Norway’s Oil Fund: Lessons for African Sovereign Wealth Funds
Building one of the largest entities in the world
For 30 years, the Government of Norway has been saving lots of money for its citizens through its sovereign wealth fund (SWF), the Government Pension Fund Global (the Fund). In fact, 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’s holdings alone. During most years, the returns have been phenomenal. In 2017 alone, the Fund returned USD 131 billion. If this benefit were a country, it would represent the 5th largest economy in Africa.
How did Norway achieve this? By establishing one of the largest corporations in the world, with an exemplary governance structure.
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’s oil industry surpassed anyone’s expectations.
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In 1969, Phillips Petroleum made a major 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 the late 1976, the Ekofisk oil field alone was producing over 350,000 barrels of oil per day.
Subsequent world-class discoveries were made soon after Ekofisk. The Government doubled down on the sector through policies and investments. In 1972, Statoil, the state petroleum company, was created to enable Norway to be an active player in its domestic oil industry and to also “build up Norwegian competency within the petroleum industry”.
Demand for oil grew exponentially. This sequence of events coupled with the Norwegian government’s informed decision-making caused a boom in Norway’s economy.
But the government knew the euphoria wouldn’t last
Although the oil industry boom fueled Norway’s economic growth, the country witnessed swings in oil prices and leaders were also aware that oil revenues would eventually drop. By the early 1980s, formal discussions began on the role of Norway’s oil industry in its economy. Experts recommended the establishment of a SWF to manage oil revenues in the interest of the long-term growth of the economy and the Norwegian people.
In 1990, Norway’s Parliament legally established the Government Petroleum Fund. The first capital transfer occurred six years later for a total sum of NOK 1,981,128,503, the equivalent of approximately USD 310 million at the time. 24 years later, the Fund has a market value of USD 1.1 trillion.
Lessons for Africa’s SWFs
The incredible success of Norway’s SWF left clues which African countries could study in building a sustainable future for their people. Resource-dependent African countries do not need to reinvent the wheel. In fact, developed countries also merely adopted policies and strategies that worked elsewhere.
Therefore, African countries should leverage on the following best practices established by Norway to elaborate or enhance the performance of their SWFs. It is important, however, that each country considers factors such as the maturity of the fund, the political and social contexts, and the level of economic development in assessing this guidance.
The importance of a comprehensive planning
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 the project of establishing a Norwegian SWF to manage oil revenues and to only spend the real return of the fund. In 1986, the Ministry of Finance published the “Norwegian Long-term Programme, 1986–1989” in which it advocated for the establishment of the fund. It wasn’t until 1990 that the Government Petroleum Fund was established via a parliamentary act.
Evidently, Norway did not establish its oil fund based on an impulse or merely a national pride. There was a sequence of events and the involvement of key stakeholders which included technocrats and academics in collaboration with politicians. The government tasked experts with studies to ensure decisions were evidence-based.
Through planning, the Norwegian Government avoided haphazard actions which often stem from a lack of evidence. The planning phase also provided a basis for control to the government because it anticipated scenarios which could emerge due to various domestic and external factors.
Development of a coherent investment strategy
The investment strategy of Norway’s Oil Fund, developed over time, is centered on the investment in a diverse portfolio of foreign assets with a long-term focus. A cornerstone of the strategy is, therefore, a geographic focus on markets outside of Norway. Also, the investments are diversified across equities, bonds, real estate, and renewable energy. The Fund’s strategy is articulated in the management mandate of the Ministry of Finance.
The Fund has so far met its diversification target through its investments across 74 countries in 9,200 companies. In Africa, the fund has investments in Morocco, Tunisia, Egypt, Ghana, Nigeria, Kenya, Tanzania, Botswana, and South Africa. In Africa alone, it has a portfolio worth over USD 8 billion (as of 28 December 2020).
The key lesson isn’t that African SWFs should implement the same investment strategy as the Fund. Instead, it illustrates the importance of establishing an investment strategy that is aligned with the overall mission of the SWF and the mechanisms available to achieve it. For the Fund’s managers, a diversified portfolio outside the country is coherent with its mandate.
Finally, it is worth noting that the Fund’s investment strategy is not static. It is regularly revised by Norges Bank at least every third year with a comprehensive rationalization.
A robust governance structure
The Fund has an effective operational management that includes checks and balances.
- The Parliament has legal oversight on the oil industry via the Government Pension Fund Act
- The Ministry of Finance is the custodian of the Fund
- Norges Bank is tasked by the Ministry of Finance to manage the Fund. Specifically, this is undertaken by the Norges Bank Investment Management (NBIM), the asset management unit of the Bank
- The Leader Group at NBIM sets guidelines and delegates tasks and investment mandates within their delegated areas of responsibility
This governance model ensures that no one person or entity is too powerful than the system itself. The concept of good governance is especially important in Africa where politicians’ interference in public affairs is recurrent.
Transparency and accountability
Although the Fund did not initially directly engage with stakeholders from the civil society, it has been quite transparent from inception. Today, it is among the most transparent SWFs in the world. While critics continue to push for more transparency (it rightfully protects some private information from the public and competition since it is a participant in the financial markets), the Fund consistently avails annual reports of its operations, interim reports, management reviews, voting guidelines, strategic plans, and a plethora of other information that truly constitute a library for curious Norwegian citizens. One is even able to track all the current investments of the Fund across its portfolio.
African SWFs should also seek to be more transparent. Most SWFs in Africa do not publish annual reports or release independent audits. Clearly, transparency has a cost and the Fund has the means to be quite transparent. Still, transparency is also a decision, therefore African SWFs must strive to increasingly be more transparent and set objectives in annual reports so that they are held accountable.
Flexibility in adapting to changes
Although much planning went into the design of the Fund, the government and other stakeholders have remained flexible in its management and oversight. For example, the following changes were made during the past two decades:
- In 2000, some emerging markets were added to the Fund’s benchmark equity index
- Corporate and securities bonds were added to the fund’s benchmark fixed-income index in 2002
- A decision was made to increase the share of equity investments from 40% in 60% in 2007
- Real estate was included in the Fund’s asset class in 2008
- In 2017, it made its first real estate investments in Asia
Flexibility ensures that the Fund is adapted to current market changes and not fixated in time.
Above all, a strong political will
Some may argue that this is the most critical factor in the success of the Fund. While this may be up for debate, it is clear that the political leaders of Norway considered the misfortune of many countries that were unable to manage their natural resources wealth. They sought to avoid the same fate for their country.
Together over a 30-year period, the key stakeholders committed to the sustainability of the Fund despite multiple leadership changes.
Over the years, under different leaderships, the parliament has passed a myriad of reforms to self regulate its oversight of the Fund in order to make it more sustainable. In 2001 for example, the parliament voted the budgetary rule into law based on a guideline proposed by the Ministry of Finance. The rule capped at 4% the allocation of the Fund’s value to the government’s yearly fiscal budget. This demonstrated a political commitment towards the vision of the Fund because the framework ensured that its real value is preserved for future generations.
African political actors must increase commitment to SWFs if there is any chance that they achieve their intended mandated.
The Key Takeaways for African SWFs
An analysis of Norway’s Oil Fund and other major SWFs indicates an absence of correlation between the natural resources revenues of a country and the performance of its SWF. In other words, the amount of income a country earns from its natural resources is not a perfect gauge of the performance of its SWF. Although Norway has gained greatly from its oil wealth, so have many African countries which are still unable to significantly develop their SWFs.
For example, Nigeria exported USD 206 billion worth of crude oil between 2015 to 2019 (OPEC). During the same period, Norway exported approximately USD 136 billion of crude oil. Considering that Nigeria began commercial production of oil in 1958, it is easy to surmise the significant income the petroleum industry has brought to the country. Norway was not gaining as much in oil exports income when it created and developed its oil fund.
To illustrate this point further, it is important to recall that not one African country figures on the list of the top 20 largest SWFs in the world despite the inflows of revenues from natural resources.
Clearly then, the elaboration and management of a successful SWF depends on other factors of which the most fundamental is the design of the fund itself. Will the fund have a domestic mandate or seek to only invest in foreign markets? What mechanisms could allow the government to dip into the fund to balance the fiscal budget? Who will manage the fund and how will they be held accountable? Will the fund rely solely on revenues gained from a specific resource? These are all questions that must be answered prior to establishing an impactful SWF.
With a SWF that is over three times the size of Saudi Arabia’s Public Investment Fund, Norway has demonstrated that good governance coupled with a sound economic planning and execution, could enable any country to build a prosperous and sustainable economy for all its people. And achieving this would not be a miracle, but merely a consequence of excellent work.