natural resource funds - millennium...

Natural Resource Funds

BotswanaPula Fund

Botswana

Gaborone

A JOINT CENTER OF COLUMBIA LAW SCHOOL AND THE EARTH INST ITUTE AT COLUMBIA UNIVERSITY

VALE COLUMBIA CENTERON SUSTAINABLE INTERNATIONAL INVESTMENT

BOTSWANA


Santiago Compliance

Index

44 / 100 52 / 100 56 / 100

Resource Governance Index Natural Resource

Fund Score

Truman Sovereign Wealth Fund Scoreboard

2 August 2013

Market Value

Pula Fund $6.9 billion

Synopsis

Fund Highlights• ThePulaFundwasestablishedundertheBankofBotswanaActof1975andreestablishedundertheBankofBotswanaActof1996.

• Thefundconsistsoftwoaccounts,theGovernment InvestmentAccountthatbelongstotheGovernmentofBotswanaandaforeignexchangereserveaccountthatbelongstotheBankofBotswana.

• ThePulaFund’spolicyobjectiveisunclear,howeverit hasbeenusedtostabilizerevenuesandservesasafuturegenerationssavingsfund.

• Botswanaseekstoensurethatcurrentspendingisonly financedwithnon-resourcerevenues.Resourcerevenuesaretheneitherusedtofinanceinvestment(including humancapital)orsavedinthePulaFund.

• Whilegeneralbudgetprinciplesguideflowsintoandoutofthefund,noexplicitoperationalrulesfordepositsandwithdrawalsexist.

• Thereislimitedpublicinformationonfundassetsand weakoversightoffundactivities.

Good Governance Fundamentals

ClearDepositRules no

ClearWithdrawalRules no

ClearInvestmentRules yes

Transparent no

PubliclyAvailableAudits yes

EffectiveOversight no

BOTSWANA


The Pula Fund in its first incarnation is established under the Bank of Botswana Act of 1975.

Bank of Botswana Act 1996 establishes the Bank of Botswana and the Pula Fund in their current forms, replacing the Bank of Botswana Act 1975.

Expenditure rule is introduced that sets maximum government expenditure at 40% of GDP.

1993 1996 2006

TIMELINE

3 August 2013

Timeline and Fund Objectives

Fund Inception• ThePulaFundwasoriginallyestablishedin1993under theBank of Botswana Act in 1975.

• ThePulaFundwasreestablishedundertheBankof BotswanaAct1996.1

Fund Objectives• AlthoughthePulaFundhasbeendescribedasafuture generationssavingsfund,itsobjectiveaccordingtotheoriginalBankofBotswanaAct1975andthesubsequentBankofBotswanaAct1996remainsunclear.Onoccasion,thefundhasbeenusedforrevenuestabilization.2

• ThePulaFundpreservesaportionofthecountry’s foreignreservesfromdiamondandmineralexportsas along-terminvestment.

BOTSWANA

Natural Resource Funds4 August 2013

OPERATIONS

ObjectivesareClear

RuleforHowMuch CanbeWithdrawnin

AnyGivenYear

RuleforWhich RevenuesMustbe DepositedandWhen

Exceptionsto RulesareClarified

INVESTMENT

Useof ResourceRevenues

asCollateral

Domestic Investmentis

ExplicitlyProhibited

Investment RiskLimitations

Publicationof SpecificInvestments

MANAGEMENT

Penaltiesfor MisconductbyFundManagers&Staff

Ethical&Conflict ofInterestsStandardsforManagers&Staff

TheDetailed Responsibilities ofFundManagers

&Staff

TheRoleof Government

AgenciesinFund Management

TRANSPARENCY AND OVERSIGHT

PublicDisclosure ofIndependent ExternalAudits*

PublicDisclosure ofInternal

AuditResults

Formalized Oversight Mechanism

PublicDisclosure ofRegularlyCompiled

FundReports**

6/16

Eachboxrepresentsa regulatorystandardessentialforpromotingconsistent useofandsafeguardingresourcerevenues.Whiteboxeshighlightregulatorygapsinfundgovernance.

PresenceofRegulation

AbsenceofRegulation

Good Governance Standards and Gaps in Regulation

GoodGovernanceStandardsMet

*AuditresultsarepublishedintheannualBankofBotswana reportsdespitetheabsenceofregulations.

**TherearenoregularlycompiledreportsbeyondtheinformationincludedintheoverallBankofBotswanaannualreports.

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Operational Laws, Rules and Policies

Fund StructureThePulaFundconsistsoftwoparts: 1.TheGovernmentInvestmentAccount,whichbelongs

tothegovernmentofBotswana.

2.ThePulaFund’sforeignreserves,whichbelongtotheBankofBotswana.

Fund Deposit Rules3

Government of Botswana Deposits• Indetermininghowmuchmineralrevenuetosaveandspend,BotswanasetsaSustainableBudgetIndex,theratioofnon-investmentspendingtonon-mineralrevenues. Forexample,in2012thegovernmentsettheSustainableBudgetIndexat0.8,whichmeansthatnomorethan 80percentofnon-mineralrevenuescanbespenton recurrentgovernmentexpendituresoutsidethehealth andeducationsectors.4

• Oncethegovernmentdeterminesthemaximumamount itcanspendonnon-investmentexpenditures,itmust splitremainingrevenues(allmineralrevenuesand remainingnon-mineralrevenues)betweenspendingonhealth,educationandpublicinvestments(e.g.roads; electricity)andsavinginthePulaFund.

• Thetotalamountofspendingisconstrainedbyan expenditurerulethatprohibitsthegovernmentfromspendingmorethan40percentofGDPinanygivenyear.5

• Anyfiscalsavings,eitherintendedorrequiredbythe expenditurerule,aretransferredtothegovernment’s portionofthePulaFundknownastheGovernment InvestmentAccount.

Bank of Botswana Deposits• Foreignexchangereservesthatareinexcessofthe amountrequiredfordailyforeigntransactions(keptin theLiquidityPortfolioandcurrentlysetatsixmonthsofcover)aretransferredtotheBankofBotswana’sportion ofthePulaFund.

The Pula Fund is not governed by strict

deposit or withdrawal rules. Instead, deposits are determined by the

size of foreign exchange inflows

and the size of fiscal surplus. Withdrawals

cover fiscal deficits.

BOTSWANA


Foreignexchangereserves(US$)

Liquidityportfolio(BankofBotswana)

Pula Fund

Surplusforeignexchangereserves

(US$)(belongs to Bank

of Botswana)

GovernmentInvestmentAccount(BotswanaPula)

(belongs to government of Botswana)

Governmentfiscalbudget

surplus/deficit

MineralexportearningsincludingDebswanadiamond

exports(US$)

Governmentmineralrevenues(BotswanaPula)

Operational Laws, Rules and Policies

Flow of Funds Taxation,royaltiesanddividendsfrominterestinDebswana*andotherminingcompanies6

Privatecapitalflows

*Debswanaisa50/50jointventureminingcompanybetweenthegovernmentofBotswanaandDeBeers.

BOTSWANA


Policy on in-State investments: ThePulaFundmaynotinvestdirectlyinBotswana.13

Investment Laws, Rules and Policies

Investment AuthorityThePulaFundismanagedbytheBankofBotswanaandisjointlyownedbytheBankandthegovernmentofBotswana.7

Investment Objectives8

• Ensurethesafetyoftheforeignexchangereserveand preserveitsvalue.

• Maintainliquiditysothatfundscanbemadeavailablein atimelymannerandatreasonableprices.

• Optimizereturnsthroughprudentinvestmentand acceptablelevelsofrisk.

Investment Strategy9

TheFundmitigatesriskwiththefollowingstrategies:• Reservesareonlyinvestedincurrenciesthatarefreely convertible.Ifinvestinginsovereigndebt,itmustberatedatleastAa2/AAbyMoody’sandStandardandPoor’s (Baa3/BBB-inthecaseofG7membercountries).

• TheBankinvestsmainlyinU.S.dollar,euro,poundsterlingandyenassets.ThecurrencyallocationsforfixedincomeassetsfollowstheallocationstheIMFusesfortheirSpecialDrawingRightscurrencybasket,setat41.9%U.S.dollars, 37.4%euro,11.3%poundsterlingand9.4%yensince2011.10

• Allocationofequityinvestmentsinvariouscountriesisdeterminedbyeachcountry’sweightintheMSCIIndex, astockmarketindexcomprisedofacollectionofstocksfromalldevelopedmarkets.

• TheFundusesexternalfundmanagerstomanagea portionoftheforeignreservesasameansofbenchmarkingperformanceagainstassetsthataremanagedinternallybytheBankofBotswana.

Investment Allocation11

TheBankofBotswanareviewsthePulaFund’sassetmixeverythreetofouryears.Thecurrentguidelineforallocationofassetsasof2012isasfollows:• 40%Equities• 60%Long-TermFixedIncomeAssets

Allocation by Asset Class12

AsofDecember2012

Equities Long-TermFixedIncome

37%

63%

BOTSWANA


The National Assembly passed legislation creating the Pula Fund and the national development plans that help guide its operation.

The Auditor General, as requested by the Minister of FInance and Development Planning, reports on the accounts and operations of the Bank of Botswana.

The Minister of Finance and Development Planning is consulted on strategic asset allocation and receives audited reports from the Bank of Botswana for presentation to the National Assembly.

Independent auditor’s findings are included in the Bank of Botswana’s annual report to the Minister of Finance and Development Planning.

NationalAssembly

AuditorGeneral

ExternalAuditor

Pula Fund(heldattheBankofBotswana)

ExternalFundManagers

BoardofGovernors

InvestmentCommittee

MinisterofFinanceandDevelopmentPlanning

Management and Accountability

The Board of Governors is responsible for approving investment policies and guidelines.

The Investment Committee makes decisions regarding portfolio rebalancing that are then approved by the Board of Governors. It also monitors the performance of external fund managers.

A portion of funds are managed by external fund managers with the rest managed by the Bank of Botswana itself.

Management and internal accountability External accountability

BOTSWANA


Oversight and Safeguards

Oversight Mechanisms• TheInvestmentCommitteeperformsa

periodic review of investment methodology.

• Fundfinancesaresubjecttoaregular and comprehensive internal audit.

• Fundfinancestobesubjecttoaregular and independent external auditthatmeets internationalstandards.

Common Oversight Mechanisms or Safeguards Not Present in Botswana• Lackofadomestic oversight committeeto“police”FundactivityandensureadherencetotheregulationsthatgoverntheFund’sactivity.

• Lackofformal government approvalofFunddepositsandwithdrawals.

• Fundsarenotmanagedseparately fromthecountry’sinternational reserves.

• Aninternational oversight institution,suchas theWorldBankortheIMF,doesnotroutinelymonitorFundmanagement.

Pula Fund financial information can be

found in the Bank of Botswana’s audited

annual report.

BOTSWANA


Transparency Laws, Rules and Policies

There is public disclosure of the following:

WhenorhowoftenFundreportsarepublishedandmadepubliclyavailable yes

WhichindividualsororganizationsareresponsibleforpublishingFundreports yes

SizeoftheFund(s) yes

Depositandwithdrawalamounts yes no

Returnsoninvestments yes

Detailedassetallocation–geographiclocation no

Detailedassetallocation–assetclass yes no

Detailedassetallocation–specificassets no

Naturalresourcepricesandotherfiscalassumptionsusedtocalculate depositandwithdrawalamountsallowedunderfiscalrules

no

BOTSWANA


Bank of Botswana

Act 1975

http://www.elaws.gov.bw/docs/statutes/ Botswana%20Statute%20Law%201975.pdf

Bank of Botswana

Act 1996

http://www.bankofbotswana.bw/assets/uploaded/ Bank%20of%20Botswana%20Act.pdf

National Development Plan 2007

http://www.finance.gov.bw/index.php? option=com_content1&parent_id=334&id=338

Annex: ListofApplicableLaws

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1. http://www.imf.org/external/np/pp/eng/2012/082412a.pdfp.35.



4. BankofBotswanaAnnualReport2012p.100.Availableat:http://www.bankofbotswana.bw/assets/uploaded/bob-ar-2012-main.pdf

5. http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2010/11/16/000158349_20101116090208/Rendered/PDF/WPS5480.pdfp.8.

6. BuildingtheDomesticRevenueBase:NaturalResourceTaxationandTaxMoraleinMozambique,TanzaniaandZambia.NORADWorkshopReportApril2012.BeatGislerp.15.Availableat: http://www.norad.no/en/thematic-areas/ macroeconomics-and-public-administration/tax-for-development/currents-issues/presentations-tax-seminar-in-lusaka-april-2012


8. http://www.bankofbotswana.bw/index.php/content/ 2009103012004-reserve-management-guidelines

9. IMFGuidelinesforForeignExchangeReserveManagement:CountryCaseStudiesp.47-48.Availableat:http://www.imf.org/external/pubs/ft/ferm/guidelines/2005/part2.pdf

10.http://www.imf.org/external/np/tre/sdr/sdrbasket.htm

11. IMFGuidelinesforForeignExchangeReserveManagement:CountryCaseStudiesp.47.Availableat:http://www.imf.org/external/pubs/ft/ferm/guidelines/2005/part2.pdf

12. BankofBotswanaAnnualReport2012p.44.Availableat:http://www.bankofbotswana.bw/assets/uploaded/bob-ar-2012-main.pdf

13. http://www.imf.org/external/pubs/ft/gfsr/2007/02/pdf/ annex12.pdfp.49.

Endnotes

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