Oxford SWF Project

Ashby Monk

I have to say, I’ve been captivated by what’s going on in Ireland with respect to the National Pension Reserve Fund. The Irish have been facing a very tough dilemma: Do they tap the NPRF or do they face economic dislocation and potentially even a sovereign default? This may seem like a no-brainer but consider this: when the NPRF was established in April 2001, the idea was that it would not be touched (at all) for over two decades. Here is the blurb from the NPRF website:

“No money can be drawn down before 2025 and, from then on, drawdowns will continue until at least 2055 under rules to be made by the Minister for Finance.”

This was the agreement that facilitated the political deal underpinning the existence of the fund. But this ideal has taken a back seat to more pressing problems. Indeed, the government tapped the NPRF in 2009 to save Ireland’s failing banks. And now, the National Treasury Management Agency seems to view the NPRF as a ready source of capital should further bailouts be needed:

“According to a briefing NTMA gave London analysts on Tuesday, Ireland has a cushion of cash reserves of €23bn as well as €25bn in the National Pension Reserve Fund…”

Granted, tapping the NPRF is far better than an Irish default. However, by dipping into the pension pot, the government has broken its original deal with the public. Moreover, it has shown that it can—rather painlessly—get access to these assets should it find it politically expedient. In my view, these are two factors that could, over time, de-legitimize the NPRF in the eyes of the public.

Anyway, I’m not passing judgement on Ireland’s decisions (although the country’s pensioners probably aren’t all that pleased). Rather, I’m just interested to watch the governance systems of pension reserve funds flex and strain under the weight of cash-strapped governments during the crisis…

Ashby Monk

Nigeria has squandered billions of dollars in oil revenues over the past few decades due to corruption. The country is ranked near the bottom of Transparency International’s Corruption Index, and its status as the world’s 8th largest crude producer has done little to improve the lives of many within Africa’s most populous nation. As such, Nigeria has often served as inspiration for other countries to set up a SWF. For example, Ghana is reported to be setting up a SWF to avoid Nigeria’s fate.

Put simply, Nigeria lacks credible and legitimate institutions to manage oil rents. It is the only OPEC country NOT to have a SWF (…though that’s not to say that other OPEC countries are beacons of anti-corruption…). While Nigeria has had the Excess Crude Account since 2004, the ECA has no clear legal basis and has been the subject of considerable ‘political wrangling’. As Finance Minister Olusegun Aganga said,

“The present arrangement is just an administrative arrangement, it has no legal basis.”

Moreover, the ECA is nearly empty. According to Reuters, the ECA contained over $20 billion when Yar’Adua came to power. However, it has been tapped at regular intervals and now has only about $3 billion.

The new Nigeria government is searching around for an innovative mechanism to manage oil rents. Accordingly, Nigeria’s acting President Goodluck Jonathan has called for the launch of a new SWF. According to Aganga,

“What we have to begin now is to give it a legal basis so the excess crude account will be replaced by a legal arrangement … in line with international best practice.”

Aganga also notes,

“The whole idea is that it is absolutely irresponsible for us to spend all the revenue we generate today. We need to provide for the future.”

This sounds sensible enough! So, what’s the likelihood that these guys can pull this off?

Honestly, I have no idea; I’m no expert on internal Nigerian politics. However, I know people, who know people, who know such things: Jason Mosley, Senior Editor for Africa at Oxford Analytica and Chair of an NGO in Nigeria, has this take:

“The contested constitutional status of a new SWF, in place of the Excess Crude Account, would not be resolved. However, one thing that the new fund could do a better job of would be to define the conditions under which transfers are made to the federal, state and local administrations. The drawdown of about 17 billion dollars over the past couple of years has been justified as counter-cyclical ‘stimulus’ spending, but it’s hard to take that seriously. A new fund might conceivably do a better job of keeping the funds invested in assets abroad, if defined properly. However, with the acting president calling for urgent action — and in the middle of a contested leadership transition, with party primaries looming ahead of the 2011 elections — what are the chances of a proper design being developed and adhered to? Slim to none, in my opinion.”

I’m a bit less pessimistic than Jason (though, I acknowledge, that my optimism is probably due to the fact that I’m further removed from the reality on the ground i.e. I don’t really know what’s going on). Still, Aganga was a former MD at Goldman Sachs in London. While that might not be seen as a compliment today, it at least illustrates competency. Moreover, Aganga has the right inclinations about how a  SWF should be different from the ECA:

“It is the same idea, but the only difference is that the money we have in the excess crude account does not have the same legal and transparent framework.”

Once again, this all comes down to the governance and design of the SWF. As we have seen, SWFs that haven’t gotten this right have failed. So, if Nigeria’s new leadership wants to be successful, they should design an organization that can withstand political corruption and has explicit rules on contributions and withdrawals.