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Africa eyes Gulf, Asia for help on SWFs

Dubai, August 11, 2010

Africa's nascent sovereign funds are turning to Asia and the Gulf for a steer on how to manage resource revenues, a move that could shield wealth for the future and lure more attention from international investors, said analysts.

But there is no simple "cut and paste" model as Africa faces a challenge in striking a balance between spending today to build infrastructure and reduce poverty and saving for tomorrow, as well as guarding against corruption and squandering.

Nigeria, Angola and Ghana are among countries that are in a process of setting up a SWF to manage oil windfall revenues.

Some African countries have sought advice from Norway, considered to have the most transparent and efficient fund and one that is awash with oil money.

But they are also increasingly looking at developing Asian and Gulf nations, where funds are often managed in an opaque but strategically efficient manner, which may suit Africa better.

"The major issue with SWFs is putting in structures both legal as well as others so that you don't spend all the money immediately," said Andrew Ang, adviser to Norway's SWF and an associate at the U.S. National Bureau of Economic Research.

"Asian and Middle Eastern funds do this in a non-transparent way. They manage to achieve legitimacy without huge public transparency."

Proper management and investment of oil revenues for the wider economy improve growth prospects and credit ratings.

Nigeria and Angola already have ratings of "B+" from Standard & Poor's. These ratings would help attract investors looking to invest in emerging market bonds.

"Having a large reserve fund positively affects investor perception of stability and it will affect credit ratings. The reputation effect is very valuable," Ang said.

Many governments in the Gulf and Asia - home to the world's largest SWFs such as the Abu Dhabi Investment Authority or China Investment Corporation - have used SWFs as a strategic economic tool to diversify their economies.

Unlike Norway however, these funds have operated at arm's length from their governments and disclosed little. This helps them avoid public criticism in case they make a short-term loss and focus on long-term goals instead.

Ghana - whose oil field is due to start bringing in revenues from late 2010 - is speaking to Norway, Trinidad & Tobago, Nigeria, Angola and Gabon on how to run a sovereign wealth fund.

Opec member Nigeria has sought advice from the UAE, while Rwanda, which hopes to set up an SWF by 2020 once it becomes a methane gas exporter, is speaking to Singapore.

"The model works well because they're relatively secretive. You can't say transparency is a golden ticket," said Gary Smith, head of central banks, supranational institutions and SWF business at BNP Paribas Investment Partners.

"The 'Be like Norway' message is okay but it's not appropriate in its entirety. But Norway has got things to offer: internal marketing to domestic audiences and stakeholders."

Norway's fund benefits from high transparency and  accountability thanks to a clear mandate and the integrity of asset allocation process, which they publish on a regular basis.

"There is a huge tendency for government-sponsored organisation to become bureaucratic, inefficient, wasteful, without the private sector value of profit maximisation," Ang said. "Norway is a shining light that shows how to build a professional organisation within a government structure."

Corruption and waste

It is paramount for African nations to establish a clear framework and objectives for their funds, before they even begin a debate on how to allocate assets and maximise profits.

In Nigeria, a lack of clear legal basis on revenue distribution between federal, state and local governments has led to constant political wrangling.

This has resulted in the Excess Crude Account, which the country plans to replace with a sovereign fund, shrinking to $3.4 billion, less than a quarter of the amount it had 3 years ago.

Little progress has been made for Angola's plan, announced in June last year, to set up a sovereign fund. Despite its vast oil and mineral wealth, an estimated two-thirds of Angolans live on less than $2 a day, according to the World Bank.

"You need spending rules and a clearly written mandate. Discretionary spending will open it up to expropriation or corruption risk," Ang said.

They must also avoid the "Dutch disease" problem - a phrase stemming from the 1960s Dutch economic crisis following the discovery of North Sea natural gas.

Rapid oil sector growth could make other industries less competitive - as happened to the Dutch - and lead to lower growth and development than those with fewer natural resources.

"Whoever is setting up a SWF, they shouldn't look at it as a ticket to an elite club," Israfil Mammadov, chief investment officer of Azerbaijan's sovereign fund, told Reuters. "They should look at it from the point of view of public finance discipline. You don't look at a SWF and say everything is fine."-Reuters




Tags: | Gulf | Africa | Nigeria | sovereign wealth fund |

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