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Egypt: Preparing for the Sovereign Wealth Fund

Niveen Wahish , Monday 7 May 2018
Ashraf Ghazali
File Photo: Ashraf Ghazali, CEO of NI Capital, a subsidiary of the National Investment Bank (NIB) which prepared the initial study for the fund.

Egypt’s government is making preparations for the establishment of the EGP 200 billion sovereign wealth fund which was announced in April, with the hope that the legislation governing and regulating the operation of the fund will go through parliament and be issued within six months.

The fund will be a national sovereign wealth fund, rather than a wealth-maximisation fund, Ashraf Ghazali, CEO of NI Capital, a subsidiary of the National Investment Bank (NIB), explained.

In an interview with Al-Ahram Weekly, Ghazali said Egypt’s sovereign wealth fund would focus on economic development and seek to harness government and private-sector investment as well as financing from other funds for development projects targeted by the Egypt Strategy 2030 goals.

“The fund will be 100 per cent owned by the Egyptian government,” Ghazali stressed, clarifying that the government would partner with private-sector companies on specific projects.

NI Capital carried out the initial study to establish the wealth fund, working with a group of top-tier consulting firms specialising in establishing similar funds for two years until the draft law setting up the fund could be presented to the Ministry of Planning.

Egypt’s sovereign wealth fund will be different from the wealth-maximisation funds set up by the United Arab Emirates, Saudi Arabia and Norway, which depend on surpluses from the sale of natural resources such as oil and invest across the globe in order to accumulate and preserve capital.

The Norwegian fund has over $1 trillion in assets, for example, including 1.3 per cent of global stocks and shares, making it the world’s largest sovereign wealth fund.

Egypt does not have such excess wealth, Ghazali said, adding that as a result its fund would be financed by a combination of cash, in-kind contributions in the form of under-utilised state-owned assets such as land, buildings, factories, and companies, and properties that can be more efficiently utilised to generate better returns.

But will that be enough to carry out the targeted investments? Ghazali explained that the fund would aim to attract the private sector and domestic and foreign partners in order to carry out projects that serve the government’s development plans.

Egypt’s fund will also only invest within Egypt, and it will encourage other funds to do so jointly with the government, he said.

He stressed that the projects taken on by the fund would be economically viable. They could include everything from restructuring state-owned companies and establishing green-field companies to infrastructure and utilities projects.

If management is not able to attract investment, then the projects are not economic, and in this case they also would not attract investment from the sovereign fund.

There would need to be selectivity in the assets that could be transferred to the fund, he added, stressing the need to start with companies that could be turned around. The fund would then be able to grow its capacity to take on more projects, he said.

Ghazali does not believe the fund is a reversal of government policy regarding divesting its holdings in state-owned companies. Instead, it is a way of withdrawing from daily management while staying on as a shareholder.

He said the government should invest in certain sectors with development goals in mind, pointing out that for some years the private sector had been hesitant to invest. “If the government had not had investment arms, we would have had a problem,” Ghazali said.

The government must play a role as when it invests it paves the way for the private sector to become more involved, he explained.

The presence of the government as co-investor at the sovereign level in mega-infrastructure projects where the private sector would not venture alone is also important, he said.

The projected sovereign fund is one of the tools the government has adopted to achieve its long-term development plans, Ghazali said, adding that the Malaysian model is the closest to Egypt’s case.

Khazanah Nasional Berhad, the strategic investment fund of the government of Malaysia, holds the commercial assets of the Malaysian government and undertakes strategic investments on behalf of the nation, he said.

According to its website, in the first 10 years of its operations, which began in 1994, Khazanah “assumed a custodial role in managing the government’s commercial assets as well as investing in strategic and high-technology sectors”.

Today, Khazanah is one of the largest sovereign funds in the world, and it has performed well domestically and has also acquired companies around the world, including in Egypt.

Ghazali believes Egypt can do the same with its new fund, something he describes as “long overdue”.

“In Africa, Egypt is one of the very few countries that does not yet have a sovereign fund. We have been thinking about it for a long time, but it never materialised. This time round, the government is serious about it, and it is taking serious steps, such as the draft law, to make it happen,” he added.

Who would manage the fund? There are two models, according to Ghazali. In Norway, a separate state-owned management company manages the fund, with Norges Bank Investment Management being the asset-management unit of the Norwegian Central Bank, managing, among other things, the country’s main pension funds.

In other cases the government runs the fund itself. Ghazali believes the Norwegian model would be the better choice for Egypt because a separate company with a private-sector mindset would likely be more able to take the necessary investment decisions.

Its management team would rely on a framework developed and agreed with the state. The form of management would be one of the issues settled by the law as well as the governance model governing it, Ghazali said. Governance was particularly important in that it provided for checks and balances without hampering investment, he explained.

In drafting the new law, the legal status of sovereign funds around the world had been examined, and it had been found that they were established by special laws allowing them to become one of the investment arms of the government concerned, he said.

Such laws typically regulate the transfer of assets from one authority to another, needed to ensure the smooth transfer of chosen assets to the sovereign fund. “Transferring assets from one authority to another is complicated even though both are government entities,” Ghazali explained.

The law also regulates how the fund will make its investments and in which sectors. Once the new law is approved by parliament, there will be clear executive plans that will take six months’ preparation stating where money will be placed and where funding will come from.

The fund is not a short-term project, Ghazali said, and its positive effects may take time to be felt. “It takes between 10 and 15 years before a fund begins to bear fruit,” he concluded.

*This story was first published under the title "Preparing for the wealth fund" in Al-Ahram Weekly 

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