One of the biggest problems we have in the 21st Century is the sourcing of funds to pay for local services and administrations. There has been many ideas raised to try and solve this problem; from making cuts; streamlining local services; giving up services to a higher-level form of governance; and everyone’s favourite – raising taxes. However, there might be a new idea to solve this problem in the future, that being the creation of regional sovereign wealth funds.
Sovereign Wealth Funds – What Are They?
Now some of you may be wondering ‘what is a regional sovereign wealth fund?’ Well, lets break it down. Firstly, the main thing is that a sovereign wealth fund (SWF) is ‘a state-owned investment fund or entity that is commonly established from revenue sources’, according to SWFI. Regional in this article’s context refers to local areas in the United Kingdom (e.g. Lincolnshire).
With this basic idea of what a sovereign wealth fund can be, is there an example of one? The answer is YES. There are several countries with one and there are even regional states in America with them. The following are but a few examples:
One of the most famous sovereign wealth funds is the Norway wealth fund. The Norway oil fund is the largest sovereign wealth fund in the world at the time of this article. The fund itself is funded by revenue from Norway’s North Sea oil and gas profits. It is then put in the stock/ investment markets with a 20% reinvestment of the profits it makes. The aim of this fund, according to the official website of Norges Bank Investment Management, ‘is to ensure responsible and long-term management of revenue from Norway’s oil and gas resources in the North Sea so that this wealth benefits both current and future generations’.
This sovereign wealth fund creates around an annual return of 5.8% of its total worth, which currently stands at nearly 11 trillion NOK (1.24 trillion USD). This helps fund a lot of Norway’s expenses and will do so long into the future.
Another popular and supported sovereign wealth fund is the one in Alaska. This one, unlike Norway’s sovereign wealth fund, is not funded with an investment source in the market. Instead, it collects wealth by allowing companies to use their regional resources such as oil, gas and valuable minerals. With the wealth gathered, Alaska then gives all of its residents a cut of the profits for living in the country.
This idea is very popular with the local people. However, it is very short sighted once the resources run out, as there will be very little money to gather for residents of the state.
Other ways to fund one
Because not every region has the resources to build a sovereign wealth fund, how can they build the wealth for one? Well, there are a few ideas which could be used to start up an investment fund like Norway’s; these consisting of methods using tax, charity and wealthy donations. Before you could try to introduce any of these, you would have to hold a public referendum to gain agreement to go along with these measures and to pursue them for a long period of time before they can benefit individuals from the wealth they could create.
The first way to build such a fund up would be through introducing a local tax on common expenditure to gather the money required. Here is an hypothetical example to help explain:
If Lincolnshire puts an extra 0.5% sales tax on all their shopping goods for ten years, this would allow the region to gather enough wealth to build their sovereign wealth fund. During this ten year period, all the money gathered would be invested. From the profits raised, 100% would be re-invested to help build up the wealth fund. Following this, they would then move to a system of having 20% plus reinvestment with the rest spent on local projects and services.
The second way to fund a regional sovereign wealth fund is through the charity of the local people. This could be done through single donations or a standing order payment direct to the fund to help it build over time. This way is more volunteer-based, thus not suffering from backlash unlike the tax-based model. However, unless the local community is heavily invested in building wealth for the future, it may not reach a sizeable amount in order to be of great benefit.
The final way is similar to the second, but it is based on gaining wealth through donations from the wealthy and businesses from the local area to help start the fund. This method does not have a chance of gaining a large amount of wealth quickly however, for it is hard to convince companies or individuals to give up their financial resources in order to help a long-term project entering fruition, especially if it does not create benefits in the short-run. However, if they do, they could benefit from the long-term effects through marketing and image approval methods.
These ideas are some way away from how we could build a sovereign wealth fund. Yet it is important to review why we should have one and what would its benefits be. When it comes to the matter of having a regional one, the best justification to establish one is through it helping the regional area to become financially independent. This in turn would allow the local authorities and populace to take more control of their local affairs.
Another reason is that it would help to make it a more positive area with national status, which could help many of the areas around it change from ‘net cost to the state’ to ‘net financial gain’ for the country. Finally, why we should look into developing regional sovereign wealth funds is that it helps secure long-term finances which lowers the possibility of future austerity. These are thus the following benefits that could emerge:
- Financial independence
- More control
- Increased investment
- Increased local wealth
- Increased local and national GDP
- Financial security
- Decreased financial burden on the state
Overall, the idea of having a regional sovereign wealth fund could be the investment that the country needs to secure long-term prosperity. By giving a local area the financial resources that are independent of taxes and the detriments local economies currently face, they could ensure renewed prosperity for many areas down on their luck in these modern times.
Featured image credit: Adeolu Eletu on Unsplash