WILL SOVEREIGN WEALTH FUND STOP BOOM AND BUST CYCLE?
Nigeria may soon shed the toga of a prodigal nation- a nation known for wasting scarce resources on frivolous spending- as the National Assembly is in the threshold of establishing a Nigerian Sovereign Investment Authority (NSIA) to manage its Sovereign Wealth Trust Fund.
At a public hearing by the National Assembly Committees on Finance on a Bill for an Act to establish the NSIA, Finance Minister, Olusegun Aganga, stated that the enactment of the law will make it possible to replace the Excess Crude Account (ECA)with the NSIA.
Already some stakeholders have applauded the move saying that the Sovereign Wealth Fund (SWF), when established and effectively managed, would be used to enhance the savings and transfer of crude oil proceeds from generation to generation. However, this does not mean that the proposal is, without its critics.
While the proponents are saying it was the answer to efficient management of the nation's resources, especially for generations yet unborn, critics believed that the bill would create another bureaucracy that Nigeria does not need and that it only differs in nomenclature from the Excess Crude Account (ECA).Yet others argue that Nigeria has peculiar challenges which will not only thwart the motive of a Sovereign Wealth Fund (SWF) but cannot be solved by such a fund.
In its determination to ensure a quick take-off of the proposed fund, the National Economic Council, comprising federal and state governments, agreed to set aside $1 billion seed fund already domiciled with the Central Bank of Nigeria, CBN, with a view to reducing wastage from the excess crude account.
Aganga, noted that 'the initiative will help in curbing wastages in governance, as well as provide funds for the development of the nation's infrastructure and securing of generations yet unborn to benefit from the wealth of the nation's resources.
The establishment of the funds provides the country with the opportunity to transform its economy and attract both local and international investment towards the provision of infrastructure, as well as help in making Nigeria one of the leading economies in the world.' Other highlights, he noted, are that excess revenues accruing from sale of the crude oil would be remitted into the sovereign wealth fund; it would be would be published in the national dailies and shared based on the recommendations of the Governing Council and Board of the SWF, by the three tiers of government when the price of crude oil falls for about four months.
Realities of SWF
The Nigeria Labour Congress (NLC) endorsed the establishment of the fund and called on the National Assembly to amend relevant sections of the 1999 constitution which could jeopardize the setting up of the fund, adding that the establishment of the sovereign wealth fund was long overdue. Afripol , a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa, commended the this initiative. It stated that Nigeria is making a bold but calculative move to establish a sovereign wealth fund (SWF).
This is a good thing coming from the presidency, although Nigeria has wasted substantial time in coming to this at a later period. But it's better late than never. The President understood that excessive revenue generated from oil export must not be left dormant in the foreign reserve but can be prudently invested and be appreciated.
'SWF is designed for countries like Nigeria that do have little or no foreign debt with budget surplus, although Nigeria in her recent budget will borrow some money to finance her surge in spending. But all things being equal, Nigeria is among the extreme low debt nations-to- GDP ratios; therefore SWF is still good for the country to prudently manage her foreign reserve. '
A public commentator and law price winner, Mr. Edward Ubah agreed that the policy approach of the finance ministry merits commendation but, noted that it is a program far ahead of its time in Nigeria. According to him, what Nigeria needs is to tackle the issues of infrastructure first. There is still time, he said, for government to rethink the SWF, bearing in mind that the fund is necessary but not sufficient.
On Aganga's view that Nigeria was one of the few OPEC members that had not set up the Sovereign Wealth Fund Authority, Ubah queried: 'at what time in the life of these countries we now wish to copy did they set up a SWF? Did it precede infrastructural development? Could we take stock of their various infrastructural demand per population vis-Ã -vis its supply and compare same with Nigeria? The net result would be startling.'
Transparency and management
Dismissing the fears that selfishness, lack of patriotism and corruption may thwart the operation of a sovereign wealth fund like its precursor, ECA, whose sharing principle was roundly condemned by the citizenry for its lack of transparency and accountability, Aganga assured all and sundry that the Santiago principle would be applied to the letter.
He explained that 10 per cent of the sovereign wealth fund will be devoted to development of infrastructure at the state level and Federal Capital Territory, FCT; Stabilization fund for sustenance of the economy, and savings fund for future generation. The initiative, according to him, would be run on the Santiago Principles which emphasize transparency and accountability in governance, in line with international best practices.
The principles were proposed in 2008 through a joint effort between the International Monetary Fund (IMF) and the International Working Group of Sovereign Wealth Funds (IWG). So far 23 nations have signed onto the principles.
According to the IWG, the creation of the Santiago Principles was driven by the goal for SWFs: To help maintain a stable global financial system and free flow of capital and investment; to comply with all applicable regulatory and disclosure requirements in the countries in which they invest; to invest on the basis of economic and financial risk and return-related considerations; and to have in place a transparent and sound governance structure that provides for adequate operational controls, risk management, and accountability. The Santiago Principles contribute to the IWG's objective for SWFs by monitoring three important areas - legal framework, institutional framework and governance framework, and investment policies and risk management.
'Every month, the Government of Nigeria (through the three tiers of government) will set aside excess oil revenues – those over and above the amount needed to fund our nation's budget – and invest those revenues in the NSIA. Today, this amount goes into the Excess Crude Oil Account, but it is not invested or managed in the way the NSIA will be managed. 'You may recall that rightly or wrongly, the management of the ECA, which was a very good idea, has come under sustained criticism over the years by some Nigerians and the international community. This replaces it.
'The NSIA will then allocate those revenues to three areas: National infrastructure development; long-term savings; and a stabilisation fund that can be drawn against during economic emergencies to help us balance our budget. This way, each and every month, Nigeria is saving for its children, investing in its future, and building its financial fortress in order to meet budgetary commitments each year in the face of volatile oil prices. 'This way, Nigeria is escaping from its boom and bust cycle of the past, and planning for stable long-term growth and development', he explained. Aganga provided further insight into how the NSIA will be funded and how it will invest the harnessed funds.
'Going forward, the NSIA will receive monthly funding of 90 per cent of all commodity revenues that are above what the National Assembly approves each year as the revenue necessary for our budget – using the well-established oil price benchmark rule. 'The remaining 10 per cent will be set aside in a budgetary smoothen account to smooth monthly fluctuations in budgetary revenue, up to an agreed limit based on historical usage.'
On the prudent management of Nigeria's foreign reserve, Emeka Chiakwelu, principal policy strategist at Africa Political and Economic Strategic Center (Afripol) said that Nigeria can learn from Dubai and other Persian Gulf oil countries that have invested in the western economies especially in the American Real estate and fiduciary bonds. He added: 'Government should assemble a committee of experts to manage the reserve and invest some of the money in stable market overseas.'
He explained that transparency is an important foundation in managing a corrupt-free sovereign wealth fund, saying that it is essential that transparency and probity will be the guiding light to our country as we invest our money with the returns to create more wealth. 'First and foremost, capable men and women of integrity will run and manage the SWF. Some people are so cynical about Nigeria that they think that Nigerians are devoid of honesty, uprightness and integrity.
But the truth is that Nigeria has good men and women who are patriots and will do a good job for our beloved Nigeria. Transparency must be self evident in the sense that it will be open to the public and anybody can be able to access information on the investments and returns.
'Nigeria therefore should join the association of the International Working Group of Sovereign Wealth Funds (IWG). This body (IWG) is abiding to the rules and regulations of the treaty they made with International Monetary Fund (IMF) named Santiago Principles that detailed the openness, transparency and probity in the management of sovereign wealth fund. It was documented in Wikipedia clearly that the IMF's 'Santiago Principles are a set of 24 voluntary guidelines that assign 'best practices' for the operations of Sovereign Wealth Funds (SWFs),' he stated.
He then suggested that the presidency should set up a committee of experts to manage the wealth fund:
'The Minister of Finance or the Governor of Central Bank of Nigeria may head the committee. The presidency may decide to step outside the confines of the government and appoint nongovernmental bureaucrat to head the commission.
But whatever the case might be, by the nature of their roles - minister of finance and governor of the central bank will play active roles in the management of the SWF. It is essential that the committee must comprise of Nigerians from all walks of life including the average Nigerian trader and market women to university professor and government bureaucrats. This is important in order to involve the Nigerian society as partakers and watchdogs. SWF can work for Nigeria when properly managed with transparency and probity.'
Shedding more light on the Fund, a Deputy Governor of the Central Bank of Nigeria, Mr Tunde Lemo, noted that the Authority is expected to use both the initial and subsequent funds to set up the future generation fund, Nigeria infrastructure fund and stabilization fund with a minimum investment of 20 percent of the amount in each of the funds.
'The Authority may declare a distribution (dividends) provided that it made profit across all funds for at least five years following the enactment of the Act and made profit in the year the dividend is to be paid. Besides, the distribution must not be more than 60 percent of the profits of the Authority at the time of the distribution and must be approved by the Governing Council,' he said.
ECA and SWF
The Head of Research and Investment, Afrinvest (West) Africa, Mr Victor Ndukuba, agreed that the SWF is a noble idea but it must be understood that it is one of the several accounts that Nigeria has. As for the argument that it is long overdue, Ndukuba said that there are no two countries that have exactly the same fundamentals; therefore, the issue of timing does not hold water.
'It is just like a savings account where the profits from excess oil price will be saved. The only difference between SWF and the ECA is that experts in fund management would manage the portion that is meant to be invested,' he said. The excess crude account, which source is the gap between the budget benchmark oil price and the rise in the global oil price was established in 2004 with $9.4billion as initial deposit. Currently, the funds are held in the Excess Crude Account (ECA) to help stabilize the budget.
The rationale behind the ECA is to act as a stabilization fund, closing budget deficits that are a product of oil price volatility, and to potentially fund domestic infrastructure investments. But several years down the line, complaints by the National Assembly and civil society groups continued to mount that ECA was an illegal account. The Federal Government finally agreed that the current Excess Crude Account has no real legal backing since it was formed under a political arrangement from the previous administration.
It then set machinery in motion to replace the Excess Crude Account. Based on this, President Goodluck Jonathan in May 2010 asked his economic team led by Minister of Finance , Olusegun Aganga, to make the requisite arrangements to establish a sovereign wealth fund (SWF) as soon as possible.ECA will be replaced with a National Sovereign Wealth Fund (NSWF) which has now been christened Nigerian Sovereign Investment Authority(NSIA).
The new body will manage Nigeria's excess earnings from crude oil.
Aware of possible conflict in name and operation, the Chairman of Senate Committee on Finance, Senator Ahmed Makarfi, stressed the need for clarity in the role of the National Assembly, just as he called for states' input into the sovereign wealth fund. He said the senate would do everything to ensure that the setting up of the fund does not contravene constitutional provisions on the sharing of the Federation Account.
Spelling out the operations of the NSIA, Aganga, said it would take off with a seed capital of $1billion already provided by the National Economic Council (NEC) with all the 36 state governors agreeing to the deal. He explained further: 'Every month, the Government of Nigeria (through the three tiers of government) will set aside excess oil revenues – those over and above the amount needed to fund our nation's budget – and invest those revenues in the NSIA.Today, this amount goes into the Excess Crude Oil Account, but it is not invested or managed in the way the NSIA will be managed. You may recall that rightly or wrongly, the management of the ECA, which was a very good idea, has come under sustained criticism over the years by some Nigerians and the international community.
This replaces it. The NSIA will then allocate those revenues to three areas: National infrastructure development; long-term savings; and a stabilisation fund that can be drawn against during economic emergencies to help us balance our budget. This way, each and every month, Nigeria is saving for its children, investing in its future, and building its financial fortress in order to meet budgetary commitments each year in the face of volatile oil prices. This way, Nigeria is escaping from its boom and bust cycle of the past, and planning for stable long-term growth and development.
'The Future Generations Fund will build an intergenerational savings base by investing in long-term assets that generate a rate of return to accumulate wealth for the next generations of Nigerians. The Stabilisation Fund will protect the budget by providing a stable, last resort source of finance when the budget smoothing account is deemed to be insufficient.
'This stabilisation function will ensure the smooth functioning of government and delivery of key services during periods where oil revenues from petroleum sales are less than the level anticipated and approved by the National Assembly and the budget smoothing account does not have sufficient balances.
'The NSIA will be a statutory corporation – a corporation created by a law passed by the National Assembly, and will be owned by Nigerians. The Federal Ministries of Finance and Justice have worked with international and local advisers in preparing the draft Bill.
This Bill has been reviewed and contributed to by the Attorneys General of the 36 states of the federation and has subsequently been approved by the National Economic Council and the Federal Economic Council.' While the creation of the fund is a good idea, it won't solve the problem of fiscal discipline in the country, Bismarck Rewane, chief executive officer of Financial Derivatives Co. Ltd., a Lagos-based fund manager, said last year. 'It has to start from the executive.'
The former minister of information Professor Dora Akunyili explained that Nigeria is one of the few countries lagging behind in setting up the Fund as almost all the OPEC members have already established such funds. 'Currently, there are more than 50 sovereign wealth funds in operation globally, and they together manage over $3 trillion in sovereign assets. Sovereign Wealth Funds now form a fundamental component of strategic wealth management for the oil rich countries of the Middle East, the export-led growth countries of South East Asia, in rich countries in Europe and North America, and in poor natural resource dependent countries such as Botswana.
'In fact, Nigeria, Ecuador and Iraq are currently the only OPEC members without a sovereign wealth fund', Aganga added.
SWF $4trn assets
The combined assets of the world's sovereign wealth funds (SWFs) have reached almost $4trillion,in the last one year while many funds have intensified their investments in alternative assets. According to research by Preqin, SWFs' assets under management grew by 11 per cent for the second year running, from $3.59trn in 2010 to $3.98trn in 2010.
The proportion of SWFs with private equity investments rose from 55 per cent to 59 per cent; the proportion for investment in infrastructure went from 47 per cent to 61 per cent. Sovereign funds typically have long time horizons and their liabilities may be discretionary, making them well suited to infrastructure and alternative assets.
'Following global economic stabilisation, many sovereign wealth funds that had delayed plans to diversify their holdings as a result of the economic downturn have now resumed these plans,' said Sam Meakin, managing editor of the 2011 Preqin sovereign wealth fund review. 'The significant collective assets under management of SWFs means that they represent an important potential source of capital for fund managers across all asset classes.'
Some SWFs were subject to capital withdrawals in 2010. Russia's Reserve Fund was used to balance the country's federal budget, leaving it with assets of $25.4bn now compared with $60.5bn at the start of 2010.
Among African countries, Libya and Botswana have SWFs with Ghana poised to establish same as soon as the country begins oil production.
UAE-Abu Dhabi establishment it's version of SWF known as Abu Dhabi Investment Authority in 1976. Today its assets are worth $627 billion. Norway's Government Pension Fund-Global established in 1990 has assets worth $445billion. Saudi Arabia's SAMA Foreign Holdings has $432 billion while China has three of such funds: SAFE Investment Company and China Investment Corporation, China National Security Fund with $347.
1 billion,$288.8 and $146.5 respectively. Singapore's Government of Singapore Investment Corporation established in 1981, has assets worth $247.5 billion, Kuwait Investment Authority established in 1953 has $202.8billion;Russia's National Welfare Fund established in 2008 has $168 billion while Hong Kong Monetary Authority has assets worth $139.7 established in 1993.