Olajide Olutuyi, Co-Founder/ CEO, Top-Olax Energy Limited

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Subjects of Interest

  • Frontier and Emerging Markets
  • Private Sector Development
  • Sustainable Development

Why Nigerian state governments must establish sovereign wealth funds 18 Aug 2016

In 1926, George Samuel Clason, an American business man, started writing a series of pamphlets on thrift and financial success, using Babylonian parables. Clason is the author of The Richest Man in Babylon, one of the most inspiring books on wealth ever written. While the book's central message is for individual empowerment, it is also applicable to governments.
In the book, Arkad, the richest man, was asked how he acquired his fortune. Arkad quoted the first piece of advice he received from Algamish, his mentor: “I found the road to wealth when I decided that a part of all I earned was mine to keep.” The advice to save nothing less than a tenth of what he earned was the start of a transformation in Arkad's life.

Successive Nigerian governments failed to save or invest a part of their earnings. No individual or government that spends all their income during times of plenty should expect everything to be well in times of famine.

Globally, countries as well as sub-national entities that generate revenues from commodity exports have established frameworks to put aside a portion of their earnings for the future and the vehicle mostly used for such savings is the sovereign wealth fund (SWF). In some jurisdictions, SWFs also receive part of the reserves held by central banks.

Despite the current global market volatility, it is estimated that total assets under management (AUM) by sovereign wealth funds globally reached $6.51 trillion as of March 2016, according to Preqin, a leading source of information on the alternative assets industry.

Norway's Government Pension Fund Global remains the world's largest SWF with $877 billion in AUM. Commonly referred to as the oil fund, the Norwegian SWF held 1.3 percent of all global listed equities as of December 31, 2015. The oil fund's assets have risen sevenfold over the past 11 years.

Although Nigeria is a bigger economy than Norway, its SWF is much older (established in 1990) and significantly dwarfs Nigeria's. The Qatar Investment Authority, established in 2005 to manage oil and natural gas surpluses of the Arab nation, is estimated to hold in excess of $170 billion of assets.

According to the Nigerian Sovereign Investment Authority (NSIA), the agency that manages Nigeria's SWF, an additional $250 million in capital was added to its $1 billion seed capital last year by the federal government. NSIA's 2015 financial statement, which was released in April, shows that the fund had an additional $550 million in third-party assets under management last year.

The Nigerian SWF is the third largest in sub-Saharan Africa, after Botswana's Pula Fund (with $5.97 billion in AUM) and Angola's Fundo Soberano de Angola (which holds $5 billion in AUM as of the end of last year). Nevertheless, the decision of the Federal Government of Nigeria to establish a sovereign wealth fund is one of the most significant economic policy decisions taken in recent times. The legislation that established the Nigerian SWF was passed in 2011, to set up the NSIA whose mission is to play a leading role in driving sustained economic development and providing stabilisation support in times of economic stress.

By having a larger SWF, the Angolan government appears to have a stronger political will to save for the future than the Nigerian government has. According to a damning statement made by erstwhile Finance Minister, Dr. Ngozi Okonjo-Iweala, there was no political will in the immediate past administration of President Goodluck Jonathan to save for the rainy day.
Speaking at the George Washington University, Washington D.C., in April, Okonjo-Iweala said, “In 2004 we saved $22 billion because the political will to do it was there. And when the 2008 /2009 crisis came, we were able to draw on those savings precisely to issue about a five per cent of GDP fiscal stimulus to the economy, and we never had to come to the Bank or the Fund. This time around and this is the key now, you need not only to have the instrument, but you also need the political will. In my second time as a finance minister, from 2011 to 2015, we had the instrument, we had the means, we had done it before, but zero political will.”
The current Finance Minister, Kemi Adeosun, said last month the Nigerian economy is in a "technical recession." The 2016 "Budget of Change" is facing significant implementation headwinds as funds for capital projects are unavailable due to declining oil receipts as a result of lower oil prices and output. Many of the states, including the oil-producing states, are faced with massive cash crunch, which has led to their inability to pay salaries and meet obligations to contractors.
Notwithstanding the grim macroeconomic conditions, it is important for the federal and state governments to muster the political will to set aside portions of their revenues into savings. Apart from being stakeholders of the NSIA, the states can also set up independent savings schemes. State legislators need to pass laws that mandate the state governments to save a portion of their monthly allocations or revenues for the rainy day.   
Today, as a  country we have so much less to show for all the years of oil boom we have had. Our infrastructure gap is huge yet our savings are so lean. In most states, there are no savings at all. As the government's economic management team works hard to get the economy to recover from this recession, we must, at the same time, begin to plan on the sustainable development of all the Nigerian regions and states. Although this recession was precipitated by the slump in oil prices, the country could have potentially averted the recession if we had a substantial savings buffer and the economy was effectively diversified.  
Subnational entities in the United States and Canada have embraced SWFs as a way of securing the future of their communities. After oil started booming from the Bakken Formation in North Dakota, state legislators established a sovereign wealth fund in 2010 to help save and invest revenue from its oil sales. The North Dakota Legacy Fund is now valued at $2.4 billion. Texas' Permanent School Fund is a sovereign wealth fund which provides revenues to fund public primary and secondary education in the state of Texas. As of the end of fiscal year 2014, the fund had an endowment of $36.3 billion.
Alberta, an oil rich province of Canada, established its Heritage Trust Fund in 1976 with three main objectives; namely, to save for the future, to strengthen or diversify the economy, and to improve the quality of life of Albertans. It had $17.5 billion in assets as of March 31, 2014.
Data from the office of the Accountant General of the Federation indicates that Nigeria's Ebonyi, Ekiti, Osun and Rivers States received N35 billion, N40 billion, N46 billion and N245 billion, respectively, from the federation account in 2011. Data for 2012 also indicates similar amounts were received. This is apart from the Internally Generated Revenues (IGRs) of the respective states in that period. We can reasonably infer that if these states had saved between 10-20 percent of their monthly revenues, they would now have a buffer to draw from to implement their budgets in this period of economic stress. The current fiscal challenges must instruct government officials across the states on the value of saving for the future.