Leadership (Abuja)

5 June 2011

Nigeria: Sovereign Wealth Fund - the Prospects, the Problems

analysis

Recently, President Goodluck Jonathan signed the Nigeria Sovereign Investment Authority (NSIA) bill into law. In this report, Amaka Ifeakandu captures experts' views on the future of the Fund

The quest for putting in place a Sovereign Wealth Fund (SWF) in the country has become a reality. This was as a result of the recent passage of the bill establishing it by the National Assembly and signing of the Act by President Goodluck Jonathan.

The journey to the present stage had been tortuous for the former Finance Minister, Dr. Olusegun Aganga who initiated the bill. Despite the initial setback occasioned by various criticisms from those who were supposed to know better, Aganga never relented but was prepared to offer superior arguments on the desirability of the scheme for the country at this time.

One strong factor the Finance Minister had going for him was the backing of the President from the beginning.

The Minister had been optimistic that the Fund would be a reality in the life of the previous administration which ended on May 29. Even before the passage of the bill, the government had put aside $1 billion to set up the fund.

With the accelerated passage, one can say that the the bill is one of the fastest that had been sent to the National Assembly and all the knotty issues around it were resolved within a record five-month period.

The bill which was submitted in December last year was passed by the National Assembly within a space of four months and it was signed into law in May this year. As the President has signed the Act into law, the major task before all, especially, the facilitators is how to make the Fund achieve its desired objectives.

However, a Sovereign Wealth Fund is generally described as "a state-owned investment funds composed of financial asset such as stocks, bonds and property or other financial instruments." Simply put, it is basically a government's investment portfolio. The policy is one that most oil-producing nations have adopted in the recent time to face challenges of the future.

In the case of Nigeria, the sovereign wealth fund is aimed at having good management of the nation's oil windfall. It is meant as a savings fund for future generations; an economic stabilization fund and an infrastructure fund.

As regards the management of the Fund, a Governing Council will oversee the Nigeria Sovereign Investment Authority (NSIA) but will not have any direct fund management responsibility.

The Council will consist of the president (who may be represented by the vice president), the 36 state governors, the finance minister, attorney general, national planning minister, the Central Bank of Nigeria (CBN) governor and the chief economic adviser to the president.

Four private sector representatives, two civil society representatives, two youth representatives and four academics will also sit on the Council.

The management board will consist of nine directors to be identified by an independent committee made up of the finance minister and "distinguished, professional" Nigerians.

The NSIA will report on a quarterly basis to the Governing Council while an annual report will be published in newspapers.

The NSIA created as part of the bill, will manage three sections of the fund:

* Future Generations Fund - a rolling five-year investment plan meant to provide future generations with a solid savings base even once its hydrocarbon reserves are exhausted.

* The Nigeria Infrastructure Fund - to generate returns on investment in basic infrastructure such as power generation, agriculture, roads, ports and railways.

* The Stabilization Fund - a last-resource source of financing for budget deficits caused by weaker-than-expected commodity prices. The government can request funds at the end of a financial quarter if actual oil and gas revenues fall below the revenues forecast in the budget.

It is hoped that these three funds will reduce Nigeria's long-term economic reliance on oil revenues, insulate it from commodity price shocks and serve as an investment catalyst to draw in other infrastructure investors.

Meanwhile the Fund already has a seed funding of $1 billion set aside from the Excess Crude Account and was authorized by the National Economic Council (NEC).

The Fund will receive monthly funding of a "large proportion" of oil and gas revenue above the budgeted revenue and approved by parliament.

The NSIA will have the power to invest in, purchase, maintain and sell assets and investments of any kind and open branches in Nigeria and abroad to achieve its objectives.

Its affiliates will be able to issue bonds or other debt instruments and borrow or raise money in any currency.

Speaking at the signing of the Nigerian Sovereign Investment Authority NSIA bill into law, President Goodluck Jonathan said that his administration was fully committed to turning oil assets into a vehicle for wealth creation, economic diversification and investment.

He said that the bill was particularly historic on the grounds that it was the first time Nigeria would have a law backing the creation of a sovereign wealth fund.

The President said that the fund would provide " a strong, transparent and effective tool for the management of the nation's petroleum wealth for the benefit of Nigerians. " He said that revenues accruing to NSIA would be invested by it through three special funds- the Nigerian infrastructure fund, the Future Generation Fund and the Stabilisation Fund.

He said 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. He also said that the future generation fund would build an intergenerational savings based on investing in longer term assets that would generate returns to the accumulated wealth for the future generations of Nigerians while the stabilization Fund would help to protect annual national budgets by providing a stable, last resort source of financing during periods of fiscal deficit from a sustained fall in oil process.

Aganga had earlier said that the establishment of the Sovereign Wealth Fund (SWF) would help to fast-track the development of infrastructure and also help establish financial discipline in the country.

According to him, the SWF will introduce transparency and accountability on how to manage the country's financial resources; strengthen fiscal framework and act as a catalyst for both local and international investors, and will attract other sovereign wealth funds to come into the country and invest in local infrastructure, which will help diversify our economy.

The former Minister of Finance further explained that the SWF would 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.

According to him, 10 per cent of the sovereign wealth fund would be devoted for development of infrastructure at the state level and Federal Capital Territory, FCT, stabilization fund for sustenance of the economy, as well as savings fund for future generations.

He noted that the initiative would be run on the Santiago Principle which emphasized transparency and accountability in governance, in line with international best practices.

He explained that of all OPEC countries, Nigeria was one of the few that had not set up the Sovereign Wealth Funds Authority, stressing that the fund would be managed by proven asset custodians.

According to the former minister, 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.

He emphasized that the excess revenues accruing from sale of crude oil would be remitted into the sovereign wealth fund and shared by the three tiers of government when the price of crude oil falls for about four months, noting that the sharing of excess crude account had faced serious criticism from Nigerians for lack of transparency and accountability.

Aganga further explained that the money accrued into the fund would be shared based on the recommendations of the Governing Council and Board of the Sovereign Wealth Fund and that the amount accrued into the account would be published in the national dailies.

In his remark after signing the bill to law, Aganga said Nigeria now joins other OPEC states and more than 50 other natural-resource-rich countries - which together manage over three trillion dollars in sovereign assets in having a national savings plan for managing natural resource wealth.

He said that until now, Nigeria, Ecuador and Iraq were the only OPEC member countries without a sovereign wealth fund, adding that Ghana and Uganda have moved forward with establishing their Sovereign Wealth Funds, even when their oil production is not yet fully on-line.

He said that Algeria established its sovereign wealth fund in 2000, to save the difference between the actual and projected revenue generated from petroleum resources. That Algerian fund is currently estimated to be worth US$57 billion.

Aganga noted that Sovereign Wealth Funds now form a fundamental component of strategic Wealth management of fiscal surpluses globally.

He recalled that over the last five years, the average price of oil was about $78 per barrel. However, in the last 10 and 15 years, this average price of oil was about $57 and $45 per barrel respectively. "This kind of volatility can have deleterious economic consequences, particularly in an economy like ours whose revenue is so closely tied to the price of oil. The NSIA now forms a fundamental component of Nigeria's macroeconomic wealth management framework, ensuring that as a nation, we reduce our susceptibility to the unintended consequences volatile oil prices can bring about, such as high inflation and adverse impact on economic growth, real appreciation of the currency, weak export base, surge in import and the accompanied unsustainable balance of payments position," he added.

Aganga said that following international best practices of Sovereign Wealth Funds around the world, the NSIA would have the highest standards of corporate governance in its administration, and would conduct its investment activities in a fully transparent manner, in accordance with the internationally acclaimed Santiago Principles that were agreed upon by the world's leading sovereign wealth funds.

He stated that the NSIA would be subject to two levels of governance, first and principally by a board of directors made up of experienced investment management professionals and second by a Governing Council with oversight responsibility

But despite the huge benefit of the fund it witnessed a lot of criticism both at state and national level, especially from government officials. The state governors had picked holes on the scrapping of the excess crude account and having it replaced with the SWF. It directed the federal government to seek alternative sources of funding for the wealth fund.

Also, some National Assembly members initially saw it as a breach of the country's constitution quoting Section 80(1) of the 1999 Constitution which states that: All Revenues or other moneys raised or received by the Federation (not being revenues or other moneys payable under this constitution or any Act of the National Assembly into any other public fund of the Federation established for specific purpose) shall be paid into and form one consolidated revenue fund."

Commenting on the establishment of the Funds, a financial expert said that "it is a more sensible and planned savings that will impact positively on the economy of Nigeria if it is well managed."

He stated that while the creation of the fund is a good idea, it won't solve the problem of fiscal discipline in the country.

He urged the various governments particularly the executive to imbibe fiscal discipline.

Commending the signing of the NSIA, the Managing Director of APT Securities and Fund Limited, Garba Kurfi said " it is now we are getting it right in terms of management of excess crude oil legally and other wise."

He said that although the establishment of the SWF came late he added tt "it is better than never".

For the fund to achieve the expected results, he said that the government should get professionals to manage the fund better and as well use best portfolio mix that would maximize returns with minimum risk.

"We shall get professionals who will manage it better, we shall also use the best portfolio mix that maximize return with minimum risks, we shall set the pace in the sub-sahara Africa so that new oil country such as Ghana, and Southern Sudan will take a lesson," he added

In his own view, the managing director of H. J. Trust Investment, Mr. Harrison Owoh said that the SWF was a good policy.

He said that the major challenge the country had every minute of the day was the implementation and continuity of the policy, adding that once managers of the fund would not dip their hand in it for their selfish interest the future of the country and unborn generation was guaranteed.

Describing the fund as futuristic insurance for the unborn generations and future growth of the nation's economy, he however expressed the fear that such policy might be killed after Jonathan's administration.

He said that the Petroleum Trust Fund (PTF) which was established during the Abacha regime started very well but was killed during Obasanjo's government.

He said "if there will be continuity of the policy, the purpose of the fund will be achieved but change of administration in future may affect it unless the law backing the Act stipulates that no government will abort the establishment of the fund."

Some analysts, however, are of the view that to ensure that a strong, independent and effective Sovereign Wealth Fund is established for Nigeria, clear frameworks must be developed for the following key areas of the National Sovereign Wealth Fund: The Legal/Statutory and Institutional/Administrative Framework; the Corporate Governance Framework; the Fund Investment Management Framework; the Risk Management Framework, and the Corporate Responsibility and Reporting Framework.

In addition to the above, the following specific information are considered necessary: the enabling law/act establishing the SWFshould have provisions that are clear, comprehensive and robust; the corporate governance rules for the administrative organ(s) must be clearly thought-out with well-defined responsibilities and processes; the internal control checks and balances must be thorough and well-defined. Breach of controls must attract sanctions that should be equally well-defined; the financial and operational independence of the organs of the SWF must be guaranteed by statute.

Also, the NSWF and its body must be safeguarded from undue political influence through well-defined administrative and operating procedures; international best practice should be brought to bear on all issues relating to the SWF and its organs, and transparency and Accountability in reporting must be seen as a major feature of the Fund and its organs.

Generally, one thing we should bear in mind is the fact that the fund is working elsewhere is not a guarantee that it must work in Nigeria. However, it might be working in other countries because the calibre of people that manage the fund have the future of their country at heart but in a situation where majority of the fund managers are interested in their selfish interest, it will be difficult to achieve the expected result.

But if managers strictly adhere to good corporate governance principle and framework for its establishment, Nigeria might just be on the right path to becoming one of the leading world economies by 2020. The SWF is a good initiative that if it is well managed, the future lives of unborn generation are secured in advance.

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