How to manage oil revenues

African SWFs
In Africa there are SWFs in Algeria, Angola, Botswana, Equatorial Guinea, Gabon, Ghana, Libya, Mauritania, Nigeria and Senegal. While the Botswanan fund is funded by diamond exports, the continent’s remaining SWFs handle oil and gas revenues.

The Algerian and Libyan funds are by far the largest and are several times bigger than the next largest, the Botswana SWF.

Some are very small because they are new, as in the case of Ghana, while others are predominately used to even out fluctuations in oil revenues, as with Nigeria’s Excess Crude Account, and so are of limited size.

As so often, data on the value of African SWFs varies but they held combined assets of $114bn in 2009. The vast bulk of this was held by the Libyan Investment Authority and Algeria’s Revenue Regulation Fund.

Funds were launched in Ghana, Nigeria and Angola in 2012. Accra’s decision is understandable, given that Ghana had only recently begun large-scale commercial oil production.

Norway’s Government Pension Fund is split into two halves focusing on domestic and global assets respectively. It was set up in 1990 and at the end of June this year it held $889bn in assets, making it the biggest SWF in the world

The continent’s two biggest oil producers could have launched their funds many years earlier, although their creation is better late than never. Ghana will use 70% of its oil income to support the state budget for both recurrent and capital spending, with the remaining 30% dedicated to its SWF and oil revenue stabilisation funds.

There is more flexibility in the Nigerian fund, which has now been restructured to support three aims: infrastructural development, a SWF to benefit future generations and an oil revenue stabilisation fund.

Abuja has pledged to invest $1bn a year in its SWF over six years, while Angola’s new Fundo Soberano de Angola (FSDEA) has received a government a promise of $5bn to kick-start its operations.

José Filomeno de Sousa dos Santos, a member of the FSDEA board, says: “We are committed to promoting social and economic development, investing in projects that create opportunities that will positively impact the lives of all Angolans today and to generate wealth for future generations.”

Angola’s SWF already dedicates part of its investment to infrastructure, agriculture, transport, power, water and hotel projects within sub-Saharan Africa.

The adoption of the Norwegian model could also require a cultural change. Despite their great national wealth, Norwegians are famously reluctant to flaunt personal wealth and the purchase of sports cars or expensive jewellery is usually regarded as distasteful, tacky, or uncultured. The desire to save today to counter future problems is deeply embedded in the national psyche.

Norway is also among the least corrupt countries in the world and politicians are not known to use their political positions in order to garner wealth. In most African countries, conspicuous wealth often attracts praise.

On the other hand, transferring surplus oil revenues to an SWF could be part of the solution, albeit only in conjunction with greater transparency. Otherwise, they could merely provide a route for financial mismanagement.

Abuja has pledged to invest $1bn a year in its SWF over six years, while Angola’s new Fundo Soberano de Angola (FSDEA) has received a government a promise of $5bn to kick-start its operations

Investments within the African continent do not have to be purely motivated by sentiment. Norges Bank Investment Management (NBIM), which manages Norway’s global fund and which is part of the Ministry of Finance, has announced that it is considering investing in more frontier markets in an effort to increase returns.

Chief executive Yngve Slyngstad says that there are quite a few countries in Africa where the fund has not yet invested.

He added: “The majority of our investments are in South Africa, although we have some investments in Egypt, Morocco and Kenya. We think we should be as broadly diversified in the global economy as possible, so that means we will continue to add more markets as soon as they satisfy our minimum requirements for market standards.”

The Norwegian SWF now holds about 1.3% of global listed equity.

There will also be some tension in fund management over the balance between supporting recurrent state spending and investment for the future.

Increased state spending would boost inflation, thereby countering some of the effect of the extra spending. This is a particular problem in Norway, which is already one of the most expensive countries in the world.

However, most SWFs focus on international investment in order to reduce the inflationary pressures on their own economy. Nigeria’s SWF also suffers from division between the federal and state governments over the allocation of oil revenues, as any money paid into a SWF will reduce the proportion left over for state expenditure.