The Nigerian government will send a bill to parliament in the next two weeks to create a sovereign wealth fund aimed at preventing states from raiding oil proceeds, its finance minister Olusegun Aganga has said.
“The prudential guidelines for anyone to gain access to these funds will be much, much tougher, as we don’t want anyone taking these funds,” Aganga told Emerging Markets in Washington yesterday.
Sub-Saharan Africa’s largest oil producer is mulling how to save oil revenues, above a benchmark price, to finance infrastructure investments while ensuring fiscal sustainability. A sovereign wealth fund (SWF) would replace the excess crude account (ECA), the current system of managing oil revenues.
The ECA, originally intended as a federally controlled account, has come under fire, as the constitution requires revenues to be divided equally between federal, state and local governments. Since September 2007, the ECA’s resources have fallen from $20 billion to just under $500 million as state governors have used Nigeria’s oil bounty to fund their budgets.
These moves have sparked fears over lack of fiscal transparency and poor quality of spending. The funds are at the centre of a power tussle between states and the federal government.
“We are creating this SWF to strengthen our fiscal structure,” said Aganga. The former Goldman Sachs executive said the ECA could remain, but that most of Nigeria’s excess oil proceeds in the coming years should be parked in the SWF.
Consultations with the three tiers of government will take place in the coming months to determine the SWF’s capitalization, the structure of the fund and the legal basis of the ECA, he said.
The SWF will initially be seeded with $1 billion of capital, after commitments from the federal and state governments, and could take a portion of the central bank’s $35 billion of reserves, he said. It will have three main tiers: investments for future generations, an economic stabilisation fund and an infrastructure fund for co-investment with other state and private investors.
The stabilization part of the fund is designed to provide a cushion to a drop in oil prices. The federal government typically relies on oil revenue for 80% of its budget.
The fund will be a state-backed, privately run vehicle, and adhere to the so-called Santiago Principles for sovereign wealth funds, an IMF-backed code of governance for government-backed investment vehicles. In this respect, the fund will be modelled on Mubadala Development Company, a state-owned company of the Abu Dhabi government, Aganga said.
The Nigerian finance ministry is soliciting legal and financial advisers, including JP Morgan, on the structure of the prospective vehicle. The upcoming bill will contain proposals to give the SWF the “flexibility to leverage and catalyse private sector investment”, Aganga said.
The infrastructure investment portion of the fund will be the largest. The fund could issue project finance bonds, with state-backed guarantees, to develop the domestic fixed income market and bring down borrowing costs of the private sector by proving a pricing benchmark, he said.
Development economists argue that the excess crude account – by allowing powerful state governors to siphon off revenue at will – has exacerbated the resource curse in Nigeria.