Nigeria’s Sovereign Wealth Fund: The Issue Is Governance

The Jonathan government, following the example of other oil-rich states, wants to establish a sovereign wealth fund, and it has deposited a reported one billion U.S. dollars as seed money in it. The New York Times reports that big Wall Street firms are angling to get some of the action.

Not so fast.

Nigeria’s oil revenue is distributed among the federal, state, and local governments according to a set formula. The diversion of some of that oil revenue into a sovereign wealth fund reduces the amount available for distribution, and the powerful governors are objecting. Some governors are going to court to block the establishment of the fund. Another, the current head of the governors’ conference, is calling for the governors themselves to determine how much of their state’s oil revenue should be deposited in the fund.

It is an open secret in Nigeria that governors are largely unaccountable for how they use their state’s oil money allocation. In theory, state legislatures should hold them accountable. But, in many or most cases, legislatures are dominated by the governors’ patronage networks.

So, a sovereign wealth fund gores the governors’ ox. And governors are increasingly powerful as the federal government weakens.

The federal government could, of course, deposit a percentage of its own share of the oil revenue in a sovereign wealth fund. To be successful, however, will require strict controls over withdrawals – especially for political purposes.

Nigeria has an excess crude account, in which all revenue was deposited above a benchmark per barrel of oil. At one point, the account reached 30 billion U.S. dollars, and then dropped to one billion dollars, according to the New York Times. Clearly, there have been raids on the cookie jar. That is a cautionary note for the sovereign wealth fund.

A successful sovereign wealth fund, like the excess crude account, is less about finance and more about the quality of governance.