Wall St. Giants Seek a Piece of Nigeria’s Sovereign Fund
By AZAM AHMED
Wanted: A reliable overseas business partner to invest more than $1 billion presently trapped in Nigeria.
This is not a scam.
Nigeria, the West African nation that has gained notoriety for the illicit e-mail spammers aiming for Western bank accounts, is attracting attention for legitimate financial opportunities — investing its own savings.
In an effort to preserve and increase its oil revenue, the country recently established a so-called sovereign wealth fund, following the path of many resource-rich countries. Now, Wall Street titans like Goldman Sachs, Morgan Stanley and JPMorgan Chase are courting top government officials, aiming to grab a piece of a portfolio that could eventually be worth tens of billions of dollars.
“The country is at a point of inflection, and what we do in the next few years will set the pace,” said Olusegun Aganga, the former Nigerian finance minister and current minister for trade and investment, who helped create the sovereign wealth fund. “It’s a land of opportunities, which unfortunately has not been tapped well.”
More than half a century after discovering oil in the Niger Delta, the country continues to subsist barrel to barrel. Poverty is rampant. Public corruption is pervasive. And the government coffers are bare, even though Nigeria is the 10th-largest oil producer in the world.
By saving and investing the petro dollars, Nigeria hopes to break the resource curse. The nation, which derives 80 percent of its revenue from oil, created the sovereign wealth fund to buffer its economy from volatile commodity prices and impose fiscal discipline. The government so far has set aside $1 billion for the fund, and it could funnel as much as $2.5 billion a year, if oil prices remain high.
“One of our biggest problems in civil society is the time horizon that we’re operating on — whether election cycles or quarterly reports,” said Ashby H.B. Monk, a research associate at the University of Oxford who studies sovereign wealth funds. “The idea of a sovereign fund is to give government bureaucrats an opportunity to make long-term policy knowing that the buffeting winds of capitalism won’t blow them off course.”
Such funds have become powerful investment forces over the years. Abu Dhabi and Kuwait have amassed hundreds of billions of dollars by plowing their oil riches into stocks, bonds and other global assets. During the financial crisis, sovereign wealth funds provided critical capital to banks and other troubled firms.
To grab a piece of the lucrative business, big banks and asset managers have tirelessly cultivated relationships with governments worldwide and added teams dedicated to sovereign wealth funds. In recent months, bankers, lawyers and consultants flew to the Nigerian capital of Abuja to pitch officials on their services. The government chose JPMorgan Chase as one of its advisers on the structuring of the fund.
In other countries, the Wall Street feeding frenzy has drawn criticism. The Libyan Investment Authority, which was started in 2006, has complained that it lost millions of dollars on several investments, while money managers generated huge fees, according to documents leaked this summer to Global Witness, an advocacy group.
The Securities and Exchange Commission is looking into whether American money managers, in trying to land business with sovereign wealth funds, violated antibribery laws, according to people with knowledge of the matter who were not authorized to speak publicly about the inquiry. “If you don’t get these organizations designed correctly as sophisticated investment operations, you can lose a lot of money,” Mr. Monk said. “It’s the power of finance — for good or bad.”
Nigeria’s new fund is the brainchild of Mr. Aganga, a Nigerian native who worked at Ernst & Young’s London office before joining Goldman Sachs in 2001. Last year, the Nigerian president, Goodluck Jonathan, asked Mr. Aganga to join his cabinet.
As the minister of finance, Mr. Aganga pushed to start a sovereign wealth fund almost immediately. He had helped oversee part of Goldman’s Africa business, and knew Nigeria was among the last oil-rich nations without an investment portfolio.
“It’s important that we have some savings for the future generations,” Mr. Aganga said. “It just makes sense for your economy. You’re completely exposed otherwise.”
But Nigeria has a spotty record managing its money. In 2004, the country started plowing extra oil revenue into a separate account, as a way to build savings. At one point, the portfolio held an estimated $20 billion, analysts say.
The funds did not last long. State and federal authorities leaders regularly siphoned off money to fill budget holes, build utilities or pay for other projects. By last year, the assets had plummeted to less than $1 billion.
“There were no rules about withdrawals or whom it belonged to among the three tiers of government in Nigeria,” said Razia Khan, head of African research at Standard Chartered Bank.
To avoid making the same mistakes, Nigeria is earmarking assets for different purposes in a structure that mirrors older sovereign wealth funds. One portfolio, which will invest in stocks and bonds, is focused on long-term growth in preparation for the day when the oil wells run dry. An infrastructure portfolio will support upgrades to the country’s bridges, roads, buildings and railways.
During periods of weakness, the government will have an emergency account to prop up the economy. But officials will be able to access the money only under certain circumstances, like a steep drop in oil prices.
Commitment will be crucial. Some politicians are already grumbling that the sovereign wealth fund will divert assets that the economy desperately needs now, and they are threatening to derail the effort. Such pressure, said John Campbell, a former United States ambassador to Nigeria and a senior fellow at the Council on Foreign Relations, a nonpartisan research center, could prompt the country to “raid the cookie jar” to deal with short-term issues. “Unless there is the political will to live up to those aspirations,” he said, “it’s not going to work very well.”
“My view is, better mute the trumpets for the time being,” Mr. Campbell said.
It will come down to execution, say Nigerian officials and outside analysts. The government is tapping an independent board to oversee the investment process and to ensure compliance. While critics point to the delay in naming those directors as a potential concern, authorities defend their position. They argue that the new finance minister, Ngozi Okonjo-Iweala, a former managing director at the World Bank, who was sworn in this August, needs time to learn all about existing matters.
The board “will define how effective this becomes,” said Fola Oyeyinka, an adviser to the Nigerian minister of finance. “The flavor of that board will dictate not just to Nigerians but to the world how serious we are.”
