Tuvalu Trust Fund

Tuvalu Trust Fund
Sovereign wealth fund
Industry Institutional investor
Genre “binary trust fund structure”. The binary structure consists of an endowment fund and a revolving fund.
Founded 1987
Founder United Kingdom, Australia, New Zealand and the government of Tuvalu.
Headquarters Tuvalu, Australia and New Zealand
Key people
 Professional Fund Managers - two Australian based firms - manage the fund on a day-to-day basis
Total assets A$127 million (Maintained Value as at March 2012) [1]

The Tuvalu Trust Fund is an international sovereign wealth fund established to benefit Tuvalu, a small, central Pacific island nation, by providing income to cover shortfalls in the national budget. The Tuvalu Trust Fund was established in 1987 by the United Kingdom, Australia and New Zealand.”[2] The value of the Tuvalu Trust Fund, as at 30 September 2012, was approximately A$127.3m,[1] with the market value of the fund increasing by 10.5% during the 2011/2012 financial year.[3] The International Monetary Fund 2014 Country Report noted the market value of the Tuvalu Trust Fund dropped during the global financial crisis, however the total value of the fund had recovered to more than $A140 million (3.5 times of GDP). As the result of fiscal surpluses achieved in 2012 & 2013 the CIF had increased to more than $A 15 million (38 percent of GDP).[4]

Australia and New Zealand continue to contribute capital to the Tuvalu Trust Fund and provide other forms of development assistance.[3][5]

History

An agreement to establish the trust fund was signed in Suva on 16 June 1987 by representatives of the governments of Tuvalu, Australia, New Zealand and the United Kingdom.[6] The initial amount invested by the latter three nations amounted to A$27.1 million.[7] The United Kingdom withdrew from the agreement in 2004.

Through successful investment abroad, the initial assets of A$27 million grew to A$66 million in 2000[8] and A$100 million in 2010.[9] This amount was achieved with the help of other international donors of Japan and South Korea.[8] The 20th anniversary review of the Tuvalu Trust Fund described the performance as being that:

“ In the first twenty years of operation the Fund has grown to $106.6 million in Market Value as at 30 June 2007. The real rate of return on the Fund has averaged 6.2 percent per annum providing $65.7 million in revenue to Tuvalu. Of this $24.1 million has been used to help fund budget deficits, $29.2 million has been reinvested in the Fund and $12.4 million is held in the CIF awaiting drawdown as at 30 June 2007. The Government’s subsequent reinvestments back into the Fund since inception raises Tuvalu’s contributions to the Fund to $29.8 million including the initial contribution of $1.6 million. It makes Tuvalu the major contributor to the Fund, which is evidence of Tuvalu’s commitment to the long term sustainability of the Fund.[10] ”

The International Monetary Fund 2014 Country Report described the market value of the Tuvalu Trust Fund as having dropped significantly during the global financial crisis, but has since recovered. The performance of the Tuvalu Trust Fund and the Consolidated Investment Fund (CIF) from 2010 is described as follows:[11]

Fund2010 2011 2012 2013 est. 2014 proj.2015 proj
Tuvalu Trust Fund A$108 million A$119 million A$131 million A$141 million A$146 million A$145 million
Consolidated Investment Fund A$7.2 million A$3.2 million A$4.5 million A$14.5 million A$20.6 million A$18.2 million

Contribution to the Tuvaluan budget

The Fund was established for the intended purpose of helping to supplement national deficits, underpin economic development, and help the nation achieve greater financial autonomy.[8] An undertaking of the Government of Tuvalu is that it will “treat all moneys received by it from the Fund as public moneys of Tuvalu and as such subject to Parliamentary appropriation and scrutiny.”[2]

The Trust Fund, has contributed roughly (A$79 million) 15% of the annual government budget each year since 1990.[3] With a capital value of about 2.5 times GDP, the Trust Fund provides an important cushion for Tuvalu's volatile income sources from fishing and royalties from the sale of the .tv domain.[9]

Distributions from the Tuvalu Trust Fund are not always available. No distributions were made in the four years (2000–2004), with the previous most significant distribution being in 1988.[12] In 2005 the government had to draw from its consolidated trust fund (“B Account”) in order to bring the budget deficit down to an acceptable level.[12]

Meeting the needs of the 2013/14 budget of the government also required drawing from funds held in the “B Account”.[13] However funds were available as the result of fiscal surpluses achieved in 2012 & 2013, the CIF had increased to more than $A15 million (38 percent of GDP).[4]

Structure

Brian Bell, a member of the Tuvalu Trust Fund Advisory Committee since the inception of the Fund in 1987, describes the purpose of the Fund as being:

“ The Tuvalu Trust Fund was aimed at providing a source of revenue to overcome a chronic budget deficit situation. The revenue is distributed to the Government from the A Account to the B Account. The amount needed is then drawn down into the consolidated revenue account as an additional source of revenue for expenditure on government services through the recurrent budget.[14] ”

Brian Bell described the operation of the Fund as being directed to ensuring that the capital of the Fund is maintained in real terms for inflation, with payments to the Tuvalu Government each year:

“ At the end of each financial year on 30 September, the Advisory Committee calculates the maintained value of the fund based on the Australian consumer price index. If the market value of the fund is greater than the maintained value, then the difference is automatically distributed to the Tuvalu Government and placed in a buffer fund (the B Account) referred to in the Budget as the Consolidated Investment Fund (CIF). The purpose of the B Account is to ensure that there is a steady flow of revenue available to the Government from year to year.[14] ”

The capital of the Fund is known as the “A Account”. The "B Account" or “Consolidated Investment Fund” (CIF) is a revolving “buffer account” that receives funds from the returns or “disbursements” of the "A Account". The operation of the Fund through two accounts assists in stabilizing the long-term financial situation of the Government of Tuvalu as well as addressing short-term budget needs.[1] The "B Account", which belongs exclusively to the Government, holds income distributions from the "A Account" until funds are needed to be used for the national budget.[1] It therefore serves as a buffer against the volatility of the ‘A Account’ returns, i.e., during years when there are no returns or low returns. For example:

“ The end of the fiscal year 2010/2011, marked the fourth consecutive year when no distribution could be made to the budget because the Market Value of the fund at AU$115.1 million was less than the real market value of AU$127.5 million; however, because of the CIF account, the government was able to draw almost AU$16 million to support budget over the four year period.[1] ”

The role of the "B Account" is therefore to improve the predictability and consistency of transfers from the "A Account".[1] The "B Account" must maintain a sufficient balance to cover the years in which there are no returns or low returns from the "A Account". There is no specific language in the agreement that established the Fund as to the minimum balance of the "B Account". There has been a debate about how much of a buffer is sufficient.[15]

The Fund was established with a management structure that was designed to avoid the mismanagement and corruption that has plagued many other Pacific trust funds. One important element of the Fund is that it is structured to avoid overdrawing to fund unauthorised projects. This is achieved through the "separation of fund capital from fund proceeds available for distribution."[8] The success of the Fund is attributed by Brian Bell to the following factors:

• Accountability through a Board of four directors with Tuvalu in the chair and the other original parties providing members;

• Professional funds management;

• Monitoring of the fund performance by actuarial consultants (the Fund Monitor);

• Auditing of the fund by international auditors;

• An advisory committee to monitor Tuvalu’s economic performance and provide advice to the Government and the Board.[14]

Falekaupule Trust Fund (FTF)

The success of the Tuvalu Trust Fund was followed by the establishment of the Falekaupule Trust Fund (FTF), which is a trust fund for outer island development.[12] The Asian Development Bank (ADB) provided A$6 million in loan funds, with the FTF being established in July 1999 and with the funds being invested in February 2000.[16] The Tuvalu Government agreed to match the amount provided by the ADB, with contributions from each of the eight island communities of Tuvalu, and with the contributions from the island contributions also matched by the Government. The governance structure of the FTF follows that of the Tuvalu Trust Fund, but each with island community having a representative on the board and the government provides a non-voting chair.[14] In 2001 the value of the FTF was around $15 million of which $1.2 million was contributed by the island communities.[16] The market value of the FTF has increased:

“ As at 30 June 2007, the FTF’s market value stood at $25.3 million. After eight years of operation, the FTF has made three distributions totalling to $4.7 million. A Reserve Account was established in 2005 having the exact same purpose as the CIF, which is to smooth out the stream of revenue from the main investment. At 30 June 2007, the FTF’s Reserve Account was $1.4 million.[10] ”

The global financial crisis affected the FTF, which is required maintained its value in real terms before a distribution can be made. At 30 September 2010, the maintained value was $27.3 million; the result of capital growth and contributions from development partners. This is some $3.5 million higher than the market value of $23.8 million. The gap of 15% between the market value and the maintained value must be recouped before another distribution can be made.[17] Since the commencement of FTF the there have been only four years in which distributions were made. The FTF has distributed $6.4 million with some $5.3 million allocated to island development (the balance of $1.1 million is held in reserve by the communities). This equates to an average of $55,000 spent per island per year.[17]

See also

References

  1. 1 2 3 4 5 6 Kevin Petrini, Marilyn Simmons, Silvia Irawan, Alex Heikens (2012). "Case Study Report: Tuvalu Trust Fund". UNDP. Retrieved 17 September 2013.
  2. 1 2 "Agreement Concerning an International Trust Fund for Tuvalu" (PDF). 2008 Revised Edition CAP 4.22.1. 2008. Retrieved 17 September 2013.
  3. 1 2 3 "New Zealand Ministry of Foreign Affairs and Trade: Aid Program (Tuvalu)". Retrieved 17 September 2013.
  4. 1 2 "Tuvalu: 2014 Article IV Consultation-Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Tuvalu" (PDF). International Monetary Fund Country Report No. 14/253. 5 August 2014. p. 3. Retrieved 21 March 2016.
  5. ↑ "Australian Government: AusAID (Tuvalu)". Retrieved 28 November 2012.
  6. ↑ "Hansard - House of Lords (HL Deb 30 June 1987 vol 488 c237WA)". Retrieved 28 November 2012.
  7. ↑ "Nimmo Bell (Tuvalu Trust Fund)". Retrieved 28 November 2012.
  8. 1 2 3 4 Foreign Assistance: Lessons Learnt From Donor’s Experience in the Pacific Region (Appendix IV). (General Accounting Office (US) GA-01-808). August 2001. Retrieved 28 November 2012.
  9. 1 2 "Tuvalu: 2010 Article IV Consultation-Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Tuvalu". International Monetary Fund Country Report No. 11/46. 8 February 2011. Retrieved 4 September 2011.
  10. 1 2 "Tuvalu Trust Fund: 20th anniversary profile (1987-2007)" (PDF). Tuvalu Trust Fund Board. 2007. Retrieved 17 September 2013.
  11. ↑ "Tuvalu: 2014 Article IV Consultation-Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Tuvalu" (PDF). International Monetary Fund Country Report No. 14/253. 5 August 2014. p. 17. Retrieved 21 March 2016.
  12. 1 2 3 Taafaki, Tauaasa (2007). "Polynesia in Review: Issues and Events, 1 July 2005 to 30 June 2006, Tuvalu". The Contemporary Pacific 19 (1): 276–286. doi:10.1353/cp.2007.0036.
  13. ↑ "Tuvalu PM Sopoaga’s big worry – finding funds to run nation’s affairs". Island Business. 13 September 2013. Retrieved 17 September 2013.
  14. 1 2 3 4 Bell, Brian A. (2001). "Trust Funds for improved governance and economic performance in developing countries" (PDF). A contributed paper delivered to the AARES 45th Annual Conference 23–25 January 2001, Adelaide, South Australia. Retrieved 17 September 2013.
  15. ↑ Gerard A. Finin (2002). "Will Trust Funds Sustain the FSM and RMI? Lessons from the Tuvalu Model" (PDF). EWC Pacific Islands Congressional Study Group 5/3/02. Retrieved 17 September 2013.
  16. 1 2 Bell, Brian A. (2001). "Trust Funds for improved governance and economic performance in developing countries" (PDF). A contributed paper delivered to the AARES 45th Annual Conference 23–25 January 2001, Adelaide, South Australia. Retrieved 17 September 2013.
  17. 1 2 Andrew McIntyre, Brian Bell, and Solofa Uota (February 2012). ""Fakafoou – To Make New": Tuvalu Infrastructure Strategy and Investment Plan" (PDF). Government of Tuvalu. Retrieved 13 October 2013.
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