{"id":471569,"date":"2021-06-01T12:49:45","date_gmt":"2021-06-01T12:49:45","guid":{"rendered":"https:\/\/www.kapitalafrik.com\/?p=471569"},"modified":"2021-06-01T12:49:45","modified_gmt":"2021-06-01T12:49:45","slug":"norways-oil-fund-lessons-for-african-sovereign-wealth-funds","status":"publish","type":"post","link":"https:\/\/www.financialafrik.com\/en\/2021\/06\/01\/norways-oil-fund-lessons-for-african-sovereign-wealth-funds\/","title":{"rendered":"Norway\u2019s Oil Fund: Lessons for African Sovereign Wealth Funds"},"content":{"rendered":"
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By Jeff Megayo*<\/span><\/strong><\/h1>\n
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In 1953, the State of Kuwait established the world\u2019s first Sovereign Wealth Fund (SWF) to manage the surpluses of its oil revenues. Since then, particularly during the past twenty years, there has been a proliferation of\u00a0SWFs globally as countries have discovered enormous natural resources and gained significant revenues from them. There are presently over 20 SWFs in Africa, and many other countries such as South Africa and Kenya are creating their own. The performance of most of these organizations is difficult to gauge because of their opacity. Nonetheless, there are existing SWFs that African countries can study to carry their mandates.<\/p>\n

One such organization is the Government Pension Fund Global of Norway (the Fund). The Fund is the largest SWF globally by Assets Under Management (AUM) and of the most transparent. Interestingly, although Norway is a wealthy oil nation, many countries earn far more from natural resources. Therefore, the country\u2019s SWF size results from many other reasons than the oil revenues that the government makes. It is, consequently, worthwhile for African policymakers to critically analyze Norway\u2019s Fund to improve their SWFs to achieve the mandate for which they were established.<\/p>\n

Overview of Norway\u2019s Sovereign Wealth Fund<\/strong><\/h4>\n

For 30 years, the Government of Norway has saved lots of money for its citizens through its sovereign wealth fund. The Government has amassed an asset of over USD 1 trillion for its population of just 5.33 million people. That puts Norwegian citizens among the wealthiest on earth based on the Fund\u2019s holdings alone. During most years, the returns have been phenomenal. In 2017 alone, the Fund returned USD 131 billion. If this benefit were an African country, it would represent the 5th largest economy in the continent.<\/p>\n

How did Norway manage to establish one of the largest corporations in the world, with an exemplary governance structure?<\/strong><\/h4>\n

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The Beginning<\/strong><\/h1>\n

Oil Discovery<\/strong><\/h4>\n

Norway was a latecomer to the oil industry. The country only began oil drilling in 1966, well after most oil-producing nations such as the United States, Saudi Arabia, and Nigeria. Nonetheless, the growth of Norway\u2019s oil industry surpassed anyone\u2019s expectations.<\/p>\n

In 1969, Phillips Petroleum made a significant discovery off the North Sea: the Ekofisk oil field. But commercial production only started in 1971. The Ekofisk oil field remains one of the most important offshore oil fields ever discovered in the world. At its peak in late 1976, the Ekofisk oil field alone produced over 350,000 barrels per day.<\/p>\n

Subsequently, oil companies made world-class discoveries soon\u00a0\u00a0 after\u00a0\u00a0 Ekofisk. The Norwegian Government doubled down on the sector through policies and investments. In 1972, Statoil, the state petroleum company, was created\u00a0\u00a0 to enable Norway to be an active player in the oil industry and \u201cbuild up Norwegian competency within the petroleum industry.\u201d<\/p>\n

Oil demand grew exponentially, and the Fund benefited from increased oil prices, particularly from 1973 until the mid-80s and again from the general rally of oil prices from 1999 until 2008. This sequence of events, coupled with the\u00a0Norwegian Government\u2019s informed decision-making, caused a boom in Norway\u2019s economy.<\/p>\n

The government knew the euphoria wouldn\u2019t last<\/strong><\/h4>\n

Although the oil industry boom fueled Norway’s economic growth, the country witnessed swings in oil prices. Its leaders were also aware that oil revenues would eventually drop. By the early 1980s, formal discussions began on Norway’s oil industry’s role in its economy. Experts recommended establishing a SWF to manage oil revenues in the interest of the long-term growth of the economy and the Norwegian people.<\/p>\n

In 1990, Norway’s Parliament legally established the\u00a0\u00a0 Government\u00a0\u00a0 Petroleum Fund. The first capital transfer occurred six years later from the Ministry of Finance to the Fund. It was a total sum of NOK 1,981,128,503, the equivalent of approximately USD 310 million. Twenty-four years later, the Fund had a market value of USD 1.1 trillion.<\/p>\n

Figure 2: The first capital transfer in the amount of NOK 1.981 billion to the Oil <\/em>Fund occurred on 30 May, 1996<\/strong><\/h4>\n

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SOURCE: Norges Bank<\/strong><\/p>\n

Lessons for Africa\u2019s Sovereign Wealth Funds<\/strong><\/h4>\n

The incredible success of Norway’s SWF left clues, which African countries could study in building a sustainable future for their\u00a0\u00a0 people.\u00a0\u00a0 Resource-dependent African countries do not need to reinvent the wheel. Developed countries like Norway also merely adopted policies and strategies that worked elsewhere.\u00a0Therefore, African countries should leverage the following best practices established by Norway to elaborate or enhance their SWFs’ performance. However, each government must consider factors such as the maturity of the fund, the political and social contexts, and the level of economic development in assessing this guidance.<\/p>\n

The importance of a comprehensive planning<\/strong><\/h4>\n

The planning initiatives started early. In February 1974, the Ministry of Finance submitted a parliamentary report entitled “The role of petroleum activity in Norwegian society,” which explained how the country’s oil wealth should be used to develop the country, with the Government playing a central role in the entire value chain of the industry. In 1983, the Tempo Committee, a group of experts appointed by the Government, formally introduced a Norwegian SWF project to manage oil revenues and only spend the fund’s actual returns. In 1986, the Ministry of Finance published the “Norwegian Long-term Programme,\u00a0\u00a0 1986\u2013 1989,” in which it advocated establishing the fund. It wasn’t until 1990 that Norway established the Government Petroleum Fund via a parliamentary act.<\/p>\n

Norway did not establish its oil fund based on an impulse or misguided sociopolitical jockeying or to show off. There was a sequence of careful consideration and actions and key stakeholders’ involvement, including technocrats and academics working in close collaboration with politicians. The Government tasked experts with in-depth studies to ensure decisions were evidence-based.<\/p>\n

Through planning, the Norwegian Government avoided haphazard actions, which often stem from a lack of evidence and strategic planning. The planning phase also provided a basis for the Government to anticipate and manage risks because it considered different scenarios which could emerge due to various domestic and external factors.<\/p>\n

Development of a coherent investment strategy<\/strong><\/h4>\n

The investment strategy of Norway\u2019s Oil Fund, developed over time, is centered on investing in a diverse portfolio of foreign assets and businesses with a long- term focus. A cornerstone of the strategy is, therefore, a geographic focus on markets outside of Norway.\u00a0The investments are also diversified across equities, bonds, real estate, renewable energy, and more. The Fund\u2019s strategy \u00a0is articulated \u00a0in the management mandate of the Ministry of Finance.<\/p>\n

The Fund has so far met its diversification target through its investments across 74 countries in 9,200 companies<\/u>. In Africa, the Fund has investments in Morocco,Tunisia, Egypt, Ghana, Nigeria, Kenya, Tanzania, Botswana, and South Africa. It has a portfolio worth over USD 8 billion (as of February 2021) on the continent.\u00a0The critical lesson isn\u2019t that African SWFs should implement the same investment strategy as the Fund. Instead, the Norwegian \u00a0experience \u00a0illustrates\u00a0 the importance of establishing an investment strategy aligned with the overall mission of the SWF and the mechanisms available to achieve it. For the Fund\u2019s managers, a diversified portfolio outside the country is consistent with its mandate.\u00a0Finally, it is worth noting that the Fund\u2019s investment strategy is not static. Norges Bank, the Central Bank of Norway, and the Fund Manager, regularly revisit it every three years with a comprehensive rationalization.<\/p>\n

A robust governance structure<\/strong><\/h4>\n

The Fund has effective operational management that includes checks and balances.<\/p>\n