15 March 2011

Nigeria: Sovereign Wealth Fund - What Guarantee Against Abuse?


So soon after running down the much-eulogised Excess Crude Account (ECA) set up by the Olusegun Obasanjo administration at the behest of the International Monetary Fund (IMF), the Federal Government recently began preparations to establish a Sovereign Wealth Fund (SWF).

Addressing members of the National Assembly Committees on Finance last week, Finance Minister Olusegun Aganga noted, in part, that Nigeria is one of the very few members of Organisation of Petroleum Exporting Countries (OPEC), without such a fund.

Speaking at a one-day public hearing on a Bill for an Act to establish the Nigerian Sovereign Investment Authority, Aganga noted: "Currently, there are more than 50 sovereign wealth funds in operation globally and they, together, manage over $3 trillion in sovereign assets."

The global SWF space, according to analysts, grew by a robust 11 percent last year, just as it has now become a large, important pool of potential capital for investment managers. Real estate remains a favourite, with 56 percent of sovereign wealth funds investing in it, with an average target allocation of 8.3 percent.

One other advantage of SWFs as an investment vehicle, that has also been noted, is that it tends to enjoy "longer-term investment horizons" and have more flexibility with liabilities than pension funds and insurance companies.

No wonder, Aganga continues, SWFs "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, rich countries in Europe and North America and, in poor, natural resource-dependent countries such as Botswana."


Going by what the Finance Minister told the joint committee last Wednesday:

"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 (ECA), 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.

"The NSIA will be endowed with $1 billion already approved as seed capital by the NEC. Again, I salute their vision and foresight. 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 smoothening account to smoothen monthly fluctuations in budgetary revenue, up to an agreed limit based on historical usage.

"NSIA will then allocate these monies to three separate ring-fenced funds: the Nigeria Infrastructure Fund; the Future Generations Fund and the Stabilisation Fund. And a minimum amount will be allocated to each fund to ensure that each of these goals is met over time.

"The Nigeria Infrastructure Fund will work towards bridging the national infrastructure gap, providing financing for the development of critical infrastructure across Nigeria.

"In addition, 10 percent of the Nigeria Infrastructure Fund will be devoted to regional government-sponsored development projects that promote economic development in under-served sectors or regions in Nigeria.

"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 smoothening account is deemed to be insufficient.

"This stabilisation function will ensure the smooth functioning of government and delivery of key services during periods when oil revenues from petroleum sales are less than the level anticipated and approved by the National Assembly and the budget smoothening account does not have sufficient balances.

"The NSIA will be a statutory corporation - a corporation created by law passed by the National Assembly, and will be owned by Nigerians."

The Bill seeks to establish the Nigerian Sovereign Investment Authority (NSIA) as an independent body to carry out the intentions of government to build a savings base for the benefit of future generations, enhance development of infrastructure in Nigeria and provide stabilisation support in times of economic stress.

The authority shall have a Governing Council, Board and Executive Management.

The Governing Council shall provide advice and counsel to the board as regards the objectives of the authority, but shall observe the independence of the board and officers of the authority.

What guarantee?

Like every other idea copied or initiated by the governments at any level, there is yet no assurance that the noble idea would not be abused or even jettisoned by a succeeding administration for political reasons in a country where all agree that government is a continuum and yet successive administrations hurry to jettison projects initiated by their predecessors. Examples abound, especially the much celebrated Metro-line project embarked upon by the Lateef Jakande administration in Lagos in the 1980s, only to be abandoned by the military government of Mohammadu Buhari. There are many projects across the country now begging for completion because the government that initiated them is out of power.

A source who craved anonymity, noted that although details of the SWF is still scanty, there is cause for Nigerians to be worried about the fact that the fund would be invested abroad for the good of other nations at a time when basic infrastructure across the country are begging for attention.

"Also, going by the elaborate plans being put in place to set up the SWF structure, it is evident that like the Niger-Delta Development Commission (NDDC) and other such interventionist agencies established in recent years, the fund may soon become another ministry that will duplicate the role of an existing government Ministry, Department or Agency (MDA). As you would expect, corruption will set in as the political appointees would pursue their own agenda and see their appointment as an opportunity to feather their nests, among others," he warned.

According to him, rather than establish another organ to manage the fund, "what is wrong with keeping the fund in the foreign reserves?"

For one stockbroker: "What is the guarantee that credible or the right people will be appointed to the board and management of the SWF invested abroad? We still lack purposeful leadership in Nigeria, and as such, what is the guarantee that another administration will not simply amend the enabling laws to make it possible to convert the funds to personal use?"

Continuing, he said: "What sense does it make that you are unable to feed properly, pay your rent or own a car and you are saving money abroad? We have not met our today's expectations, why save for tomorrow? People will begin to fritter away that fund abroad."

For Idowu Ogedengbe, a stockbroker, analyst and Chief Executive of Vintage Wealth Managers Ltd, it is not unexpected that the ECA has been trailed by criticisms owing to observed abuses without commensurate effects on the lives of common Nigerians.

"I think the fact that the Excess Crude Account was established without a legislative enactment, and such clear strategic objectives made it vulnerable to abuse by the politicians. However, given the commitment by key stakeholders (that is the three tiers of government) to put the necessary checks in place, I am of the view that the SWF is a desirable effort that promises to deliver tangible results.

"Under the ECA, it was easy for the state governors to clamour for the sharing of excess crude funds (as they did in the twilight of 2010, leading to the distribution of $1 billion on December 31), in view of the lack of a clear cut strategic vision guiding its disbursement," Ogedengbe added.

Many would easily remember that the ECA was $20 billion rich at the onset of the current administration of the late Umar Musa Yar'Adua and Goodluck Jonathan on May 29, 2007. The amount today is near zero without a commensurate or qualitative expenditure profile that has impacted on the life of average Nigerians.

Following the distribution of the $1 billion in December, the account was reportedly left with about $300 million, only for the National Assembly, a few weeks later, in February, to approve a loan of $1.34 billion for the Federal and 14 state governments. The loan is being sought as part of the government's 2010 external borrowing plan. The facilities are being secured from the Islamic Development Bank (IDB), the International Development Association (IDA), the French Development Agency (FDA) and the Indian Line of Credit, to finance power/energy projects, rural access and mobility project II (RAMP II), special intervention for infrastructure and social programme development.

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