Wednesday, July 23, 2008

Nigeria's Sovereign Wealth Fund (SWF) was one of the fastest growing in 2007. The SWF grew at a rate of 291% and many, like Dow Jone's Jan Randolf, consider it to be "a new financial power brokers, replacing the combined financial muscle of hedge funds and private equity, and usurping central banks as the international capital providers of last resort." Of what I am learning about the power of these financial arrangements, Nigeria could technically use their SWF to accomplish incredible feats.

A Sovereign Wealth Fund is generally defined as
"a state-owned investment fund composed of financial assets such as stocks, bonds, property or other financial instruments."
But in layman's speak it is basically a government's investment portfolio and most oil-producing nations have one. SWFs are currently causing major consternation in the United States because many foreign owned SWFs are gobbling up ownership in lucrative sectors, some of which are considered key to American security. Remember the Dubai Ports Deal that went flat when American complained that major American ports would be managed by foreign owned corporations? Well, an SWF was involved in that situation and illustrates how SWFs can be or should not be used.

I contacted a Nigerian Curiosity reader, 'Saheed', and he used Brutish Airways to explain the relevance of SWF's to me. He wrote,
"if Nigeria for example bought into Brutish Airways through swf, the Nigerian government would essentially be a stakeholder in Brutish Airways and thus have a stronger voice in dictating the company's other words, that whole incident might never have happened the way it did." [sic]
I didn't have to think too hard about the political and economic ramifications of Nigeria's SWF. Reader 'Saheed' provided further insight on this issue by indicating,
"[t]he consequence of Nigeria having a rapidly growing swf, means that, we can strategically influence key sectors in sovereign economies (perhaps buy into other African countries development, and have a strong voice in the direction of these economies)...On the other hand we can use this debt-free surplus cash for infrastructural development in Nigeria e.g.. laying communication cables, roads, housing etc.

[H]owever, I do not see it as a sign of economic development because, if misused (excessive fiscal spending internally) it can lead to inflation and/or "Dutch disease" since most of our reserves come from the sale of oil and we have a weak commodities market. in other words, price of necessities will spike even though the purchasing parity remains low." [sic]
It is exciting to know that Nigeria is doing something good - SWFs are arguably a good thing. It is important that Nigeria could use its SWF to affect the development of our country and even the development of other countries. This gives the nation a powerful tool that can be used, if necessary, to bring about positive change especially for our fellow African brothers and sisters. For instance, funds can be invested in countries that actually practice democracy or invest in green/sustainable energy, assuming Nigeria, a country considered "partly free", ever gets to that point itself. As it continues to grow, Nigeria's SWF could effectively be used to wield the nation's influence across the continent, and ultimately around the world.

However, the issue comes down to vision. Will the SWF be maintained and its funds used in a means that advances Nigeria's interests or will it be used in a way that proves detrimental in the future? Most Nigerians, myself included, question the vision of past and current leaders and thus wonder if future leaders will commit themselves to using SWFs and other streams of national income to benefit Nigerians. The fact that the average Nigerian has no concept of what an SWF is means that the average person cannot hold Nigerian leaders accountable for and/or have a say on how the SWF is used or managed. This lack of transparency in itself is troubling and could lead to corrupt practices that will devalue the potential advantages of Nigeria's growing SWF.

Despite these and other current realities, one can only hope that Nigeria's SWF will somehow turn out to be a rewarding venture for Nigeria and its people.

Further Reading:
- Check out a very helpful illustration of the various SWF's around the world and how much they are worth, from the Wall Street Journal. (Thanks to Oz, for providing this and much more helpful material).

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Anonymous said...

I try very hard, but I keep failing to see why a country like Nigeria needs a SWF. One would think that a fund for infrastructure would be in order since the ROR of this kind of fund in the worst case scenario will be X10. We have no business buying foreign assets when investment in Nigeria's infrastructure will yield more returns than any other fund on earth. It is a repressed sector in one of the most populous countries in the world.
Also why do we keep acting like the excess receipts in crude has no immediate use, and the policy folks in Abuja keep defaulting to the monetary policy argument..(oh we dont want to trigger inflation**with the most whiny voice**). If an infrastructure fund is managed efficiently inflation will be the last thing on Soludo's mind, because such a fund will trigger production. Lets keep in mind what is good for Dubai is not necessarily good for Abuja. By the way the UAE folks built their own infrastructure fist sef.

Anonymous said...

I forgot to add. The growth in Nigeria s SWF is actually something to cry about and not something to praise Yardie for.


@ Oz: I hope you did not get the impression that i was praising Yardy for the existence of the SWF. My research did not reveal that his administration created the financial structure.

Anyway, I completely see your point, any monies currently in Nigeria's SWF would be better spent building Nigeria's infrastructure and making the country better not for foreign investors, but for actual Nigerians on the ground. Nevertheless, I can't help but hope that this "money in the bank" (if I may loosely refer to it as such, could some day become a useful tool for the advancement of the nation at home and abroad.

The existence of the SWF will not change the reality that Nigerians lack basic necessities. The SWF exists, and until we hear that the monies will be disbursed for domestic uses, we can at least try to learn more about it and keep our eyes on it to whatever extent possible. That is my basic attitude towards this and so many other projects that Nigeria is into. Figure out what most of us do not know, learn about it and keep a keen eye on it so that hopefully 10 years from now, we won't find out that history was re-written and all of a sudden officials tell us that we never had all that money in the 'kitty' in the first place.

And, I am actually shocked that you suggest that Nigeria has no business buying into other countries. We can't assume that the Nigeria today will not change. Any positive or even relatively positive steps that could be of benefit to Nigerians in the future is a good thing. Or, do you disagree? Please let me know...

Anonymous said...

How high is high? That is the short term question that has kept infrastructural development low back home. The financial tools available to a country that has our type of income is beyond imagination, but it is the badly educated lot that do not get it. Our best is currently World Bank president, but in her time as Finance minister, her boss, Mr President did not allow her the freedom to innovate. Innovation and not hope is our salvation.


@ Beauty: I can't help but pay attention to your comment - "innovation and not hope is our salvation"

So, with regard to this specific issue, do you consider the SWF innovation or hope? And, why? Personally, I do not think you can have innovation without hope. I believe that it is hope (for some) that will drive and encourage innovation. If one cannot hope for something different, they cannot face/consider/attack the challenge of thinking outside the box to achieve that which is progressive and hopefully (no pun intended) innovative...

Anonymous said...

I'd explain, there is nothing about SWF's that suggests that the money should be used any differently from all other types of funds. I am suggesting that for strategic reasons, Nigeria has not business buying a part of citi or the Chrysler building. Why? Because our money should be used optimally. I feel the rate of returns per dollar of Nigeria's money if used on infrastructure is far greater than returns in foreign investment. Isn't it weird that we have the highest ror in our equity market and we still feel the need to go invest outside. Asians only do that when the ror abroad is greater than theirs at home. Or when there is excess money. Ladies and gentlemen I am happy to announce to you that Nigeria does not have excess money. Even though we call the crude oil account that. How can a man be in squalor and still be concerned about holding equity in his neighbors house because he intends to marry his wife sometimes in the future. Yes you would hold some sway in his household but that woman aint never gonna marry you cos you are dirt poor still. I feel fixing things at home serves us more strategically than our foreign policy..we are just too far behind to be concerned about other issues.
With the British airways issues, I'd say there are more ways to skin a cat. They do not treat the South Africans that way, they do not have a dime in the company. I also think it is erroneous to assume that Nigeria is going to be what it is going to be regardless of how we spend our oil loot. argh argh

Anonymous said...

The topic is interesting and article brilliant! However, if one look at events in the last 12 months in the Nigerian public sector, it is difficult to see how "Nigeria could technically use their SWF to accomplish incredible feats..." The impetus to perform incredibly is simply not in the public sector!


@ Oz" "Isn't it weird that we have the highest ror in our equity market and we still feel the need to go invest outside."

You are very right. The facts speak for themselves on this point. However, I still do not believe that we should completely write off the future uses of an SWF from a foreign policy perspective. This in itself does not change the fact that as you said, there technically is no "excess" money being that the nation's people are dirt poor. Again, I do not contest that fact. But until Nigeria's government, and Nigeria's people, wake up, smell the roses and start DOING SOMETHING about that current reality of poverty, I can still keep my eye on that SWF and the money wey boku inside. I don't think we disagree, we are just looking at the same issue from 2 different perspectives and that's cool. Whether we agree with it or not, the fact is Nigeria has an SWF and according to Bloomberg, actually plans on creating another one (though you kindly explained some of the discrepancies the Nigerian spokesperson put out there.) I'm just trying to follow the money...

I have a follow up question, if you would humor me - I see you saying that no chicks would marry Naija because it is poor. But, you should know, some women look past the current bank account of a mate and actually consider his future earning potential. Men, of course, do this too. If you take this into consideration, it would help explain why West African Anglophone countries are working to create a unified currency that will be pegged to Nigeria's growing economy. Despite the reality of the Nigeria you and I know, its future potential is well understood and is being taken advantage of. The SWF is/could be one more thing that rests on that future potential. It could all blow up in our face, but until then...

Thanks for sparing with me. lol!

@ imnakoya: "it is difficult to see how "Nigeria could technically use their SWF to accomplish incredible feats..." The impetus to perform incredibly is simply not in the public sector!"

Money, when well spent with an eye for optimal benefits, can afford "incredible feats". The only issue, in my mind, and I brought it up in the post, remains the vision to use Nigeria's money properly for the nation's and continent's benefit.

I am simply trying to challenge myself and others to look beyond the failures of Nigeria. Imagine a future, with young determined leaders who actually have a proper plan to move mountains. Imagine a time when Nigeria is a competitive economy, with true democratic values and an engaged and participating public. At that point in time, this SWF could actually be helpful. In fact, I know it could be helpful considering the trend amongst global growing economies to create as many of these SWFs as possible and wield their money everywhere. Nigeria could become like that. As such, I hope that we will watch out for and encourage financial arrangements and projects that can be used when Nigeria is the country that i dream of.

It is this understanding that makes me believe that "Nigeria could technically use

On your other point that is of interest to me, "The impetus to perform incredibly is simply not in the public sector!"

Really? I wonder upon what you hinge this opinion. I am thinking about the Banking sector and general financial market and the leaps and bounds it has made, despite some obvious issues (overvaluation of stocks). Outside of that, I can probably see what you are saying (assuming I understand your point). However, I wonder, is this "lack of impetus" of which you speak a result of the lack of individual innovation or the result of a failed and burdensome system that does not reward innovation? If you have the time, share some more of your thoughts on that comment as I am trying to understand. thanks so much!

Dojaa said...

When the right leader comes along positive things will start to happen in Nigeria, for now I have no confidence in our current leaders.

Bola said...

SOLOMONSYDELLE, seriously, NIGERIA HAS NO BUSINESS BUYING INTO OTHER COUNTRIES,because whatever realise from such transaction inform of profit or gain will never get to a common man.I see the SWF as a waste of oil revenue and tax payers money.Why don't we leave this issue until we have a better Nigeria,possibly when we no longer have rogues and robbers has politicians.The politicians we have now only looks for ways to siphon the nations wealth into their pockets so their great great granchildren can live like kings and i think this is one of such schemes.Don't be deceived by their utterances,they have been known to lie and connive to get what they want.Yardy is a politician isn't he? and we all know how he got into power, don't we?

Simi Speaks said...

I really commend ur great work!

Saheed said...

We must remember that SWFs are generally dollar- denominated assets and so it naturally derives that Nigeria's SWF serves the best purpose in the strongest economies, regardless of current ROR or ROI. As long as those economies (sectors in which the SWF are invested in) continue to grow (which they typically do), our investment can only go in the same direction while maintaining its value. While there are risks associated with SWF (market volatilty, the increasing weakness of the dollar etc etc, it is relatively more secure in proven economies than Nigeria's) Keep in mind, also that there is the issue of over-capitalization, so Nigeria cannot just pump money into its stock market if there are no real capitalization needs...Arguments can be made in favor or against SWF going outwards, but when you look at the performance of countries like China, Dubai, Russia etc, you begin to see its not simply an issue of ROR or ROI. Do you know how much THE US OWES CHINA???? hmm! RUSSIA is heavily vested in Freddie Mac and Fannie Mae! Take this example: NIgeria has considerable stock in Julius Berger, Julius Berger gets most construction contracts in Nigeria, automatically there is circulation of money, while this is an oversimplification, it does apply granted that regulations don't intefere!

Poor public planning and policy are responsible for the perilous state of our infrastructure (financial, communications, industrial etc). The government can easily add into its fiscal budget, funds to improve comunications infrastructure etc, but they mismanage it over and over again. If history is the best know the rest. The fact is that our so-called excess (i cant get into that) is safest and strongest where economies are thriving. We can always sell our interests and use the funds back home when the conditions are favorable.

Having said that, the Dutsch Disease is very real and plagues most African economies with abundance of natural resources and a meager service or industrial sector. I am saying that to say that without a strong service/private sector, we are liable to fall into this trap over and over again.

Development is a process and it comes in stages. The way to protect our financial interest is to tie it to other interests that are secure. Hence SWF!

So, we can spend on housing, roads, energy which is really a necessary condition for development but these things in and of themselves do not yield profits. This is money that should be in a budget and used PROPERLY and consistently over a period of time!!!

As long as Nigeria remains a capitalist economy, we have to play by the rules of capitalism (Hey we can even play like China (whatever economic system they go by). Make your money work for you...

In my opinion, and in the absence of good public policy and planning, I think the financial instiutions in Nigeria should take a very active role in infrastructural development through public/private partnerships.

Jinta said...

love this post. when i become president you will certainly be in my cabinet

i think you are incorrect when you say the average nigerian does not know what a swf is, you probably meant the average nigerian does not know we have an swf.

when i read about the dubai ports thing, i wondered why nigeria did not have a similar thing. i know the kuwatis have it(they own a service station chain in the UK called Q8 which a lot of people do not know belongs to the Kuwati investment company)

i now know, from your post, that we have it. my pride is however suppressed by my fear of the financial abuse and theft that has characterised every other aspect of our polity

Yankeenaijababe said...

Intresting artice...first time here. You write very well, must confess and very educated on what you talking of. I enjoyed the post and ya so rite.

TheAfroBeat said...

Definitely didn't know about this one. And is this separate from the $$ we've been saving up as a result of the oil-based fiscal rule where we've been saving the windfalls of the >$140pb for the past year or so? It could go towards the SAVE NPHC fund, no? But as Saheed points out, it is probably best that such money be saved for profit-yielding investments that can't be funnelled into private pockets as easily.

As you and Jinta rightfully pointed out, the fact that most Nigerians are unaware of its existence, means that the government has been and continues to be free to do what it pleases with it. Last I heard, the fiscal responsibility bill was still going back and forth between YarAdua and the House, i wonder if that will make a difference once it is finally passed...

Anonymous said...

S. Your But until Nigeria's government, and Nigeria's people, wake up, smell the roses and start DOING SOMETHING about that current reality of poverty is the missing innovation that I was referring. Hope in a country that seemed to have outsourced its problems to God is my pun. To answer your question, Is SWF innovation or hope? It is the discipline to cultivate talent in a society that looks for success without the excellence that should concern all. I believe in dreams, but choice rather than hope will help move the mountain.

The leadership challenge is a world issue, just look at the acting President of the USA, nobody gave him the job but Obama and others like Gates has proved that in the right environment, anything is possible. Nigeria copies the mistakes of everywhere else hence the trash by people that do not understand the future of our children = innovation. SWF begs the same question, How high is high? It is the result you achieve with it that counts.

tobenna said...

Well done for sharing this SS.
You do a good job of spotting stuff like this.
Keep sharing.
For some reason, I'm now beginning to enjoy this blog over the other more popular :)

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