2. DESARROLLO DEL TFG
2.3 DESCRIPCIÓN DEL PROCESO
The advantages of trust funds over a direct use policy are the following:
Savings: Save resource revenues that would otherwise be spent and misallocated into immediate direct consumption;
Equity: Extend benefits of resource revenues over many generations or in perpetuity;
Income: Provide an additional source of budgetary income for the state;
Investment capital: Provide an additional or alternative source of investment capital;
Intervention: Be used to intervene in the economy to achieve state objectives, such as diversification or stabilisation;
Macro management: Externalise windfall effects and prevent distortions arising in the economy.
Savings
Windfall revenues, such as those that accrue from non-renewable natural resources
during a short period of time, are notorious for being misallocated into wasteful
and consumptive projects (Barro, 2002). State behaviour in this instance is
remarkably like that of lottery winners, who have likewise received a windfall
either in a single lump sum or in a series of payments over a limited period of time.
Studies of lottery winners have indicated that they tend to misallocate their
winnings by investing in immediate consumption, often investing in assets that
depreciate rapidly and require ongoing maintenance costs, such as automobiles
savings, they tend not to increase their long-term, retirement savings.
Another aspect of lottery winnings is that of how states themselves have
managed their proceeds from state-run lotteries. As state lottery revenues are not
generally perceived as a natural resource, and as they involve social and moral
issues that most natural resources do not, they tend to be invested in special
projects. Revenues from lotteries administered by the government of New Zealand
(‘Lotto’ and ‘Instant Kiwi’) have been largely used to finance cultural activities
and the arts, and remain largely at the discretion of the Minister of Internal Affairs.
Recent surveys have indicated that New Zealanders would prefer that more
lotteries revenues be directed towards general welfare and that the discretionary
powers of the Minister be reduced (Christoffel, 1990; New Zealand Lottery Grants
Board, 1990). This suggests that the beneficiaries of the distribution would prefer
tighter control over the spending of lottery proceeds, and more restraint on the part
of those who act as trustees for the revenues.
Equity
That future generations are entitled to a share of non-renewable resource revenues
is the basic principle underlying a trust fund. Funds isolate revenues from
immediate government spending and, depending on their structure, can help to
avoid interest group competition. The trust fund capital can be constitutionally
protected to prevent its misappropriation by governments or interest groups. The
state of Alaska, for example, requires a public referendum to amend the state’s
constitution before Permanent Fund moneys can be spent. The legislature has
discretion over investment earnings, but the constitution requires that an amount
amendment creating the Permanent Fund also governs how the capital should be
invested, requiring low risk, long-term appreciation, and a guaranteed return. The
handling of investment responsibility by major investment firms, limits on foreign
investments, a thorough audit, and extensive public relations and awareness have
helped the Alaska fund avoid the problems of rent-seeking. On the other hand, the
province of Alberta has no such constitutional protection: the fund is managed
directly by the provincial cabinet and has occasionally succumbed to interest group
pressure, especially during election campaigns.
Income
Trust funds can also provide an additional source of income for the state. When
resource revenues are deposited into a state’s general fund, they vanish into a
larger pool of capital which is then expended through the state’s budget. If
resource revenues are separated into a trust fund, the fund can be invested so as to
produce earnings of its own. These earnings are distinguished in that they are
directly attributable to the resource revenues themselves (an important
consideration in demonstrating to the state’s residents that revenues have been used
wisely). Fund earnings are generated through the investments of the fund capital,
or corpus. Typical investments include equities, fixed-income investments such as
bonds, and real property.
Trust fund income might usefully be compared to the practices of the
individual investor. Typically, an individual will maintain a cheque account, in
which the individual’s income is deposited and from which payments for expenses
are made. An individual will also typically maintain a separate account, either a
is partially to save and partially to generate new income. A state’s trust fund will
also generate new income, which can then either be deposited into the state’s
consolidated revenue fund or maintained for some separate purpose. The trust
funds considered in later chapters have all generated a significant share of the
state’s total revenues. In the case of Alaska, trust fund earnings are greater than
income received from petroleum revenues themselves. Alaska’s trust fund has
become the principal source of income for the state.
Investment capital
Trust funds may also provide new sources of investment capital. As noted above,
funds will invest their capital to generate new earnings. Capital is typically
invested in income-generating assets, such as equities, fixed-income assets, and
real property, but may also be invested in capital projects and infrastructure and in
alternative investment products. Clark (1997) has noted the reluctance of fund
trustees to allocate assets to alternative investment products, based largely on
conservative investment views as well as on incomplete information. Clark
identifies four types of alternative investment products. The first is a modified
mutual fund, in which assets are bundled into a single investment, often with some
special purpose. For example, Clark notes how one Massachusetts mutual fund was
made appealing to fund trustees because its investments are concentrated in assets
that are deemed to be sensitive to the interests of organised labour (Clark 1997,
1304-05). A second alternative investment product is the secured investment trust.
Secured investment trusts are similar to mutual funds, but invest largely in urban
infrastructure, construction, and development securities (Clark, 1997, 1305). They
investments through pension fund investment innovations, which do not draw as
heavily on existing investment firms. Instead, these innovations might allow a
number of pension funds to join forces and create a largely internal investment
bank to handle investments, thus minimising costs and increasing financial returns.
A fourth form of alternative investment is venture capital, in which trust funds take
equity positions in new and emerging companies, usually those associated with
high risk but potentially high returns (such as in the biotechnology sector). Clark
notes how each of these four alternative investments can not only lead to higher
returns for fund managers, but can also achieve social good through investing in
such things as low income housing and in newly emerging technology firms, areas
that traditional funds and other financial vehicles typically shy away from.
Intervention
A trust fund may constitute a significantly large pool of investment capital, and
may thus have a great deal of influence in a small economy. A fund may, for
example, receive a higher proportion of windfall revenues during economic ‘boom’
periods, and reduce the inflow during ‘busts’, instead allocating fund income to
social expenditures, such as health and education, during recessionary periods
when revenue flows into consolidated revenues are lower than budgeted. Such a
practice helps stabilise the budgetary process and increases the reliability of
budgetary information. Some trust funds, for example, allow drawdowns of fund
principal under certain limited conditions, when other state revenues are lower than
expected. The trust fund can thus make up for shortfalls in state income, either
through the distribution of fund earnings or through fund capital. Funds can also
world prices are low, and tax producers at a higher rate (through a windfall tax)
when prices are high. Figure 2.2 illustrates in a general conceptual sense how a
fund may transfer revenues from boom to bust periods.
Income
Time
Figure 2.2 Stabilizing revenues during boom and bust periods The curve reflects boom and bust income periods, while the arrowed lines indicate
potential transfers of income from boom to bust periods.
As noted earlier, trust funds can invest in more than just portfolio
investments. In doing so, they can encourage (or discourage) economic
diversification. Through venture capital and infrastructural investments, trust funds
can help stimulate new industries. Alberta’s fund invested its assets so as to
diversify the province’s economy away from the oil sector, by encouraging, and
financing, such activities as petrochemicals production and oil tar sands recovery,
and in financing medical research and the medical industry, including major
Macro management
The use of a fund can also moderate economic cycles, as the fund can save at a
higher rate during periods of prosperity and inject these saved rents into the
economy during periods of recession. Natural resource prices are subject to large
price fluctuations based on world demand. Therefore, a peripheral economy can
experience a massive amount of resource revenue windfalls during periods of high
demand and high prices. In most cases the economy is unable to absorb these rents
(without distortionary effects) and the surplus is wasted. By depositing a portion of
these windfall revenues into a trust fund, the problems of absorption can be
avoided: the economic rents become sterilised and, if the fund invests outside the
local economy, become externalised. These externalised rents can be slowly
reintroduced into the economy at a controlled pace during periods of stagnation
and recession.
A sample trust fund is shown in Figure 2.3. The model illustrates the flow
of money through the trust fund and shows three alternatives for the use of fund
Dividends (Individual Disbursement) General Fund (Consolidated Revenues Collective Goods (Capital Projects) Earnings Trust Fund Other Revenues State’s Share of Resource Revenues Corporate Profits Natural Resource
Figure 2.3 Trust fund model
Showing potential revenue sources and earnings disbursement options.