Sustainable, Sovereign and Socially Responsible

Transcription

1 Sustainable, Sovereign and Socially Responsible A New Wealth Fund for Angola By Robert Terpstra Images: Shutterstock & FSDEA Angola s first sovereign wealth fund, the Fundo Soberano de Angola (FSDEA), will start to actively invest in 2014, aiming to nurture sustainable growth both incountry and throughout the region. The Fundo Soberano de Angola (FSDEA), the $5-billion brainchild of 71-year-old Angolan President José Eduardo dos Santos, is a relatively new sovereign wealth fund (SWF) committed to the country s social and economic development. It replaces the Fundo Petrolifero de Angola, otherwise known as the Oil for Infrastructure Fund, and is vital in promoting growth, prosperity and economic transformation. Thus far, it has been a boon for Angola: the fund s impact has both stabilised the country and preserved its capital this in order to generate alternative sources 69

2 Construction workers in Angola of income for future wealth generation. Its investment policy is founded on the commitment to seek capital preservation [and] return maximisation, says chairman of the board of directors of FSDEA, José Filomeno de Sousa dos Santos. While the fund considers investment across Africa and the globe, it has a strong focus on investing commercially in the non-oil sector to develop opportunities for the citizens of Angola. The FSDEA s overall investment strategy naturally establishes a portfolio that optimises expected returns in direct contrast to the forecasted long-term risk. The high growth patterns projected for Africa allow for substantially higher returns when compared to developed economies. The FSDEA will look to start investing actively in 2014, ensuring that all of the processes and mechanisms that allow us to work efficiently and transparently are employed, says dos Santos. The fund, headquartered in Luanda, will ensure the allocation of approximately $2.5 billion to alternative investments in the agriculture, mining, infrastructure, hospitality and real estate sectors. This large investment across Angola and other African markets will, according to dos Santos, nurture sustainable domestic and regional growth. The chairman hinted at the potential that the FSDEA may also tap into the burgeoning hospitality market in Angola, because the sector, being relatively shielded from global market volatility, [possesses] a sustainable return on investment and ultimately preserves the capital invested. In March 2013, Ernst & Young reported in Global Hospitality Insights: Top Thoughts for 2013 (GHI) that Sub-Saharan Africa saw a 54 percent year-on-year increase in the number of hotel developments. Dos Santos agrees that there is enormous potential for the cities of Luanda and Lobito in Angola with respect to FSDEA s specific hospitality focus. Getting the Green Light On 20 November 2008, the head of state announced the establishment of a special commission to erect the foundations of a new SWF, so giving the FSDEA the green light. Its predecessor was capitalised using a cash management pool that consisted of revenues accruing from Angola s sale of a tiny fraction of its oil exports approximately 5.7 percent. Revenues were equivalent to the sale of 100,000 barrels of oil per day (bpd), out of a total of 1.76 million bpd exported. The junior dos Santos has left open the possibility that the same pool of cash will be used to capitalize FSDEA. In November 2012, there were initial questions regarding the selection process of the liquidity management contract for $3 billion of FSDEA s assets. Quantum Global Investment Management (QGIM), a Swiss firm minnow, was awarded the contract. According to its website, QGIM is an absolute return, discretionary wealth manager for central banks, sovereign wealth funds and other government institutions primarily from the frontier markets. QGIM s investment outlook for November 2013 further posited that the outlook for Sub-Saharan Africa remains strong. Growth is expected to increase from 5 percent in 2013 to 6 percent in Dos Santos countered criticism by saying that in the past, Quantum proved successful in similar mandates for the Banco Nacional de Angola (National Bank of Angola). Dos Santos had previously been a business partner of Ernst Welteke, who serves on the Quantum Global Advisory Board and was the president of the Deutsche Bundesbank (German Federal Bank) from 1999 to Jean-Claude Bastos de Morais, who some believe is the brains behind the original idea for FSDEA, chairs the advisory board. The triumvirate were partners in Banco Kwanza Invest, a Luanda-based investment bank launched in 2008 under the name Banco Quantum Capital. Dos Santos resigned as the direc- Angola s government further ratified the FSDEA s investment policy in early 2013, which provided the SWF permission and access to make medium and long-term investments for the betterment of the country s economic future. Simply stated, this will allow stability with respect to wealth generation and continued prosperity for the country s 19 million inhabitants. 70 VOLUME

3 tor of Banco Kwanza Invest in June 2012, selling his shares shortly thereafter to prevent any conflicts of interest. The bank and fund do not work together in the present day, though dos Santos admits that he has gained valuable lessons from the experience, which have helped him to establish the country s SWF. My deep belief that the use of efficient and sustainable work practices will improve both public and private management in the continent has given me adequate support to work with my present colleagues, says dos Santos. Humble Origins Dos Santos, born in 1978, eldest son of the Angolan president, quickly rose to prominence as one of the première SWF chiefs in the world. Spending several years in Europe, he returned to Angola in 2002, taking a job in the insurance industry. As he recalls, like many of his fellow countrymen he had a real chance to help shape the country s future after decades of civil war. He not only succeeded in this aspect, he thrived. Dos Santos is joined on the FSDEA s autonomous board of directors by Hugo Miguel Évora Gonçalves and Artur Carlos Andrade Fortunato. The three board members, who are responsible for FSDEA s investment, management and decisions, have been working with the SWF since its launch in October The FSDEA s board and its staff are internally supervised by an audit board appointed by the Ministério das Finanças (Ministry of Finance) and its newly installed minister, Armando Manuel. Shortly after President dos Santos s cabinet reshuffle in May 2013, the first since winning elections in August 2012, Manuel was removed as FS- DEA s chairman. The junior dos Santos believes that under the leadership of President dos Santos, the country has made leaps and bounds in the economic sector. In 2012, Angola ranked ninth in African FDI destinations, with 28 new projects as outlined in Ernst & Young s Attractiveness Survey: Africa 2013 Getting Down to Business, released in May In 2011, Angola was eighth in the continent, with 37 new projects. This year, Tanzania moved past Angola into seventh place. Since 2003, Angola has registered 309 new projects, or 5.2 percent of Africa s FDI total projects. Angola s FDI funds remain a stable, longterm revenue source and with the help of FSDEA will reduce the possibility of both the country and region falling victim to rapid outflows of capital. Responding to Angola s role in the Africa Rising narrative that has been championed as of late, most recently in Foreign Policy, dos Santos said: The financial services industry in Angola has grown by 50 percent every year for the past five years. The domestic agricultural production is growing by an average of 13 percent a year, and more importantly, the real income levels have risen by over 10 percent in the last two years, while the inflation rate has come down to single digits. According to Trading Economics, in October 2013, Angola s inflation rate was 8.38 percent as reported by the Instituto Nacional de Estatística (National Institute of Statistics). It was the 15th straight month that inflation was less than 10 percent, a steady trajectory downward since January 2012, when inflation was equal to percent. Over the 13 years that data has been compiled for the country, October s figure was the country s lowest, a far cry from the more than 240 percent inflation the country witnessed at the turn of the millennium in January Econometricians in the dos Santos government project inflation for 2014 to be between 7 and 9 percent. This will allow the Monetary Committee and National Bank of Angola to avoid wide sweeping reforms and put into place the right monetary policy. The benchmark interest rate is currently on hold at 9.75 percent. Inviting Investors Ernst & Young concluded that because of its SWF, Angola will become increasingly prominent for investors across the continent over the next few years. [The] changing perceptions of relative sector attractiveness in Africa reflect the changing fundamentals of many Africa economies [including] the diversification of both sources of growth [ ] and of the actual FDI flowing into these economies, said Mark Otty, Ernst & Young s Europe, Middle East, India and Africa (EMEIA) managing partner. The rise of the fund, which according to the SWF Institute has an investment management potential of $139 billion, provides the FSDEA with an opportunity to bolster Angola s domestic investment portfolio. A sovereign wealth fund is We asked FSDEA chairman, José Filomeno de Sousa dos Santos what, in his opinion, is the best hotel and resort destination in the world? Some years ago, I travelled for a month across the various cities along the coast of the Guangdong province in China, to map the local business landscape. Despite the fact that very few local people spoke foreign languages, understood foreign culture and catered to international eating habits in that region of China at that time, it already had a reasonable hotel chain equipped to serve the mobility of local companies and domestic tourists. The hospitality sector employs and develops professionals to become bookkeepers, caterers or managers, it focuses on customer satisfaction, and it is the best substitute to home and workplace for many business people operating outside of their hometowns. These unique characteristics turn hotels in the developing world into a refreshing entry point for first-time investors and enchanted visitors, as well as excellent developers of service industry professionals. 71

4 The fund, headquartered in Luanda, will ensure the allocation of approximately $2.5 billion to alternative investments in the agriculture, mining, infrastructure, hospitality and real estate sectors. This large investment across Angola and other African markets will, according to dos Santos, nurture sustainable domestic and regional growth. an extremely complex organisation with many stakeholders, most importantly the citizens of its country of origin, says dos Santos. It is vital to get the foundations right in order to meet their expectations as effectively as possible. The FSDEA will address this by dedicating up to 7.5 percent of its endowment, equivalent to $375 million for social development and socially responsible projects. This includes access to potable water, healthcare and primary and secondary education. According to The CIA World Factbook, only 51 percent of the country has access to a safe drinking water as determined by the World Health Organisation. Only 14 countries are worse off when it comes to countries total health expenditure as a percentage of GDP. Finally, female literacy rates are dismal, at 58.6 percent, while total school life expectancy was 10 years in Currently, Angola s total investment rate accounts for 13 percent of its GDP, nearly half the mean average of its neighbours in South Africa, Botswana, Malawi, Mozambique and Namibia. According to The CIA World Factbook, in 2012, Angola s GDP purchasing power parity stood at $130.4 billion and the country has one of Africa s highest GDP growth rates at 8.4 percent something for which the fund can at least claim some credit. Oxford Economics and Ernst & Young s Growing Beyond Borders projects Angola s GDP growth rate from 2012 to 2017 to be a 6.5 percent year-on-year change, third in the continent to only Malawi at 7 percent and Mozambique at 6.88 percent. According to the IMF, crude oil export levels are second highest in the continent, and eighth in the world, contributing approximately 45 percent of the country s GDP. Success Brings Responsibility It is important to note that the FS- DEA invests across the continent and throughout the world, notwithstanding 72 VOLUME

5 a determined, long-term focus on investments within Angola s domestic market. The fund was established in 2008, had its bylaws ratified in 2011 and has been in its present form since The fund s importance lies in its ability to increase the financial reserves of the state. At the fund s initial launch, then FSDEA chairman, Hugo Manuel, said: The sovereign wealth fund will also have fiscal responsibilities, to help stabilise the economy in terms of high fluctuations in the business cycle, and help around scenarios of excessive volatility in our tax returns. Angola s government further ratified the FS- DEA s investment policy in early 2013, which provided the SWF permission and access to make medium and long-term investments for the betterment of the country s economic future. Simply stated, this will allow stability with respect to wealth generation and continued prosperity for the country s 19 million inhabitants. The caveat is that Angola displays a classic pronounced youth bulge. It is a youthful distribution indicative of developing economies. While The Brookings Institution believes this may be problematic in the medium term, dos Santos disagrees. He says that efficient and sustainable work practices will improve public and private management in Africa, providing both the chairman and its board with adequate support in establishing Angola s SWF. Improvements in governance, capacity building and transparency will bring efficiency to public sector management and enable Angola s development indicators to gradually reach those of other upper-middle-income countries globally. The FS- DEA s establishment derives from this medium-term governmental policy, he says. The fund s asset allocation envisions a portfolio that seeks to optimise the expected returns versus the expected risk over a long-term investment horizon. The rapid and high growth witnessed in the continent is creating a feasible environment for substantially higher returns in comparison to those of mature economies. The Principle of the Thing Following publication of the fund s audited financial accounts in 2014, the FSDEA will actively pursue a high rating in the Linaburg-Maduell Index in order to assess its transparency within the confines of the industry s standards. The index, as an extension of the SWF Institute, rates SWFs on 10 principles that promote transparency to the public. The first Linaburg-Maduell Transparency Index FSDEA rating will be disclosed in the first quarter of 2014 alongside its annual report. As laid out by the IMF and the now-defunct International Working Group of Sovereign Wealth Funds (IWG-SWF) in October 2008 in Santiago, Chile, the Santiago Principles will also soon govern the FSDEA s regulations. The 24 Santiago Principles are a voluntary set of Generally Accepted Principles and Practices (GAPP) that funds worldwide strive to meet. The IWG-SWF has since been replaced by the International Forum of Sovereign Wealth Funds (IFSWF). GAPP 1 states that the legal framework for a SWF should be sound and support its effective operation and the achievement of its stated objective or objectives. GAPP 6 is also noteworthy, saying that the governance framework for the SWF should be sound and establish a clear and effective division of roles and responsibilities in order to facilitate accountability and operational independence in its management, so to pursue its objectives. There are 25 IWG nations which have signed onto the Santiago Principles, two of which are in Africa, including Botswana and Libya with the Pula Fund and Libyan Investment Authority respectively. The FSDEA complies with 21 out of the 24 GAPPs, the approximate median of the 25 other member countries. Said dos Santos: We look forward to becoming a member of the IFSWF, in order for our work to be objectively assessed and improved with the support of the executive body of the IFSWF. Within this strategic framework, the FSDEA endeavours to put in place a comprehensive and systematic audit mechanism to ensure the highest level of transparency and efficiency in its operations. Integral and Necessary The MPLA-controlled Assembleia Nacional, Angola s Parliament, will assess the performance of the fund on an annual basis. Its first assessment report is expected by September Furthermore, the Department of Treasury polices the statutory requirements of the fund and will receive quarterly reports on the details of the FSDEA s activities, namely budget execution, bank statements and reconciliations, as well as budgetary and financial reports. These reports are included in a submission to the Secretariat of the National Treasury. Once audited by Deloitte, they are then validated in While we still have a lot of work ahead of us in Angola, I think we are on the right path in not only ensuring Angolan citizens attain better lives but also in playing an important role in supporting the better initiatives of the continent as a whole. 73

6 The financial services industry in Angola has grown by 50 percent every year for the past five years. The domestic agricultural production is growing by an average of 13 percent a year, and more importantly, the real income levels have risen by over 10 percent in the last two years, while the inflation rate has come down to single digits. Luanda, the capital, by the General State Accounts at the close of every fiscal year, which in Angola, coincides with the calendar year. The IMF has been carefully observing SWFs and sovereign welfare funds since at least the first quarter of 2008 and the Spring Meetings held in the US in Washington, DC. As a relatively new development within the financial arena, the IMF is curious with respect to these types of funds macroeconomic consequences and ramifications. Plans to establish a sovereign wealth fund are welcome, given the need to smooth the spending of oil revenues over time, Murilo Portugal, the deputy managing director of the IMF executive board, said in September The proposed fund will need a sound institutional framework with clear accountability, well-specified linkages to fiscal policy, and a conservative asset management strategy. Portugal further added that, at the time, Angola s macroeconomic situation was continuing to improve and reforms were starting to bear fruit. The FSDEA fund would thus be an integral component of a future agenda The Generally Accepted Principles and Practices (GAPP) or Santiago Principles were unveiled in 2008 in order to ensure the legitimacy of SWFs on both a domestic and global scale. This is accomplished through 24 points funds are asked to adhere to, promoting both accountability and transparency. Here are a select few: GAPP 3. Principle Where the SWF s activities have significant direct domestic macroeconomic implications, those activities should be closely coordinated with the domestic fiscal and monetary authorities, so as to ensure consistency with the overall macroeconomic policies. GAPP 5. Principle The relevant statistical data pertaining to the SWF should be reported on a timely basis to the owner, or as otherwise required, for inclusion where appropriate in macroeconomic data sets. GAPP 8. Principle The governing body or bodies should act in the best interests of the SWF and have a clear mandate and adequate authority and competency to carry out its functions. GAPP 9. Principle The operational management of the SWF should implement the SWF s strategies in an independent manner and in accordance with clearly defined responsibilities. GAPP 17. Principle Relevant financial information regarding the SWF should be publicly disclosed to demonstrate its economic and financial orientation, so as to contribute to stability in international financial markets and enhance trust in recipient countries. GAPP 19. Principle The SWF s investment decisions should aim to maximise risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds. GAPP 23. Principle The assets and investment performance (absolute and relative to benchmarks, if any) of the SWF should be measured and reported to the owner according to clearly defined principles or standards. Source: International Working Group of Sovereign Wealth Funds that would address macroeconomic difficulties, specifically with respect to the strengthening of macroeconomic management capacity. The launch of Angola s sovereign wealth fund is an important component of a medium-term macroeconomic policy framework to guard against volatility in the oil price, Nicholas Staines, the IMF s Resident Representative in Angola said to Euromoney in November Staines said that a key part of Angola s $1.4-billion loan (in March 2012) was under what circumstances and what rules the budget could draw upon the fund for stabilisation or other purposes. The government will need to clarify how the fund will be accounted for within the fiscal accounts and in the central bank s foreign reserves, he said at the time. The carefully screened audit conducted by Deloitte in the second quarter of 2013 allowed the fund to position itself as adhering to stringent financial reporting standards. The Angolan government sought a firm with a strong track record and expertise working with sovereign wealth funds and substantial experience across the continent and specifically in Angola, says dos Santos. His predecessor as the FSDEA chairman, Minister of Finance Manuel agreed, saying that the recent appointment of Deloitte represents a noteworthy milestone for the development of the fund. In short, it ensures accountability to both the Republic of Angola and its citizens. Angola s economic growth is expected to be driven by the expansion in the oil sector and a public expenditure programme designed to encourage economic diversification, dos Santos said, partly addressing concerns of how the fund would carry out a diversified approach on admittedly, a small scale, compared to other funds. While we still have a lot of work ahead of us in Angola, I think we are on the right path in not only ensuring Angolan citizens attain better lives but also in playing an important role in supporting the better initiatives of the continent as a whole. 74 VOLUME