MAKING THE SOVEREIGN WEALTH FUND MORE ACCOUNTABLE

Spaces for Change has just released a policy briefing paper, MAKING THE SOVEREIGN WEALTH FUND MORE ACCOUNTABLE: A RIGHTS-BASED APPROACH. The policy paper, advocates that human rights offer a very effective framework for ensuring that the activities of the National Sovereign Investment Authority (NSIA) comply with Nigeria’s human rights – social and economic rights - obligations, and the highest standard of accountability and transparency.

The propositions contained in the brief were informed by a robust online debate and discussions focusing on the recently-launched Sovereign Wealth Fund in Nigeria. A broad spectrum of young Nigerian professionals across the globe participated in the discussions on Spaces for Change’s (S4C’s) Discussion Forum on Facebook on August 29, 2012.

 Introduction

In the context of a policy program aimed at achieving fiscal prudence, enhancing the management of oil wealth, and building a savings base for future generations of Nigerians, the Nigerian Government has established a Sovereign Wealth Fund (SWF), with an initial fund of $1 billion. Accompanying the SWF’s launch is the establishment of an institutional foundation for the management of the Fund, called the Nigerian Security Investment Authority (NSIA), with a mandate to provide policy, technical and investment guidance for the NSIA’s operations. Describing the Fund as a far-sighted initiative, Nigeria’s Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, stated that the Fund places Nigeria “firmly on the path to economic transformation”. 

According to Investopedia, a SWF is a state-owned pool of money sourced from trade or fiscal surpluses, which can then be invested in various financial assets. Most of the existing funds have been traditionally associated with commodity wealth, but non-commodity funds now account for around 40% of total assets under management by SWF (Economic View, PWC, 2011). The need for prudency justifies putting money aside (by government) in form of a sovereign wealth fund for rainy day. This can be funneled into investments with the proceeds used to pay for pensions, provide capital injections in times of financial crisis etc. It also serves the purpose of ensuring that future generations benefit from the wealth of extractive finite resources e.g oil and gas.

SWF: Pressing Concerns and Challenges

It would be recalled that the proposal and efforts to establish the NSIA as a replacement for the current oil savings mechanism (ECA), was greeted with stiff opposition especially by the state governors. First off, the governors fear that the SWF portends fewer cash to share and spend. Secondly, the opposition primarily stemmed from the absence of constitutional backing for the initiative, and again, the increasing erosion of public trust in the financial resource management. Accordingly, the state governors who constitute the most vociferous critics of the SWF, instituted litigation before national courts seeking the interpretation and effect of Sections 80 & 162 of the 1999 Constitution, which obligates the government to maintain a special account to be called the ‘the Federation Account’ into which shall be paid all revenues collected by the Government of the federation.’ Put simply, the governors argue that the Constitution’s non-provision for the Fund amounts to a prohibition.

At the international scene, the vagueness, non-clarity and secrecy of the investment strategies for managing SWF assets are among the key factors fuelling opposition to the SWF. In some cases, the strategies are only known to the managers, but deliberately kept away from the public, making it virtually impossible to hold managers accountable for imprudent investment decisions. There are also fears that governments’ direct participation in the management of assets are prone to political considerations and manipulations, as opposed to purely economic and financial considerations. Consequently, host-country jurisdic­tions are under increasing pressure to limit the scope of such investments, raising the specter of political confrontation and financial protectionism. 

Although the SWF eventually came through after almost one year of navigating complex social, economic and political bottlenecks from many quarters, it is still very imperative that the above critical concerns that fueled initial resistance be addressed as a way of inspiring public confidence in the initiative. 

 

Making the SWF More Accountable 

The human rights paradigm offers enormous potential to inform and enhance development efforts especially in a time of multiple and interlocking social and economic crises. There is overwhelming evidence that importing certain human rights precepts - such as transparency, non-discrimination, participation and accountability – into the design and implementation of macro-economic development policies and programs significantly helps to direct attention to the poorest and most marginalized. For instance, the concept of progressive realisation encoded in human rights law (Article 2 of the ICESCR) recognises prevailing resource constraints, but commits governments to deploy available resources towards achieving the full realisation of economic, social and cultural rights as expeditiously and effectively as possible, to the advantage of the most vulnerable sections of the population.

The triumvirate human rights principles of transparency, participation and accountability simply mean that governments are obliged to provide mechanisms through which citizens can hold the state accountable; participate in policy making, and access the information required to do so. Along these lines, both the government and the managers of the investment Fund (NSIA) have a shared obligation to ensure that the operations of the investment mechanisms are as transparent as possible. Depending on the type of mechanism, its size, and the scope of its activities, it is highly desirable to establish communication, engagement, monitoring and reporting guidelines with respect to the Fund’s management. Such a standard would not only contribute to domestic financial stability, but also enhance international financial stability by increasing the transparency, accountability, and predictability of the operations of governments in managing their international investments and discharging their obligations to current and future generations.

The NSIA‟s commitment to subscribe to the Santiago Principles is commendable. The Santiago Principles are a set of twenty four (24) voluntary guidelines designed to create trust in recipient economies, promote transparency and  global best practice within National Sovereign Wealth Funds. The IMF “facilitated and coordinated” the creation of the International Working Group on Sovereign Wealth Funds in 2008, which was responsible for the Santiago Principles (also known as the Generally Accepted Principles and Practices or GAPP). The Principles are purely voluntary, and there is no authority that enforces them.

Independent studies establish that SWFs‟ commitment to the Santiago Principles is deeply rooted in their owners‟ domestic political governance arrangements. In other words, absent clear benchmarks, indicators for
measuring progress and a solid enforcement regime, the Santiago Principles are likely to suffer the same fate and challenges facing other voluntary instruments of accountability such as the OECD Declaration and Decisions on International Investment and Multinational Enterprises. Implementing these Principles in practice will remain a huge challenge, except deliberate policy, legislative and administrative measures are put in place to establish credible systems of public accountability, especially by transforming the Principles into locally enforceable guarantees.

Conclusion
 

No doubt, the establishment of SWF will provide a solid legal foundation and framework for management of the country‟s windfall oil savings, which will in turn, help the economy absorb shock when world oil prices are volatile. In other words, the government‟s plan to institutionalize the stabilization of its oil revenue through the NSIA is a welcome development. We, however, hold the view that institutionalizing human rights within the NSIA fiscal consolidation and investment operations is in keeping with Nigeria’s commitment to protect, respect and fulfill social and economic rights.

The challenge now lies in determining how to match the SWF’s honorable intentions with a political will to take immediate steps, individually and through international assistance and cooperation, especially economic and technical, to the maximum of its available resources, with a view to achieving progressively the full realization of social and economic rights of Nigerian citizens. 

For the full text of the policy paper, please click on the link below:  

Policy Paper: Making the Sovereign Wealth fund More Accountable: A Rights-based Approach

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   This Policy Paper is prepared and issued under the auspices of Spaces for Change's Policing the Policy (PtP) Journal Series. The PtP uses the human rights paradigm to police and analyse social and economic policies and programs of government that coincide with our thematic thematic focal points: economic and environmental justice; security and conflict, housing and urban governance; and youth development.