Page 74 - Aamir Rehman Gulf Capital and Islamic Finance The Rise of the New Global Players

58 PART I Background and Context

At the start of the flow are national energy companies, which are
fully owned by the state and are the governments’ core source of
income. As discussed earlier, it is the surpluses generated by oil com-
panies that have enabled the remarkable capital formation of the
region.
The first demand on energy income is, of course, to fund the
national budget. The mechanisms by which this occurs vary from
country to country. Each state, as discussed earlier, has a different
breakeven point, after which energy income enables new surpluses.
When the price of oil is below that level, there are deficits that need
funding through reserves or other methods.
At the government level, two types of institutions play particu-
larly pivotal roles as wealth is allocated. Ministries of finance, which
are customarily responsible for the public sector’s budgeting process,
have a part to play in funding ministries, projects, and government
initiatives. In years of windfall surpluses, new projects and initiatives
may be launched and need to be funded appropriately. Central banks
are also important as holders of national reserves. SAMA Foreign
Holdings—imperfectly dubbed a sovereign wealth fund for analyti-
cal purposes—are assets of the Saudi Arabian Monetary Agency, the
Kingdom’s central bank.
Sovereign wealth funds (or national trusts, as they may more
appropriately be called) absorb the wealth that is available for invest-
ment in line with their broad mandates. Sometimes there are specific
rules in place for this flow. Under Kuwaiti law, for example, at least 10
percent of Kuwait’s oil revenues must be put into the KIA Future
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Generations Fund. According to Harvard Business School analysis,
Saudi Aramco –(the world’s largest oil company) retained only about
7 percent of its profits in 2008, with 93 percent flowing into the gov-
ernment for funding the budget and 75 percent being channeled
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through SAMA (the central bank, discussed earlier). The allocation
process may be more or less rules-based depending on the state and
the year, but it generally follows a pattern involving multiple ele-
ments of our institutional framework.

Traditional Allocation Models

The essentially conservative mandates of generalist SWFs naturally lead
to fairly traditional asset allocation models within such institutions. The
bulk of SWF assets (like the assets of endowment funds and other large
prudential institutions) is understood to be in the traditional asset