The law establishing the Nigerian Sovereign Investment Authority (NSIA) was approved in May 2011. Nigeria’s progress towards joining the club of nations with a fully operational sovereign wealth fund (SWF) has been painfully slow, and the headline cause of the delay has been the resistance of the state governors. It has been said that Nigeria is the only member of OPEC without a fund in operation.
This can be challenged semantically but there are other high-profile nations outside the club. The UK springs to mind in this context. We can look at weaknesses in the British physical infrastructure and wonder what impact savings from North Sea oil taxes for a rainy day might have had.
The balance in Nigeria’s SWF is the US$1bn seed capital transferred from the excess crude account (ECA), which the governors tried to block in court. Their objections to the fund can be easily explained. They know that they will receive a share, defined by formula, of any distribution from the ECA sanctioned by the Federation Account Allocation Committee. They do not directly guide the timing of such distributions, and accept that there will be good years (such as 2010) and bad years (2009). At the same time, the SWF, which has three components (for stabilisation, national infrastructure and future generations), would operate very differently. Its governing act sets strict parameters for the release of funds: in contrast, the ECA is not based in law, so there is no control over the payouts.
State government finances are fragile. In 2011 they raised a total of N509bn from internally generated revenue (IGR) and paid out N680bn on personnel, and a further N485bn on overheads. The personnel costs will have since increased on account of the national minimum wage legislation, which was passed by the National Assembly in March 2011. (This law, in common with that creating the NSIA, was framed with good intentions but with limited regard for the broader picture.)
The state governments as a group do not therefore generate enough revenue themselves to pay their employees, let alone related overheads, other recurrent costs and their capital programmes. IGR covered 15 percent of state governments’ total spending in 2011, and the potential to push up the ratio is modest in at least one half of the 36 states.
The governors’ stance is unbending, which is recognised by the FGN. The coordinating minister of the economy (CME), interviewed by the Financial Times in October, floated the possibility that the federal government could transfer US$100m into the SWF each month and indicated that some state governments were thinking along the same lines. This would be a very poor second best in our view, and would do little to meet the macro objectives of the NSIA Act. Accumulation on the scale suggested by the CME would not create the buffers required to withstand an external shock such as a slump in the oil price. In contrast, the state/NNPC share of oil production in 2013 would generate more than US$20bn for a fully functioning SWF on the basis of the assumptions in the FGN’s budget proposals and our forecast of an average spot price for Bonny Light of US$115/barrel.
It follows from the above that the governors will be looking for a compromise if the SWF is to replace the ECA, which will mean some compensating fiscal advantages. One route could be a revision of the core formula for the distribution of revenues between the three tiers of government (52.7 percent for the FGN, 26.7 percent for the states and 20.7 percent for the local governments). A second could be an increase in the rate of VAT, which generated a total of N318bn for the states in 2011. A third route and one which divide the governors would be a re-examination of the “onshore-offshore dichotomy”, from which stems the current 13 percent derivation formula. This has been mooted by governors of northern states, drawing a reminder from their counterparts in oil-producing states that the formula had been set at 50 percent under the First Republic.
An alternative would be to amend the NSIA Act. The SWF in Gabon receives 10 percent of projected oil revenues in the annual budget and 50 percent of all revenues earned above the budget threshold. There are merits in this system but Gabon is a highly centralised state and Nigeria has a federal structure: a change of direction at this point would make the process even longer in our view than finding a compromise between the FGN and the state governments.
We feel therefore that the blame for the impasse over the SWF does not rest solely with the governors. The NSIA Act and the minimum wage legislation have major fiscal implications for state government finances which were not considered in the National Assembly. If the states’ IGR did not cover their personnel costs in 2011, what is the picture now that the minimum wage has been raised from N7,500 to N18,000 per month? It is little surprise that most states have not yet complied with the legislation. We do expect a compromise over the SWF but one with a fiscal cost to the FGN.