The Opportunity Cost Of The Late Establishment Of The Nigeria Sovereign Wealth Fund

By

Shafii Ndanusa

shafiie@hotmail.com

Background

According to the latest Sovereign Wealth Fund Rankings released by the Sovereign Wealth Fund Institute, the Abu Dhabi Investment Authority (ADIA, UAE) is the largest sovereign wealth fund today in terms of asset size. ADIA’s total asset under management is estimated to be around Six Hundred and Twenty Seven billion US Dollars ($627 billion) as at March, 2012. At a conservative exchange rate of $1/=N=155, this sum is around =N=97.185 trillion (Ninety Seven trillion, One Hundred and Eighty Five Billion Naira). Using the fiscal year 2012 budget of =N=4.8 trillion (Four trillion, Eight Hundred Billion Naira) reportedly passed by the Nigerian National Assembly as a benchmark, the total asset base of the Abu Dhabi Investment Authority as at today is therefore equivalent to Nigeria’s total annual budget for at least twenty (20) years.

In addition to the above, it is vital to note that the Abu Dhabi Investment Authority is not the only sovereign wealth fund owned by the United Arab Emirates and established using crude oil revenues. There are others too such as:

1.      The Investment Corporation of Dubai – established in 2006 and now estimated to be worth around $70 billion (Seventy Billion US Dollars) as at March, 2012

2.      The International Petroleum Investment Company – established in 1984 and now estimated to be worth around $58 billion (Fifty Eight Billion US Dollars) as at March, 2012

3.      The Mubadala Development Company – established in 2002 and now estimated to be worth around $27.1 billion (Twenty Seven Billion, One Hundred Million US Dollars) as at March, 2012

The Abu Dhabi Investment Authority (ADIA) was established in 1976. This particular sovereign wealth fund (ADIA) was established exactly some twenty (20) good years after the first commercial discovery of oil in Nigeria at Oloibiri. Specifically, on the 15^th of January in 1956, oil was discovered in commercial quantity at Oloibiri in Nigeria. What has happened to Nigerias’ economic development efforts since then as it relates to its oil revenue represents a classic case of the resource curse syndrome. With one single multinational government-owned organization (the ADIA); managing total financial assets that is equivalent to Nigeria’s budget for at least twenty (20) years, I think it is high time Nigeria wakes up from this deep economic slumber, if at all there is even the desire for a chance to compete on the global economic landscape.

Assuming Nigeria had set up its own sovereign wealth fund some years after the commercial exploitation of crude oil began, perhaps the country’s economic development history would have been different. The first sovereign wealth fund in the Middle East is the Kuwait Investment Authority (KIA). It was established from oil revenues in 1953 and is estimated to be worth around $296 billion (Two Hundred and Ninety Six Billion US Dollars) as at March, 2012.

The Story of the Nigeria Sovereign Wealth Fund So Far

In an effort to stem the resource curse syndrome, the Federal Government of Nigeria initiated the Nigeria Sovereign Wealth Fund Initiative and got the Nigeria Sovereign Investment Authority (Nigeria Sovereign Wealth Fund) Bill signed into law on 27^th   May, 2011.   As at the end of March, 2012 the fund is yet to kick off operations. Unless the Nigeria Sovereign Wealth Fund is made operational, then no serious benefit can accrue to the nation from its set up.

At the moment, the implementation of the Nigeria Sovereign Wealth Fund appears to be mired in controversy as some key stakeholders (specifically Nigeria’s State Governors) have posed a challenge to the take off of the Fund. The Supreme Court of Nigeria is expected to be the final arbiter in the ensuing dispute between the various levels of Government. It is important not to lose sight of the fact that prudent management of Nigeria’s oil revenue is a national necessity/emergency at all levels of governance (Federal, State and Municipal). Especially now that another global economic crisis is looming. In the final analysis, the Supreme Court of Nigeria may have to decide between the Economy and Politics in order to resolve the dispute on this delicate subject matter.

However, whichever way the pendulum swings, there is a wide range of options for all parties (Federal and State Governments). It is gladdening to observe that all parties have come to appreciate the urgent need for prudent management of financial resources through the instrumentality of the sovereign wealth fund model. The dispute appears to be centered on the acceptable framework for achieving the initiative. State Governments need to know that they could equally set up their own separate wealth funds using revenue from different sources to achieve desirable socio-economic goals within and outside the state.

Sovereign wealth funds today represent national/state strategies for ensuring prudent and disciplined management of financial resources. Many governments across the globe have come to accept sovereign wealth funds as one of the most efficient vehicles for socio-economic transformation. One of the key reasons why sovereign wealth funds have been successful as transnational and institutional investors is because they are expected to subscribe to a comprehensive set of transparency and accountability principles and practices known as the Santiago Principles or Generally Accepted Principles and Practices (GAPP).

Today, Nigeria has carried on with over fifty five (55) years of the commercial discovery of crude oil without a functional sovereign wealth fund. This is despite the fact that the nation is in dire need of economic infrastructure which one of the Funds is expected to support its provision. Time is of essence and it is expected that all disputes would be quickly resolved so that the nation can move forward in its march of economic transformation.

The Opportunity Cost

Having joined the sovereign wealth fund race late in the day, Nigeria has clearly lost some opportunities in terms of the alternatives that have been forgone between the time commercial oil exploitation began in Nigeria and to date. I must state that this paper is not intended to do justice to the length and/or breadth of the subject matter. It is only intended to scratch the surface and perhaps provide a little insight to political leaders, policy leaders, administrators, researchers, analysts and students who might be interested in the subject matter. It is my hope that this piece might rekindle genuine interest that will mobilize more effort towards the rapid implementation of the Nigeria Sovereign Wealth Fund Initiative.

The Nigeria Sovereign Investment Authority (NSIA) is expected to replace the Excess Crude Account (ECA). Excess income over and above the annual budgetary benchmark from oil and gas sources is meant to serve as funding for the NSIA. Had Nigeria established its sovereign wealth fund shortly after commercial exploitation of oil began in the country, it would have avoided most of the following opportunity costs:

1.      Loss of significant national savings that would have been made from excess oil income. This loss would have been both in monetary terms and in real value terms. The monetary term loss covers the actual sum of national savings lost each year and accumulated for on an annual basis from the moment commercial exploitation began in excess to date. The real value terms loss covers all the annual monetary sums lost with each year being adjusted for inflation and accumulated over the years up to the current year 2012. Also, the issue of adjusting monetary for purchasing power parity over the years may be considered.

2.      Loss of great opportunity to make strategic commercial investments within and outside the country over all the years that surplus revenue accrued. The extent of this particular loss would not be an easy task to quantify in numerical terms. This is because different commercial investments in different regions/countries of the world have different rates of return in different sectors of economies.

3.      Significant loss is capital gains that would have accrued from different categories of fixed asset investments over the years. This is another element of opportunity cost whose value would be difficult to ascertain. A realistic estimate would be the best option. However, there is no doubt that if investigated further, its scope would be large.

4.      Other elements of the opportunity cost to Nigeria would cover social, environmental, human and political costs.

The Verdict

Despite having started the sovereign wealth fund late in addition to the ongoing dispute over its implementation, the general public opinion appears to be in favor of the establishment of the Nigeria Sovereign Wealth Fund. The Nigeria Sovereign Wealth Fund is generally held to be a good, timely and laudable initiative.

Suffice it state that the moment to speed up and fast track the launch of operations of the Nigeria Sovereign Wealth Fund is now. The earlier this gets done, the better for the entire economy. Resolution of outstanding issues will need to be quickly and permanently done with a great deal of options for all stakeholders. Unless sovereign wealth funds are unlocked and made available to support/finance development programs, they would largely remain idle and almost useless.

Mr. Shafii Ndanusa, FCCA is the author the book titled: Bankruptcy and Survival in Times of Economic Uncertainty, published by Xlibris Corporation, United Kingdom.