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Nigeria’s Sovereign Wealth Fund And Inter-generational Equity

13 Oct 2013

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Minister of Finance, Dr (Mrs) Ngozi Okonjo-Iweala



By Chiazor Ezenwa

On May 11, 2011 the Nigerian Senate approved the Nigeria Sovereign Investment Authority Bill, 2010, which sought to establish a sovereign wealth fund to manage excess profits from the country’s sale of crude oil. Before then, it had been passed by the House of Representatives, in line with the Nigerian Constitution.

It was subsequently signed into law by the President of the Federal Republic of Nigeria, His Excellency, Dr. Goodluck Ebele Jonathan, GCFR. More than a year later, on August 28, 2012, the Coordinating Minister for the Economy and the Honourable Minister of Finance, Dr (Mrs) Ngozi Okonjo-Iweala announced the appointment of the Chairman of Board and Management team of the Nigerian Sovereign Investment Authority (NSIA)

This was a welcome development as there has been a lot of concern by well-meaning citizens about why a major oil producing nation like Nigeria with revenues totaling $50.3 billion in 2011 alone, could not meaningfully establish a sovereign wealth fund like other natural resource-rich nations such as Angola, Singapore, Norway, UAE-Abu Dhabi etc.

According to experts, a Sovereign Wealth Fund (SWF) is a state-owned pool of money that is commonly established from balance of payments surpluses and funneled into investments rather than simply keeping it in the central bank or channeling it back into the economy.

However, the major argument for establishing a Sovereign Wealth Fund (SWF) is the idea of intergenerational equity. Natural resources are finite, and through the instrumentation of an SWF, a country can diversify revenue streams by devoting a portion of its reserves to an entity that invests in the types of assets which act as shields against systemic risk, and in the case of Nigeria, against oil related risk.

Before the creation of the NSIA, surplus funds, mainly emanating from the sale of Nigeria’s crude oil were held in the Excess Crude Account (ECA), which was created in 2004 to act as a stabilization fund against budget deficits arising out of oil price volatility, and to potentially fund domestic infrastructure investments.

It is important to note that with its establishment and formal take-off, the Excess Crude Account (ECA) has been replaced with the NSIA under three pools namely, the Future Generations Fund, the Nigerian Infrastructure Fund, and the Stabilization Fund.
Briefly, the Future Generation Fund targets a diversified portfolio of appropriate growth investments in order to provide future generation of Nigerians a solid savings base for such a time as the hydrocarbon reserves in Nigeria are exhausted;

While the Nigeria Infrastructure Fund will invest in infrastructure projects in Nigeria that meet the country’s targeted financial returns and contribute to the development of essential infrastructure.

Potential areas for investment include transportation, energy and power, water resources, agriculture, among others, in order to stimulate growth and diversification of the Nigerian economy, attract foreign investment, and create jobs for Nigerians; and
The Stabilization Fund will provide stabilization support to the Federation revenue in times of economic stress
The Nigerian Government injected a take-off cash of $1bn into the NSIA making it the third largest SWF in sub-Saharan Africa, after Botswana’s $6.9 bn and Angola’s $5 bn funds.

Recently, at the inauguration of the Governing Council of the NSIA Board at the Presidntial Villa, Abuja, on Wednesday, September 18, 2013, President Jonathan stated that the initial $1 billion investment in the Fund is not inconsequential as not many sovereign wealth funds have started out with such amount.

The President reiterated that although the NSIA take-off gives the Government credibility, its sustainability depends on continuous contributions and broad-based support from all Nigerians. The key concern for many Nigerians, however, is to see fiscal astuteness and transparency in the management of the fund, especially, considering the controversy that trailed its establishment.
According to the Harvard-trained head of the NSIA, Mr. Uche Orji, although the seed funding of $1 billion is a modest sum by global standards, the Fund, through the government’s disciplined contributions, could become one of the largest pools of capital in Sub-Saharan Africa.

Most importantly, Mr. Orji strongly believes that the NSIA’s sound corporate governance and risk management pillars will be the key factors that sets it apart to achieving its objectives. The enabling Act clearly intends the Fund as an independent organization as has been captured in its “F-I-T “operational model, namely, ‘Financial sustainability, Independence in decision-making’; and Transparency in process.

In line with its mandate, the NSIA makes investment with the expectations of profitable returns. Already, the authority is working hard to evaluate a number of infrastructure projects across the country some of which include Second Niger Bridge, Gurara Dam Phase 2, seaports investment and an aircraft leasing company to ease the financial burden in the airline industry and promote greater visibility in its operations.

It is hoped that the development of well-conceived infrastructure projects by the Authority will also provide a platform for national pension funds to invest in credible undertakings.

Earlier in September, the NSIA made its first investment of $200m in US treasuries and a US corporate bond portfolio.
For now, it might be presumptuous for Nigerians to appraise the nascent fund, but for establishing international best practices in governance and investment procedures, the 2013 Assets-based Fund Rankings by Sovereign Wealth Fund Institute has placed the NSIA in the top ranking chart of Sovereign Wealth Fund Institute ahead of Venezuela, Vietnam, Indonesia, Australia, Gabon etc. which were all established long ago.

Unequivocally, the establishment of the Nigerian Sovereign Investment Authority (NSIA) is a mark of political courage on the part of President Goodluck Jonathan. It is fundamentally, a practical component of The Transformation Agenda and the Vision 20:2020; and a further attestation of the Administration’s commitment to fiscal responsibility and building a savings base for the Nigerian people, enhancing the development of Nigerian infrastructure and providing stabilization support in times of economic stress.

–Dr, Ezenwa is a Diaspora Nigerian from Maryland, USA.

Tags: Business, Nigeria, Featured, Wealth Fund

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