The Take-Off Of The Nigeria Sovereign Wealth Fund: Things To Watch Out For

By

Shafii Ndanusa

shafiie@hotmail.com

 

 

Background

 

Dr. Ashby Monk and Professor Gordon L. Clark are two researchers known for their extensive work on Sovereign Wealth Funds (SWFs). Regular publications arising from their distilling research initiatives on different aspects/issues affecting sovereign wealth funds in all parts of the world get posted on the Oxford SWF Project website. Policy makers, practitioners and other researchers regularly enrich their knowledge and understanding on the SWF subject matter by visiting this website from time to time. 

 

Under recent publications on this website is a paper jointly authored by Professor Gordon L. Clark and Dr. Ashby Monk and published with the link titled; Modernity, Institutional Innovation and the Adoption of Sovereign Wealth Funds in the Gulf States. The abstract to this paper begins with the following:

 

“Whereas debate about sovereign wealth funds (SWFs) often focuses upon the global significance of their investment strategies, these institutions are also emblematic of the new global order of financial capitalism. SWFs are a mechanism for states to advance their interests through global financial markets and are a switch point for the translation of resource assets into financial assets in global markets. Yet, realizing the promise of SWFs is not easy”

 

If leading global researchers on SWFs are of the view that realizing the promise of SWFs is not easy, then it is important that those charged with the responsibility of realizing the promises of setting up SWFs particularly in countries and cases with new SWFs take proper note. On the 28th of August 2012, the Federal Government of Nigeria unveiled the board membership of the Nigeria Sovereign Investment Authority (NSIA). The NSIA is to oversee the management of Nigeria’s three Sovereign Wealth Funds namely:

 

  1. Nigeria Future Generations Fund

  2. Nigeria Infrastructure Fund

  3. Nigeria Stabilization Fund

 

The NSIA Act 2011 was reported to have been signed into law on 27th May, 2011. Apart from the successful passage by the Nigerian Parliament of the NSIA Bill and the granting of Presidential Assent to the Bill, the recent constitution of its board membership is the next most significant milestone in pursuance of the noble goals behind the establishment of the NSIA. Although, the NSIA is designed to have a Governing Council as its highest organ of governance above the Board of Directors, the role of the Governing Council is basically to providing general guidance and advice.

 

It is Not Yet Uhuru

 

With the NSIA board in place and its operations expected to kick-off in October 2012, the country is truly on the path to creating long-term investments and benefits for the entire citizenry.  However, as the victory of this achievement is being celebrated it is important to note that it is not yet Uhuru. For the NSIA, this is just the beginning. It is prudent to recall that it took fifteen (15) calendar months from the period the NSIA Act was signed into law (May 27th, 2011) to the date the board was constituted and unveiled (28th August, 2012). Many thanks to the initial opposition received from the Nigeria Governors Forum (NGF).  The opposition from the State Excellencies resulted in heated debates, negotiations and further delays in the implementation of the SWF initiative.

 

Because State Governors in Nigeria are by law members of the NSIA’s Governing Council, securing their buy-in at every stage of the implementation is important. Finally agreeing that the NSIA Board be constituted with only the take-off grant of the sum of One (1) billion United States Dollars, the stage is now set for the next phase of the imbroglio between the State Governors and the Federal Government. The Excess Crude Account (ECA) which ought to have been completely abolished from the moment the NSIA Act was signed into law (on 27th May, 2011) is still very much in existence. The status of the ECA remains at the centre of the disagreement between the different tiers of Government.

 

Outstanding Issues

 

Unless the issues surrounding the status of the ECA are permanently resolved, it would impact negatively on the ability of the NSIA to deliver on its promises. The Supreme Court of Nigeria may have to adjudicate on the matter if the out-of-court settlement options fail.  Firstly, if by the end of December 2012, the ECA issue has not been fully resolved between the different tiers, it could well mean that the NSIA Board would not have the right foundations for projecting future revenue inflows from excess crude sales.

 

This again would impact negatively on the immediate need for the NSIA Board to develop a strategic plan that is realistic and achievable. If the validity of the strategic plan is in doubt as a result of revenue uncertainties, then the annual operating plans that should derive from the strategic plan would largely become unreliable. When financial resource plans cannot be relied upon with certainty, then the risk of failure in the course of the implementation of programs and projects is actually heightened. This particular scenario is not what a new organization like the NSIA needs. As such, all hands must be put on deck to resolve the Excess Crude Account impasse once and for all.

 

A Threat to the Planned and Sustainable Growth/Development of the NSIA

 

The Nigeria Sovereign Investment Authority is scheduled to kick off operations with One (1) billion US Dollars in the month of October, 2012. This amount is almost insignificant when compared to the Six Hundred and Twenty Seven (627) billion US Dollar total asset base of the Abu Dhabi Investment Authority (ADIA). The cumulative total asset under management of all the global SWFs as at today is in excess of Five (5) trillion US Dollars. Nigeria, being a major producer of crude oil in the world accounting for just One billion US Dollars of this sum certainly can do better than this.

 

This is why it is critical for all the outstanding issues surrounding the Excess Crude Account to be resolved quickly and decisively. This issue has a direct impact on the amount of revenue that the NSIA would receive periodically from Government. In the economic life of a nation, there is always the time to face the economic demons.

 

If we assume that the issues surrounding the ECA have resolved and that the NSIA receives an average of 1.5 billion US Dollars as monthly revenue. It would take at least four hundred and seventeen (417) calendar months to hit the 627 billion US Dollar point of the Abu Dhabi Investment Authority. Hypothetically, this should happen in about thirty five (35) years from now (Fiscal Year 2047), all things being equal.

 

In several scholarly comparisons of SWFs, the ADIA is used as a benchmark. This is because it is regarded as the flagship SWF, the largest in total asset size and established since 1976. It is instructive to note that the Abu Dhabi Investment Authority was established with crude oil savings some twenty (20) good years after the commercial discovery of crude oil in Nigeria in 1956 at Oloibiri.  This speaks volumes for how much financial savings, economic resources and opportunities have been lost by the country as a result of the delays in the establishment and take-off of the Nigeria Sovereign Wealth Fund.

 

Benchmarking for the Future

 

Without doubt, it would take quite some number of years before the NSIA would be able to make serious impact (in financial terms) within the global SWF community. During this time, there will be a lot to learn from the experiences of those that have gone ahead.

 

Although and for now the ADIA is commonly used for benchmarking due to its size and experience, I do not see it remaining the flagship SWF even within the oil income-funded category of SWFs. I foresee that within the next five years and perhaps very soon, it will lose that position to a more aggressively growing SWF. Based on my personal observations relating to annualized average growth rates in their total asset size, any of the following four SWFs may rise to the pole position in terms of total asset size under management:

 

  1. The Government Pension Fund owned Norway

  2. The SAFE Investment Company owned China

  3. The SAMA Foreign Holdings owned by Saudi Arabia

  4. The China Investment Corporation owned by China

 

The total asset sizes and year of inception for the above listed SWFs as at July 2012 are contained in the latest ranking of SWFs published on the sovereign wealth fund institute website. Benchmarking of performance should therefore not only be static (in present time) but also futuristic (in future times) in scope. In this way, the NSIA can identify how much effort and resources would be required to achieve a certain ranking within the global SWF club.

 

An Amazing Discovery

 

According to the CIA World Factbook, Nigeria is the tenth largest producer of crude oil in the world. Nigeria produces more crude oil than many countries with well-established and thriving SWFs. According to the World Factbook, Nigeria produces more crude oil than each of the following countries/group:

 

  1. Kuwait

  2. Venezuela

  3. Brazil

  4. The European Union

  5. Norway

  6. Algeria

  7. Libya

  8. Qatar

  9. United Kingdom

  10. Indonesia

 

Truly amazing! And to think that the Nigeria Sovereign Investment Authority in the year 2012 is just worth One (1) billion US Dollars……there is obviously a lot of work to do.

 

Mr. Shafii Ndanusa is designated as a Fellow of the Association of Chartered Certified Accountants (ACCA), United Kingdom, a Member of the Institute of Chartered Accountants of He holds a Bachelor of Science degree in Accounting and a Master of Business Administration degree with specialization in Finance. He wrote from Abuja. Nigeria.

Emails: shafii@accamail.com,    Phone: 2348033713910

 

Mr. Shafii Ndanusa FCCA has carried out extensive research and authored several publications on the subject of Sovereign Wealth Management.  He is also the author of a book titled; Bankruptcy and Survival in Times of Economic Uncertainty, published and distributed by the Xlibris Corporation in the United Kingdom.