National wealth fund

A National Wealth Fund (NWF) is a state-owned holding company owning and managing public commercial assets, including;

• Corporations (or State-Owned Enterprises)
• Utilities (or Public Utilities) typically active with the supply of water and electricity to the public, public transportation, including trains, metros, buses and airports
• Financial institutions such as banks (or State-Owned Banks), insurance companies and mortgage institutes
• Real estate and forestries

National Wealth Funds are mainly active in the domestic market, but some have expanded to invest internationally.

Contrary to Sovereign Wealth Funds (SWF), who are mostly funded by revenues from commodity exports or from foreign-exchange reserves held by the central bank, NWF have been set up to actively manage public commercial assets acquired historically by the state or after some private sector failures.

National vs Sovereign Wealth Fund

A Sovereign Wealth Fund (SWF) is primarily a fund manager, concerned with managing reserve liquidity and like a hedge fund typically investing in securities traded on major mature markets. SWFs are designed to optimize a portfolio of liquid assets and securities, through continual securities trading to achieve balance between risk and returns. An example is GIC owned by the Government of Singapore.

A National Wealth Fund (NWF) is an asset manager, concerned with active management of a portfolio of operational assets, similar to that of a private equity fund. The purpose is to maximize the portfolio value through active management including the development, restructuring and monetization of the individual assets. An example is Temasek Holdings owned by the Government of Singapore.

History of National Wealth Funds

The idea of governing public assets in a separate balance sheet, outside the government bureaucracy is not entirely new. Possibly the first external public asset governance company the world saw was CDC (Caisse des Dépôts et Consignations, the Deposits and Consignments Fund) in France, which was established in 1816 to restore confidence following the Napoleonic Wars. Its primary mission was, and still is, long-term investment to promote economic development in France, managing savings, retirement pensions, and financing for social housing, education, and social security.

An early example in the United States was the Reconstruction Finance Corporation (RFC), which was set up in 1933 to boost national confidence and help banks restart lending amid the Great Depression, or IRI in Italy. Both modeled on the War Finance Corporation, which had been created to provide financial support to industries and banks essential for the US effort in World War I.

After World War II, governments across Europe created special entities to manage state assets and/or fulfill economic developmental objectives. An early example was the German developmental institution KfW (formerly KfW Bankengruppen), established in 1948 and Statsföretag in Sweden in 1970.

In 1974, Temasek Holdings was set up as a holding company designed to separate the regulatory and policy-making functions of government from its role as a shareholder of commercial entities, heralding the modern version of the NWF. The vision behind Temasek was Goh Keng Swee, one of the "economic architects" of Singapore, as laid out in an essay on economic development:

One of the tragic illusions that many countries of the Third World entertain is the notion that politicians and civil servants can successfully perform entrepreneurial functions. It is curious that, in the face of overwhelming evidence to the contrary, the belief persists.

Largest National Wealth Funds

• Content referenced from The Public Wealth of Nations

A total of 15 countries with 23 NWFs, with an aggregate value of some $1 trillion. In value terms, this is only a very small fraction — or some 2% — public commercial assets owned at the central government level, and even less as a share of total public assets.

The majority of the existing NWFs are in Asia, split between MENA and East Asia, with only 6% of NWFs (in value terms) in Europe and none in the US or the Americas.

To be specific, only five out of 34 OECD countries have an NWF to manage their commercial assets. Most existing NWFs have more or less clearly expressed value maximization as their main objectives. One-third of all NWFs have a credit rating from one of the three main rating institutions, borrowing on the back of its balance sheet, although most NWFs do so with explicit or implicit guarantee of the government. Few have made the effort of Temasek with the Singaporean government to clearly express the independence of its debt issue. Only a few have achieved a relevant level of transparency, such as publishing a consolidated annual report.

Purpose of NWF

The NWF uses all the appropriate private sector tools and institutional frameworks that enable the government to consider the portfolio of commercial assets as a whole from the perspective of operating income and liabilities without any of the constraints of a public sector bureaucracy.

Consolidation under a private sector vehicle allows the government to establish strategies for handling lossmaking assets, while the priority of improving performance provides greater opportunities to raise financing and choose optimal circumstances for disposals, in the same way as a private sector owner.

As with the investment strategies in private equity fund it is geared towards long- hold, multi-year investment strategies in going concerns and large-scale projects, or other tangibles that are not easily converted to cash. Here, fund managers take greater control and actively influence operations and the development of assets or asset management to generate greater long-term returns.

See also

• Global Financial System
• National wealth
• Sovereign Wealth Fund

References

¹ Citi GPS, June 2015

²Goh, K.S. (1972) The Economics of Modernisation and Other Essays. Singapore: Asia Pacific Press

³ Citi GPS, June 2015

⁴ Citi GPS, June 2015