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Key decision-making bodies and their functions

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representatives on SIF governing bodies or its relationship with government entities outside of the formal governing bodies. For example, the government, which often operates under competing priorities, could pressure a public capital SIF in certain circumstances to invest in politically motivated projects that may deviate from the long-term mandate of the SIF. On the flip side, the government could also give the SIF favored access to government public-private partnership project pipelines, favored pricing on government assets, and favored treatment by regulatory authorities—all of which could distort and crowd out private investors operating in the same sectors. The governance framework for the SIF ideally corrects for these issues through (1) an oversight structure that seeks to insulate SIF management from pressures to deviate from the mandate or distort the private market, and (2) the identification ex ante of the market gap the SIF must address without the risk of crowding out private capital.

KEY DECISION-MAKING BODIES AND THEIR FUNCTIONS

SIF governance structures typically consist of three levels of decision-making bodies that represent ownership, oversight, and management. The owner (or public sponsor), in addition to providing capital to the SIF, sets its driving objectives; the overseeing board sets the strategy to deliver on these objectives (with the input of the manager) and supervises the delivery; and the management carries out the objectives. The governance structure ideally works to (1) insulate the SIF and its investment decisions from political interference, (2) ensure that short-term political interests do not outweigh the long-term mandate, and (3) balance autonomy and independence of the fund with proper oversight and accountability.

The selection, composition, and characteristics of each governance body are important ingredients to the overall governance framework of a SIF. Each of these factors can either subtly, or more tangibly, undermine the integrity and efficacy of a SIF. Recruiting qualified and experienced decision-makers on governing bodies improves the likelihood that a fund’s mandate and investment policy are aligned (Alsweilem et al. 2015). Nevertheless, institutions vary a great deal with regard to their capacity to select qualified board members, hire strong senior staff, and govern themselves as human capital–enhancing organizations (Ambachtsheer 2007; Clark and Urwin 2008). Ideally, no overlaps in membership should exist between the three governance bodies because such overlaps could create parallel chains of reporting. The principle of clarity should generally drive governance arrangements, and the respective roles and responsibilities of these three bodies should be transparently defined in the SIF’s establishment law, bylaws, or governance codes or guidelines. Separation of responsibilities between the governance bodies is to some extent countryspecific, reflecting legal and political circumstances. However, public sector participation ideally occurs in the higher-level governing bodies representing ownership, whereas private sector characteristics predominate at the oversight and management levels.

The specific characteristics of the governance arrangements derive primarily from the law establishing the SIF and from whether the fund and the fund manager are separate legal entities with different ownership compositions. As discussed in chapter 3, investor rights and governance arrangements are embedded within the law(s) that set up the SIF—such as trust law or company law—and the

corresponding legal structure of the SIF. When the fund is not a legal entity, the SIF’s governance arrangements stem entirely from the law that established it. In addition, the governance model can change if the public sponsor is financially invested in the management entity of the SIF. The differentiating organizational trait particularly of the limited partnership model, frequently used by mixed capital SIFs,6 is a separation in legal identity between fund and fund manager: investment assets are housed in the fund, and management assets (or management responsibility) are located within management companies contracted to manage the fund.7 SIF owners in limited partnership structures may exercise ownership rights over the fund but not the fund manager. This organizational distinction can in turn affect the governance arrangements of the SIF, as discussed in more detail in the following subsections.

Ownership structures

Ownership of the SIF by the public sponsor refers to the sponsor’s role as provider of anchor capital. This may include (1) investor in a fund structure (for example, the Marguerite Funds), (2) shareholder in a holding company structure (for example, Khazanah Nasional Berhad), or (3) creation of a ring-fenced pool of assets within a ministry (for example, the Ireland Strategic Investment Fund [ISIF]). The ownership structure of a SIF is exercised through several options.

One common, simplified ownership model for public capital SIFs sponsored by a government has the ministry of finance (or its equivalent) as the proxy legal owner of the fund. Parliament (or the equivalent legislative body in a country), which represents the interests of the taxpaying electorate, is the body to which the SIF is ultimately accountable. However, the ownership function for a SIF is commonly exercised through the government’s ministry of finance, which is typically also the legal owner of the SIF (see World Bank 2014).8 For example, by law, Ireland’s Minister for Finance is the owner of the Ireland Strategic Investment Fund (ISIF)9 and is therefore also responsible for exercising the government’s ownership functions (see table 4.1). The government may choose to set up a dedicated unit within the ministry of finance to concentrate the relevant capacity to perform this ownership function. In Norway, for example, the Government Pension Fund Global is managed by Norges Bank Asset Management, which is overseen by a dedicated Asset Management Department at the Ministry of Finance. In general, other ministries, such as those related to the sectors in which the SIF will operate, could also be candidates for proxying government ownership of the SIF (for instance, the Arab Republic of Egypt’s Law No. 177/2018, which established the Egypt SWF, specified the competent minister as the Minister of Planning Affairs). However, the ministry of finance is generally considered to have the highest level of expertise in investment, finance, and economics to oversee a SIF’s operations and its role in the overall economy and fiscal framework. Best practice on ownership models for SIFs generally avoids fragmented ownership between government entities because diffused ownership structures can complicate governance and diminish accountability and the ability to make decisions (World Bank 2014). Even if the ministry of finance assumes the ownership role, however, other ministries could provide an advisory role to the SIF. For instance, Section 40 of Ireland’s National Treasury Management Agency (Amendment) Act 2014 (NTMA Act 2014) provides that the Irish Minister for Public Expenditure and Reform can advise on ISIF’s investment strategy.

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