SOVEREIGN WEALTH FUND: WHY GOVERNORS ARE KICKING

• Gov. Amaechi
The controversies swirling around the much-anticipated Sovereign Wealth Fund (SWF) do come to most Nigerians as a huge surprise, particularly, in the wake of the court action instituted against the Federal Government by the 36 governors.

The question on many lips is this: Why this bitter opposition to the Fund that will 'build a savings base for future generations, enhance development of infrastructure and impose fiscal discipline?'

The Chairman of the Nigeria Governors' Forum (NGF), the arrowhead of the anti-SWF, Governor Rotimi Amaechi of Rivers State, gives the reason.

According to him, what the Federal Government has done is mere hijacking of our money. His words: 'The conduct of the government of the federation and her officials is a violation of the principle of the Rule of Law and breach of the independence of the judiciary and constitutes a violation of the principle of the Rule of Law handed down by the Supreme Court. The Rule of Law eliminates completely the rule of man…Governors agree that the Federal Government should save but the law has to be respected. What the Federal Government has done is mere kidnapping of our money.'

Shedding more light on the issue, he said:
'Section 80 of the constitution is talking about Consolidated Revenue and it also says that the executive authority of a region shall extend to the execution and maintenance of the constitution of the region and to all matters with respect to which the legislature of the region has, for the time being, power to make laws but shall be so exercised as not to impede or prejudice the exercise of the executive authority of the federation or to endanger the continuance of Federal Government in Nigeria.'

Throwing his weight behind the governors, Asiwaju Bola Ahmed Tinubu, the immediate past governor of Lagos State and a chieftain of Action Congress of Nigeria (ACN), criticised the creation of SWF by the Federal Government, saying the Fund was illegal and an attempt to hoodwink Nigerians.

His words: 'I'm in full support of the governors going to court. The Sovereign Wealth Fund is an illegal looting committed under an act. It is giving the Excess Crude Account (ECA) another name and taking it to the House for illegal constitutional amendment.'

'When an act confiscates and contradicts the constitution, Section 162 of the constitution says all revenue must be distributed. You cannot act unconstitutionally if you are a government of rule of law. You are confiscating the money of the state; you are violating the constitution; it is illegal. It is an amendment to the constitution if it is not seen clearly by Nigerians. Otherwise, Section 162 of the constitution is useless. What are the steps to be taken before an amendment to the constitution takes effect. That is clear there. I ask, if you are a regular saver and your child is dying of anaemia in a hospital and you say you are saving for that child to inherit. Will you say you must save that money and not pay for the blood if the child needs blood transfusion? The states say this is our time to develop, why are you forcing them? You can save the Federal Government's portion. It is unconstitutional. I'm in support of the governors.'

What is Sovereign Wealth Fund?
A sovereign wealth fund (SWF), according to Wikipedia.org., is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign Wealth Funds invest globally.

'Some Sovereign Wealth Funds may be held by a central bank, which accumulates the funds in the course of its management of a nation's banking system; this type of fund is usually of major economic and fiscal importance. Other Sovereign Wealth Funds are simply the state savings, which are invested by various entities for the purposes of investment return, and which may not have a significant role in fiscal management.

The accumulated funds may have their origin in, or may represent foreign currency deposits, gold, Special Drawing Rights (SDRs) and International Monetary Fund (IMF) reserve positions held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings. These are assets of the sovereign nations which are typically held in domestic and different reserve currencies such as the dollar, euro and yen. Such investment management entities may be set up as official investment companies, state pension funds, or sovereign oil funds, among others,' it adds.

The first SWF – Kuwait Investment Authority (KIA) – was set up in 1953. Since then, over 70 such funds are known to exist around the world. Of the top 10 largest funds, China Investment Corporation is the youngest. It was set up in 2007. The top 20 biggest SWFs have existed for a minimum of 20 years on the average.

Nigerian scenario
The idea of setting up a Sovereign Wealth Fund for Nigeria has been around since the Excess Crude Account (ECA) – a quasi SWF – was set up in 2004 to hold funds, accruing as oil revenue above the budget benchmark prices during the administration of former President Olusegun Obasanjo. This remained impossible to realise until Mr. Olusegun Aganga, former Goldman Sachs Managing Director and erstwhile Minister of Finance, provided a strong will to push through the executive bill for the Nigeria fund for legislative approval and presidential assent. The Nigeria Sovereign Investment Authority (NSIA) Act 2011 was subsequently passed into law last May. It is aimed at building a savings base for Nigerian citizens. It also seeks to enhance the development of Nigerian infrastructure and provide stabilisation support in times of economic stress .

The Sovereign Investment Authority (Establish, etc.) Act, 2011 established for the country a Sovereign Investment Authority. This Authority is charged to receive, manage and invest in diversified portfolios the excess of the medium and long term revenue of the federal, states, local governments and area councils. The proceeds of these investments are statutorily required to create a savings base for the country, develop infrastructure that will attract local and foreign direct investments.

The Nigeria Sovereign Wealth Fund (NSWF) legislation is necessitated by the depletion and the non-renewable nature of the hydrocarbon resources in the country and the need to develop critical infrastructure that would attract investment and diversify the economy.

In fact, the bill for the Act states in its Preamble that:

'The Nigerian State has over the years relied heavily on income from hydrocarbon resources, which form the mainstay and support for its socio-economic development; hydrocarbon deposits being depleting natural resource assets that may not be available in sufficient quality for future generations of Nigerians to continue to support the development of vital infrastructure; the federal, state, Federal Capital Territory and local governments of the federation have agreed to take steps within the constitutional framework to provide for the needs of current and future generations by channelling certain available resources to infrastructure, areas of investment and stabilisation measures to safe guard the economy as may be required; and the federal, state, Federal Capital Territory and local governments of the federation, drawing from the experience of other countries and adopting best practices, have agreed to establish the Nigeria Sovereign Investment Authority as an independent entity to carry out the intention of the federal, state, Federal Capital Territory and local governments to, among other things, build a sustainable savings base for the benefit of future generations.'

The Act sets out the objectives of the Authority as follow:

a) to build a savings base for Nigerian people;
b) to enhance the development of Nigerian infrastructure;

c) to provide stabilisation support in times of economic stress; and

d) to carry out such other matters as may be related to the above objects.

It adds that the Authority shall:
a) establish a ring-fenced diversified portfolio of appropriate growth investments for the benefit of future generations of Nigerian citizens (the 'Future Generations Fund') as further set out in Part IV of this Act and the investment policies and procedures developed by the Authority;

b) establish a ring-fenced portfolio of investments specially related to and with the object of assisting the development of critical infrastructure in Nigeria that will attract and support foreign investment, economic diversification and growth (the 'Nigerian Infrastructure Fund') as further set out in Part V of this Act and the investment policies and procedures developed by the Authority; and c) establish a ring-fenced portfolio of investments to provide supplemental stabilisation funding based upon specific criteria and at such time as other funds available to the Federation for stabilisation need to be supplemented (the 'Stabilisation Fund') as further set out in Part VI of this Act and the investment policies and procedures developed by the Authority.

In furtherance of the Funds established under sub-section (1) of this section and for the carrying out of its other functions, the authority shall:

a) receive, manage and invest the initial and future contributions on behalf of All the Future Generations Fund, the Nigeria Infrastructure Fund and the Stabilisation Fund pursuant to the allocations of contributions of the Federal Capital Territory and Local Governments made in accordance with section 31 of this Act;

b) reinvest the profits and proceeds of its investments to generate further risk adjusted returns in service of the Federation except as provided in this Act; c) develop and foster skills in asset-management, investments, operations, risk management and other related areas in addition to developing expertise in infrastructure, project management and auditing capabilities in qualified Nigerian personnel in a matter consistent with the overall financial objectives of the authority;

d) implement best practices with respect to management independence and accountability, corporate governance, transparency and reporting on performance as provided in this act, including with due regard as appropriate for the Santiago Principles;

e) attract co-investment from other investors, including strategic investors, sovereign and internationally-recognised investment funds and private companies, to enhance the Authority's capital and maximise risk-adjusted returns; and

f) obtain the best achievable finance returns on all capital and assets of the Authority.

With all these laudable objectives, why should the governors kick against the Fund?

Oserogho $ Associates in its online comments on the Acts opines that:

'Section 80 (1) of the 1999 Constitution (as amended) provides that all revenues received or raised by the Federal Republic of Nigeria shall be paid into one Consolidated Revenue Fund for the benefit of the entire Federation of Nigeria. The exception to this provision is whereby a Law passed by the National Assembly, a specific public fund is created for a specific public purpose, like the Sovereign Investment Authority to manage Nigeria's Sovereign Wealth Fund. Opposition to the constitutionality or legality of the NSWF Act will remain misplaced until the 1999 Constitution (as amended) is further amended to devolve more legislative authority, responsibilities and revenues on the states and local governments areas as should be the case in a federal system of government as opposed to the current 'unitary'' System of government in Nigeria.'

Writing on the Nigerian Sovereign Wealth Fund Concerns, Jide Akintunde, the Managing Editor of Financial Nigeria Publications, agrees with the above position. According to him, there is much more work to be done in fiscal reform in Nigeria than what the National Sovereign Investment Authority (NSIA) represents. 'It doesn't give the sense of fiscal federalism that these three funds – Permanent Wyoming Mineral Trust Fund (PWMTF), Alaska Permanent Fund (APF) and New Mexico State Investment Office Trust (NMSIOT) – give the United States.'

He advised that certain state economic agents need to be restructured or consolidated. 'Although it is now a public company, will the Infrastructure Fund have any relationship with the Urban Development Bank which holds the government mandate to finance development of public infrastructure in Nigeria? How about the confusion of having a new Stabilisation Fund separate from the long-standing Stabilisation Fund, which has been part of the sharing of federal revenue?' he asked.

On the desirability or otherwise of SWF, Akintunde said: 'As it has been stated until May when the NSIA Act came into existence that Nigeria was one of three members of the Organisation of Petroleum Exporting Countries (OPEC) having no sovereign wealth fund. Desirability of Nigeria SWF can hardly be faulted under the right legal, institutional and governance frameworks. The last financial crisis, which saw the price of crude oil tumble from $147 a barrel to around $32 a barrel tells how volatile government revenue can be, if there is no mechanism to smoothen it through savings of budgetary surplus. It is a matter of responsibility that savings should be made for the future generations, so that they are not bequeathed with only environmental catastrophe, arising from crude oil production, after the wells might have dried up.

However, these strong reasons should not lead to the founding of the Nigeria fund that will not be able to rise to the challenges that it was set up to address. No question about it, the NSIA Act requires a review.'

For instance, he observed that the composition of the Governing Council for the Fund is the most recent indication of lack of consensus to build a united country around development agenda as opposed to harmony for revenue sharing purposes.

'How will this impact the investment decisions of the management of the fund? There are already indications of a strong affinity between the fund management and government's (business as usual) projects. For instance, Mr. Aganga was quoted as saying that the infrastructure fund would be dedicated to investments in the development of critical 'national' infrastructure, with 10 per cent of it going to agriculture and government sponsored projects. With this arrangement, the independence of the fund management is already compromised.

The United Arab Emirates' SWF – Abu Dhabi Investment Authority (ADIA) – carries out its investment programme 'independently and without reference to the Government of Abu Dhabi or other entities that also invest funds on the government's behalf. China Investment Corporation (CIC) is promoted as an investment institution established as a wholly state-owned company under the Company Law of the People's Republic of China. CIC is governed by the country's Company Law and the company's Articles of Association and operating guidelines. Will economic consideration and potential good upside return on investment provide guidance for investing the Infrastructure Fund? Linking project approved by the Federal Executive Council to investment of the fund would make it heavy weight on political consideration and lightweight on commercial considerations.'

Hedge Fund or SWF
In trying to showcase further weakness of the Nigeran version, Akintunde tries to compare SWFs with Hedge Fund, saying they share several similarities contrary to the notion of clear-cut dissimilarity, between both. 'But a generally acknowledged dissimilarity, which literatures commonly cite is that SWFs are not directly leveraged, whereas hedge funds are. The Nigeria fund, through its subsidiaries, will issue bonds and other debt instruments to raise fund for investment. This provision in the NSIA Act requires close scrutiny for two reasons.

The bill was debated at a time of national outcry about the rising level of the country's external debt and the mammoth domestic debt. Consequently, a freeze on external borrowing was agreed by the Federal Government while the framework for issuance of the monthly FGN Bond was to be reviewed. Should the SWF become a vehicle for creating national liabilities, it can be counter-productive, especially because of the suspect framework for the fund's governance. What is more, creating another borrowing vehicle at a time of sovereign debt concerns is a manifestation of the usual lack of coordination in government policies.'

To drive home this point, Akintunde compares Nigeria with Ghana, saying that SWF opponents' argument on its leverage strips it of one of its myths. 'It means SWFs do contribute to market volatility with regard to their investment behaviour and pooling of the funds. Ghana, a nascent oil economy, recently passed the Petroleum Revenue Management bill, which, among other provisions, established the Ghana Heritage Fund and the Ghana Stabilisation Fund. But the very idea of using oil revenue as collateral for loans generated heated debate in parliament. In Nigeria, however, the SWF seems to be a borrowing vehicle. While the controversial provision in the Ghanaian bill eventually scaled legislative approval, its application is in the realm of the wider fiscal management, and not with regard to funding the wealth funds created.'

Looking at the merits and demerits of the Fund, the Edo State Governor, Comrade Adams Oshiomhole, said the 36 governors were not opposed to the Nigeria Sovereign Wealth Fund but that they are only challenging the manner the fund is being executed.

Speaking at the on-going 15th Stockbrokers Annual Conference, Oshiomhole attributed the perceived opposition of the governors to the attitude of some ministers.

According to him, the former Minister of Finance, Mr. Olusegun Aganga, handled the issue of the SWF with so much arrogance.

'Let me be very open with you on the arrogance with which former Minister of Finance, Olusegun Aganga, handled the issue of SWF. As the finance minister then, he had powers over federal finances, not states' finances. No one should come out to say that the Federal Government is more transparent than state governments in terms of finances. Savings at Federal level into the SWF is for all Nigerians. Federal Government has no state of its own to manage. A state cannot save what it doesn't have. Savings is a function of earnings,' he said.

He, however, said the Coordinating Minister of Finance, Dr. Ngozi Okonjo-Iweala, and the governors were making moves to resolve the issue. 'Okonjo-Iwela is very persuasive and she is doing a lot of work in the interest of the nation. The reality is all about discussing the best way to save the future, not the savings. Savings should not be based on excess crude because the so-called excess is based on forecasts whose bases are sometime doubtful,' he said.