The $3.5 Trillion Question: Why governments establish sovereign wealth funds… and are they working?

Posted by Andrew Bauer1

RWI Logo

This blog is the first of two articles on sovereign wealth funds in a natural resource-rich setting

Since 2000, over 30 governments in natural resource-rich countries have created sovereign wealth funds. More than a dozen more are in a pre-operational phase. In Kenya, Sierra Leone and the Canadian province of Saskatchewan, plans are being drawn up. In Uganda, draft legislation has been tabled in parliament. Funds in Colombia and Papua New Guinea have been established but are not yet operational. In fact, nearly all new oil, gas or mineral producers and even several hopeful producers are planning on establishing sovereign wealth funds.

Why do natural resource-rich governments so desire their own sovereign wealth funds? More importantly, given their proliferation and size ($3.5 trillion in assets under management), are these funds serving their purpose(s), justifying their creation?

To answer these questions, the Revenue Watch Institute-Natural Resource Charter (RWI-NRC) and Columbia University made detailed case studies of 22 natural resource funds—defined as the subset of sovereign wealth funds financed primarily out of oil, gas or mineral revenues—and examined another 32. The full report can be accessed at our website on natural resource fund governance.

We found that a handful of funds are achieving their stated objective(s), whether it is to mitigate the negative effects of revenue volatility by stabilizing budget expenditures, save finite resource revenues for future generations, earmark resource revenues for specific development-related programs, sterilize large capital inflows, or even protect natural resource revenues from misappropriation by exposing them to greater scrutiny. These funds (e.g., Chile’s Pension Reserve Fund and Social and Economic Stabilization Fund; Norway’s Government Pension Fund Global; the Permanent Wyoming Mineral Trust Fund; Ghana’s Heritage and Stabilization Funds) are nearly all located in jurisdictions with strong rules-based policymaking and accountable institutions. And nearly all of them are overseen by multiple bodies such as parliament, supervisory councils, comptroller’s offices or even citizen groups.

Regrettably, the majority of funds are either not achieving their objectives or, worse, have become sources of patronage or corruption. Some of the horror stories are well known:

• the Libyan Investment Authority investing in opaque hedge funds run by friends of the regime, paying excessive fees and losing nearly all of a $1.2 billion derivatives investment during the latest global financial crisis;

• the Kuwait Investment Authority losing approximately $5 billion on failed investments in Spain in the 1980s and 90s, facilitated by an absence of internal controls or supervision;

• the Russian government plundering nearly $10 billion from the National Wealth Fund, essentially an oil-financed public pension fund, from 2009 to 2013.2

It is more difficult to assess funds that are either not achieving their macroeconomic aims, such as Azerbaijan’s State Oil Fund or Trinidad and Tobago’s Heritage and Stabilization Fund which have failed to stabilize expenditures, or are too opaque to examine, such as Brunei’s Investment Agency or Equatorial Guinea’s Fund for Future Generations. These cases raise questions about why the funds were created in the first place, whose interests they are serving, and what assets they are purchasing.

What we do know is that some funds bypass normal budget processes by investing directly in the local economy through their choices of domestic asset holdings. It is unclear whether this improves spending efficiency or simply circumvents formal oversight and internal controls like public procurement systems. However the funds that purchase assets locally—like those in Angola, Iran and Russia—are generally the least transparent.

Given this spotty track record, we return to the first question: Why do natural resource-rich governments so desire their own sovereign wealth funds? Perhaps they have drawn lessons from past oil revenue windfalls in the 1970s that were largely consumed instead of saved or invested. Or they have looked to the Chilean or Norwegian experiences, where funds have been used wisely to avoid the ‘resource curse’. However it is equally probable that the demand for funds is part of a trend, potentially a dangerous one for governments without sufficiently robust internal controls, strong oversight bodies and the capacity of Chile or Norway.

Regardless of whether a government establishes a fund to address a specific concern about absorptive capacity, volatility or intergenerational equity, or whether it is simply because it is fashionable, it is important that the fund does not undermine existing public financial management systems and that it improves natural resource revenue governance.

Our report outlines six steps for establishing or reforming a fund that will increase the probability that it will serve its intended purpose(s), each step elaborated in a policy brief that can be found here. These steps include setting clear fund objectives, establishing clear fiscal rules for deposits and withdrawals and investment risk limitations that align with the objectives, instituting strong internal and external oversight, and rigorous transparency requirements.

Governments establishing or reforming their natural resource funds should also obtain broad political consensus on operational rules. Even the best rules will not be enforced unless key stakeholders and the broader citizenry have bought in to the need for saving some natural resource revenues—as opposed to spending them all through the budget immediately. The six-step process and how to build consensus around these rules will be discussed in the next blog.

Note: Our research on fund governance, including policy briefs and case studies, reside at The documents have been designed to provide government officials, policymakers, researchers and citizens with information to better understand natural resource fund governance, and in particular to equip policymakers with the necessary background to set up funds or reform existing ones.


1 Economic Analyst, Revenue Watch Institute.

2 Lina Saigol and Cynthia O’Murchu, “After Gadhafi: A Spent Force,” The Financial Times, September 8, 2011.; Sara Bazoobandi. Political Economy of the Gulf Sovereign Wealth Funds: A Case Study of Iran, Kuwait, Saudi Arabia and the United Arab Emirates. New York: Routledge, 2012.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.