Nigeria’s Sovereign Wealth Fund: Just before the Next Scandal

The National Economic Council (NEC) made up of State Governors, relevant Ministers and the Presidency came out with a heartwarming resolution to formally create a National Sovereign Wealth Fund (NSWF). This fund is to replace the obtuse Excess Crude Oil Fund (EXCOF), which is an anomaly as far as the nation’s law is concerned. The EXCOF, as it was called, was dreamed up under the previous administration as a stop gap stabilization fund to basically cushion the effect of the volatile oil revenue that greases the wheels of “governance” (or “mis-governance” you may say) in Nigeria. Over $3.8 trillion, mostly from commodity rich countries, are under management of Sovereign Wealth Funds (SWF) across the world. SWFs do not just serve economic functions, but can also be important tools in diplomacy.

While the NEC resolution is commendable and long overdue, it is important to raise important points of public concern; potential pitfalls that the road from opacity to definition is riddled with. First, one may wonder what legal backing the council gives such fund. Unless, the current constitutional amendment process accommodates such vision, the NSWF will still be an anomaly under the law. The nation’s constitution does not recognize any funds accruing to the federation under any guise as “excess”. Indeed, with the proliferate nature of the army officers that wrote and offloaded the document on us, it is codifies a “spend-spend-steal” mentality. Hence, it is important to immediately codify the concept of a sovereign wealth fund into the current amendment process to give this fund the backing of the law.

The council resolution also raises important concerns, especially on what exactly constitutes “excess funds” that forms the core of deposits into the fund. Federalist concerns on state role in determining what benchmark crude oil prices should be is essentially valid. What obtains now is that anything in excess of the federal budget benchmark is regarded as excess, without regard for state inputs (irrespective of that fact that these funds is basically a joint account between the states and national governments). I believe a consultative mechanism already exists in the Federal Accounts Allocation Committee to determine a national benchmark crude oil price, in which case anything in excess of such could be deposited in the fund. A separate fund to actively manage foreign reserves may be considered as well; as Singapore’s Temasek Holdings (for interests) and GIC (reserves) is modeled.

Important governance issues should also concern stakeholders. Who are the managers of this fund? Can the federal ministry of finance, often subject to political manipulation and corruption, be trusted to efficiently manage such enterprise? What conflict of interest issues will possibly arise in case money from the fund is doled to outside professional managers the way China does?

Certainly, one must be curious as to which model Nigeria is adopting in managing its new fund. Is this going to be a “Fund of Funds” model like China? Or more hands-on management as obtainable in United Arab Emirates or Saudi Arabia where technocrats make investment decisions? Won’t such fund become a target of political gladiators and cesspool of corruption subject to manipulation and conduit for payoffs and reward in the emerging economy? Basically, what process protections are in place to prevent an abuse of the NSWF as say the Petroleum Trust Fund of the 90s was abused?

More importantly, what investment model will the fund adopt? Will this fund have a long term outlook on investments, with emphasis on capital preservation or will it focus on value expansion, with an eye at regular distribution to its stakeholders to cushion their budget? Will it adopt the Russian-Norwegian model of saving for future generations with an eye at stability, or will it take the aggressive stance of the Singapore GIC fund seek for maximum return? In contrary, the Russian Fund for example is fixed income (bond/currency) focused; this is also as opposed to the equity-private equity focused Saudi or Chinese funds with higher returns. The type of underlying assets, and especially the mix-rate of such, goes a long way in determining not just the volatility/risk of such holdings, but also their returns.

From what the Finance Minister, Mr. Aganga espoused after the decision was made public, it appears the fund will be divided up in pools with a hybrid outlook. I surmise this will be a mistake. In this case, it appears it will try to do everything. A more pragmatic outlook will be adopting a stance temporarily, and diversifying its focus as the investment value is realized and funds under management expands.

With less than $10 billion (by comparison, tiny Kuwait has $200bn in its fund, UAE has excess of $600bn and China has well over $1 trillion) in the EXCOF, I doubt if the fund is positioned to both seek rapid capital appreciation (aggressively), and invest for capital preservation (conservatively) at the same time. With such paltry sum, it is perhaps ideal that an aggressive investment stance in the short to intermediate term to maximize return (at increased risk level of course) will be more appropriate. Now is not the time to be conservative, since oil will flow in Nigeria for at least two or more generations.

Another important parameter that the announcement failed to touch on, and one hope has been better enunciated (at least it will show some thought have put into this, instead of some wild copy cat move this is appearing to be by the day) , is imposed constraints. What geographic, investment grades or asset allocation constraints have been placed on the new NSWF? Will this fund be foreign equity focused like the Chinese and Saudi Sovereign Funds, or will it be local equity focused like the Norwegian fund? Will it be aggressive in managing and trading its investments, or will it adopt a hands-off approach?

Again, will this fund be free to invest in domestic infrastructure like the Abu Dhabi/Dubai (UAE) fund or a hybrid between domestic equities and infrastructure like say the Kuwait Future Generations Fund? The NSWF can be an important element in the infrastructure renewal program of the future, but that must hand in hand with serious coordination with other agencies of government which raises governance concerns. Indeed selection of local business partners and concessions will raise serious philosophical questions on why and how government should profit from its own development program which otherwise should be non-profit (as far as its duty to governance is concerned).

Speaking of coordination, and as was previously pointed out, SWFs can be powerful instruments in foreign relations. The outsized investment of the Saudi government in the United States has made it both powerful and vulnerable depending on which time of the day you speaking of. For one, Saudi Princes have long maintained leverage over US Middle East policies because of their outsized influence in the Halls of Congress through the various lobbyists employed by the corporate fronts (American companies like Citi Group etc.). This influence of course modulates the Israeli’s lobby influence. However, the Saudi are constrained by the knowledge that the US judicial system and government is always one injunction away from seizing these assets, and hence modulates their views on important priorities like Israel-Palestine conflict or Islamic proselytization. Nigeria must consider these pitfalls and opportunities as she designs a fund that suits her economic and polit

ical interests.

And just out of curiosity, does the evil “great vampire squid” called Goldman Sachs have anything to do with Finance Minister (and Goldman Alumni) sudden interest in our large resources sitting idle at the Central Bank? Well, your guess is as good as mine! Well now we know, “Goldman is everywhere!”

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