9.4 FONSIS organizational structure

of Economy, Finance and Planning into two separate ministries: the Ministry of Economy, Planning and Cooperation and the Ministry of Finance and Budget. The former Ministry of Economy, Finance and Planning’s two board seats were transferred to the Ministry of Economy, Planning and Cooperation. The board elects a chairman proposed by the President of the Republic; the CEO may also be considered for the chairman role. Board members are appointed for three-year terms (renewable once), which can be revoked during their term with the approval of the President of the Republic.

FONSIS’s CEO is appointed by the board on recommendation of the President of the Republic, for a five-year term (renewable once). With the approval of the President of the Republic, the CEO may be dismissed for gross misconduct, mismanagement, or unsatisfactory performance. The CEO must have at least 10 years of relevant experience in investment management, sovereign fund management, and banking (financing, mergers, acquisitions, capital markets, and so on), with at least 3 years as manager, general manager, associate or managing partner, or similar managerial position. The CEO must meet requisite standards of integrity. Figure 9.4 depicts FONSIS’s organizational structure under the CEO.

Once investments are approved by the board, the Investment Committee validates each disbursement to make sure it is made according to the board’s resolution. The Investment Committee comprises six members: the CEO, executive director in charge of business sectors, the executive director in charge of finance and investor relations, the chief legal officer, and two board members (one of whom chairs the Investment Committee).

FIGURE 9.4

FONSIS organizational structure

CEO

Legal and regulatory affairs

Strategy and communication directorate

Executive directorate in charge of funds activity

Executive directorate in charge of investments

Financial and administrative directorate

Sectoral investments directorate

Sectoral investments directorate

Source: FONSIS. Note: CEO = chief executive officer; FONSIS = Fonds Souverain d’Investissements Stratégiques (Sovereign Fund for Strategic Investments).

STAFFING AND RECRUITMENT

FONSIS has a staff of 34, including 15 investment professionals with 10–20 years of relevant experience in Senegal and abroad. Professional backgrounds include investment banking, commercial banking, and investing. With the exception of board members who are government representatives, all FONSIS employees come from the private sector. FONSIS used an external Senegalese recruitment agency during the very early stages of recruiting. It subsequently put in place an internal process to hire staff, including public announcements of open positions, screening procedures, interviews with current staff, tests, and interviews with the executive directors.

The FONSIS Law establishes that management remuneration must be attractive and enable the hiring of qualified investment professionals. Personnel salaries and bonuses are set by the board on recommendation of the CEO. In practice, FONSIS cannot match the remuneration (salary plus bonus) of similar private sector funds, but the appeal of working for a high-profile institution in their native country has proven attractive for members of the Senegalese diaspora previously working in international financial centers.

ECONOMIC IMPACT AND ESG REPORTING

In its investment strategy FONSIS emphasizes the achievement of social and environmental impacts and the promotion of good governance practices. Specifically,

• FONSIS defines social and environmental impact as the creation of jobs with acceptable salary levels, local economic development, and the strengthening of value chains, coupled with minimal negative impact on the environment. • From a governance perspective, FONSIS pushes portfolio companies to adopt transparent management and supervisory structures, performance and reporting systems, and accounting standards and procedures.

FONSIS implements its impact and ESG practices at all phases of the investment process, namely,

• In the project selection phase, FONSIS screens projects using predefined criteria including job creation, impact on local economy, coherence with the PSE, and minimal impact on the environment. In addition, projects must obtain clearance from the Ministry of Environment and Sustainable

Development if required by it; such clearance is based on the completion of an environmental study. • In the project implementation phase, once a project or company enters

FONSIS’s portfolio, FONSIS works proactively with it to implement the required ESG standards. • In the monitoring phase, as a shareholder, FONSIS requires quarterly reporting of ESG compliance by its portfolio companies and participates in their governance bodies. The ESG standards follow international best practices, such as those promoted by the International Finance Corporation.

FONSIS has been a member of the International Forum of Sovereign Wealth Funds since 2019 (see IWG [2008] for the Santiago Principles).

FINANCIAL DISCLOSURE AND RISK POLICIES

FONSIS publicly discloses relevant financial information related to its operations in its annual reports. Reports are also published for the board of directors and the different committees.

As a limited liability company, FONSIS is subject to auditing requirements laid out by company law. International auditing firm Ernst & Young and a local firm have been appointed as auditors. In addition, according to Article 24 of the FONSIS Law, FONSIS is subject to control by the State General Inspection, the Court of Auditors, and the General Inspection of Finance.

At the time of writing, FONSIS had not yet formalized its risk policies.

NOTES

1. 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 in 1993 by 17 West and Central African nations. 2. Senegal’scurrencyistheWestAfricanCFAfranc(CFAF)andispeggedtotheeuro.FONSIS is denominated in CFAF. Throughout this case study, any conversion to uS dollars is based on an exchange rate of CFAF 575.00 to uS$1.00, as of the beginning of October 2018. 3. See the “Who We Are” page on the FONSIS website (https://www.fonsis.org/en/who-we -are/our-mission). 4. SAED stands for Société Nationale d’Aménagement et d’Exploitation des Terres du Delta du fleuve Sénégal et des vallées du fleuve Sénégal et de la Falémé (National Society for the

Development and Exploitation of the land of the Senegal River Delta). 5. More specifically, the uniform Act on Commercial Companies and the Economic Interest

Group (uniform Act). 6. Constitutional law dated May 14, 2019. 7. Decree n° 2019-762 dated April 7, 2019.

REFERENCES

FONSIS (Fonds Souverain d’Investissements Stratégiques). 2014. “Schématisation des

Procédures Internes d’Investissement et de Financement.” FONSIS, Dakar. FONSIS (Fonds Souverain d’Investissements Stratégiques). 2019. “Rapport Annuel 2018.”

FONSIS, Dakar. https://www.ifswf.org/sites/default/files/annual-reports/Fonsis -rapport-2019.pdf. FONSIS (Fonds Souverain d’Investissements Stratégiques). 2017. “Rapport Annuel 2017.”

FONSIS, Dakar. https://www.fonsis.org/sites/default/files/rapport-annuel/Fonsis _Rapport_2017.pdf. IWG (International Working Group of Sovereign Wealth Funds). 2008. “Sovereign Wealth

Funds Generally Accepted Principles and Practices: ‘Santiago Principles.’” IWG. https:// www.ifswf.org/sites/default/files/santiagoprinciples_0_0.pdf.

10 Case Study—The Ireland Strategic Investment Fund: A Strategic Investor in a HighPerformance Economy*

A strategic investment fund must by nature be long term, but its mandate and strategy need to be flexible and adaptable, evolving to the needs of the economy. —Eugene O’Callaghan, Director, Ireland Strategic Investment Fund

BACKGROUND AND MISSION

The Ireland Strategic Investment Fund (ISIF) is a fully state-owned €8.8 billion fund (as of December 31, 2018) with the double bottom line mandate to invest (1) on a commercial basis and (2) in a manner designed to support economic activity and employment in Ireland. It was established by act of parliament, specifically the National Treasury Management Agency (Amendment) Act, 2014 (hereinafter, the NTMA Act 2014).1 ISIF invests both directly and indirectly through third-party managers, and has the flexibility to invest across the capital structure—from secured debt (rated or unrated) to venture equity.

ISIF is the successor of the National Pensions Reserve Fund (NPRF), established in 2001 to supplement the existing pay-as-you-go public pension system. NPRF was controlled by the NPRF Commission, acting through the National Treasury Management Agency (NTMA, or the Board) as fund manager. One of the statutory purposes of the NPRF was to meet as much as possible of the costs of social welfare and public service pensions from 2025 until 2055. Up to 2010, the Exchequer contributed an amount equal to 1 percent of gross national product annually into the NPRF. The NPRF Commission, through the NTMA, built a global, long-term portfolio of listed securities (stocks and bonds), real estate and private equity, commodities, and absolute return funds.

As a result of the global financial crisis, a significant portion of the assets of NPRF was used to recapitalize fragile Irish banks. In light of the particularly severe effects of the crisis in Ireland, at the direction of the Minister for Finance,

*This case study uses language directly from ISIF’s Santiago Principles Self Assessment in some sections. The self assessment can be found at https://www.ifswf.org/assessment/ireland -strategic-investment-fund. Research for this case study was completed between 2018 and 2019. The text reflects the circumstances at that time.

in 2009 a total of €10.7 billion from the NPRF was invested in Allied Irish Banks plc and the Bank of Ireland, followed by a further €10 billion in 2011. Investments in the two banks were segregated into a Directed Portfolio subject to the direction of the Minister for Finance and oversight by the Department of Finance. The remaining pool of capital, termed the Discretionary Portfolio and worth approximately €4.5 billion in 2011, stayed under the control of the NPRF Commission. The annual contribution to the NPRF stopped in 2010 as a result of Ireland’s worsened fiscal position.

In September 2011 the government announced its intention to establish a strategic investment fund to channel resources from the NPRF toward investment in sectors of strategic significance to the future of the Irish economy, which led to the announcement of ISIF and its mandate in mid-2013 and the formal establishment of ISIF in December 2014. This intention required legislative changes in the form of the NTMA Act 2014, providing, among other things, for the establishment of the ISIF and the transfer of all NPRF assets (both Directed and Discretionary Portfolios) to ISIF. Ownership of ISIF is vested in the Minister for Finance, with the NTMA responsible for control and management of the fund; consequently, NPRF’s investment mandate ended. At the date of transfer from NPRF to ISIF, the total portfolio was valued at €22.1 billion, including €15 billion in the Directed Portfolio (subject to oversight and direction from the Minister for Finance) and €7.1 billion in the Discretionary Portfolio.

Following ISIF’s establishment, its initial investment strategy was approved by the NTMA after consultation with the Minister for Finance and the Minister for Public Expenditure and Reform, and published in July 2015. The investment strategy was reviewed in 2017–18—in compliance with Section 40 the NTMA Act 2014, which requires a periodic review of the strategy—and amended to reflect Ireland’s rapidly improving economic situation and changing investment opportunity for ISIF. The initial strategy reflected Ireland’s need to attract capital and stimulate the economy in the aftermath of the global financial crisis that severely affected the country. By the time of the strategy review, Ireland’s economy had improved well beyond expectations. ISIF submitted its own review material to the two government departments (Department of Finance and Department of Public Expenditure and Reform), and the Department of Finance published its review of ISIF in the fourth quarter of 2018 as part of the Budget 2019 materials (Ireland, Department of Finance 2019).

In July 2018, the Minister for Finance and Public Expenditure and Reform announced a refocusing of ISIF on five key economic priorities: (1) indigenous industry, (2) regional development, (3) sectors negatively affected by Brexit, (4) projects to address climate change, and (5) housing supply (Ireland, Department of Finance 2018). The latter priority is intended to address Ireland’s housing shortage, one of the key issues that emerged with the economic recovery. The change in focus reflects the strong growth in the Irish economy and increase in capital inflows over the previous years, but also new challenges such as Brexit, the public debt level, the risk of economic overheating, national competitiveness, and global economic and geopolitical uncertainties.

To align with this new strategy and the ministerial review, a new ISIF business plan was developed (ISIF Investment Strategy 2.0), according to which a portion of ISIF funds would be reallocated through legislation to a new rainy day fund2 and to two newly established agencies (ISIF 2019b). This reallocation

is to occur over the medium term, with approximately 50 percent of it occurring in 2019. ISIF’s Discretionary Portfolio was valued at €8.8 billion as of December 31, 2018 (ISIF 2018b). Of ISIF’s capital, €3.5 billion will, subject to the requisite legislation, be reallocated as follows: €750 million has been committed to the newly established Home Building Finance Ireland (an agency dedicated to extending low-risk, working capital loans to small and medium housing developers); up to €1.25 billion to the Land Development Agency; and €1.5 billion to a rainy day fund, the primary purpose of which is to mitigate severe economic shocks beyond the normal fluctuations of the economic cycle. As a result, ISIF’s size is reduced to €5.3 billion. ISIF’s housing investments will seek to avoid overlap with Home Building Finance Ireland.

The following details of the case study reflect the position up to the end of 2018, before ISIF Investment Strategy 2.0.

FUND STRUCTURE

ISIF is not a separate legal entity; it is a fund3 comprising a collection of assets, owned by the Minister for Finance and managed and controlled by the NTMA (subject to the direction of the Minister for Finance in respect of the Directed Portfolio element of the ISIF).

The NTMA Act 2014 established some general principles for the establishment and operations of ISIF. These principles include the following (see the subsection on governance for further detail):

• Adoption of a legal framework for ISIF including a specified policy mandate (investment objectives) and a framework for its management and control, which are publicly disclosed • Minister for Finance ownership of ISIF4 • Status of the NTMA as controller and manager of ISIF, with responsibility for determining the investment strategy for ISIF • Oversight provided by the Investment Committee of the NTMA on implementing the investment strategy

NTMA controls and manages ISIF, which does not include any third-party capital (figure 10.1). The NTMA is a public agency that provides asset and liability management services to the Irish government. In addition to managing ISIF, these services include borrowing on behalf of the government and managing the national debt, the State Claims Agency, the New Economy and Recovery Authority, and the National Development Finance Agency. NTMA has a staff of approximately 500, 45 of whom are allocated to the ISIF team. In addition, the ISIF team is supported by a number of NTMA corporate functions, including economics, finance, information technology, human resources, legal, communications, agency secretarial, risk, compliance, and internal audit.

MANDATE FOR INVESTMENT

The policy mandate for ISIF is that it be invested, on a commercial basis, in sectors and opportunities intended to generate positive economic impacts for Ireland. Specifically, according to the NTMA Act 2014, NTMA “shall hold or invest the assets of the Fund [ISIF] (other than directed investments) on a