We need look no further than Norway to grasp the potential impact of a sovereign wealth fund (SWF). The Government Pension Fund – Global, the largest fund of its genre in the world, manages about USD1.4trn and holds an average stake of 1.5 percent in every listed company globally. Over 25 years it has grown to the point that in 2019 for the first time it made a larger contribution to government coffers than the taxes and royalties from the Norwegian oil and gas industry.
There is an unspoken cap of 3 percent of assets under management (AUM) on the annual transfer to the government. This was breached in 2020, the first year of the COVID-19 pandemic when the disbursement of about USD50bn represented about one-quarter of government inflows that year. The spending helped cushion the impact of the pandemic such that GDP contraction of -2.5 percent was among the best outturns in Europe. The disbursement went a long way for a population of less than six million.
SWFs do not generally score well for openness although we should say in its defence that the mandate of the Norwegian fund including its broad asset allocation is set by the national parliament. A recent innovation, and the first for the industry, has been to publicize its voting intentions five days before companies’ annual meetings.
Nor is its record to be lightly dismissed: Norges Bank Investment Management, the effective manager, has just reported a 14.5 percent return for 2021 (including 20.8 percent on its equity holdings). In our research for this piece, we came across an article from a well-known wire service from early 2016 flagging the possibility that the Public Investment Fund, the Saudi vehicle, would become the largest SWF globally within five years. Ah, the beauty of hindsight and the joy of witnessing the splattering of eggs across faces!
While the AUM of the Saudi fund have grown to an estimated USD400bn, we should highlight the challenge for Nigeria and indeed all commodity-exporting emerging markets to diversify their economies.
The Norwegian fund, by virtue of its size and relative openness, has become a torchbearer for elements of the industry. The newish chief executive of its manager is eager to boost its environmental, social, and governance reporting. He is following an established trend. The fund had earlier halted all investment in tobacco products, nuclear weapons, and coal. Among its one-off trades, it sold its positions in Walmart on the grounds of the company’s labour relations, in the miners Rio Tinto and Vale on the basis of environmental damage, and in two Israeli construction firms that had been active in the West Bank.
At the other end of the spectrum, we recall the sorry tale of the Libyan Investment Authority (LIA), which took household names in Western investment banking to court over several trades booked in 2008. The High Court in London was entertained in the mid-2010s by anecdotal evidence of one bank’s hedonistic marketing strategy.
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It did not help that, following the removal of President Muammar Qadhafi and the effective partition of Libya, there were rival claims over the LIA. In the absence of transparent institutional lines of reporting, senior appointments at SWFs become politicized. The first chair of Angola’s Fundo Soberano was the son of the president: when his father was replaced, he was too.
The SWF Institute, based in the US, has identified 25 funds in Africa. Little is known of many of them due to their size. We should add that opacity is the rule, not the exception, for such funds globally. The Nigerian Sovereign Investment Authority, in contrast, shares a lot of information in its audited accounts and elsewhere. At end-2020, its AUM amounted to USD3.6bn including USD1.6bn managed on a third-party basis. This is a case of what might have been if it had been allowed to execute its mandate in line with the act of parliament passed in May 2011.(By way of illustration, the Russian SWF started to accumulate revenue from crude oil sold at above USD40/b in 2017.)
SWFs need to capitalize on the export of primary commodities before the opportunity is lost. We are reluctant to keep referring back to the Norwegian model but its establishment was well-timed in the country’s journey as an oil producer. We feel that many net-zero carbon targets, notably those set at COP26 in the UK in November, are overambitious because the majority of crude oil producers are state-owned and core sources of government revenue in economies still to be diversified. If a government has plans to transform the national infrastructure to attract investment and please its citizens, will it hurry to rein in oil production? That said, the changes are coming and the opportunity is finite. We do not see many SWFs growing on the basis of renewal energy exports.
Kronsten is a consultant on African economics and finance
