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The sovereign wealth fund should subsume the Excess Crude Account 17 May 2018

The controversial Excess Crude Account (ECA) has been in the news since it was reported in December 2017 that President Muhammadu Buhari had obtained the approval of the National Executive Council (NEC) to withdraw USD 1 billion from the account to tackle the Boko Haram insurgency. Unsurprisingly, the approval to withdraw the funds has drawn suspicions both in respect of its timing in relation to the 2019 general elections and its supposed aim.
    
Indeed, the ECA has been controversial since its inception and it is a wonder that the current administration still runs the account. It was the belief of many that the ECA would be subsumed into the Sovereign Wealth Fund (SWF), which is at least established by statute. The SWF is structured to ensure more productivity and transparency. But it would appear that we needlessly run both fiscal funds.

The ECA is a government account used to save oil revenues in excess of the budgetary benchmark price. It was established in 2004 under the administration of President Olusegun Obasanjo. The misgivings about the account are so legendary that some writers have suggested the account had existed at the Central Bank of Nigeria (CBN) since the General Ibrahim Babangida administration. The account was popularly referred to as the ‘Gulf War Windfall,’ which later became the subject of a probe headed by the late Nigerian economist, Pius Okigbo.

The claim is that the succeeding military administrations of General Sani Abacha and General Abdulsalami Abubakar continued to maintain the account as some sort of slush fund controlled at the pleasure of the Head of State for extra-budgetary expenditure of the Federal Government. It is no wonder that the formal creation of the account in 2004 was met with a deep sense of mistrust, allegations of mismanagement and abuse; and a barrage of lawsuits have challenged its constitutionality and legality.

On the contrary, one of the reasons given for setting up the SWF was to address the controversies surrounding the legality of the ECA. The Nigeria Sovereign Investment Authority (NSIA) Act establishing the SWF was signed into law by President Goodluck Jonathan on the 26th of May, 2011 after it was passed by both houses of the National Assembly.

The CBN defined Sovereign Wealth Fund in a 2012 publication of its ‘Understanding Monetary Policy Series,’ as a state-owned investment fund, which comprises financial assets such as stocks, bonds, property, precious metals or other financial instruments. It is basically a pool of money derived from a country’s reserves, which are set aside for investment purposes to benefit the country’s economy and citizens.

Nigeria established the NSIA to manage its SWF. The mandate of the SWF is to receive, manage and invest funds in a diversified portfolio of medium- and long-term assets on behalf of the Federal Government, State Governments, the Federal Capital Territory and Local Government Councils in preparation for the eventual depletion of Nigeria’s hydrocarbon resources. The aims of the Fund are threefold – to generate revenue to meet budget shortfalls in the future; to provide dedicated funding for development of infrastructure; and to build a savings base for future generations. These aims are properly incorporated into the three investment vehicles created by the NSIA Act, namely the Stabilization Fund, the Nigeria Infrastructure Fund and the Future Generations Fund.

The initial seed money for the SWF was USD 1 billion. The seed money was taken from the ECA and it represented the contributions of the Federal Government, State Governments, Federal Capital Territory and Local Government Councils in accordance with the formula stated in the Allocation of Revenue (Federation Account, etc.) Act. In February 2017, the government increased the capitalisation of the SWF by $250 million.

Subsequent funding is to be derived from residual funds from the Federation Account, excluding the derivation portion of the revenue allocation formula. Section 29(2) of the NSIA Act provides that “Promptly upon revenues being received into the Federation Account each month, the Authority shall be funded from all amounts of Residual Funds above the Budgetary Smoothing Amount.” It would thus seem that the source of revenue reserved for the ECA is what has been designated for partly funding the SWF.

The SWF has faced similar criticisms about its legality, just like the ECA, based on the provisions of Section 162 of the Constitution. Section 162 provides for the “Federation Account into which shall be paid all revenues collected by the Government of the Federation, except the proceeds from the personal income tax of the personnel of the armed forces of the Federation, the Nigeria Police Force, the Ministry of department of government charged with responsibility for Foreign Affairs and the residents of the Federal Capital Territory, Abuja.”

Subsection (3) provides that “any amount standing to the credit of the Federation Account shall be distributed among the Federal and state Governments and the local government council in each State on such terms and in such manner as may be prescribed by the National Assembly.”

Both the ECA and SWF have, therefore, been alleged to be an attempt by the executive to fund extra-budgetary spending by circumventing due process. It is, however, this writer’s view that the SWF, having been created by statute, does not breach the above provisions of the Constitution. Although the Constitution does not expressly provide for such a Fund, it does not expressly prohibit it either. Rather, the Constitution in Section 80 recognizes the existence of revenues payable under an Act of the National Assembly into  different public funds established for a specific purpose (these revenues are exempted from the revenue to be paid into the Consolidated Revenue Fund of the Federation). The SWF is one of such funds.

Unlike the ECA, the NSIA Act provides for an ownership and governance structure of the SWF that ensures protection of the funds as well as transparency and accountability. All ownership interests in the Fund are held by all tiers of government (Federal, State and Local), including the Federal Capital Territory, in trust for the citizens. No government in the federation can transfer, redeem, assign, dispose of, sell, mortgage, pledge or otherwise encumber any interest of any kind in the Fund. The legislation thus protects the Fund from the hands of corrupt and greedy executives.

On governance, the NSIA is governed by three organs – the Governing Council, the Board of Directors and the Executive Management. This structure projects the sense of a private corporation with a public character and ownership. The Governing Council is headed by the President. Its members include the governors of the thirty-six states in the federation, the Minister of Finance, the Minister of Justice, the Minister of National Planning, the Governor of the Central Bank of Nigeria, the Chief Economic Adviser to the President, and the Chairman of the Revenue Mobilization Allocation and Fiscal Commission.

Other members of the Governing Council are two representatives of civil society, four eminent academics, two representatives of Nigerian youths and two private sector representatives. The council performs mostly an advisory and approval role in support of the Board of Directors and other officers of the Authority. The Board of Directors is headed by the Chairman; and heading the Executive Management is the Managing Director/ Chief Executive Officer who is independent in the exercise of his responsibilities under the Act.

The objectives of the Fund are also clearly stated in the three Funds established thereunder – the Stabilization Fund (to provide budget support in times of economic stress), the Future Generations Fund (to act as a savings fund for future generations of Nigerians) and the Nigeria Infrastructure Fund (to invest in domestic infrastructure). Besides, the NSIA is a signatory to the Santiago Principles (SPs) of the International Forum of Sovereign Wealth Funds (IFSWF), which was established in 2009 by the International Monetary Fund (IMF). The SPs are a set of twenty-four voluntary guidelines that assign best practices for the operations of SWFs, including transparency and governance. Given such frameworks, it would have, therefore, been impossible for the President to remove monies from the Fund with the mere approval of NEC.

Both the ECA and the SWF are good instruments of fiscal policy with similar objectives. With the SWF’s legal backing, organised structure and wider scope, the ECA can conveniently be subsumed into the SWF as it is imprudent for Nigeria to manage both accounts concurrently. The ECA, as currently constituted, will always be regarded with suspicion given its lack of legal backing, proper structures and exigent withdrawals from it.

The SWF, on the other hand, seems to have yielded good results. According to the NSIA’s 2016 annual report, the last annual report published by the Authority on its website at the time of writing this article, the Authority reported a total comprehensive income of N149.83 billion. Total assets grew to N420.93 billion (a growth of 97% from the previous year), while investment and interest income grew to N11.2 billion (a 92% growth).

A Financial Nigeria columnist, Funmilayo Odude is a Lagos-based legal practitioner, and a public affairs analyst.