Thursday, June 19, 2014

The Nigerian SWF

Sovereign Wealth Funds (SWF) are state-owned investment funds typically (though not exclusively) funded through revenues from commodity exports or foreign exchange reserves held by central banks which invest in real and financial assets-stocks, bonds, real estate, infrastructure, precious metals or alternative investments such as private equity and hedge funds. The term “sovereign wealth fund” was reportedly first used in 2005 by one Andrew Rozanov in an article titled, “Who Holds the Wealth of Nations?” in Central Banking Journal, even though such funds have existed for over a century. The number of SWFs has however dramatically increased in the 2000s. While some nations’ SWFs may be said to be discretionary to the extent that they are funded from non-commodity budgetary surpluses and the nations have little or no debt, the logic of sovereign savings is more compelling for nations (such as Nigeria) who are dependent on raw material exports such as oil, copper or diamonds given the volatility and unpredictability of their prices and exhaustibility of the resources. SWFs may thus be for savings, stabilization, economic or even strategic objectives. According to some figures I obtained on-line attributed to the Sovereign Wealth Fund Institute, assets under management of SWFs increased for the fifth year running to over $5.78trillion in 2013 with an additional $7.2trillion held in other sovereign investment vehicles such as pension reserve funds, development funds and state-owned corporations funds, and $8.1trillion in other foreign exchange reserves thus indicating that SWFs and their associated sovereigns potentially control over $20trillion of global investible resources. Many of the major global SWFs subscribe to the “Santiago Principles”-a set of 24 voluntary guidelines jointly formulated by the IMF and the International Working Group of Sovereign Wealth Funds (IWG-SWF) now replaced by the International Forum of Sovereign Wealth Funds (IFSWF). The key objectives underpinning the Santiago Principles are maintaining a stable global financial system and free flow of capital and investment; ensuring compliance with regulatory and disclosure requirements; investing on the basis of appropriate economic, financial risk and return considerations; and ensuring transparent and sound governance, controls, risk management and accountability in SWFs. The Nigerian SWF known as the Nigerian Sovereign Investment Authority (NSIA) was established by an Act of the National Assembly and Presidential Assent in May 2011 to receive, manage and invest in diversified portfolio of medium and long term assets, revenues received from the federal, state and local governments of Nigeria as well as the federal capital territory. The NSIA has an acceptable and sensible fund structure comprising a Nigeria Infrastructure Fund (NIF), Future Generation Fund (FGF) and The Stabilisation Fund (TSF) ensuring that the fund meets economic (infrastructure finance), savings and stabilization objectives. The FGF which pursues savings and growth for future generations receives 40 percent of NSIA funding; same as the NIF which invests in domestic infrastructure projects (including up to 10percent of its funds in social infrastructure in underserved sectors or regions); while TSF receives 20percent of NSIA resources for provision of a buffer against macroeconomic instability. In terms of governance, the NSIA’s 55 person Governing Council represents the ownership and stakeholder groups in the fund-the President, 36 state governors, ministers of finance and national planning, Attorney General of the Federation, CBN Governor, Chief Economic Adviser, Chairman of Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) and twelve individuals representing private sector, civil society, youths and academia. However while the Governing Council and the NSIA board were constituted with regard to the ownership and stakeholders in the Fund, the same cannot be said for its management, especially top management! Unfortunately the NSIA has been bogged down in ceaseless controversy and litigation as the governors remain implacably opposed to its operations and funding. To the best of my knowledge, no additional resources have been transferred to the fund since the initial $1billion seed capital funded from the so-called “Excess Crude Account”. I support the concept of a SWF for Nigeria. As I noted earlier, given our acute dependence on oil and the risk factors consequent thereon-budgets, foreign reserves, exchange rates, inflation and even domestic liquidity and purchasing power are all substantially dependent on oil earnings-sovereign savings are a necessity and not a luxury for Nigeria! However Nigeria is a federation and our SWF must recognize that essence in its fund ownership structure, governance and management. Funds held in the SWF must be held in trust for the owners, with the title to the fund resources clearly ascertainable at all times, and the management of the NSIA must reflect the ownership diversity and interests since there is no doubt that the quality of human resources required to properly manage such a fund reside in all parts of the country. Meanwhile the president and state governors must show the right vision and statesmanship to negotiate a sustainable existence and funding for the Nigerian SWF-a fund of $1billion would not serve the savings, infrastructure financing and stabilization needs of a $510billion economy!

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