Britain is building a new sovereign wealth fund — what can it learn from the others?

The writer is an FT contributing editor

Twenty years ago, sovereign wealth funds were rare. Today, you can hardly move for them. According to Global SWF, a company tracking state-owned investors, there are 179 funds managing a collective $12.4tn in assets. As Britain gets ready to launch its new National Wealth Fund, what lessons can it take from abroad?

With only £7.3bn of initial funds, the NWF will be a world away from the massive intergenerational saving fund that think-tanks on the left and right of Britain’s political spectrum have spent decades calling for the state to build. And rather than investing where returns look best, the NWF task force has recommended that it should aim simply not to lose money. Its real focus will be on supporting Britain’s clean energy transformation, and economic growth more broadly.

In the taxonomy of SWFs, this makes the NWF a “strategic” fund. Strategic funds, unlike savings or stabilisation funds, target non-financial objectives — typically development goals. Far from being unusual, they are the most populous category of SWF by number, if not by asset value.

Saudi Arabia’s $925bn Public Investment Fund is the largest of this type of fund. It aims to support Saudi Vision 2030 — an ambitious industrial strategy to transform the economy away from a dependence on oil and boost the country’s international standing. Buying up football clubs may produce good financial returns, but this will be more of a happy coincidence than a product of cold commercial calculation. If the NWF is to avoid becoming a generalist slush fund, building strong governance arrangements will be key.

Well-managed funds tend to recruit staff from outside normal civil service channels, pay competitively and function independently in pursuit of their clearly designed mandate. Ministers should be kept at arm’s length from operational decisions for at least three reasons.

Some content could not load. Check your internet connection or browser settings.

First, among SWFs, strategic funds are the most susceptible to cronyism. International experience is littered with high-profile disasters. The embezzlement scandal involving 1MDB — a strategic Malaysian SWF — was declared by the US Department of Justice as its “largest kleptocracy case to date” in 2016, and resulted in the jailing of the country’s former prime minister. And the Panama Papers revealed tens of millions of dollars were being paid by FSDEA — Angola’s strategic SWF — to close contacts of President José Eduardo dos Santos’s son. It would be great to think Britain needed no checks against cronyism, but the unlawful use of fast-track VIP lanes to award PPE supply contracts to companies with close political connections during Covid-19 reminds us of the importance of strong institutional guard rails.

Second, given the NWF’s ambition to crowd in private capital, ministerial involvement would make Britain vulnerable to foreign governments using their vast pools of SWF capital as tools of soft power. Independent officials pursuing unambiguous briefs are better able to manage such conflicts of interest.

Third, it’s not obvious that ministers are especially suited to long-term capital allocation decisions. They are under constant pressure to provide answers to the pressing problem of the day. And absent the transparency of a financial return, they run the risk of being able to mark their own homework, or not mark it at all. These risks seem to me to be higher for elected politicians than for civil servants.

Encouragingly, arm’s-length operations, independent governance and professional staffing are all recommended in a report prepared for the Labour party on the fund’s design principles by the Green Finance Institute. It would be wise to follow this advice.

While Australia’s Future Fund was founded on privatisation receipts and a myriad of resource-rich nations have built their SWFs from oil revenues, Britain has little choice but to fund the NWF with debt issuance. While this might sound risky, it is not uncommon. France, Italy and Belgium have each built small SWFs despite running high levels of government debt. Singapore, China and New Zealand have even shown it’s possible to create very large sovereign wealth without natural resource windfalls. Britain’s debt-centric fiscal rules don’t discriminate between a pound spent acquiring productive assets and a pound lost down the back of the sofa. This may be one reason the NWF will start so small. While unlikely, shifting the object of Britain’s fiscal rules from net debt to net worth would allow for greater ambition.

Governance design is not the sexiest area of public policy. When it comes to building SWFs, it is arguably the most important. For Britain’s new fund, it will probably determine its success.