funds

BOX 2.5

Complex authorizing environment for China government guidance funds

despite substantial variation in the way china’s national and subnational strategic investment funds (called government guidance funds, or GGFs) operate, a World Bank study found that they are often subject to a complex authorizing environment, resulting in conflicting messages that can blur the strategic objectives and undermine investment performance of these entities (mcGinnis et al. 2017).

Apart from reporting to their respective government sponsors, GGFs can be subject to regulation and supervision from a variety of agencies such as china’s national development and reform commission, the ministry of Finance, the State-Owned Assets Supervision and Administration commission of the State council, the chinese Securities regulatory commission, and the Asset management Association of china. understandably, each of these bodies regulates from a different perspective, creating overlapping regulatory frameworks. For example, the national development and reform commission’s goal is to ensure that GGFs target their capital to strategic industries in support of the government’s industrial development policies, whereas the chinese Securities regulatory commission and the Asset management Association of china are focused on supervising funds that have raised capital from the private sector to ensure that investors in these funds receive adequate protection. In addition to central government policies and regulation, local GGFs are also subject to administrative measures devised by lower levels of government. moreover, State-Owned Assets Supervision and Administration commission of the State council guidelines, which apply to state-owned enterprises, including GGFs, emphasize value capital preservation and appreciation.

As discussed in chapter 7, frequent reporting may thus skew the long-term investment nature of the strategic investment fund, forcing it to be driven—at least partially—by short-term returns in order to abide by supervisory guidelines. These principles can conflict with the fundamental nature of private equity–style investing, which is high risk and may require several years to produce profits.

Source: McGinnis et al. 2017.

priorities may well be subject to change. A good example of the latter change is ISIF. ISIF was established by nTmA Act 2014, after the global financial crisis, to invest in sectors of strategic significance to the Irish economy such as real estate, small and medium enterprises, venture capital, infrastructure, and so on. In 2015, ISIF’s initial investment strategy was published; in 2017–18, the government initiated a review of the investment strategy given the rapidly improving economic situation in Ireland. As a result of this review, the Irish government revised ISIF’s investment strategy in February 2019 to re-center on five new economic priorities: indigenous industry, regional development, sectors affected by Brexit, climate change, and housing. Such a fundamental shift in core mandate may result in changes to the operational structure of the SIF.

To develop its capacity and implement a long-term mandate, a SIF needs enduring and broad-based political commitment that spans electoral cycles: the absence of such support can jeopardize the longevity and effectiveness of the fund. For example, in 2004, through the venture capital Trust Fund Act, the government of Ghana created a SIF, the venture capital Trust Fund (vcTF), that was to be funded by a 25 percent levy from Ghana’s national reconstruction Levy39 derived from banks and financial institutions. The vcTF was funded by the levy for only three years, however, because the national reconstruction