Sovereign Wealth Funds:
The Integration of Sovereignty, Investment, and Sustainability
Dr. Hamed Alkandary
Managing Partner
Sovereign Wealth Funds: The Integration of Sovereignty, Investment, and Sustainability
When a state, in its sovereign capacity and identity, seeks to enter the informal financial realms, many dual-purpose terms emerge, often bearing ambiguous labels intended to reconcile opposites.
Thus, we encounter terms such as: "the state as a private person," "civil contracts with the state," and "the state as an investor in the private sector." So, what is the background behind this?
From "the Competing State" through the Public Sector...
To "the Investing State" in the Private Sector
From the standpoint of economic theory, certain Eastern models compel the state to enter the market not as an investor but as a direct, principal competitor. The objective is simply to adjust market forces in favor of lower-income citizens, even if this results in direct losses to the state budget.
Conversely, in Western economic theories, such direct state intervention in the economy is viewed as impermissible. The state is not allowed to operate a competing public sector within the market. Rather, the market must remain exclusive to the private sector, with the state permitted to invest therein just as any private investor would — without any preferential privileges or powers to alter the free dynamics of supply and demand.
Following the collapse of the Soviet Union in the early 1990s, the public sector model fell out of favor, as most countries — including many in the Arab world — lost faith in Eastern economic theories and pivoted toward the Western free-market model.
Consequently, most of these states engaged in the sale of state-owned enterprises, which constituted their public sector, to private investors through privatization programs. These processes often resulted in significant financial losses to the state, as strategic facilities were sold at values well below their true worth.
One of the main reasons for this fervent desire to offload these public assets — even at undervalued prices — was to rid the state of the burdens of continuous losses and liquidity drains caused by poor public management.
Subsequently, states withdrew from the marketplace and avoided competing with the private sector, leaving consumers at the mercy of large corporations that control supply quantities and pricing. This dynamic drove many nations below the poverty line, as citizens were unable to secure even the minimum standard of living. Without the "compassionate" embrace of the public sector, people had no alternative but to work around the clock to meet even their most basic needs.
As such, states that had lost their public sectors found themselves constitutionally obligated to return to supporting their citizens. However, this time, the financial losses did not stem from loss-making state enterprises, but from direct social support measures — such as cash subsidies, housing and healthcare assistance, or government intervention to sell strategic goods below cost.
The issue lies in the fact that the former public sector, despite inefficiencies, was not entirely loss-making; its losses were not absolute. In contrast, social support represents a 100% loss of public funds with no potential for return. What exacerbated this situation further was the global inflation in food prices following successive financial crises and wars — starting from 2008, then 2011, 2020, and most recently, 2022.
Thus, developing nations — and even those with high growth trajectories or classified as developed — found themselves back at square one. After shedding the burden of public sector losses, they now face a deteriorating society, weakened purchasing power, and a vanishing middle class. These states are now compelled to find a solution to replace direct social support to sustain their standing — or risk falling behind in meeting the needs of their populations. So, what is the solution?
Sovereign Wealth Funds:
Financial Fiction or Tangible Growth
As established earlier, states have found no viable path toward development and sustainability except by reactivating economic activity — this time, however, through “real investment”, not “top-down” investment; that is, not investment based on the state's superior authority as a public sector owner acting under the pretext of public interest.
Instead, states have pursued a different route — the establishment of sovereign wealth funds (SWFs) that mobilize public capital not through standalone public sector projects, but through direct investments in existing “private sector companies” that dominate the market.
In essence, the economic solution offered by sovereign wealth funds is to invest public capital into successful private enterprises — not only at the domestic level but also in “international, cross-border companies”.
These global corporations tend to have stable market valuations, sound financial standing, and consistent returns. They also serve as effective hedges against currency inflation — whether domestic or in key foreign currencies like the USD or Euro — since their market value remains relatively unaffected by inflationary pressures. Thus, these investments offer states a reliable means of preserving national wealth and planning for long-term intergenerational equity.
All these advantages have led many states to consider offshore investment strategies, emulating private investors, especially as governments increasingly benefit from access to top-tier talent and global financial advisory expertise.
This is not financial fiction. The state is a legal person with independent financial standing, free to manage and operate its funds without being confined to a singular operational model or rigid theoretical economic frameworks. Moreover, it is now easier than ever for states to act as investors, given the accessibility of global stock exchanges and capital markets where blue-chip companies and other financial instruments are listed.
Accordingly, the concept of the SWF is no longer exclusive to developing nations. It has gained the attention of advanced economies as well — most notably the United States, where President Donald Trump proposed in February 2025 the creation of a U.S. sovereign wealth fund. This fund aimed to build a financial reserve, monetize federal assets, reinvest proceeds, and potentially fund strategic ventures, such as acquiring stakes in tech companies. However, the initiative has yet to materialize.
Thus, the sovereign wealth fund has become a necessity. It is now incumbent upon states to consider how such funds are structured — their legal personality, governance frameworks, protections against corruption, safeguards against operational failures, and most importantly, how they can be managed with a private-sector investment mindset, not through bureaucratic, governmental models. This is the central challenge.
The Public Sector in Kuwait and the Mixed Economy Model
The approach adopted by the Kuwaiti legislator mirrors that of many Arab jurisdictions that initially promoted a competitive public sector. The State of Kuwait has not confined itself to roles in security, sovereignty, and equality, but has actively provided essential services through its public sector and created institutions competing with the private market.
This approach is not exclusive to the pre-1990s era. In fact, the Kuwaiti legislator has remained committed to establishing public institutions that deliver public services, even into the current period.
For example: In 2010, the legislator enacted Law No. 39/2010, establishing a public joint-stock company to oversee the construction and operation of power generation and water desalination plants.
Additionally, there are laws supporting labor subsidies, housing grants, and even direct funding of small and medium enterprises, covering up to 80% of capital under Law No. 98/2013,
To an economic observer, it may appear that Kuwait is committed to direct economic intervention. However, this interpretation is superficial. The Kuwaiti legislator has, in fact, aimed to craft a hybrid economic model — one that Ensures essential citizen services via the public sector, while fostering a dynamic, open, and globally competitive economy through private sector growth.
This is evidenced by the Privatization Law (Law No. 37/2010), which regulates programs for transferring ownership or management of public enterprises to the private sector. Yet, the Kuwaiti legislator avoided blind asset sales or undervalued privatization of public assets.
To avoid the pitfalls experienced by earlier privatization models, a hybrid method was adopted — a partial transfer of ownership from public institutions to public joint-stock companies, which in effect operate as sovereign holding funds>
Under this framework, the new joint-stock company legally replaces the former public entity and inherits its rights and obligations (Article 12). Private sector entities and financial market participants may own only up to 35% of the new company (Article 13(a)).
Hence, the Kuwaiti legislator prohibited conventional privatization models, to preserve public wealth. However, challenges persist — if the public institutions being transferred are poorly managed, their underperformance may carry over to the new company. Moreover, unattractive public assets may fail to draw private sector interest.
Consequently, Kuwait’s public capital remains tied to traditional public sector thinking or hybrid public joint-stock companies. Even where private investors are involved, their influence remains limited by the state’s managerial control, especially when the state holds the “golden share” — which allows it to veto decisions of the general assembly or board of directors (Article 16), even as a minority shareholder.
Thus, it is inaccurate to describe Kuwait as a purely public-sector economy incompatible with sovereign wealth fund principles, nor can it be said that Kuwait has fully embraced liberal privatization. Instead, Kuwait’s economic model is a conservative hybrid, using the sovereign holding fund structure to implement privatization in a cautious, legally safeguarded manner.
This context indicates that the state must pursue a more direct, transparent, and in-depth approach to:
· Protect national wealth,
· Support lower-income citizens,
· Hedge against inflation,
· Preserve financial capacity against erosion — especially given large segments of society reliant on public support.
Therefore, a solution must be found that simultaneously reduces the state’s fiscal burden from both public sector losses and social spending, while preserving the standard of living for citizens and safeguarding public funds. It is in this context that Kuwait emerged as one of the earliest adopters of the sovereign wealth fund concept.
Sovereign Wealth Funds in Kuwait:
A Strategic Legislative Vision
The Kuwaiti legislator adopted a strategic and forward-looking approach with respect to sovereign wealth funds and resource sustainability. The State did not bind its economy to the theories of public sector dominance, even at the height of the global spread of Eastern economic doctrines advocating for state control over the economy.
Conversely, it did not fully liberalize its economy to Western free-market models either. Rather than offloading public sector institutions as a means of shedding fiscal burdens, the legislature established the Kuwait Investment Authority (KIA) under Law No. 47 of 1982, tasking it with managing public funds, forming general reserves, and investing such reserves under the umbrella of the state’s reserve fund, in accordance with a strategic investment vision aimed at sustainability.
Kuwait also has a unique characteristic — namely, its vast oil wealth, which far exceeds the needs of current generations. However, such wealth is finite by nature, necessitating that the generation enriched by the oil boom of the 1960s and 1970s consider the welfare of future generations post-resource depletion. This duty is constitutionally mandated under Article 21 of the Kuwaiti Constitution.
Accordingly, the Kuwaiti State recognized the necessity of establishing a sovereign wealth fund to safeguard national wealth as early as the 1970s. This resulted in the issuance of Decree Law No. 106 of 1976, establishing what is known as the Future Generations Fund (FGF) — a reserve-type fund.
The law imposed a mandatory annual deduction of 10% from public revenues, irrespective of expenditure levels or whether the revenues resulted in an actual surplus (Article 1, Decree Law 106/1976). This percentage is considered public order, meaning it cannot be reduced, waived, or withdrawn from under any circumstance (Article 3).
Kuwait’s experience with organizing and managing its sovereign fund has been globally pioneering. The fund’s assets, managed by the Kuwait Investment Authority, continued to grow, reaching USD 803 billion, and then USD 923 billion by 2023, and more than 0ne trillion USD in 2025.
Amid this global success, legislative debates began to emerge regarding potential amendments to Decree Law No. 106 of 1976, with some voices advocating the possibility of withdrawing from the FGF in times of budget deficit. Others argued for increasing the annual deduction above the 10% threshold, citing the volatility of oil prices, the declining strategic importance of oil due to the rise of sustainable energy alternatives, and the long-term risks such developments pose for future generations — despite the significant increase in oil prices in 2012.
Ultimately, the latter viewpoint initially prevailed. Cabinet Decision No. 993 of 2012, based on the opinion of the Fatwa and Legislation Department, raised the deduction from budget revenues to 25%, a rate that was applied for three years (2012–2015).
However, the collapse of oil prices rendered this rate unsustainable considering government spending needs. Consequently, the Cabinet reverted to the 10% rate through a new decision, formalized in the Final Accounts Law for 2015 under Law No. 159 of 2017.
This adjustment marked the beginning of a broader shift in policy toward the Future Generations Fund. As oil prices declined and stabilized, and with the 2023 Kuwaiti state budget relying on oil for nearly 90% of its revenues, the financial future of the Kuwaiti population became increasingly dependent on fluctuating oil prices.
This situation raised concerns that the continued deduction to the FGF might be unjust to the current generation, particularly following the liquidity crisis caused by the COVID-19 pandemic, which disrupted non-oil revenue streams in 2020 and the subsequent years.
As a result, Law No. 18 of 2020 was enacted to relieve pressure on public finances by modifying the criteria for contributions to the FGF. Under the new framework, contributions are now contingent upon the existence of an actual budget surplus, as determined by final financial accounts following the 2018–2019 fiscal year. If no such surplus exists — or if the surplus is marginal and only sufficient to cover the General Reserve Fund — then contributions to the FGF are suspended. Estimates indicated that this adjustment could generate an immediate budget surplus exceeding KWD 3 billion.
In any case, Law 18/2020 subjected budget allocations to the proposal of the Minister of Finance, followed by approval by the Council of Ministers, and finally ratification by the National Assembly through the Final Accounts Law, in compliance with Budget Law No. 31 of 1976.
It is important to note that Law 18/2020 did not authorize withdrawals from the FGF. Instead, it revised the financial mechanism for funding the fund, without altering its protected status or original purpose.
Risks of Sovereign Fund Inertia in Kuwait:
The Future Generations Fund as a Case Study.
Following the amendment to the legal framework governing the Future Generations Fund, it became clear that preference had shifted to the General Reserve Fund. This signals the beginning of a deliberate slowing in the growth of the FGF.
However, such deceleration must be limited solely to liquidity inflows — that is, the rate at which funds are transferred to the FGF from the state budget. It must not affect the growth of the fund’s value of assets as determined by the performance of its investments.
With the FGF surpassing USD 1 trillion in assets, the Kuwait Investment Authority must not become complacent. On the contrary, it must actively pursue the expansion of the fund’s value through reinvestment of existing portfolio gains.
At this juncture, significant financial and administrative risks emerge for the FGF — a fund established in 1976, and one that now appears to have become secondary in priority compared to the General Reserve Fund whose facing lack of liquidity in the past years.
Has the Future Generations Fund Absorbed Kuwait’s Developmental Potential
At this point, we must ask: Has the Future Generations Fund (FGF) hindered Kuwait’s development capacity?
Considering the current state of the Kuwaiti economy, the limited scope of non-oil revenue, and the developmental disparity between Kuwait and other Gulf countries, it appears — at the very least — that the FGF has slowed the momentum of current development efforts in Kuwait.
The Kuwaiti legislator now faces a conflict between two opposing imperatives:
The first consideration is to accelerate economic development, accepting higher short-term fiscal risks to future generations in exchange for a calculated opportunity to build a broader, more diversified, and more resilient economy, thereby providing long-term stability and a more secure future for the Kuwaiti criticizes — instead of keeping national wealth locked in the form of semi-liquid financial assets within the FGF.
The second consideration is to maintain the rigid preservation policy of the FGF — a strategy which, in practice, has become an impediment to real development. This excessive preservation may be one of the direct causes behind Kuwait’s economic stagnation and lack of diversification, leaving the country over-reliant on oil revenues. These revenues are either stored as idle liquidity or invested through indirect financial channels, which have not contributed to the creation of any meaningful infrastructure or productive economic sectors within Kuwait.
A Legislative Path Forward:
Responsible Access and Productive Investment
The solution, it appears, lies in legislating-controlled withdrawals from the FGF, coupled with the implementation of governance frameworks and moderate-risk investment principles.
The legislature must not continue to adhere to a rigid accumulation strategy that does not lead to economic expansion or structural reform, and that instead results in the inflation of financial accounts which are already facing erosion from inflationary pressures and underperforming returns.
By reassessing the role of the FGF — not as an untouchable reserve, but as a strategic economic tool — Kuwait may achieve a balanced policy that preserves future wealth while also activating present-day growth, in line with sustainable and prudent fiscal governance.