SWF

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.

It is time to change how Norway's Oil Wealth is managed

Norway has reached a critical point in how its oil wealth is managed. There is now an active debate not just on the investment strategy of the Oil Fund, but also on the governance mechanisms by which this oil wealth is managed.

The first debate has been driven in part by the launch of a 2013 Re-Define report that was critical of the Fund’s investment strategy. The second debate is driven by a secretive investment in Formula 1 that went wrong and has been recently exposed by Dagens Naeringsliv (DN)

Solutions to the first debate include selling out of fossil fuels, investing in the green economy, seeking out illiquid assets such as infrastructure and investing half the portfolio outside OECD economies. The solution to the second is to set up a Parliamentary Council for the Oil Fund “Stortingets Råd for Oljefondet” (SRO).

While the debates have originated independent of each other, they are intimately related. The Oil Fund is owned by Norway’s Parliament on behalf of Norwegian citizens. The Parliament defines the investment objective of the Fund as “maximising the purchasing power of the fund capital, given a moderate level of risk.” Under the present governance arrangements, this objective is translated into investment guidelines by the Ministry of Finance that are then followed by Norges Bank Investment Management, which actually invests the funds.

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.

Investing for the Future - Norway's SWF needs to change

Re-Define has launched a major new report on the Norwegian Sovereign Wealth Fund, the largest in the world.  The report can be found here and the press release here

I still remember that feeling of surprise when I first looked at Norway's Sovereign Wealth Fund (GPF), now the world's largest, in 2007. Having worked both in the financial industry and in public policy, I was struck by three observations in particular. They still make me uneasy.

The first was how the portfolio, in 2007, was comprised almost entirely of investments in liquid securities in the developed world. These still constitute more than 90% of the GPF. The second was how some of the largest investments of the GPF were in oil companies. Even today, three of the ten largest equity holdings of the GPF today are in oil majors and as much as 10%-15% of the overall portfolio is heavily exposed to oil, gas or coal. The third was the laid-back approach the GPF took to engaging on matters of governance, policy and ethical guidelines, which has not changed.

 

Pages