is typically articulated in the constitutive documents of the SIF. For example, the Ireland Strategic Investment Fund (ISIF) has a statutory mandate to invest “on a commercial basis in a manner designed to support economic activity and employment in Ireland” as set out in the National Treasury Management Agency (Amendment) Act 2014 (NTMA Act 2014), Section 39.8 Similarly, the investment policy statement of NSIA-NIF states that the fund “seeks to make a positive financial return on its investments in the infrastructure sector in Nigeria. It also aims to attract and support foreign investment and enable growth.”9 The mandate is likely to reflect the institutional history and political environment of the SIF’s home country; therefore, some countries will prefer mandates that are as close as possible to market-based, whereas other countries may prefer more government participation. The double bottom line mandate of the SIF seeks to match the government’s policy objective with the need to attract private capital. The policy goal set by the public sponsor includes but is not limited to growing the economy, creating jobs, opening up economic opportunities for women and minorities, adapting to or mitigating climate change, boosting specific sectors or regions of the economy, and diversifying away from commodity reliance (in countries where that is the main industry). In this book, unless otherwise specified, “economic return” or “economic impact” refers generically to the fulfillment of the SIF’s policy goal. SIFs set up by quasi-sovereign entities may also address thematic objectives across a range of geographies, such as the need for environmental finance. The policy objective is key because the sovereign (or quasi sovereign) as the principal has a much wider lens in assessing what constitutes profit than a typical fund manager does (van der Tak and Squire 1995). Sovereigns are focused on maximizing net benefits to society, whereas fund managers are focused primarily on financial returns. Therefore, the SIF must pursue active economic, environmental, and social impact in addition to financial return. But this dual objective presents the SIF with a potential operational conflict that it must constantly seek to balance and mitigate. On the one hand, overemphasizing the policy objective while sacrificing returns could alienate the private capital the SIF seeks to attract and generate politically motivated investments through a vehicle that invests outside of the country’s budget process. On the other hand, if the quest for financial returns is overly highlighted, the SIF could gravitate toward investments that are highly attractive to the private sector but have limited policy impact (Halland et al. 2016). Thus, the mandate is designed to provide equal emphasis on both aspects: the policy objective is tempered by a financial return objective and vice versa.
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