Authority

development finance institutions. Khazanah is almost entirely owned by the Minister of Finance Incorporated,15 but one share of the company is owned by the Federal Lands Commission (Incorporated). Although FONSIS is currently solely owned by the state, its establishment law allows ownership of FONSIS to be divided between other government agencies.16

An arrangement also common to public capital SIFs, usually driven by political economy considerations, is to incorporate a governing council17 as a high-level governing mechanism within the ownership tier of the fund. This council represents broad government and societal ownership interests, plays an advisory role to the public capital SIF, and—depending on the jurisdiction—may or may not report directly to the parliament or other legislative body. Governing councils do not have legal ownership of the SIF but are often authorized by law to exercise specific ownership functions over the fund (see the discussion on ownership responsibilities in the next subsection). These councils are typically set up in public institutions and play a high-level advisory and supervisory role, such as providing input on the fund’s strategy and policies, weighing in on any increases or decreases in capital, reviewing investment activities and performance, and assessing the hiring and firing of executives. For example, NSIA’s current ownership structure, as mentioned earlier, is divided between the federal and subnational governments (see the case study in appendix A).18 As a result, NSIA’s governance structure includes a governing council representing these broad ownership interests (see box 4.2 for details).

Such councils can enhance the political legitimacy of the SIF and its operations by ensuring broad representation from the spheres of government, business, the financial sector, policy, academia, and civil society.19 In the case of NSIA, for example, the federal government’s use of a representative governing council helped ensure state-level support when the fund was established. However, the composition of the governing council must strike an optimal balance between representation and capacity. Governing council members with expertise in investment, corporate governance, and the sectors in which the SIF is active can enhance the ability of the council to provide useful oversight of the SIF.

BOX 4.2

Governing council: The example of the Nigeria Sovereign Investment Authority

According to the Nigeria Sovereign Investment Authority (Establishment, etc.) Act, 2011, the following government representatives, who are mostly proxy owners or have fiscal or monetary authority, have an automatic seat on the governing council: the President (who chairs the council), the 36 state governors, the Attorney General, the Minister of Finance, the minister in charge of the National Planning Commission, the governor of the central bank, and the chief economic adviser to the President, among others.

In addition, the President appoints to the council four reputable representatives of the private sector, two representatives of civil society (such as nongovernmental organizations or professional organizations focused on civil rights), two representatives of Nigerian youth, and four academics.

The governing council reviews the fund’s strategies, policies, changes in capital, investment activities, and performance, as well as the hiring and firing of executives.

Source: World Bank; see case studies in appendix A.

Conversely, if council members do not have such capacity, their influence could be detrimental to the SIF. It is also important that the governing council’s role be clearly specified by law or regulation and not overlap with or undermine other decision-making bodies, such as the board of directors. For instance, the NSIA Act 2011 states clearly that the governing council must observe the independence of the board and officers of NSIA.20

Whereas ownership structures for public capital SIFs focus on permanent capital vehicles, mixed capital SIFs pivot around pooled investment in a finite life legal entity, with investor rights dictated through contractual measures between the investor(s) and the fund manager. In the models described previously, pertinent to a public capital SIF, the SIF is usually formed as a permanent capital vehicle, thus assuming an enduring role within the government apparatus. Such permanent capital vehicles typify SIFs set up solely by one public sponsor (usually the government) with ultimate control over the SIF’s longevity (see chapter 2). In contrast, as discussed in chapter 3, mixed capital SIFs often use finite life private equity–style legal structures (such as the limited partnership) and ensuing ownership and governance models. Finite life funds are convenient because they limit the tenure of the co-ownership relationship between the public sponsor and other investors, allowing a parting of ways once mutual objectives are met. For example, Asia Climate Partners (ACP) was formed by founding partners Asian Development Bank (ADB), ORIX Corporation, and Robeco pooling ownership interests in a 10-year limited partnership vehicle targeting the renewable energy, resource efficiency, and environmental sectors in emerging Asia. In this private equity–type ownership model of a SIF, investors exercise their ownership rights through contractual provisions described in chapter 3, which provide the contours of the fund’s operation and its overall governance structure. The key governance document—usually the limited partnership agreement (described in greater detail later in this chapter)—lays out the rights and obligations of the investors and manager.

As a mixed capital fund sponsored by the government of India, the National Investment and Infrastructure Fund (NIIF) presents a hybrid ownership model, combining ownership features seen in both mixed capital and public capital SIFs. Specifically, the Ministry of Finance’s ownership stake in NIIF is directly pooled with that of other investors as found in other mixed capital SIFs, and the ownership function is aided by a governing council representing government and business communities. The funds of NIIF are unit trusts that mimic the general partner (GP) / limited partner (LP) structure, pooling investments from the government of India (49 percent stake) and other domestic and international investors. The government’s investments in the three funds of NIIF, as well as its stake in the manager of the fund (NIIF Limited), are made directly through the Ministry of Finance (that is, there is no separate ownership entity). The government’s ownership interests are overseen by the Department of Economic Affairs of the Indian Ministry of Finance, which maintains an open communication channel with NIIF Limited. Therefore, the Ministry of Finance is the proxy legal owner of the stakes in the funds and manager, and is empowered to exercise the government’s ownership rights. NIIF’s Governing Council, chaired by the Minister of Finance and including members of India’s business, investment, and policy communities, meets annually to provide general guidance on NIIF’s strategy.21 Both the Ministry of Finance and the Governing Council are headed by the Minister of Finance, thus ensuring consistency in strategic decisions.