Sunday, 30 October 2011

Monday Business ReportSovereign Wealth Fund: Why governors arekicking

The controversies swirling around the
much-anticipated Sovereign Wealth
Fund (SWF) do come to most
Nigerians as a huge surprise,
particularly, in the wake of the court
action instituted against the Federal
Government by the 36 governors.
The question on many lips is this: Why
this bitter opposition to the Fund that
will “build a savings base for future
generations, enhance development of
infrastructure and impose fiscal
The Chairman of the Nigeria
Governors’ Forum (NGF), the
arrowhead of the anti-SWF, Governor
Rotimi Amaechi of Rivers State, gives
the reason.
According to him, what the Federal
Government has done is mere hijacking
of our money. His words: “The conduct
of the government of the federation
and her officials is a violation of the principle
of the Rule of Law and breach of the
independence of the judiciary and constitutes
a violation of the principle of the Rule of Law
handed down by the Supreme Court. The Rule
of Law eliminates completely the rule of
man…Governors agree that the Federal
Government should save but the law has to be
respected. What the Federal Government has
done is mere kidnapping of our money.”
Shedding more light on the issue, he said:
“Section 80 of the constitution is talking
about Consolidated Revenue and it also says
that the executive authority of a region shall
extend to the execution and maintenance of
the constitution of the region and to all
matters with respect to which the legislature
of the region has, for the time being, power to
make laws but shall be so exercised as not to
impede or prejudice the exercise of the
executive authority of the federation or to
endanger the continuance of Federal
Government in Nigeria.”
Throwing his weight behind the governors,
Asiwaju Bola Ahmed Tinubu, the immediate
past governor of Lagos State and a chieftain
of Action Congress of Nigeria (ACN),
criticised the creation of SWF by the Federal
Government, saying the Fund was illegal and
an attempt to hoodwink Nigerians.
His words: “I’m in full support of the
governors going to court. The Sovereign
Wealth Fund is an illegal looting committed
under an act. It is giving the Excess Crude
Account (ECA) another name and taking it
to the House for illegal constitutional
“When an act confiscates and contradicts
the constitution, Section 162 of the
constitution says all revenue must be
distributed. You cannot act
unconstitutionally if you are a government of
rule of law. You are confiscating the money
of the state; you are violating the
constitution; it is illegal. It is an amendment
to the constitution if it is not seen clearly by
Nigerians. Otherwise, Section 162 of the
constitution is useless. What are the steps to
be taken before an amendment to the
constitution takes effect. That is clear there.
I ask, if you are a regular saver and your child
is dying of anaemia in a hospital and you say
you are saving for that child to inherit. Will
you say you must save that money and not
pay for the blood if the child needs blood
transfusion? The states say this is our time to
develop, why are you forcing them? You can
save the Federal Government’s portion. It is
unconstitutional. I’m in support of the
What is Sovereign Wealth Fund?
A sovereign wealth fund (SWF), according
to, is a state-owned
investment fund composed of financial
assets such as stocks, bonds, property,
precious metals or other financial
instruments. Sovereign Wealth Funds invest
“Some Sovereign Wealth Funds may be held
by a central bank, which accumulates the
funds in the course of its management of a
nation’s banking system; this type of fund is
usually of major economic and fiscal
importance. Other Sovereign Wealth Funds
are simply the state savings, which are
invested by various entities for the purposes of
investment return, and which may not have a
significant role in fiscal management.
The accumulated funds may have their origin
in, or may represent foreign currency
deposits, gold, Special Drawing Rights (SDRs)
and International Monetary Fund (IMF)
reserve positions held by central banks and
monetary authorities, along with other
national assets such as pension investments,
oil funds, or other industrial and financial
holdings. These are assets of the sovereign
nations which are typically held in domestic
and different reserve currencies such as the
dollar, euro and yen. Such investment
management entities may be set up as official
investment companies, state pension funds,
or sovereign oil funds, among others,” it adds.
The first SWF - Kuwait Investment
Authority (KIA) - was set up in 1953. Since
then, over 70 such funds are known to exist
around the world. Of the top 10 largest
funds, China Investment Corporation is the
youngest. It was set up in 2007. The top 20
biggest SWFs have existed for a minimum of
20 years on the average.
Nigerian scenario
The idea of setting up a Sovereign Wealth
Fund for Nigeria has been around since the
Excess Crude Account (ECA) - a quasi SWF
- was set up in 2004 to hold funds, accruing
as oil revenue above the budget benchmark
prices during the administration of former
President Olusegun Obasanjo. This remained
impossible to realise until Mr. Olusegun
Aganga, former Goldman Sachs Managing
Director and erstwhile Minister of Finance,
provided a strong will to push through the
executive bill for the Nigeria fund for
legislative approval and presidential assent.
The Nigeria Sovereign Investment Authority
(NSIA) Act 2011 was subsequently passed into
law last May. It is aimed at building a savings
base for Nigerian citizens. It also seeks
to enhance the development of Nigerian
infrastructure and provide stabilisation
support in times of economic stress .
The Sovereign Investment Authority
(Establish, etc.) Act, 2011 established for the
country a Sovereign Investment Authority.
This Authority is charged to receive, manage
and invest in diversified portfolios the excess
of the medium and long term revenue of the
federal, states, local governments and area
councils. The proceeds of these investments
are statutorily required to create a savings base
for the country, develop infrastructure that
will attract local and foreign direct
The Nigeria Sovereign Wealth Fund
(NSWF) legislation is necessitated by the
depletion and the non-renewable nature of
the hydrocarbon resources in the country and
the need to develop critical infrastructure that
would attract investment and diversify the
In fact, the bill for the Act states in its
Preamble that:
“The Nigerian State has over the years relied
heavily on income from hydrocarbon
resources, which form the mainstay and
support for its socio-economic development;
hydrocarbon deposits being depleting natural
resource assets that may not be available in
sufficient quality for future generations of
Nigerians to continue to support the
development of vital infrastructure; the
federal, state, Federal Capital Territory and
local governments of the federation have
agreed to take steps within the constitutional
framework to provide for the needs of current
and future generations by channelling
certain available resources to infrastructure,
areas of investment and stabilisation
measures to safe guard the economy as may
be required; and the federal, state, Federal
Capital Territory and local governments of
the federation, drawing from the experience
of other countries and adopting best
practices, have agreed to establish the Nigeria
Sovereign Investment Authority as an
independent entity to carry out the intention
of the federal, state, Federal Capital Territory
and local governments to, among other
things, build a sustainable savings base for
the benefit of future generations.”
The Act sets out the objectives of the
Authority as follow:
a) to build a savings base for Nigerian people;
b) to enhance the development of Nigerian
c) to provide stabilisation support in times of
economic stress; and
d) to carry out such other matters as may be
related to the above objects.
It adds that the Authority shall:
a) establish a ring-fenced diversified portfolio
of appropriate growth investments for the
benefit of future generations of Nigerian
citizens (the “Future Generations Fund”) as
further set out in Part IV of this Act and the
investment policies and procedures developed
by the Authority;
b) establish a ring-fenced portfolio of
investments specially related to and with the
object of assisting the development of critical
infrastructure in Nigeria that will attract
and support foreign investment, economic
diversification and growth (the “Nigerian
Infrastructure Fund”) as further set out in
Part V of this Act and the investment
policies and procedures developed by the
Authority; and c) establish a ring-fenced
portfolio of investments to provide
supplemental stabilisation funding based
upon specific criteria and at such time as
other funds available to the Federation for
stabilisation need to be supplemented (the
“Stabilisation Fund”) as further set out in
Part VI of this Act and the investment
policies and procedures developed by the
In furtherance of the Funds established
under sub-section (1) of this section and for
the carrying out of its other functions, the
authority shall:
a) receive, manage and invest the initial and
future contributions on behalf of All the
Future Generations Fund, the Nigeria
Infrastructure Fund and the Stabilisation
Fund pursuant to the allocations of
contributions of the Federal Capital Territory
and Local Governments made in accordance
with section 31 of this Act;
b) reinvest the profits and proceeds of its
investments to generate further risk adjusted
returns in service of the Federation except as
provided in this Act; c) develop and foster
skills in asset-management, investments,
operations, risk management and other
related areas in addition to developing
expertise in infrastructure, project
management and auditing capabilities in
qualified Nigerian personnel in a matter
consistent with the overall financial objectives
of the authority;
d) implement best practices with respect to
management independence and
accountability, corporate governance,
transparency and reporting on performance
as provided in this act, including with due
regard as appropriate for the Santiago
e) attract co-investment from other
investors, including strategic investors,
sovereign and internationally–recognised
investment funds and private companies, to
enhance the Authority’s capital and
maximise risk-adjusted returns; and
f) obtain the best achievable finance returns
on all capital and assets of the Authority.
With all these laudable objectives, why should
the governors kick against the Fund?
Oserogho $ Associates in its online comments
on the Acts opines that:
“Section 80 (1) of the 1999 Constitution (as
amended) provides that all revenues received
or raised by the Federal Republic of Nigeria
shall be paid into one Consolidated Revenue
Fund for the benefit of the entire Federation
of Nigeria. The exception to this provision is
whereby a Law passed by the National
Assembly, a specific public fund is created for
a specific public purpose, like the Sovereign
Investment Authority to manage Nigeria’s
Sovereign Wealth Fund. Opposition to the
constitutionality or legality of the NSWF
Act will remain misplaced until the 1999
Constitution (as amended) is further
amended to devolve more legislative authority,
responsibilities and revenues on the states and
local governments areas as should be the case
in a federal system of government as opposed
to the current “unitary’’ System of
government in Nigeria.”
Writing on the Nigerian Sovereign Wealth
Fund Concerns, Jide Akintunde, the
Managing Editor of Financial Nigeria
Publications, agrees with the above position.
According to him, there is much more work to
be done in fiscal reform in Nigeria than what
the National Sovereign Investment Authority
(NSIA) represents. “It doesn’t give the sense
of fiscal federalism that these three funds -
Permanent Wyoming Mineral Trust Fund
(PWMTF), Alaska Permanent Fund
(APF) and New Mexico State Investment
Office Trust (NMSIOT) - give the United
He advised that certain state economic
agents need to be restructured or consolidated.
“Although it is now a public company, will the
Infrastructure Fund have any relationship
with the Urban Development Bank which
holds the government mandate to finance
development of public infrastructure in
Nigeria? How about the confusion of having
a new Stabilisation Fund separate from the
long-standing Stabilisation Fund, which has
been part of the sharing of federal revenue?”
he asked.
On the desirability or otherwise of SWF,
Akintunde said: “As it has been stated until
May when the NSIA Act came into existence
that Nigeria was one of three members of the
Organisation of Petroleum Exporting
Countries (OPEC) having no sovereign
wealth fund. Desirability of Nigeria SWF can
hardly be faulted under the right legal,
institutional and governance frameworks.
The last financial crisis, which saw the price
of crude oil tumble from $147 a barrel to
around $32 a barrel tells how volatile
government revenue can be, if there is no
mechanism to smoothen it through savings of
budgetary surplus. It is a matter of
responsibility that savings should be made for
the future generations, so that they are not
bequeathed with only environmental
catastrophe, arising from crude oil
production, after the wells might have dried
However, these strong reasons should not lead
to the founding of the Nigeria fund that will
not be able to rise to the challenges that it was
set up to address. No question about it, the
NSIA Act requires a review.”
For instance, he observed that the
composition of the Governing Council for the
Fund is the most recent indication of lack of
consensus to build a united country around
development agenda as opposed to harmony
for revenue sharing purposes.
“How will this impact the investment
decisions of the management of the fund?
There are already indications of a strong
affinity between the fund management and
government’s (business as usual) projects.
For instance, Mr. Aganga was quoted as
saying that the infrastructure fund would be
dedicated to investments in the development
of critical “national” infrastructure, with 10
per cent of it going to agriculture and
government sponsored projects. With this
arrangement, the independence of the fund
management is already compromised.
The United Arab Emirates’ SWF - Abu Dhabi
Investment Authority (ADIA) - carries out its
investment programme “independently and
without reference to the Government of Abu
Dhabi or other entities that also invest funds
on the government’s behalf. China
Investment Corporation (CIC) is promoted as
an investment institution established as a
wholly state-owned company under the
Company Law of the People’s Republic of
China. CIC is governed by the country’s
Company Law and the company’s Articles of
Association and operating guidelines. Will
economic consideration and potential good
upside return on investment provide guidance
for investing the Infrastructure Fund?
Linking project approved by the Federal
Executive Council to investment of the fund
would make it heavy weight on political
consideration and lightweight on commercial
Hedge Fund or SWF
In trying to showcase further weakness of the
Nigeran version, Akintunde tries to compare
SWFs with Hedge Fund, saying they share
several similarities contrary to the notion of
clear-cut dissimilarity, between both. “But a
generally acknowledged dissimilarity, which
literatures commonly cite is that SWFs are
not directly leveraged, whereas hedge funds
are. The Nigeria fund, through its
subsidiaries, will issue bonds and other debt
instruments to raise fund for investment.
This provision in the NSIA Act requires close
scrutiny for two reasons.
The bill was debated at a time of national
outcry about the rising level of the country’s
external debt and the mammoth domestic
debt. Consequently, a freeze on external
borrowing was agreed by the Federal
Government while the framework for issuance
of the monthly FGN Bond was to be reviewed.
Should the SWF become a vehicle for creating
national liabilities, it can be counter-
productive, especially because of the suspect
framework for the fund’s governance. What
is more, creating another borrowing vehicle at
a time of sovereign debt concerns is a
manifestation of the usual lack of
coordination in government policies.”
To drive home this point, Akintunde
compares Nigeria with Ghana, saying that
SWF opponents’ argument on its leverage
strips it of one of its myths. “It means SWFs
do contribute to market volatility with regard
to their investment behaviour and pooling of
the funds. Ghana, a nascent oil economy,
recently passed the Petroleum Revenue
Management bill, which, among other
provisions, established the Ghana Heritage
Fund and the Ghana Stabilisation Fund. But
the very idea of using oil revenue as collateral
for loans generated heated debate in
parliament. In Nigeria, however, the SWF
seems to be a borrowing vehicle. While the
controversial provision in the Ghanaian bill
eventually scaled legislative approval, its
application is in the realm of the wider fiscal
management, and not with regard to
funding the wealth funds created.”
Looking at the merits and demerits of the
Fund, the Edo State Governor, Comrade
Adams Oshiomhole, said the 36 governors were
not opposed to the Nigeria Sovereign Wealth
Fund but that they are only challenging the
manner the fund is being executed.
Speaking at the on-going 15th Stockbrokers
Annual Conference, Oshiomhole attributed
the perceived opposition of the governors to
the attitude of some ministers.
According to him, the former Minister of
Finance, Mr. Olusegun Aganga, handled the
issue of the SWF with so much arrogance.
“Let me be very open with you on the
arrogance with which former Minister of
Finance, Olusegun Aganga, handled the
issue of SWF. As the finance minister then,
he had powers over federal finances, not
states’ finances. No one should come out to
say that the Federal Government is more
transparent than state governments in terms
of finances. Savings at Federal level into the
SWF is for all Nigerians. Federal
Government has no state of its own to
manage. A state cannot save what it doesn’t
have. Savings is a function of earnings,” he
He, however, said the Coordinating Minister
of Finance, Dr. Ngozi Okonjo-Iweala, and
the governors were making moves to resolve
the issue. “Okonjo-Iwela is very persuasive and
she is doing a lot of work in the interest of the
nation. The reality is all about discussing the
best way to save the future, not the savings.
Savings should not be based on excess crude
because the so-called excess is based on
forecasts whose bases are sometime doubtful,”
he said.

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