The Santiago Principles and the NRF Act 2021
On New Year’s Day, the authoritarian government of the oil-rich nation of Kazakhstan removed the subsidy on fuel prices, sparking countrywide protests not only because of the resulting higher gas prices but also over issues relating to inequality, poverty and corruption. So far, 26 persons have been killed, as the state security sought to quell the protest after a shoot to-kill-order from the President was given. The country was ruled for three decades by Nursultan Nazarbayev who in 2019 handed over the presidency to Qasym-Jomart Tokayev. Nazarbayev, however, remained in the background as “leader of the nation”, a title that grants him and his family immunity from prosecution.
Two Wednesdays ago, the National Assembly passed the Natural Resource Fund (NRF) Bill 2021 without debate, after a chaotic scene erupted in the Assembly as Opposition Members of Parliament vehemently opposed the Bill being considered. The following day, the President assented to the Bill while the Minister of Finance signed the commencement Order the next day to bring the Act into operation. The main issue of contention is the repealing of the predecessor legislation of 2019 and replacing it with what they believe to be a lesser form of legislation that removes several safeguards against the abuse of the oil revenues accruing to the nation. Several civil society organisations and individuals have expressed similar concerns.
Section 4 of the NRF Act 2021 provides for the Fund to be managed in accordance with ‘the principles of good governance including transparency and accountability, and international best practices including the Santiago Principles’. The Act defines the “Santiago Principles” as the generally accepted principles and practices for Sovereign Wealth Funds (SWFs) voluntarily endorsed by the International Forum of Sovereign Wealth Fund (IFSWF) members.
In today’s article, we discuss the nature and purpose of SWFs, outline the first five of the 24 statements of principles contained in the Santiago Principles, and assess the extent to which the Act is in compliance with those principles. These principles were developed in 2008 by a Working Group of the IFSWF at a meeting in Santiago, Chile.
SWFs are special purpose investment funds or arrangements that are owned by the general government mainly for macroeconomic purposes. They are usually in the form of investments in foreign financial assets and include funds relating to fiscal stabilization, savings, reserves, development and pension liabilities. SWFs help to improve the management of public finances, and facilitate macroeconomic stability and high-quality growth. They are financed out of balance of payment surpluses, official foreign currency operations, proceeds from privatization, and commodity exports, among others. SWFs are funds set aside to meet future financial commitments as well as for the “rainy day”; and for the benefit of the present and future generations in a fair and equitable sharing arrangement. Extreme care should therefore be exercised to ensure that not only wise investment decisions are made but also clearly defined and prudent withdrawal policies are followed to safeguard against any depletion.
The natural resources of a country belong to its citizens, both present and future. The revenue derived from their exploitation represents the replacement of a physical asset with a financial one. In principle, only the return on investment, that is, the revenue portion, should be withdrawn and utilized to meet operational needs, otherwise the country’s capital base will be eroded. Withdrawals from the capital portion should only be permissible as a last resort and to the extent they are to be used for developmental purposes that are of the highest national priority while at the same time ensuring the right of future generations to such revenue is safeguarded. In a diversified economy, there is hardly any need to access the SWF for capital expenditure purposes since internally generated revenue from taxation and other means ought to be enough to meet such expenditure. Where this is not so, recourse is usually to borrowings which will eventually be included in the public debt of the country to be serviced out of such revenue once the public debt to GDP ratio is within manageable limits.
A key objective of SWFs is having in place a transparent and sound governance structure that provides for adequate operational controls, risk management, and