projects from initial sourcing through transaction close. The underlying aim is for the fund to be responsible for managing all stages of the preparation of PPP transactions until financial close. A PPP project venture fund may, after originating and structuring a project, be entitled to take an equity and/or mezzanine stake in the project’s special purpose vehicle, representing the government’s participation. The PPP venture fund would then have a direct incentive to generate viable and profitable projects. Such a fund can be set up either as a fully state-owned SIF, as a public-private (or _hybrid_ ) SIF, or even as a subfund or fund compartment within an SIF. FONSIS is an example of a fully state-owned SIF that includes a PPP venture fund function. The inclusion of the venture-financing function in a single fund (as opposed to a separate compartment) enables the government to capitalize on project preparation costs that the SIF at financial close converts into equity stakes, or into a cost refund or a success fee.

_Sourcing projects from national budgets._ Since SIFs are partly or fully state owned, they have an opportunity to align their investment strategy with the identified economic development priorities of their country of operations, subject to project viability. The close relationship with the government makes it easier for SIFs to source their projects from national infrastructure master plans, line ministries of relevant sectors, PPP units, SOEs and public utilities, PPP studies performed by the government and development banks, other SIFs and SWFs, in addition to private developers (unsolicited proposals), commercial banks, and PE infrastructure venture funds. FONSIS is an example of this model. Sourcing projects from national development plans and other government-related project pipelines must not inhibit the ability of the SIF’s manager to make fully independent viable investment decisions that will enable the SIF to attract private capital. An SIF established as an independent entity by an act of parliament may help to address this problem, as was the case for FONSIS. Legal independence of the SIF may also address an important challenge often faced by public investment units that are part of national treasuries. For these units, it may be difficult to offer staff benefit packages beyond those available through standard public sector salary regimes, as is necessary to attract and retain highly skilled investment managers from the private sector.

# **_C. Balancing Policy and Commercial Objectives_**

_Investment objectives._ Successful achievement of an SIF’s double bottom line requires that fund managers invest in projects that achieve competitive financial returns sufficient to attract investors across the risk spectrum, as well as economic policy objectives and associated economic returns. As discussed in section 6, when policy imperatives prevail over commercial considerations, SIFs may find it difficult to attract private capital even when they have good corporate governance. On the other hand, a fund that defines its policy objectives too loosely, focusing only on the maximization of returns, may end up making investments that would have taken place anyway, crowding out instead of crowding in private sector capital, resulting in a negative multiplier at the level of the overall economy.

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