This opinion piece first appeared in the print and online editions of the Norwegian daily newspaper “Aftenposten” and can be read in Norwegian here.
The election is dominating headlines in Norway, but how its Oil Fund is governed matters far more than whether the left or right win.
Withdrawals from the fund financed a seventh of the public budget in 2016 and 2017. The running of the health, education and welfare systems will continue to be part-funded by the long-term return generated by the fund from its investment strategy. This in turn depends on how well the Fund is governed. Here, there is reason to worry.
At present, the Fund significantly underperforms its peers in Canada, Sweden, the Netherlands and elsewhere, even as it risks a repeat of the large losses suffered in 2008. This is largely the fault of the Asset Management Department at the Finance Ministry, a small group of under-qualified bureaucrats with no prior experience of investing. They are responsible for 99% of the risk and return registered by the Fund, while almost 600 more qualified staff at the NBIM are twiddling their thumbs.
For example, the Ministry has repeatedly overruled experts and competent NBIM staff, who have sought to invest in private equity and infrastructure and increase the allocation to emerging economies in line with its peers. This, and other unnecessary restrictions placed on how NBIM invests has shrunk the Fund’s investible universe, reducing returns even as the Fund is exposed to high and concentrated risks in slow-growth OECD economies.
As a Fund which has more degrees of freedom than any of its peers, at least on paper, the Oil Fund should enjoy stellar returns, party by making investments few others have the capacity to. But the restrictions imposed by the Finance Ministry mean that Norway’s $1 trillion Oil Fund underperforms most of its peers, including those that have regulatory, liability and liquidity constraints that the Oil Fund does not.
Yes, finance is not rocket science or neurosurgery, but the right education and experience are critical in the making of good finance professionals, one of the many reasons they command exorbitant salaries. The thought of a one trillion-dollar fund run by generalist career-bureaucrats, with no relevant experience, should worry Norwegians as much as the thought of GP doctors performing neurosurgery. An academic masters in economics qualifies someone to run the oil fund as little as a basic degree in general medicine qualifies them to perform surgery on the brain.
Most other funds have a professional board with deep expertise in the financial sector that sets investment strategy. As acknowledged by the Gjedrem Commission, Norges Bank’s board, comprised mainly of monetary policy academics, is poorly equipped for that purpose. We endorse Gjedrem’s recommendation to move the fund to a new entity, NGIM, complete with an independent and competent board. But he ignores the fact that the most important decisions are made by the Finance Ministry.
On paper at least, Norway’s parliament oversees the Finance Ministry, but in reality it has no expert capacity to do so. The Ministry acts as the judge, jury, police and executioner, overseeing its own strategy. The media also wrongly focuses on NBIM, which has discretion over only about 1% of the investments made by the Oil Fund. No one holds the Ministry, whose poor decisions have already cost Norwegians more than $150 billion in lost revenue, accountable. The present poor investment strategy also carries the risk of large losses by concentrating risks in slow growth rich economies vulnerable to another big crash. This would have dire consequences for the welfare state and could lead to deep cuts in education, health and infrastructure spending.
That is why I have suggested setting up a Stortingets Råd for Oljefondet (SRO), an independent advisory board for the parliament, to provide independent, conflict-free expertise to the Finance Committee to enable it to hold the Finance Ministry and NBIM to account.
This new governance arrangement where NGIM’s board is empowered to take decisions on investment strategy and is effectively overseen by the parliament, supported by an independent SRO, is in line with best practices elsewhere. The present arrangement does not even meet basic international standards.
This long overdue reform, of setting up NGIM and a SRO, should be urgently enacted by the next government and will allow competent professionals to drive investment strategy, increasing returns and reducing risk.
This could almost double the Oil Fund’s annually contributions to the Norwegian budget, a multiple of any difference between the left and the right in this election. It will also reduce risk, enhance transparency and make all decision-makers more accountable. It is time to bring the Oil Fund into the 21st century.
Mr Sony Kapoor is the Managing Director or Re-Define