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.

Conversation with William (Bill) White

Note: This is an edited transcript of a wide-ranging conversation I had with Bill in April 2013 over coffee in Hong Kong 

Sony: This is Sony Kapoor of Re-Define talking to Bill White of BIS fame. He needs no further introduction. Bill, we are in this global situation where there is a huge amount debt in the system and central banks have flooded the system with money. At the same time, OECD countries are facing a structural slow-down of which the demographic time bomb is a part. They also have the highest levels of public and private debt. Simultaneously, power in global governance structures is starting to shift towards the East. Not to mention recent ructions in emerging markets.

Given that we are facing the triple challenge of the changes in governance, the structural break in growth rates, and unprecedented levels of credit and debt, particularly in OECD economies, how does the landscape look going forward? What is the best we can hope for?

Bill: To be honest, the landscape looks rather scary. Clearly, when you talk about this credit bubble we are at the end in the advanced markets, of a very long period of excessive credit creation. This has now crept over into the emerging markets as well. I think that in a certain way they have inherited it, through more or less the fixed exchange rate system, the imbalances of the advanced market economies; we have a global problem here. It is, however, most obvious in many of the advanced market economies.

So, we have a problem. Now the question is, what do we do to deal with the problem? I do not think that the quick fix, for example, the idea that you can use base money to expand government spending in a cost-less manner, or quantitative easing. I think these quick macro-fixes really are totally illusionary as a general solution. I believe that what we do have to focus on is the search for things that will actually work.

Did Lehman Brothers die in vain?

Having once worked for Lehman Brothers and having championed financial reform long before it became fashionable subject, I have strong opinions on the issue. Just as I was about to write something for the 5th anniversay of Lehman's collapse, a Good Samaritan sent me this transcribed text of a keynote speech I had made at the 2nd anniversary of the collapse. After browsing through it, I decided it did not need any editing -  so here goes… It is also a good précis of my book that you can download here. You might also want to read my recent FT op-ed on how financial reform is lagging behind and a piece I wrote on what a good banking system ought to look like. Enjoy!

The world has been rocked by the most major financial and economic crisis in recent history. This exposed several aspects of financial system dysfunction. These not only increased the instability of the financial markets, but also impeded their normal functioning as tools to allocate economic resources efficiently throughout the real economy.

The collapse of Lehman Brothers two years ago was at the heart of this crisis. This is not a Eulogy to Lehman Brothers. That having been said, Lehman in death managed what it could not do while alive – be more famous than its peers Goldman Sachs and Morgan Stanley. In death, Lehman may have performed a greater service for society than it did perhaps in the many decades of its existence – provided of course that we have learnt the right lessons from its failure and acted on them. Did Lehman die in vain? 

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.