FONSIS

BOX 3.2

Establishment laws that rely on commercial legislation: The case of FONSIS

The legal frameworks of strategic investment funds often rely extensively on both special and general laws. The legal framework of Senegal’s FONSIS (Fonds Souverain d’Investissements Stratégiques, or Sovereign Fund for Strategic Investments), for instance, highlights the potential benefits of supplementing special legislation with standard commercial legal frameworks. The establishment of FONSIS was authorized by the Senegal National Assembly under Law 2012-34,a which was subsequently ratified by the President of the Republic. Law 2012-34 prescribes that the rules of organization and functioning of FONSIS “shall be determined by this Act, by the Statutes and the Rules of Procedure in accordance with the standards, in particular those of the OHADA uniform Act on companies.”b general legislation therefore complements special legislation in areas where the former may be inadequate.

As a limited liability company under OHADA law,c FONSIS is subject to all applicable provisions, but these provisions can be modified when necessary by the FONSIS-specific Law 2012-34. FONSIS’s status as a Senegalese Société Anonyme also means its board has full power over investment decisions, with no need for government approval, thus enhancing operational independence. At the same time, FONSISspecific law includes special provisions not covered by commercial law. Article 24 of Law 2012-34 submits FONSIS to the audit of government administrative bodies such as the general State Inspectorate and the Court of Auditors.

Also per Law 2012-34, Senegal owns 100 percent of the company’s capital. Ownership can be open to other state entities, but the state’s direct ownership shall not be less than 70 percent.

Source: FONSIS case study; see appendix A. a. Law 2012-34: Authorizing the creation of a Sovereign Fund of Strategic Investments (FONSIS), adopted on December 27, 2012. b. Article 3, Law 2012-34. OHADA (Organisation pour l’harmonisation en Afrique du droit des affaires, or Organization for the Harmonization of Corporate Law in Africa) is a system of corporate law and implementing institutions adopted by 17 West and Central African nations in 1993. c. The 2014 Acte Uniforme Révisé Relatif au Droit des Sociétés Commericales at du Groupement d’Intéret Économique.

functions. NSIA is also “independent in the discharge of its functions,” under Section 1(4) of the NSIA Act 2011. Similarly, the ghana Infrastructure Investment Fund was set up under the ghana Infrastructure Investment Fund Act, 2014, as a “body corporate with perpetual succession,” which “may sue and be sued and have in all respects the powers of a body corporate.”16

In general, primary legislation should establish basic principles that cannot be easily changed, whereas specific fund details can be enshrined in secondary legislation that can evolve over time. As with SWFs, there is great variety in the level of detail in SIF establishment legislation, partly as a reflection of different traditions and constitutional requirements among countries (Al-Hassan et al. 2013). Some countries have extensive primary legislation, with only modest supplementary secondary regulation. Others will rely heavily on secondary regulation, such as rules and policies written by the ministry of finance. As noted by Al-Hassan et al. (2013), for instance, the law establishing Norway’s government Pension Fund global has only nine short sections but is augmented by a series of secondary regulations and policies by the Norwegian ministry of Finance. In general, it is preferable to establish basic principles in primary legislation, which cannot be easily changed, and to prescribe specific fund details in secondary legislation, which may be amended as the fund evolves (World Bank 2015). Details can also be left to other constitutive documents, such as articles of association, depending on the type of legal structure used.

Typically, the first part of the SIF-specific law will describe the SIF’s foundational elements, such as its mandate, legal structure, and ownership; who manages it; and the rules by which funds can flow in and out of the SIF. Although the form and detail of establishment legislation will vary from jurisdiction to jurisdiction, several provisions are commonly found in comprehensive primary SIF legislation:

• Preliminary details. Legislation will typically start by describing basic details, such as the name of the fund, the location of its principal offices, and the fund’s legal domicile. • Objectives and mandate. The law must describe the objectives or the mandate of the fund. It is important that the law states clearly that the SIF will pursue both a financial and a policy objective, and clarifies any hierarchy between these two objectives. For example, although the NSIA-NIF must seek financial returns, the NSIA Act 2011 (Section 41.5) provides that 10 percent of NIF’s available investment capital in any fiscal year can be invested in social infrastructure projects that enhance economic development in underserved regions, even if they provide less return potential. • Legal structure and life of the fund. The law must highlight the legal structure of the SIF and whether it has a finite life. If provisions are envisioned for the dissolution of the fund, they must be clearly specified and not compromise the long-term horizon that SIFs typically take. • Capital provider(s) and fund management. The law must describe who capitalizes the fund or—if the SIF is set up as a corporation—provides its equity. It must also designate a fund manager or, in the case of a corporation, establish procedures for the appointment of its board and top management. The statute may state that the government or a specific ministry is the investor or shareholder (as the case may be) in the SIF but that the SIF itself is the legal owner of the assets. Typically, global practice is that, on the government side, the ministry of finance is the proxy capital provider to the fund (or shareholder, as the case may be), because the ministry of finance is usually responsible for the financial and fiscal implications involved with the SIF. Ideally, the law will also clarify any restrictions on legal ownership of fund assets or the management company. • Operational independence of fund manager. The legal provisions should also state to what extent the management company or, in the case of corporations, the board of directors is independent from government influence, and how such independence is protected with suitable governance arrangements.17

Ideally, the fund manager or board has operational independence but also is assured of the government sponsor’s support. • Source of funds and withdrawal of funds. The law must define the initial assets of the SIF and outline the rules for fund inflow. This requirement includes defining the terms under which the SIF may borrow (if at all) and the purpose of such borrowing, and whether profits and gains would be reinvested into the fund. If a partial source of funds for the SIF comes from the contribution of state assets (such as equity stakes in SOEs), the transfer of these assets must be clearly written in law to ensure that the SIF is sufficiently funded for its mandate, and any conditions under which the transfer would occur must be clarified (see box 3.3 for more details). The law must also define the terms, conditions, and limits under which funds can be withdrawn from the SIF, including by defining the dividend policy.