Towards a Spanish Sovereign Wealth Fund

Andrés Ortega

8 mins - 17 de Febrero de 2023, 07:05

Spain wants to attract investment from sovereign wealth funds in other countries, but lacks its own, beyond SEPI (Sociedad Española de Participaciones Industriales, the successor to Franco's INI), which has more specific purposes, or COFIDES (Compañía Española de Financiación del Desarrollo). SEPI's scope of action covers 15 wholesale enterprises, 9 minority companies and 100 indirect businesses, and its management 'must combine economic profitability and social profitability'. A sovereign wealth fund along the lines of others in the world, especially the European model, would provide a powerful instrument in the hands of the State (although the Autonomous Communities could participate) to invest as a shareholder— not subsidise— in nascent companies with high profitability potential, certainly in the so-called Deep Tech sector, and even in foreign companies, thereby obtaining profits that could then be used to finance other policies, such as social policy. Does Spain need it? We believe it does, although given the level of public indebtedness, it is difficult to implement it.

A sovereign wealth fund is an instrument administered by a state (or sub-state entity) with the aim of investing and managing its resources for long-term, strategic purposes. ICEX and the Instituto de Empresa produced an interesting report on sovereign wealth funds in the world in 2020 (including in Latin America), although according to Wikipedia, Spain is not among the top 49. Norway's fund invests in companies around the world (including Spain), with conditions, such as respect for the environment or human rights, and with profitability objectives (which are not always achieved). It acts independently, but part of its profits can be used by the state in its budgets. Sovereign wealth funds are often said to have three objectives: to save (from gas or oil revenues or other commodities, if the country has them), to invest in economic transformation, and to generate returns from investments at home or abroad, for example, from big technology companies. Recently, these funds have invested heavily in storage and data centres used by global and local companies alike and have a pull effect on other companies.

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The World Bank, in a recent report, notes that sovereign wealth funds have multiplied over the past 15 years, and these funds are supported by the World Bank itself. Their average return in 2021, according to a study by Invesco, a US fund manager, was 10%. The T20 (the G20 thinktank network) has addressed this on several occasions, including a proposal to create a platform for cooperation between sovereign wealth funds in the G20 countries. Not all major economies, although many do, have sovereign wealth funds. The US is more embedded in the grant culture through the Pentagon and other departments. The latest step in this regard is the $370 billion Inflation Reduction Act (IRA) geared towards reducing emissions and promoting green technology, which has set alarm bells ringing in Europe. While the US lacks sovereign wealth funds at the federal level, some of its states, such as Texas, Alaska and Wyoming, do have them (derived from commodity revenues). Part of the US left supports the idea of a federal sovereign wealth fund, which would invest in the shares of domestic companies, but also in those of other countries, thus recovering part of the profits. China is in the lead (not surprising given its system of state capitalism), followed by France, Singapore and Norway, the UAE, and Saudi Arabia. Many come from hydrocarbon revenues. But this is not the case in France and Germany, among others.

In Spain, COFIDES can be considered a sovereign wealth fund. With the Oman Private Equity Fund, it has formed the SOPEF fund (Spain Oman Private Equity Fund). But Spain, while retaining SEPI, has opted for a policy of public aid and subsidies, whether by national or European means, such as the substantial NextGenerationEU funds that nourish the current Recovery, Transformation and Resilience Plan, or national ones. Some of this European assistance could have formed the basis of a large European sovereign wealth fund but has not.
Some in the EU (notably France and the president of the European Commission) are considering competing with the US IRA and China with a so-called European Sovereign Wealth Fund. This is not truly a European sovereign wealth fund (the French president called it that at first before changing to avoid scaring off some fiscal conservatives in the EU), but new European funding to subsidise companies especially in clean energy and new industries. According to Commissioner Thierry Breton, it would be financed by common debt, and 'should allow direct, fast and flexible budget support to well-identified projects of interest to EU sovereignty across any sector of our industrial spectrum'. The last European Council showed that there is not yet sufficient consensus on this - some countries want to see the results of the current plan first and also point to the existing European Fund for Strategic Investments, under the European Investment Bank (EIB), which provides guarantees and venture capital funds. Smaller economies fear that larger or more efficient ones might nationally subsidise their own industries more, leaving those who are unable behind. In any case, European limitations on national aid are being reviewed in the face of a changing global competitive landscape, posing both risk and opportunity for Spain.

This is where sovereign wealth funds come in. France has Bpifrance, which mobilises €2.5 billion with the aim of financing 500 high-tech startups, mixing direct investments (French Tech Seed in the form of bonds convertible into shares) and grants for startups labelled by approved prescribers. It is part of the 'New Industrial France' strategy accompanied by a €54 billion plan, called France 2030, to accelerate technologies contributing to the environmental transition and support emerging technologies such as hydrogen and outer space. Germany, for its part, approved in 2021, weeks after France decided to extend public funding for its deep-tech startups by an additional €500 million, the establishment of the DeepTech Future Fonds (DTFF), funded by the €10 billion Zukunftsfonds (Future Fund, launched a year earlier). Ireland, among other European countries, also has its own funding scheme.

There are big differences in the way these sovereign wealth funds are managed, and the effectiveness of a Spanish sovereign wealth fund would depend to a large extent on its independence and depoliticisation, something foreign to Spanish political culture, as seen in SEPI. It would have to be managed by a politically independent team— appointed by Parliament with a strict mandate?— far from any cronyism when it comes to deciding its investments, and, of course, professional, as in the Norwegian case, and seeking profitability. A genuine European Sovereign Wealth Fund would therefore perhaps be less risky, although, as we have pointed out, the mood is not right for it at present. The government, together with the parliament, would be free to spend whatever part of the fund's profits it decided on in the general state budget. 

But in an indebted country like Spain, how can it be set up and financed gradually? In addition to opting for the European option, it could be based on gold and foreign currency deposits, special drawing rights, and the International Monetary Fund's reserve position in the hands of central banks and monetary authorities, along with other national assets such as other industrial and financial holdings– incorporating, after privatisation, several companies currently in SEPI and giving them a more depoliticised company management— or income from new sources in the future. In any case, given the global competition from other sovereign wealth funds, and in general from other economies in more advanced countries and sectors, and the consequent need to invest in cutting-edge technologies and recover profits from large technology and other companies, Spain should study the potential of having its own sovereign wealth fund.

Se puede leer la versión original del artículo en español

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