• Monday, May 20, 2024
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SWF: Between constitutional and development imperatives


The legality and desirability of the institution of a Sovereign Wealth Fund (SWF) in Nigeria are not one and the same thing. While determination of the former is an exclusive preserve of the law court and at the moment sub judice, the latter which is not a subject of dispute before any adjudicating body is, however, the focus of this piece.

SWFs the world over are attaining a position of universal prominence since the 2008 global economic recession when they played critical stabilizing role, and their managers, now widely classified among the new “Movers and Shakers” of the post-crisis world economic order, though may share common prospects; they essentially are faced with divergent challenges across different climes – Nigeria’s experience is a case in point.

The Nigeria Sovereign Investment Authority (NSIA), a body established in May 2011 by an act of parliament to manage the nation’s SWF is presently preparing its legal team to defend its constitutionality, and hence legality, before the Supreme Court come September 23. This, notably, is happening at a time when other SWF managers across the globe are busy preparing for two upcoming important events. First is the Institute Fund Summit 2014 Europe, an international event organized by the Las Vegas-based global consultancy, the Sovereign Wealth Fund Institute (SWFI), and taking place in London from October 27 – 28 while the second; the Sixth Annual Meeting of the International Forum of Sovereign Wealth Funds (IFSWF) will hold from November 19 – 20 in Doha, Qatar.

It is instructive to note that the NSIA fully joined membership of the IFSWF on 28 May 2014 alongside the Russian Direct Investment Fund (RDIF), by ratifying the Santiago Principles (SP). The SP is a set of 24 guidelines developed through a joint effort between the International Monetary Fund (IMF) and the International Working Group of Sovereign Wealth Funds; as proposed in the 2008 Kuwait Declaration; to provide a framework of rules on “appropriate governance and accountability arrangements and sound, prudent conduct of investment practices.”

Beyond the legal tussle surrounding the Nigeria’s SWF, certain pertinent questions beg for answers: Is a SWF needed this time by the country? Are there pressing social and economic reasons why we should keep maintaining the fund? Is the NSIA’s much-maligned legal status worth being overlooked for its acclaimed benefits?

The general purpose for establishing a SWF by any government should first be put in proper perspective. In a 2010 post by Forbes, they are likened to a kind of economic insulator. But common views regard them as special purpose investment vehicles for government’s surplus assets. The SWFI defines a SWF as “state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from resource exports.” The Nigeria’s SWF is oil-export based.

Since 2004, revenue earned by the federation from the sale of crude at international oil price in excess of budgeted oil benchmark, has ceased to be shared among the federal government and the 36 federating units as more money to burn, but instead was initially saved in an Excess Crude Account (ECA) to act as buffer against future systemic risk, especially oil-related risk.

From the ECA, the federal government withdrew $1bn in 2011 as seed capital to commence the nation’s SWF after the creation of the NSIA. These initiatives, in the argument of the 36 state governments, violate section 162 of the Constitution, hence their case in court.

Nigeria’s SWF as currently managed by the NSIA is made up of 3 components: Stabilization Fund (SF), Nigeria Infrastructure Fund (NIF) and Future Generations Fund (FGF) with initial capital of $200m, $400m and $400m respectively. While the SF is to provide buffer for future budget deficits occasioned by oil price volatility, the NIF is to fund the nation’s wide infrastructure needs and FG a kind of insurance against possible gloom that may befall any future generations not lucky to have ‘petro-dollars’ dug from their soil. Oil is a non-renewable resource.

It is also worth noting that the global geography and politics of fossil fuel, as well as the discovery of large deposits of shale oil in previously high oil-importer-nations add to the volatility of international oil price, and the susceptibility of economies like Nigeria’s which is highly dependent on oil revenue.

It will amount to eating up the future and retarding efforts at creating steady development, if today’s excess income are spent and not invested; given the precariousness of our economic and  demographic sustainability.

Our SWF has not done badly. In its first year of operation the NSIA declared a profit of N525m in its 2012/2013 Annual Report. Its strategic investments for development especially through the NIF are commendable. There is the N1.6bn investment in partnership with the Nigeria Mortgage Refinance Company to augment the primary mortgage market, and improve Nigerians’ chance of owing their own homes.

Other notable partnerships have been created by the NSIA with private and public sector giants like Guarantco, KfW, Ministry of Agriculture and Rural Development, General Electric, Julius Berger and the International Finance Corporation; with commitments running into millions of dollar to develop, finance and implement  infrastructure projects in areas of housing, healthcare, transport, power and gas. Little wonder Uche Orji, NSIA’s chief executive officer was considered by the Milken Institute to deliver a speech on “investing in national development through SWFs” at the 2014 Global Conference of the institute in Los Angeles last April.

NSIA also has a record of international approvals to its credit. The SWFI’s Linaburg-Maduell Transparency Index Ratings for SWFs recently upgraded NSIA to a 9 from a score of 4 at its 2014 second quarter results. This was credence of some sort to earlier awards won by NSIA such as: CEO Magazine’s 2014 “Most Innovative Sovereign Wealth Fund in the World”; Africa Investor Magazine’s 2013 “African Sovereign Wealth Fund of the Year”; and its recent admission into the International Working Group of SWFs.

If there should be any debate on the Nigeria’s SWF, it should be that of growing and not scrapping it. The NSIA which presently has total assets of $1.4bn is, according to the September 2014 SWFI Fund Rankings, the 5th largest in Africa. It ranks behind Algeria’s Revenue Regulation Fund (RRF), Libya’s Libyan Investment Authority (LIA), Botswana’s Pula Fund (PF), and the Angola’s Fund Soberano de Angola (FSDEA); which respectively boast of assets worth $77.2bn, $66bn, $6.9bn and $5bn. These statistics are in sharp contrast to Nigeria’s profile as Africa’s biggest economy, largest exporter of crude oil and most populous.

Nigeria is not alone in building sovereign wealth from excess oil revenue for stabilization and development purposes. If anything, we are a late comer and a small player. The 3 biggest SWFs in the world are also oil-based. These are Norway’s Government Pension Fund–Global (GPFG); UAE-Abu Dhabi’s Abu Dhabi Investment Authority (AIA); and the Saudi Arabia’s SAMA Foreign Holdings (SAMA-FH) which respectively have assets worth $893bn, $773bn, and $737.6bn by latest available data. The oldest SWF in the world, Kuwait’s Kuwait Investment Authority (KIA) with assets worth $410bn is also notably oil-based.

By its rebased GDP, Nigeria is now the 26th biggest economy in the world with a further dream to become one of the biggest 20 economies by 2020. It can therefore not afford to go in opposite direction to global economic trends. It can not also afford to waste its present wealth and put its future young generations into economic jeopardy. Savings and investments are the engine of job and wealth creation.

On a global scale, SWFs are now more understood, respected and many investment frontiers made opened to them. Even previously antagonistic voices and policy think tanks have given them a pat on the back.

In a publication by Mckinsey & Co., “A growing role for Sovereign Wealth Funds”, Gerard Lyons, influential economist and foremost global forecaster, who is reputed for accurately predicting doom for popular economic policies and financial vehicles in the past, has described SWFs as “new and important element in innovative finance that is, quite literally, bringing power (and water and roads) to the people.”

The NSIA should no doubt be contextualized within the ambit of the rule of law. This is itself the first condition of the Santiago Principles (GAPP1. Principle). But whatever is the outcome of the case before the court, our government must find an amicable way of nurturing this initiative that works to enhance our collective well being, and that of our unborn children.