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| Strategic Investment Funds
Levy was repealed in 2007 as a result of its perceived negative impact on businesses. VCTF’s budget became inconsistent thereafter because the fund was solely capitalized by the government. With the change in Ghana’s government in 2008, the political will surrounding the establishment of VCTF also diminished (Divakaran, Schneider, and McGinnis 2018). This is a particular risk for public capital SIFs funded by one government. In principle, mixed capital SIFs are less vulnerable to political cycles because the presence of private co-investors can act as a counterweight to political considerations and strengthens the commercial focus of the fund.
ISSUES TO CONSIDER BEFORE ESTABLISHING A SIF Before establishing a SIF, policy makers must consider whether prevailing political, economic, financial, and sector-specific conditions are enough for the fund to be successful. First, as with SWFs, when the government is the public sponsor, it must employ a thorough and inclusive process to establish the legitimacy of the SIF within the citizenry, political parties, and financial and business communities. Without legitimacy, SIFs may be vulnerable to shifting political sands. Second, because SIFs are employed to mobilize private capital, the enabling environment for private investors is a consideration for the success of the SIF. The enabling environment is a broad concept that ranges from the existence of specific laws and regulations, such as for establishing a private fund, to governance considerations, such as the level of corruption of a country and the ability to enforce contracts. A SIF may not require that all these elements be addressed as necessary conditions before establishment;40 however, to attract private capital, the SIF must operate within a legal and regulatory environment sufficiently strong to provide co-investors with confidence that contracts can be structured and enforced. Particularly in the case of public capital SIFs, a key factor of success is the continuing commitment of the public sponsor anchoring the SIF, which may be secured through legal and institutional safeguards that ensure the longevity of the fund and prevent deviations from the mandate (see chapters 3 and 4 on legal and governance considerations). The public sponsor also sends important signals to potential private partners through its overarching structural decisions that determine how the SIF operates. In-depth discussion on good practices around these structural decisions forms the crux of the following five chapters of this volume. Private investors look for signals of assurance that the SIF’s investments will be undertaken on commercial terms, albeit within the fund’s politically defined mandate. The public sponsor’s choice to allow the SIF to be managed professionally is one such signal. Mixed capital SIFs can also enhance operational independence by restricting government ownership to a minority stake. For instance, the government of India signaled its desire to attract and accommodate private capital by choosing to restrict its stake in both the NIIF and its fund manager to 49 percent. Public capital and mixed capital SIFs alike strengthen operational independence by adhering to best practices for governance, such as involving independent directors on their boards and committees and inserting legislative checks and balances on government intervention (see chapters 3 and 4). Public sponsors and SIFs also send signals of commercial orientation through whom they recruit for SIF investment teams—typically recruiting both management and staff
