Tuesday, October 30, 2012

Sovereign Wealth Fund: One Right Step for Nigeria

Angola has just established a Sovereign Wealth Fund (SWF) shortly after Nigeria’s $1billion SWF. Goddy Egene writes that Angola’s move shows that Nigeria took the right decision in the first place.

President Goodluck Jonathan’s signing of the Nigeria Sovereign Investment Authority (NSIA) bill into law in 2011 marked a positive step towards the establishment of the Sovereign Wealth Fund (SWF) in Nigeria.

A SWF has proven to be a veritable form of investment for the future, especially for countries that depend largely on commodities and raw materials such as oil and other mineral resources as their main source of revenue like Nigeria.

Although the law has been signed since last year, the Board to manage the SWF was only constituted recently. The delay in the full take-off of the fund has been due to opposition from some state governors who had contested the establishment of the fund.

The Opposition

Some of the governors, who foresaw the Excess Crude Account (ECA) as a regular source of funds, believe that the establishment of SWF would affect the ECA and thus deny them access to funds.

However, defending the SWF, the Coordinating Minister of the Economy and Finance Minister, Dr. Ngozi Okonjo-Iweala, declared that the fund would save money for future generations, fund infrastructure and defend the economy against commodity price shocks. She added that SWF would make Nigeria more attractive for investors.

Angola’s $5bn SWF

But while Nigeria is still slow to commence the operations of the SWF, Angola, Africa’s second-biggest oil producer, is starting its SWF with $5 billion in assets to ease the impact of commodity price volatility that prompted an International Monetary Fund (IMF) loan three years ago.

Known as The Fundo Soberano de Angola (FSDEA), it is to be managed by a three-member board led by Armando Manuel, an adviser on economic issues to President Jose Eduardo dos Santos.

According to Manuel, FSDEA investments would include financial securities and stakes in infrastructure and hospitality projects and other industries that may exhibit strong growth in sub-Saharan Africa.

“It is an evolution of the resources fund that had been proposed using 100,000 barrels of oil a day and it’s from this perspective we hope the fund will grow,” he said.

Before Nigeria and now Angola, three other African countries had established SWFs. The countries are Mauritania, Equatorial Guinea and Algeria.

History of SWFs
In general, the first SWF in the world was established in Kuwait in 1953, as a means of helping to stabilise the economy from fluctuating oil prices. In 1956, the Gilbert Islands (now Kiribati), established the revenue equalisation reserve fund to manage profits from phosphate mining.

After Kuwait and Kiribati, the next major SWFs were created in the 1970s, in the wake of the oil stock. But the most recent wave of SWFs’ establishment started in the 1990s with the Norwegian government’s pension fund-global in 1990, after which the trend has continued till today. And within the last five years, some countries such as China, Iran, Russia, Qatar, and United Arab Emirates, have established their own SWFs.

However, the world’s biggest SWF is operated by Norway and has $582.9 billion under management at the end of 2011, according to the Sovereign Investment Lab at Bocconi University in Milan, Italy.

Analysts believe that the Nigeria SWF should swing into action without further delay, considering the tortuous journey and the benefits derivable from the fund.

Aganga’s Role

The establishment of the SWF in Nigeria is actually the brain-child of former Minister of Finance and current Minister of Trade and Investment, Olusegun Aganga.

The SWF is based on the Santiago Principle-with three investment baskets – the Nigeria Infrastructure Fund; the Future Generations Fund and the Stabilisation Fund.

With the benefit of hindsight and convinced by the urgent need of the country for a “special buffer” to jump-start its economic regeneration, Aganga initiated a research into the workability of a SWF in the Nigerian environment.

He used international research experts and under his watch, the framework for the establishment of the SWF was designed before he posted to the ministry of trade and investment, which was newly created.

Explaining the concept of how the fund would work under the Santiago Principle, Aganga, at that time, said the Infrastructure Fund would be used in bridging the nation’s infrastructure gap by investing in the development of critical infrastructure across the country.

“Notably, 10 per cent of this fund will be devoted to agriculture and regional government-sponsored development projects that will promote economic development in under-served sectors or regions in Nigeria,” he said.

On the Future Generations Fund, Aganga said it would be used to build an inter-generational savings base by investing in longer term assets that generate returns to accumulate wealth for future generations of Nigerians.

On the other hand, the Stabilisation Fund, he explained, would be used to protect the country’s budget by providing a stable, last-resort source of finance during periods of fiscal deficit.

Benefits of SWF

“However, the Stabilisation Fund will ensure the smooth functioning of government and delivery of key services during periods where revenues from petroleum sales are less than the level anticipated and approved by the National Assembly,” he said.

According to Aganga, with the establishment of the SWF, Nigeria will join other OPEC states and more than 50 other natural-resource-rich countries, which together manage over $3 trillion in sovereign assets, in having a national savings plan for managing natural resource wealth.

Speaking on efforts to convince the governors, he said, “We actually took our time to make sure that we did everything that we needed to do. I actually made representations to the governors at the National Economic Council at least four times. Each time we discussed it, we looked at areas where we needed to be flexible.

“We looked at their concerns and we structured it in a way to accommodate all the concerns. They had input into it. And when we decided to set up the fund and set aside $1 billion, we went round every governor for a yes or no answer, and the consensus was ‘set up the fund, set aside $1 billion,” he added.

Despite the initial opposition by the governor’s forum, some of the governors commended the establishment of the SWF, saying it was a brilliant idea.

For instance, the Governor of Niger State, Aliyu Babangida, had said the SWF would aid sustainable growth and development in Nigeria.

“The Minister of Trade and Investment, Olusegun Aganga, is the founder and father of SWF in Nigeria. He is one of those few patriotic and visionary Nigerians, who is very passionate about the economic transformation of this country.

“His appointment by President Jonathan, first as the Minister of Finance, and now as Minister of Trade and investment, has resulted in the introduction of policies and reforms that have helped to put Nigeria on a sound footing to attract local and Foreign Direct Investment across all sectors of the economy. Had it been that we established the Sovereign Wealth Fund 50 years ago, we would have gone very far,” he said.

With the board and management in place, the SWF is set to begin operations.

Need to Patronise Domestic Markets

However, stockbrokers have said the domestic market should be considered when the decision to invest the fund would be made. According to the President of Chartered Institute of Stockbrokers (CIS), Mr. Ariyo Olushekun, the fund should be well-utilised, especially the future generation aspect of the fund.

“The fund should be invested in the Nigerian market. It does not make sense for Nigeria to take funds out of its own economy and deposit such funds with investment banks abroad or for them to be invested abroad, because that would mean that they will be using the fund to develop such economies.

“We should use our savings and our reserves to develop our own economy. In any case, we have heard of countries that even lost major part of their funds in the process of sending the funds abroad,” he said.

He cited Libya, he said, reported to have lost about 80 per cent of its SWF to foreign markets. “We do not want to do that here in Nigeria, therefore, we should use our funds here to develop our economy,” he declared.

......THIS DAY
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