Overview of Strategic Investment Funds
overwhelmingly from investment banking, fund management, or consulting firms—or whom they select for the board. The public sponsor’s capacity for effective ownership is also important. For instance, if fund management is outsourced, then oversight bodies within the government will need the requisite economic, financial, and legal capacity to efficiently oversee the performance of the private fund manager and to manage the contractual relationship (see chapter 4 on governance). Transparency in operations is another c onfidence-boosting signal for private partners. Because SIFs are investors of public capital, transparency is central to all the frameworks that guide SIFs’ activities, including their interaction with the government budget and the country’s fiscal framework (see chapter 7 on transparency and disclosure).
PREPARATORY STUDIES TO ESTABLISH A SIF To establish the legitimacy of the SIF as a tool of intervention, the public sponsor must start with a preliminary study—or feasibility study—that establishes the analytical foundation upon which a SIF is based. Particularly when a government is the public sponsor, the establishment of a sovereign investment fund is a one-time occurrence, or in any case not a frequent one. If a public capital SIF’s establishment is driven purely by political considerations or electoral cycles, the public sponsor could rush the process to establish the fund in a way that severely hampers the functionality and sustainability of the fund. For both public capital and mixed capital SIFs, a thorough preliminary study permits the sponsor to articulate a precise definition of the fund’s mandate and allows for the definition of legal and regulatory priorities in the setup of the fund. Specific decisions on legislation, governance structure, and investment policy follow from there. Such sequencing is important. Adequate legislation and regulatory measures for the SIF can be duly considered only if a proper analysis of the fund’s role and mandate has first been undertaken. Previous feasibility studies for other public financial institutions can provide important lessons (see box 2.6 on the feasibility study for the Green Investment Bank). A well-conducted feasibility study accomplishes multiple objectives through a sequenced analysis that, at each stage, either validates or refutes the value of a SIF intervention. The key objectives of the study are to develop a holistic understanding of the investment landscape in the target area—who the investors are, where capital gravitates, who manages the capital, and so on—and validate whether there are gaps in financing caused by either market or government failures. This analysis allows the public sponsor to conclude whether the SIF could indeed provide additionality in this space and whether the SIF is a more desirable instrument to serve the articulated policy purpose compared with other alternatives that might achieve the same goals. If the SIF is established as the instrument of choice, the feasibility study must provide a refined articulation of its mandate and outline the organizational and operational parameters within which it will function. The study must identify a pipeline of assets that would be investment worthy if investment could be catalyzed into this space. The feasibility analysis for a government-sponsored SIF should also ideally ensure consistency between the SIF’s investment activities and sovereign macroeconomic policies, and identify the fiscal risks the government may undertake through the SIF as well as the fiscal risks the SIF would be exposed to through the sovereign.
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