The decision of the Federal Government of Nigeria to establish a National Sovereign Wealth Fund (NSWF) is by far one of the most significant economic policy decisions taken in recent times. Contrary to expectations, the significance of this decision is not in terms of the monetary implications of the decision. But rather, in terms of what it says about the level of economic and fiscal discipline that the Governments at all levels in Nigeria wish to bring to bear on the process of sovereign resource management.
A bill for the establishment of the Nigerian National Sovereign Wealth Fund has already been sent to the Nigerian Parliament and a seed capital of one billion US Dollars ($1 billion) only has also been set aside for the Fund.
A Sovereign Wealth Fund (SWF) is an investment fund owned by a sovereign state/nation with the mandate to invest in financial assets such as stocks, bonds, precious metals, property and other financial instruments. The structure and scope of investments of a sovereign wealth fund depends on the circumstances of each nation as well as what the enabling law setting up the sovereign wealth fund permits. Sovereign wealth funds usually have long-term investment focus. However, their objectives might include providing liquidity stabilization funds as well as the funding of vital economic infrastructure projects.
Background History of Sovereign Wealth Funds:
Although the last ten years (year 2000 to 2010) has witnessed a massive increase in the number of established sovereign wealth funds, they have been around for quite some time. According to a publication on wikipedia.org, the very first SWF was the Kuwait Investment Authority, which was established in 1953 before Kuwait secured its independence from the United Kingdom. The Kuwait’s Fund was created from crude oil revenues and is reported to be currently valued at about two hundred and fifty billion US Dollars ($250 billion). It has been argued that the Nigerian Sovereign Wealth Fund ought to have been established right from the moment Nigeria began to earn excess income from crude oil sales. With the apparent growing influence of successful sovereign wealth funds (together with their organs and subsidiaries) across the international financial and capital markets landscape, it is obvious that it will be difficult to disagree with the above argument.
As at today, the combined total financial assets base of all the Global Sovereign Wealth Funds under management is over three (3) trillion US Dollars and it is growing fast. Due to the sheer volume of their financial assets base, sovereign wealth funds have become a major force to reckon with in the global financial and capital markets industry.
The Resource Curse Argument:
The resource curse argument has often been advanced as the reason why some nations that are richly endowed with natural resources such as crude oil and precious metals still have a significant percentage of their populations living below the poverty line. The argument holds that excess income accruing from the exploitation of the natural resources leads to a culture of unrestricted spending and mismanagement of financial resources. This eventually leads to the disruption of basic economic fundamentals that are required for development. The consequence of the above is simply widespread poverty and lack of access to the basic necessities of life.
It is proposed that strong fiscal institutions are required to transform the benefits of natural resource abundance to real and tangible benefits for the vast majority of a nation’s population.
Why Nigeria needs to establish a Sovereign Wealth Fund!
Sovereign Wealth Funds are thus usually established to save and invest the excess liquidity that arises from natural resource exploitation. When for instance revenue from crude oil sales exceed the budget projections, the extra revenue represents excess liquidity. Pumping the excess liquidity through spending back into the national economy has the capacity to disrupt planned economic fundamentals, particularly in a situation when the inflation rate is high. The net effect of that is that the value of money is affected, economic plans are disrupted and the economic targets become unrealized. There is thus the need to warehouse and save the excess liquidity and then invest it for the long term in order to ensure that a nation maximizes its benefits.
The Nigerian Sovereign Wealth Fund is expected to address the issues associated with Nigeria’s excess liquidity arising from crude oil sales. It is as such expected to replace the Excess Crude Account (ECA). In the past, excess earnings from crude oil sales were held in the excess crude account. When there are budget revenue deficits, funds are withdrawn from the excess crude account and disbursed to all the three tiers of Government (Federal, State and Local Governments).
The operation of the excess crude account has long been considered an administrative arrangement without any clear legal or statutory framework. The administration of the excess crude account was thus vulnerable to political exigencies and at most could be described as having been arbitrary. Beyond this arbitrariness, claims and counterclaims to the excess crude account by the different tiers of Government was a sure root cause of conflict amongst the various contending parties. The establishment of the Nigerian Sovereign Wealth Fund is intended to address most of these anomalies.
Nigerian Sovereign Wealth Fund: Prospects
Because Nigeria derives a significant proportion of its foreign exchange earnings from crude oil sales, it is vital to x-ray the prospects of this noble initiative from the perspective of the objectives it seeks to achieve. It is reported that the Nigerian Sovereign Wealth Fund is expected to provide:
1. A Savings Fund for future generations
2. An Economic Stabilization Fund
3. An Infrastructure Fund
It is obvious from the above that a great deal of thought was given to the idea of the Nigerian Sovereign Wealth Fund as the benefits accruable from the achievement of the above objectives are boundless.
Firstly, saving for future generations is a bold attempt to discourage the culture of total consumption of earnings. The guiding principle should be that earnings above budget projections need not be spent. The excess revenue/liquidity could be saved and invested to earn more income for the present and future generations. It is anticipated that a significant proportion of the Savings Fund will be used for long term investment assets.
Secondly, Nigeria’s heavy dependence of crude oil revenue for the funding of annual budgets and development plans exposes its economy to the vagaries of the oil industry.
Oil revenue projections are based on oil price and output assumptions. When price and output projections do not tally with reality (as they always do), the result is that planned economic objectives are not met. This disruption of planned economic goals cuts affects all the three tiers of Government.
The economic stabilization fund objective is therefore an attempt to shield the Nigerian economy from the volatile nature of international crude oil prices as well as the uncertainties associated with daily crude output production. Crude output is occasionally affected by disturbances within the oil-producing region. The economic stabilization fund will help in smoothening the process of budget implementation since revenue shortages can be funded from the economic stabilization fund.
The Infrastructure Fund which is expected to be the largest of the three is of vital importance to the overall development efforts of Governments at all levels. The project partnerships that are expected to be funded with the fund should have the capacity to impact directly and positively on the lives of the people. The
re is no doubt that
Nigeria’s economic, education, health and social infrastructure needs are awesome and requires boosting. However, it is important that the infrastructure fund is used to address the most vital infrastructure needs.
Nigeria’s Sovereign Wealth Fund: Tips for Getting it Right
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:
1. The Legal/Statutory and Institutional/Administrative Framework
2. The Corporate Governance Framework
3. The Fund Investment Management Framework
4. The Risk Management Framework
5. The Corporate Responsibility and Reporting Framework
In addition to the above, the following specific tips are considered necessary:
1. The enabling law/act establishing the Nigerian Sovereign Wealth Fund should have provisions that are clear, comprehensive and robust.
2. The corporate governance rules for the administrative organ(s) must be clearly thought-out with well-defined responsibilities and processes.
3. The internal control checks and balances must be thorough and well-defined. Breach of controls must attract sanctions that should be equally well-defined.
4. The financial and operational independence of the organs of the Nigerian Sovereign Wealth Fund must be guaranteed by statute.
5. The NSWF and its organs must be shielded from undue political influence through well-defined administrative and operating procedures.
6. International Best Practice should be brought to bear on all issues relating to the NSWF and its organs.
7. Transparency and Accountability in reporting must be seen as a major feature of the Nigerian Sovereign Wealth Fund and its organs.
To this end, it is wise for Nigeria to subscribe to the Santiago Principles. The Santiago Principles are a set of twenty four (24) voluntary guidelines that have been proposed in the year 2008 to promote global best practice within National Sovereign Wealth Funds.
It is the outcome of a joint effort between the International Monetary Fund (IMF) and the International Working Group of Sovereign Wealth Funds.
Mr. Shafii Ndanusa is a Certified Chartered Accountant (ACCA, U.K.) and Fellow of the American Academy of Financial Management (FAAFM, U.S.A.). He holds a Bachelor of Science degree in Accounting and a Master of Business Administration degree with specialization in Finance. He wrote from Abuja. Nigeria.