PeeCeeJay

SWF: What They Are Not Telling Us

By

Jideofor Adibe

pcjadibe@yahoo.com

The recent call by the Nigerian Governors’ Forum (NGF)  for the suspension of the implementation of the Sovereign Wealth Fund (SWF) has mostly generated angry responses from Nigerians, who are miffed that the Governors do not seem to think of tomorrow. It should be recalled that the SWF was set up ostensibly to conserve a portion of the money due to the Federation Account from oil revenue in excess of the benchmarks used in budget appropriation by the National Assembly.  Before the establishment of the SWF, which was signed into Law by the President on  May 27 2011, with $1 billion seed capital,  such ‘excess’ revenues from oil  went into the Excess Crude Account created by the Obasanjo regime as  ‘savings for the rainy day’. It is expected that the SWF will be funded monthly with surpluses from the budgetary revenue from oil.

The Governors have hinged their new found opposition to the SWF on its constitutionality because  section 162 of the 1999 Constitution, which establishes the Federation Account, requires that such ‘excess funds’  should be put into the Federation Account and shared. The Governors also argue that given that their roles are increasing, especially with the newly introduced minimum wage, they need all the money they can get in order to perform their duties.

I align myself with the Governors in opposing the SWF. My position is that because of the perception problems most of the Governors have – most are rightly or wrongly perceived as no more than  ‘thieves’ -  the public seems unforgiving, and may in fact consider it a moral duty not to separate the message from the messenger  once the Governors are involved, and the issue is more money for their states. I believe the whole notion of SWF raises several issues:

One, there is a tendency to discuss the SWF as a sort of fixed savings account, without any risks involved. My understanding of SWFs however is that these are pools of government money invested aggressively for profit. And if this is so, it immediately raises questions about the expertise of those who will manage the SWF, the willingness of the owners of the funds to accept that investments could go awry, and whether the owners of the fund accept the ethical basis of the investments made. While some SWFs have grabbed headlines by their audacious investments such as Dubai’s SWF’s acquisition of big stakes in several Asian companies, including Sony, others have made pretty bad investments. Values of SWFs could also go up or down by changes in the economic climate. For instance in a working paper by the Council on Foreign Relations (CFR) published in January 2009 and entitled ‘GCC Sovereign Funds: Reversal of Fortune’, its authors Brad W. Setser and Rachel Ziemba estimated that the SWFs and foreign-currency funds of the Gulf Cooperation Council (GCC) lost about 27 percent of their assets, or $350 billion, in 2008 because of the collapse of oil prices in the latter half of the year.

Two, the governors have been lampooned by many commentators for leaning on the side of law to reject the SWF. While many commentators agree that the SWF violates section 162 of the 1999 Constitution, the consensus seems to be that the Governors should look beyond constitutionalism and focus on the spirit behind the establishment of the SWF. I do not buy this. To give the federal government this type of licence on the basis of a so-called good intention is dangerous because even the road to hell was paved with good intentions. This is especially so when the Governors have argued that the federal government has continued to deny them revenues centrally collected from companies paying stamp duties as well as taxes on the income of members of the armed forces and police which are supposed to be fully remitted to the states of residence on the basis of derivation as provided by Section 163 (b) of the 1999 Constitution. I think it is dangerous to give any government the licence to apply the law when it chooses.

Three, just like most States, the Federal Government has no history of prudence in its management of resources.  For instance while the Excess Crude Account contained more than $20 billion when late President Umaru Yar’Adua came to power in 2007,  by the end of last year it held less than $1 billion.  Our foreign reserves were raided and depleted at a time of rising oil prices. On top of all these, the level of our indebtedness has been growing by leaps and bounds. With these backgrounds, why should we expect the federal government to manage the SWF prudently?  Similarly, given our notoriety for policy reversals and somersaults, what is the guarantee that the next government will not jettison the idea of SWF, cash the investments and find spurious reasons why the federal government needs the money more than the other tiers of government?

Four, the SWF will widen the financial leverage the centre has over the states, further undermining the calls for true federalism in the country.  The current revenue allocation formula, based on a March 2004 circular from the then Minister of Finance, Ngozi Okonjo-Iweala, is 52.68 per cent; 26.72 percent and 20 percent for the federal, states and local governments respectively. With 36 states and the federal capital territory sharing only 26.72 percent (when their responsibilities are increasing), the financial leverage enjoyed by the federal government becomes obscenely enormous. Under the current fiscal system, all but two or three states are dependent on allocations from the Federation Account to meet even the cost of their wage bill. With the federal government increasingly unable or unwilling to discharge its core responsibilities of guaranteeing security of life and property and providing basic infrastructure, I feel there is no rationally defensible reason for entrusting more resources under its care. On the contrary, with the pervasive insecurity in the land, the idea of State Police has become more imperative than ever - and the states will need money for that.

Five, Nigeria’s SWF has three components that are potential sources of discord - the Nigerian Infrastructure Fund (to support infrastructural development); the Future Generations Fund, (savings for future generations of Nigerians) and the Stabilisation Fund, (to be used by government to ensure macro-economic stability in the country). Given the bitter politics that usually cloud revenue allocation in Nigeria, what formula will be used by the federal government in distributing the funds from both the infrastructure fund and future generation funds? Why will monies that should go to the states be used for macroeconomic stabilisation when this is clearly the function of the central government.

Six, suggestions that any delay in the implementation of SWF will be negatively perceived by the ‘international community’ and might even lead to credit downgrade, is balderdash and cheap blackmail. We have never been short of projects, development plans and contraptions that are hyped to the high heavens but which rarely deliver on their promises. If abandoning the SWF leads to a ratings downgrade, certainly some Nigerians may be emboldened to ask the rating agencies to declare their interest on the Fund.

Seven, I believe the Governors’ opposition to the SWF raises a fundamental question of the appropriate fiscal relationship between the three tiers of government? Are the three tier structures still relevant to our needs? Do we really want federalism for this country? This last question is pertinent because in a true federal arrangement, the federal government will have no reason to nanny the federating units by compelling them to give up a share of revenues that should accrue to them so that it will invest such on their behalf. I also honestly don’t believe that reducing the cost of governance in the country is possible under the present 36 state system. My position is that we need to collapse these states into no more than 12 or 18. I also believe the states and the federal government should each have 40% of federally generated revenue. I believe the whole idea of local government as a tier of government that should partake in revenue sharing should be re-visited. Each state should be allowed to decide whether its local governments or town unions will be the most appropriate units for sharing the state’s share of revenues.