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Strategic Investment Funds

The structure of SIFs vary along a broad spectrum, from the private management of public capital, via hybrid funds, to fully state-owned direct investment funds. In general terms, the choice of structure depends on the relative importance of market validation versus the policy objectives of the SIF. Private management of public capital occurs when the government invests in a private fund, on terms that reflect policy priorities, or when a public entity shares risk as a limited partner in a hybrid fund. In this model, investment decisions are made independently by the private sector general partner that manages the fund or by an independent investment committee that may include government representatives, while the overall investment policy is set by the fund's board, which is usually controlled by limited partners. The fund manager and general partner may be required to put up some share of the total capital. The PINAI is an example of this approach. 

In funds that are fully government owned and/or operated, market validation may come from constraints on the ownership share in each investment, limiting the SIFs' investments to minority participation of a certain size. Except for hybrid funds, fund management is frequently provided by a government-owned fund management entity operating at arm's length from the government (see appendix A). In general terms, the extent to which private capital participates in the fund's structure increases the market validation of investments (figure 4).

Figure 4. Strategic Investment Fund Structure, Market Validation, and Public Capital Multiplier


Although attaining a high level of private funding is a priority for SIFs, it is worth mentioning that a higher multiplier may translate into less control of policy objectives. In the fund-of-funds model, the public sponsor's control over an investee fund's investments may be limited to supervision of environmental, social, and governance reporting, while direct investment funds such as FONSIS can be expected to have a higher degree of control over policy objectives.

The Alberta Heritage Savings Trust Fund (AHSTF), while not an SIF, illustrates the importance of ensuring the market validation of investment projects (box 4). The AHSTF had a complex set of objectives, and a complex structure to go with it. The emphasis on public investment and the significant political influence over the fund's governance and investment decisions contributed to its poor results, and the funding of uneconomic projects resulted in many loans being written off.

Box 4. The Alberta Heritage Savings Trust Fund (AHSTF)

The AHSTF was established in 1976 by the province of Alberta, Canada, to (i) save for the future, (ii) strengthen and diversify the economy, and (iii) improve the quality of life of Albertans. During the early 1980s, the fund made loans to other provincial governments in Canada. Later, the fund's money was used for capital infrastructure projects. Investments included low-interest financing to state firms, financing to Alberta corporations to encourage diversification away from the oil sector, social investments such as parks and hospitals, and investment in the Canadian stock market.

Four of the fund's five investment divisions were particularly striking because they covered activities that are conventionally undertaken by the general budget. The checks and balances that were set up for these activities were less stringent than those normally applied to the general budget. Indeed, by transferring money to a fund with loosely defined objectives, the executive (through the cabinet) determined spending priorities in a very autonomous fashion. Although there were ex post considerations of these decisions that could have prompted the legislature's refusal to approve further transfers into the fund, these were rather weak and could not easily reverse a spending decision once it had been made.

Since a baseline analysis was not undertaken, it is difficult to assess to what extent the fund was able to achieve its policy objectives. In 1995, the fund's mandate was put to a provincial referendum, and its domestic development role ceased in 1997. Since then, it has been a pure savings fund, operating as a commercial investor with the sole objective of maximizing financial returns for its shareholders, the citizens of Alberta.

Other sovereign funds with a domestic investment mandate, such as Malaysia's Khazanah Nasional Berhad and Singapore's Temasek, appear better able to ensure market validation and generate financial returns while supporting their national economies. These funds' initial capital consisted of a portfolio of stateowned enterprises (SOEs) and other assets destined for full or partial privatization. As such, they acted as state-owned holding companies. Because these funds' role was to privatize state assets, their management and investment decision-making processes have, since the start, been exposed to and validated by market forces. The funds have since expanded into foreign assets while maintaining their public policy objectives. For example, Khazanah's foreign investments are to some extent driven by the purpose of strengthening sector and industry links that promise to benefit Malaysia's economy and Malaysian companies.