Oxford SWF Project

Jason Mosley

During the course of 2011, momentum has appeared to be building behind Nigeria’s new Sovereign Wealth Fund (SWF).  Legislation was passed in May establishing the SWF, and setting out its three functions.  These include a future generations fund, an infrastructure fund and a stabilisation fund.

However, Nigeria already has a stablisation fund — the Excess Crude Account (ECA), which was estblished in 2004.  Unfortunately, the troubled history of the ECA may be at risk of repeating itself.  The key factor at play in the previous disputes over the ECA and now over the SWF is the constitutional status of the states (and to some extent the local government adminstrations) in decision-making and management around the country’s oil revenues.

There have been tussles for many years over the formula and procedures used to divide up oil revenues — a national asset — across the federal system.  And in Nigeria, where the rents derived from control over government budgets have long been at the heart of the political process, these debates take on additional political urgency.  Disagreement between oil-producing states in the Niger Delta area and other (particularly northern) states over the ‘derivation’ formula were at the root of the effective collapse of national dialogue over constitutional reform more than five years ago.

The current constitution was drafted by a caretaker military government between the death in office of military dictator Sani Abacha in 1998 and the return to elected civilian rule in 1999.  It entrenched a trend towards increased federalism that has extended across Nigeria’s post-independence history.  The creation of smaller federal units in principle is a way to create more local legitimacy for governments and thus manage ethnic or regional tensions (Nigeria suffered a brutal civil war between 1967-70).  It is a live process — with the creation of new states still being discussed in the present.

However, while it is possible from the outside to view the federal strategy as a ‘central authority’ technique for managing tensions across the nation, in practice it has seen the creation of disparate concentrations of political and fiscal authority across the nation.  State governments are quite powerful, and are highly significant players in the federal fiscal context.  As such, the political logics at work at the state level are important factors in federal government efforts to manage the economy.

Nowhere has this been clearer than in the — ostensibly highly sensible — efforts in the past 7 years to improve governance and management of oil revenues.  Establishment of the ECA was a key factor in Nigeria’s efforts to consolidate its debt position, leading to a major debt clearance and partial write-off in 2006.  Likewise, the establishment of the SWF this year, and expectations that it would form part of a broader fiscal consolidation, have improved external perceptions.  Fitch Ratings raised its sovereign outlook to Stable on October 21, for example.

However, the constitutionality of the ECA came under legal challenge from state governments in 2008.  Envisaged as a stablisation account, the legal workaround achieved — which enshrined the entitlement of state and local governments to a share of revenues — seriously undermined that function.  Instead the ECA regularly disbursed its revenues under the management of the Federal Account Allocation Committee, leaving the fund nearly depleted by 2010.

As such, the effort to push through the SWF without altering the constitutional framework was almost destined to hit the same hurdle.  And yesterday, after weeks of back-and-forth between the Nigerian Governors Forum and the federal government, 23 of the 36 state governments filed suit at the Supreme Court, requesting that it block the federal government’s effort to transfer funds from the ECA to the new SWF, and requesting that the Supreme Court take direct control over the ECA until the dispute could be resolved.

It may be that the state governors are using the SWF as a bargaining chip over other state-federal disputes (such as the debate on the national minimum wage).  After all, the seed funding is only 1 billion, and the ECA continues to exist.  However, it may well be that the SWF is some way from being free enough from these tussles to function effectively.