Public Financial management of the Sovereing Wealth Funds

Resumo

The availability of natural resources such as oil and natural gas should be valuable to a developing country. Extraction activities should generate employment and economic growth, and their income should provide the country with the necessary foreign currency and offset the limited tax revenues earned by its government. However, many resource-rich economies are subject to the so-called "resource curse". This can manifest itself in the deindustrialization of the country, or in the appreciation of its currency, the so-called "Dutch disease". The proper use of natural resources requires investments in assets that will only become profitable over time, but it is not easy to identify these assets, so revenue management is necessary. For this task, placing revenues in investment vehicles may be appropriate. The two basic principles of revenue management are a high savings rate and the accumulation of internal assets by the government. These principles arise from the basic economic analysis of savings, which can be summarized in the so-called "permanent income hypothesis." From the perspective of this hypothesis, a rational government that receives an unexpected income stream from the exploitation of natural resources should use it in a way that distributes the corresponding increase in consumption between the present and future generations. To put them into practice, the literature proposes several solutions, ranging from tax policies designed to smooth the time profile of spending to macroeconomic policies aimed at stabilizing the exchange rate. One of these solutions consists in removing by means of taxes a significant part of the extraordinary income provided by the favorable situations in global resource markets and to accumulate them in the form of sovereign wealth funds. The role of these sovereign wealth funds can be multiple: saving for future generations, stabilizing the economy in the short and medium term, or allocating strategic public investments. The purpose of this thesis is to investigate a particular case of a sovereign wealth fund, the National Fund created to manage the income obtained from oil extraction in the Republic of Kazakhstan (RK). This republic became independent from the Union of Soviet Socialist Republics (USSR) in 1990, and since then has pursued an active reform program aimed at establishing a free market economy through privatization of public enterprises and liberalization. Due to the abundance of natural resources available to RK, the aim of its economic reform strategy is the attempt to diversify its production and exports, to be able to integrate into the global economy in a role that goes beyond being a primary resource producer. The objective of the first chapter is to assess the suitability of the design of the National Fund to become a tool that contributes to the financing of the strategy described above, taking into consideration the design and results of the set of sovereign wealth funds existing throughout the world. The National Fund of the Republic of Kazakhstan (NFRK) was created in the year 2000 as a mixed fund that pursues the three different types of objectives described in the previous paragraph. It was created following the design of the Public Pension Fund of Norway (formerly known as the Norwegian Petroleum Fund), although with significant differences, both in its design and operation. Thus, in terms of design, NFRK management is more complex, involving, in addition to the government and the central bank (as in the Norwegian case), other institutions such as the Majlis (parliament) and the presidential administration, and also more opaque, not publishing all reports on the activities of the Fund. Regarding its operation, the NFRK did not accumulate all the income derived from oil as in the Norwegian case, but only a percentage of it, plus all revenues obtained by a closed list of companies considered as extraordinary in situations where prices are favorable. On the other hand, while the Norwegian fund focuses on the savings and stabilization targets, paying special attention to the environmental impact of oil extraction, the NfRK devotes an important part of its resources to finance RK’s development strategy, determined by the presidential administration , which does not usually pay special regard to the environment. Investment in this strategy is channeled through institutions created for this purpose as the "welfare fund" Samruk-Kazyna, which acts as a matrix of holding-type business structures in sectors considered strategic, or the investment fund Baiterek, responsible for transmitting funds to the private sector through a set of regulated banking entities. The NFRK was created in a period of high prices for oil, and its original design contemplated that its assets could only be used in accordance with three lines of expenditure: refund of taxes and other fees to the companies that contributed to the Fund, extraordinary transfers to the budgets of National and local authorities approved by the presidential administration, and the costs associated with the management and supervision of the Fund itself. However, the need to reconcile the savings and stabilization objectives led to a two-fold reform of NFRK’s design in a short period of time. The experience with the original design showed the fragility of the procedure by which the amounts transferred from the NFRK to the public budgets were determined, which could be politically manipulated by the administrations that were potential beneficiaries. In order to promote the accumulation of resources towards future generations, the design of the Fund was made closer to the Norwegian model in 2006, targeting all the revenues from oil, and subsequently transferring from the Fund to the RK budget the amounts required to avoid large budget deficits. However, the excessive recourse to this kind of transfers caused by the global financial crisis that started in 2007 forced a new reform of the system in 2010 which converted the annual transfer into a revisable fixed amount. The obstacles in the functioning of the NFRK come largely from defects in its governance mechanisms. The recommendations of the International Forum of Sovereign Wealth Funds (promoted by the International Monetary Fund), included in a set of principles and voluntary practices known as the Santiago Principles (because they were drafted at a summit held in Santiago, Chile in 2008), emphasize transparency and public participation as the keys to effective and responsible governance. Transparency is difficult to put into practice in a transitional economy like that of the RK, where the tradition of central planning has diluted the distinction between the public and the private sector. Consequently, the NFRK does not participate actively in the various international initiatives aimed at promoting the transparency of sovereign wealth funds. In particular, although the NFRK publishes a large volume of information on its activities in the form of periodic reports, these reports are edited by the presidential administration before broadcasting then to the public through the national media, and cannot be considered as complete. A review of the different indicators created by international institutions to assess the degree of transparency of sovereign funds indicates that the NFRK is considered less transparent than similar funds in post-Soviet transition economies such as Azerbaijan. The chapter ends with a proposal for improving the design of the NFRK based on two main axes: the functional separation between the part of the Fund destined to comply with the savings function and the one intended to comply with the stabilization function, and the increase in transparency in the use of accumulated financial resources. Transparency can be increased in two main ways. On the one hand, distinguishing clearly in the public budgets the origin and destination of the revenue transferred from the Fund, and on the other, publishing the complete reports on the activities of the Fund to promote the transmission of information to citizens and to increase public participation. The second chapter aims to evaluate the impact of NFRK activity on the industrial diversification policies attempted in the RK as one of the central axes of its development strategy. The economy of the RK needs to be restructured and diversified in order to face up to the future to eventual exhaustion of its natural resources. Diversification is a complex, capital-intensive, large-scale task that requires large investments and systemic structural policy measures. In a country that enjoys unforeseen profits thanks to natural resources, a sovereign fund can be considered as one of the alternatives to provide precise financing, which actually happens with the NFRK. Like other primary resource exporting countries, Kazakhstan has to make decisions about how much of its income is assigned to investment in the national economy and how to invest them. The two main routes to diversify the industry of a country rich in oil are the development of oil-based industries and the substitution of imports. Oil-based industries often carry out projects on a large scale and capital-intensive, often publicly owned. On the contrary, activities that replace imports are very varied, usually small and labour-intensive and often privately owned. Although the former are much more appropriate to the existing productive structure, and have a high potential to create and maintain jobs in the short term, they do not solve the basic issue of dependence on oil and gas, so the substitution of imports is usually the target of economic reforms in resource-rich countries. However, it has to deal with the shortage of crucial elements of a private nature, such as entrepreneurship and the private assumption of risks. Therefore, the growth of the private sector is very important for diversification, both to create jobs and to attract foreign direct investment (FDI) that can provide the type of capital and knowledge needed to develop previously non-existent industries. The policy of industrial diversification in the RK was put into practice through different "plans" or "strategies" of national scope and ambitious objectives, incorporated in the so-called "Strategy for industrial development and innovation of Kazakhstan", approved in 2003. However, Practically the majority of the projects actually developed under this strategy were concentrated in the industries related to the extractive sectors. In addition, the global financial crisis started in 2007 helped to divert an important part of the funds initially aimed at the creation of new activities towards the maintenance of employment and the sanitation of the banking system. Finally, the capacity of the NFRK to finance the reform program with the part of its assets not related to the fulfilment of its functions of saving and stabilization, depends crucially on the evolution of the price of petroleum. Since the average cost of oil production in Kazakhstan is estimated at US $50 per barrel, a price of at least $60 per barrel is required so that the Fund can support the industrialization program. As a result of all these factors, it is not possible to detect any significantly positive effect of the funding from the NFRK on the objective indicators of the industrial diversification program during the five-year period 2010-2014: there were no increases in industrial activity rates or decreases in indicators concentration of production or exports in line with the magnitude of the NFRK's investments. Although a consideration of the causes of the investor's ineffectiveness of the NFRK is a question beyond the objectives set for this thesis, the fact that the growth of the assets of the Fund depends on the evolution of oil prices introduces serious doubts about the future capacity to reverse this situation An extrapolation of the behaviour of one of the reference prices of this primary resource, that of the Brent oil barrel, shows that the foreseeable tendency in the short and medium term of this price is at an average value of $60 per barrel, which is precisely the value considered as a threshold for the accumulation of assets by the Fund. The high variability of this type of prediction implies that within a reasonable confidence interval, the most pessimistic scenarios include values that are not compatible with the simultaneous achievement of all the objectives of the FNRK. The third and final chapter aims to analyse the impact on the urban system of RK of the transfer of the capital of the Republic from the largest city of the same, Almaty, to a new urban area called Astana ("capital", in the Kazakh language) quickly built from a small town called Akmola. This project, partially funded with funds from the NFRK, is probably the most ambitious of all those that were started since the declaration of independence in 1990. The literature on the diverse experiences of relocation of capitals that took place in the world after the Second World War highlights the special role that these play in the urban system as administrative centres endowed with an additional symbolic value. The chapter begins by describing the territorial structure of the RK. This one has a simple configuration, adjusted the peculiar characteristics of the Republic but similar to those of the rest of the ex-Soviets republics of Central Asia. Kazakhstan is a very large and sparsely populated country, with a relatively low urbanization rate (around 50-60% since independence) and a population settled in relatively compact regions, located far away from one another and connected by a weak internal network of expensive Maintenance due to the extreme weather conditions present in most parts of the territory. The urban structure of the RK is headed by a set of two large metropolitan areas (the old and the new capital) and fourteen small-medium-sized cities that are scattered throughout the national territory and act as administrative headquarters (of the sixteen provinces or oblast) the Republic is divided) and the location of industrial activities and services. Below these are a network of small cities and towns, many of them linked to the places where the industrial factories were located in the times of the USSR, and characterized by the industrial monoculture. The survival of these cities depends entirely on the location of the parent factories, and when they have financial problems or even close, they become places of origin of internal migration flows. The construction of new capital is an important measure of territorial planning policy, although its motivations usually cover geopolitical and socio-economic issues. Demographic motivations are particularly interesting, since substantially modifying the internal and external migratory flows of the country, they affect substantially the configuration of the urban system. One of the objectives of the creation of a new capital located in the centre-north of the RK was to try to re-balance the ethnic composition in that wide region, border with the Russian Federation and where the majority of the population was of Russian origin at the Soviet time. To achieve this goal, the internal migration of workforce surpluses in the southern regions of the Republic towards the new capital was stimulated. Another relevant demographic feature of Kazakhstan is its relative depopulation with respect to neighbouring countries. In this regard, the new capital was set up at the same time as a policy of repatriation of the important ethnic minorities of Kazakhstan distributed in border countries (Uzbekistan, Mongolia, China, Turkmenistan, ...) as part of an ambitious project to found growth of the nation about the growth of the population of Kazakh origin. With the approval of the law of creation of the new capital, the territory around the new metropolitan area of the capital declared itself one of the nine "special economic zones" created in the country to attract investors that accelerated its development. The city quickly became the second largest in the country, based on a large number of architectural and urban design projects. The RK government has followed a deliberate policy of offering its capital as the headquarters of international organizations (the Eurasian Economic Community, the International Association of Capitals and Cities of the countries of the Commonwealth of Independent States) and major events (Winter Games, International Exposition) to favour its growth. With the funding of the NFRK, through Samruk-Kazyna's "welfare fund" and special credit lines, the financial instruments required to promote the creation and development of small and medium-sized businesses were provided to the local administration. The internal immigrants wishing to settle in the capital were provided with compensatory subsidies for travel, as well as free accommodation and various active measures to facilitate their integration into the local labour market. The impact of the creation and growth of Astana is analysed from two different points of view: that of migratory flows and that of urban structure. The capital quickly became from the moment of its creation in the main focus of attraction of both internal and external migratory flows, but no conclusive evidence can be found that contributed in some way to these flows being greater than they would have been without. With regard to the second point, the rapid growth of Astana filled up a hollow in the urban system of the RK, generated by the disproportionate growth of the ancient Almaty capital, which in the times of the USSR functioned as the head of a wider urban subsystem, encompassing territories of the current republics of Kyrgyzstan, Uzbekistan and Tajikistan. In this way, the creation of the new capital allowed to avoid that the process of urbanization in the RK stopped being stopped caused by the collapse of part of the inherited industrial activity of the Soviet Union, although it was not able to avoid that it evolved more in way. In conclusion, it is possible to assert that, within the limitations imposed by this thesis, the lack of sufficient data availability to carry out a quantitative impact analysis, that the defects in the design and management structure of the NFRK begin decisively that it can fulfil the role in Resolution of known problems under the generic name of the "natural resource curse" for which it was created, although in particular cases such as the financing of measures aimed at favouring the growth of the new capital, its impact can be identified as positive. Even so, further research is necessary in the quest for data and methods that could allow a counterfactual analysis of the impact of the NFRK.