Notes

• 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

traditional fund market approach in that guidelines or requirements from sponsors are documented via side letters. 12. musacchio et al. (2017) provide an overview of the arguments for and against government intervention in financial markets through public financial institutions. Although their discussion centers on national development banks, the arguments apply similarly to SIFs. 13. Government failures resulting from factors such as bureaucracy, lack of predictability in policies, and so on. 14. The concept of additionality is prevalent in the development industry, where mdBs and dFIs are expected to make contributions that are beyond what the market can currently provide such that the private sector is not crowded out. 15. This modified definition is based on AfdB et al. (2018). 16. Local presence offers significant advantages to investors (Storper and venables 2004), including higher returns to investment (coval and moskowitz 2001). 17. The arguments in that paper, which discusses the efficacy of development banks, have parallels to that for the role of SIFs. The paper argues that, because market failures are not readily observable and governments do not always have the necessary information before setting up the mandate of a development bank, the development bank itself must serve as

“an instrument of economic intelligence” and transmit information back to the government. This argument applies to SIFs also, which are similar to development banks per the previous discussion. 18. The agreement does not include any obligation to co-invest, leaving flexibility to both parties. 19. Guarantco is the credit enhancement unit of the Private Infrastructure development

Group, an infrastructure development and finance organization funded by several bilateral and multilateral institutions. Guarantco provides local currency–contingent credit solutions, including guarantees to banks and bond investors. 20. Infrastructure projects have high preparation costs driven by the need for technical feasibility studies, due diligence, negotiating concession terms with the sector regulator, or structuring complex financing packages. compared with operational infrastructure, new infrastructure projects have high risk at the project preparation and construction stages because cost overruns and delays can compound the drawback that the project is not yet generating revenue. 21. Investments in public companies should occur only in the exceptional circumstances that, despite the potential for positive financial returns, commercial investors are not providing capital, for instance, because of extreme financial market volatility. Even in these exceptional circumstances, a SIF investment in a listed company should be weighed against other fiscal and financial policy options that could help stabilize the economy, a specific economic sector, or financial markets. The rationale for such investment by a SIF should be clearly motivated, documented, and disclosed to the SIF’s investors and the public. 22. nIIF and the department for International development committed £120 million each into the fund, and EverSource capital was selected as fund manager. 23. The Paris climate agreement, negotiated between 196 countries, required countries to articulate their own contributions (nationally determined contributions, or ndcs) to keep global temperature rise below 2 degrees celsius and mitigate global warming. ndcs are country-articulated targets of the united nations Framework convention on climate change, and are part of Article 4 of the Paris Agreement. Activated through the Paris

Agreement, India’s ndcs include a commitment to derive 40 percent of the country’s energy needs in 2030 from renewable energy sources. In addition, India has committed to a 35 percent reduction (from 2005 levels) in carbon intensity by 2030 as part of the global climate deal. 24. robeco is an international asset manager with assets under management worth €165 billion (of which €102 billion are in ESG-integrated assets), headquartered in the netherlands and fully owned by OrIX. OrIX is a diversified financial conglomerate listed on the Tokyo Stock Exchange, with activities in corporate finance, real estate, banking, and insurance, among others. Its Eco Services division is involved in renewable power generation, energy conservation and storage solutions, and waste processing (see the AcP case study in appendix A). 25. As described in Halland et al. (2016), this concept was first used in the development of the

Europe 2020 Project Bond Initiative, adopted in 2012.