3.3 Common features of primary SIF legislation: Operational elements

TABLE 3.3 Common features of primary SIF legislation: Operational elements

KEY ELEMENTS IN SIF-SPECIFIC LEGISLATION IRELAND STRATEGIC INVESTMENT FUND NIGERIA SOVEREIGN INVESTMENT AUTHORITY MUBADALA INVESTMENT COMPANY

GAPP 10: Clearly define accountability framework for SWF’s operations in relevant legislation, charter, other constitutive documents, or management agreement. GAPP 16: Publicly disclose governance framework and objectives, as well as how SWF’s management is operationally independent from owner. GAPP 13: Clearly define professional and ethical standards and disclose it to members of SWF’s governing body(ies), management, and staff. Governance Governing bodies Agency board, CEO Governing council, board, CEO, and executive management Executive council, board of directors for company, board of directors for fund, managing group with managing director

Constitution, tenure of board members, and hiring of board (selection and criteria)a 9 members (3 government, 6 independent) appointed by Minister for Finance; 5-year terms and no more than 2 consecutive terms 9 members (3 executive, 6 independent) appointed by nomination committee; 4-year terms for nonexecutive directors and chairman, max. of 2 termsb At least 5 members, including managing director and chairman; 4-year terms, renewed automatically unless Amiri Decree issued for reformation

CEO selection NTMA CEO appointed by minister

Committees Investment committee at minimum and other committees as considered appropriate by NTMA

Appointed by president Appointed by board

At minimum, board must establish compensation committee, audit committee, and risk management committee. Board may form committees composed of own members or third parties; Establishment Law does not mandate formation of any committees.c

GAPP 19: Investment decisions should maximize risk-adjusted financial returns consistent with investment policy and based on economic and financial grounds. GAPP 19.1: Clearly articulate in the investment policy, and publicly disclose, if investment decisions are subject to other than economic and financial considerations.

Investment policy Alignment with national priorities

Double bottom line mandate Investment strategy in accordance with mandate “to support economic activity and employment” and other functions in NTMA Act 2014, Section 39

Must invest assets on a commercial basis in a manner designed to support economic activity and employment in Ireland; financial return target: >cost of Irish government debt. NIF investments must to extent possible be aligned/consistent with “infrastructure priorities and plans developed by the appropriate ministries and agencies with responsibilities over the particular infrastructure asset sector.”

Invest in infrastructure sectors that contribute to growth and diversification of economy; long-term return benchmark: US CPI + 3%. Allow 10% of investment in any fiscal year for social infrastructure projects with possibly lower financial returns. In alignment with Abu Dhabi’s “Vision 2030, the long-term plan for the transformation of Abu Dhabi’s economy, with a focus on knowledge-based industries and a reduced reliance on oil”

Economic diversification and sustainability are key principles.

Provisions on co-investment/ co-investors Co-investment, joint ventures, partnerships permittedd Co-investment permitted Permits “participation with others”

GAPP 19.2: Manage SWF assets in a manner consistent with sound asset management principles. Investment strategy Eligible investments / targeted sectors Except for specific circumstances, may not directly invest in fossil fuel undertakings; indirect investment cannot invest more than 15% in fossil fuel undertaking. Primarily infrastructure assets Broad range of activities permitted

TABLE 3.3 continued

KEY ELEMENTS IN SIF-SPECIFIC LEGISLATION

Eligible instruments

Geographic restrictions

Ability for government / public sponsor to direct fund investments

IRELAND STRATEGIC INVESTMENT FUND NIGERIA SOVEREIGN INVESTMENT AUTHORITY

As appropriate As appropriate

No restriction, but foreign investments must have a positive impact on Ireland’s economy. Minister for Finance can direct ISIF to certain investments in specified circumstances, according to the NTMA Act 2014, Sections 42 and 42A.f NIF’s primary focus is domestic infrastructure.e

Not specified

MUBADALA INVESTMENT COMPANY

As appropriate

No restriction

Not specified

GAPP 12: Annually audit SWF’s operations and financial statements per recognized international or national auditing standards in a consistent manner.

GAPP 5: Report relevant statistical data pertaining to SWF in a timely basis to owner, or as otherwise required, to include where appropriate in macroeconomic data sets. GAPP 11: Prepare annual report and accompanying financial statements on SWF’s operations and performance in a timely fashion and per recognized international or national accounting standards in a consistent manner. GAPP 22.2. Publicly disclose the general approach to the SWF’s risk management framework. GAPP 23: Measure and report to owner on the assets and investment performance (absolute and relative to benchmarks, if any) of the SWF per clearly defined principles or standards. Disclosure/ reporting Audit requirements Comptroller and Auditor General of Ireland to review and audit accounts within 4 months of end of financial year

Annual internal audit by the Nigerian branch of an internationally recognized accounting firm

One or more independent auditors appointed by board of directors

Use of IFRS Not specified in law IFRS, or other globally recognized standard Not specified in law

Reporting process NTMA to provide report to minister within 6 months of end of financial year; minister must provide copies to both legislative houses. NSIA to provide annual report to president, Minister of Finance, Central Bank, National Economic Council, National Assembly, and each State House of Assembly within 3 months of end of financial year; NSIA must provide report to Governing Council every 12 months; summary of annual report and relevant documents must be made available to the public. The company shall have one or more accredited auditors verify its accounts and financial statements.

Source: World Bank. Note: CPI = Consumer Price Index; IFRS = International Financial Reporting Standards; ISIF = Ireland Strategic Investment Fund; NIF = Nigeria Infrastructure Fund; NSIA = Nigeria Sovereign Investment Authority; NTMA = National Treasury Management Agency; SIF = strategic investment fund SWF = sovereign wealth fund. a. For more on this, please see chapter 4 on governance. b. Executive directors serve for as long as they occupy their position. c. However, website indicates that Investment Committee and Audit, Risk, and Compliance Committee have been formed. d. The fund is open to private co-investment (NTMA Act 2014, Section 41(4)(d)). e. NIF’s objective is to develop infrastructure in Nigeria, but NSIA may exercise its powers “within or anywhere outside Nigeria.” f. For instance, under Section 42, the Minister of Finance, after consultation with the Central Bank, may direct NTMA to invest ISIF assets in specified securities of a credit institution, or underwrite the issue of any securities of a credit institution, if the minister considers it necessary, in the public interest, in order to remedy a serious disturbance in the economy and/or prevent potential serious damage to Ireland’s financial system.

• Governance. The legislative provisions outlining the governance of the SIF are among the most important (for SIF operations) and the most detailed. As chapter 4 discusses, the governance framework outlined in the law should aim to insulate the fund and its investment decisions from political interference while ensuring that short-term political interests do not jeopardize investments for the long-term benefits of the country. In addition, autonomy and independence of the fund must be balanced with proper oversight and accountability. The functions of the owner of the fund should be clarified in law; if these ownership functions are shared by different entities (such as a governing council and a ministry), the respective responsibilities must be clear and not overlap. • Investment policy and strategy. The investment policies and principles will usually clarify the double bottom line nature of the SIF and align investments with the fund’s mandate and the sponsor’s priorities.19 As chapter 5 discusses, there should be clear limits on the scope of investable assets. The ability to invest too broadly may blur the mandate of the fund, and staff may not have enough investment experience in certain assets and markets to invest prudentially. If the government has any ability to influence the direction of the investments, the conditions under which it can do so must be clearly spelled out in the law. For example, Ireland’s minister of Finance can direct

ISIF to certain investments but only under specified circumstances (such as economic or financial system instability), according to Sections 42 and 42A of the NTmA Act 2014.20 • Disclosure regime and risk management. Last, the establishment legislation also includes provisions relating to reporting, transparency, and audit procedures. The law should prescribe the publication of key information, such as the fund’s annual report and financial statements, accounting standards, and the general approach of the SIF’s risk management framework.

Commercial legislation

unlike public capital SIFs, mixed capital SIFs are generally established on a commercial law basis, most commonly under company law and the regulatory framework for investment funds. mixed capital SIFs, in seeking to align themselves with market norms for private capital funds, often register under commercial law and are also disciplined by alternative investment fund regulation. For example, marguerite II, as a mixed capital fund, is set up under Luxembourg company law and its fund manager is a recognized European union (Eu) Alternative Investment Fund manager. Similarly, all three funds (master Fund, Fund of Funds, and Strategic Fund) of the National Investment and Infrastructure Funds (NIIF) are Category II funds under India’s Securities and Exchange Board of India Alternative Investment Funds Regulations, 2012, but are also governed by trust law because the legal structure of each fund draws from the Indian Trusts Act, 1882.

Although public capital SIFs may in some cases also be formed entirely under commercial law, they are more likely to register under company law than submit to private equity regulation. A government might wish to establish a government-owned investment vehicle under domestic company law to enhance