40
| Strategic Investment Funds
• Public capital SIFs are fully capitalized by a government or other public entity; mixed capital SIFs are initiated and funded by a public entity but also include investment by commercial entities. • SIFs are heterogeneous in nature. They can take several different structural and legal forms, depending on the objectives they are set up to achieve and the context in which they operate. • SIFs are not always a solution and are not devoid of challenges. They cannot fix investor constraints or substitute for good fiscal management. SIFs cannot bind future administrations to honor the establishing government’s commitment to the institution or its mandate. • The primary argument for setting up a SIF is the extent to which a SIF’s intervention can address market or government failures—that is, contribute additionality to both what exists in the market and what is provided by the government. The secondary, and interrelated, argument for setting up a SIF is also its raison d’être: to crowd in commercial capital. • Consistency of the SIF’s investment activities with the sovereign’s macroeconomic policies is particularly relevant for public capital SIFs, or mixed capital SIFs anchored by one government. Fiscal integration of the public capital SIF is also important, and the government must limit the fiscal risk it undertakes through the SIF. • The public sponsor initiating a SIF must first establish the rationale and legitimacy of the SIF through undertaking a feasibility study that seeks to validate the presence of market or government failures and to confirm whether the SIF is the instrument of choice among examined alternatives. • In principle, SIFs are not providers of concessional funding. If concessional financing is considered, the feasibility study must at a minimum clearly define the exceptional circumstances in which such an approach would be allowed.
NOTES 1. Ang (2010) refers to sovereign wealth funds rather than SIFs, but his argument on legitimacy is valid also for SIFs. For sovereign wealth funds, the threat to the sustainability of the fund is political interference resulting in immediate drawdown of capital for budgetary purposes, instead of spreading the drawdown across generations. For SIFs, the risk to sustainability extends to political influence on investment decisions, threatening the financial sustainability of the fund as well as its focus on its mandate. 2. This definition is based on a previous World Bank policy research paper by Halland et al. (2016) but has modified elements. 3. That is, their strategic mandate does not include investing in publicly traded assets. 4. Typically, the fulfillment of economic, social, or environmental returns. 5. For more on the Marguerite Funds, see the case study in appendix A. 6. See discussion on SIF pursuit of commercial returns versus elements of concessionality. 7. Refer to the Santiago Principles (the generally accepted principles and practices, or GAPPs), specifically GAPP 2: “The policy purpose of the SWF should be clearly defined and publicly disclosed” (IWG 2008, 7). 8. See the ISIF web page “About ISIF” (https://isif.ie/about-us), and see the ISIF case study in appendix A. 9. See the NSIA Infrastructure Fund Investment Policy Statement as Approved on April 6, 2019 (https://nsia.com.ng/sites/default/files/downloads/Nigeria%20Infrastructure%20 Fund%20Investment%20Policy%20Statement%20-%20April%2016%202018_0.pdf ). 10. See the International Forum of Sovereign Wealth Funds web page on Morocco (https:// www.ifswf.org/member-profiles/moroccan-fund-tourism-development). 11. For reference, see “The Economic Appraisal of Investment Projects at the EIB” (EIB 2013), applied by the EIB to its entire investment portfolio. Marguerite II follows a more
