Infrastructure

Norway's Oil Fund - An Infrastructure Investor of Choice

NOTE: This is a longer version of an Oped that appeared in the Norwegian business newspaper Dagens Naeringsliv on 21 March 2014.

The revelation of the Oil Fund’s controversial investment in Formula 1 has led to Ola Mestad, Lars Hakon Sooras and Sofie Mathiasen and other Norwegian commentators to warn against allowing the Fund to invest in unlisted assets. This would be a grave mistake that would cost Norwegians dearly.

Instead, the government should bolster Fund capacity and set up a powerful independent watchdog in the form of a “Stortingets Råd for Oljefondet”.

Critics say that unlisted assets will make it harder to detect unethical investments or exercise oversight. They also warn about the lack of relevant expertise at the Fund and in the Norges Bank board that oversees it. As a reaction to the Formula 1 fiasco these concerns are understandable, but misconceived.

While unlisted investments, private equity and infrastructure disclose less information publicly, they will give NBIM access to hordes of private information. It will also be in a much stronger position to demand private information and to successfully challenge questionable practices. For effective oversight, the SRO should not only enjoy privileged access to all the data NBIM holds, but also have the right to demand more information on any of its investments.

Does anyone seriously think that Formula 1, with the constant whiff of scandal and a controversial promoter repeatedly accused of corruption, would have been an appropriate investment if only it were listed? It did not pass the smell test, period.

On why long-term investors should fund infrastructure

Investing in developing country infrastructure is a win-win strategy for long-term investors

Note: A version of this article was first published in the OECD DAC Newsletter

The world faces two major financial problems for which, luckily, there is an attractive common solution. This might be just the right time for taking the first steps towards implementing it.

The first problem is the scarcity of capital in general, and of money for infrastructure investments in particular, in large swathes of the developing world. It is widely recognised that poor infrastructure holds back development, reduces growth potential and imposes additional costs, in particular on the poor who often do not have access to energy, water, sanitation and transport.

The second problem is the current sclerotic, even negative real rate of return on listed bonds and equities in many developed economies. The concentration of the portfolios of many long-term investors in such listed securities also exposes them to high levels of systemic, and often hidden, risk.

Norway's SWF - A risky strategy that locks in low returns

This piece is the latest salvo in my on-going public debate with Norway's Ministry of Finance, that lays out the investment strategy for its $750bn sovereign wealth fund, now the biggest in the world. It appears in today's Aftenposten in response to comments by the Deputy Minister of Finance in the same newspaper.  

Norway’s future is intimately linked to how well the GPF - its $750bn sovereign wealth fund, already 150% of GDP and rising - is run. Under the 4% spending rule, as much as 15% of all government spending already comes from the GPF. Hence, returns on GPF investments and the final size of the GPF are probably more important for Norway’s economy than any other single policy.  Yet, there is little scrutiny of the merits of the GPF’s investment strategy, which is deeply flawed.

Secretary Singsaas is correct to say that GPF strategy should be based on evidence and my report provides exactly the kind of analytical basis that is necessary to improve the present approach. She agrees that there is a financial case for the GPF to make more investments in the green economy and in developing countries, but suggests incremental actions that are too little too late. The central recommendations of my report are not addressed.

Financing Real Investments in the EU

Investments that are growth-enhancing, that generate employment and that improve the sustainability of the economy are good and desirable. However, even before the crisis hit, the European Union suffered form a lack of optimal levels of investments in infrastructure, green energy and energy efficiency measures and small and medium sized enterprises. This was driven by a number of factors inherent to these kinds of desirable investments for example high upfront costs and long payoff periods in the case of infrastructure investments and a lack of policy certainty on carbon price for green investments. An additional problem was misallocation of resources by the financial sector because of excessive short-termism and crowding out by speculative investments.

The crisis exacerbated the paucity of investments flowing to these desirable categories. However, policy makers have been handed a unique opportunity to address many of these deficiencies for example through a more informed reform of the financial system and through the introduction of new and innovative sources of financing. This Policy Brief for the European Parliament identifies the main obstacles that impede desirable investments in the real econmomy and puts forward a set of concrete suggestions on how to tackle these and stimulate more investments in infrastructure, energy effeciency, green energy and SMEs.