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Should the UK have a Sovereign Wealth Fund?

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This article is written by Matthew Eyton-Jones.

Many countries, including Qatar, Kuwait, Singapore, Norway and Australia, have well established sovereign wealth funds, most of which were set up to provide for a day when the income from natural resources like oil and gas runs out. This makes sense for countries that are heavily reliant on natural resources, but what about a country like the UK, which has a developed and diverse economy?

Given the size and diversity of its economy, the UK would at first glance appear to be very unlike these countries, and it might be hard to envisage what benefit establishing such a fund would bring. However, on closer examination there is a very strong argument for doing so.

The UK has traditionally suffered from low savings rates compared to other developed countries. In addition, a significant amount of unfunded liabilities, or debt, has been built up in the benefits system, principally in the form of state pensions, the healthcare system and the provision of long-term care for the elderly.

In addition, a sovereign wealth fund could also be used to help fund core infrastructure projects both across the UK and internationally.

This has led to generational imbalances, with younger generations having to pay for these costs on behalf of older people. Increasing longevity and demographic imbalances between the old and young mean that pensions, healthcare and long-term care costs are being paid over much longer periods of time.

In order to help solve this problem, a sovereign wealth fund could be established with the express aim of addressing these long-term liabilities, similar to the way in which occupational pension funds were established from the 1930s onwards to provide funded systems to pay the pension promises made to employees.

In addition, a sovereign wealth fund could also be used to help fund core infrastructure projects both across the UK and internationally.

Given the temptation for governments to adopt a short-term approach when it comes to financial planning, a UK sovereign wealth fund would need to be established with a strong constitutional and governance framework in place to ensure that it could not be misused for short-term spending by the government of the day.

In particular, such a fund would need to have a strong independent board of trustees with legal and operational independence, on similar lines to funded occupational pension funds. Whilst a sovereign wealth fund could be established relatively quickly, it would take several decades for it to become fully invested, defined as the point where the fund broadly matches the liabilities it is intended to cover.

The UK government should honour its 2017 General Election manifesto pledge and start planning for the establishment of a sovereign wealth fund sooner rather than later.

The views in this article are expressed by Matthew Eyton-Jones. This article will also be featured in the October issue of the Sovereign Wealth Quarterly.

SWFI First Read, January 19, 2018

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NY Governor Cuomo Seeks to Treat Carried Interest as Ordinary Income for State Taxes

On January 18, 2018, New York Governor Andrew Cuomo revealed he had submitted a bill to the New York State Legislature that seeks to treat carried interest as ordinary income rather than capital gains in regard to state taxes. Governor Cuomo in his press release said that the federal carried interest tax provision costs New York roughly US$ 100 million per year.

William Bain – Bain Founder Passes Away

Dated January 18, 2018, William Bain Jr. passed away at his home in Naples, Florida at the age of 80. Bain started at the Boston Consulting Group and left in 1973 to form Boston-based Bain & Co. By 1984, Bain formed Bain Capital alongside a number of colleagues including former 2012 Republican presidential nominee Mitt Romney. In a statement to the Boston Globe, Romney said, ” It’s hard for me to imagine my life and career without Bill Bain’s mentoring.”

Prostar Capital Gets Controlling Stake in Socar Aurora Fujairah Terminal

Prostar Capital now has a 90% control stake in Socar Aurora Fujairah Terminal FZC by purchasing 100% of the shares of Socar Aurora Terminals S.A. The Prostar Capital entities investing in the asset are Prostar Asia-Pacific Energy Infrastructure Fund and a co-investment fund managed by Prostar Capital for a large U.S. state pension plan. The storage terminals acquired in the Port of Fujairah in the United Arab Emirates.

Socar Aurora Fujairah Terminal FZC is a joint venture between State Oil Company of Azerbaijan Republic (SOCAR), Swiss-based commodity trader AURORA Progress, and the Government of Fujairah.

Prostar Capital started buying the terminal back in 2013 at 18.6%. The private equity firm eventually moved its ownership up to 40% on August 14, 2015.

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ISIF Plans to Back 20 Solar Farms in Ireland

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The Ireland Strategic Investment Fund (ISIF) and Hamburg-based Capital Stage, a solar and wind park operator, are financially backing the development of 20 solar farms in Ireland which has an estimated cost at €140 million. ISIF is funding 25% of the costs, with Capital Stage providing 75% of the costs.

The generation capacity is estimated at 140 MW, with each farm ranging between 5 MW to 25 MW. The majority of the solar farms will be located along the east and south-west coasts of Ireland. Power Capital, a Dublin-based energy company formed by Peter Duff and Justin Brown in 2011, is overseeing the developments.

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PNB to Buy Stake from Malaysian Developers in Battersea Power Station Project

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Malaysia-based Permodalan Nasional Bhd (PNB) inked plans to acquire a stake in the Battersea Power Station from Malaysian developers Sime Darby Property and SP Setia, which between them own 80 percent of the site located on the south bank of the Thames. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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