January 31,2022
The Natural Resource Fund Act has been a source of controversy since its previous incarnation was enacted during the post-NCM Parliament. In protest, the PPP/C, then in Opposition, vowed not to touch the Fund which was held in the Federal Reserve Bank of New York until the law had been regularised. In a process incompatible with the historic importance of such legislation, the Bill passed within days of its first laying in the National Assembly. The war of words – and more – following the parliamentary session has continued and featured prominently in the Budget Speech. Relatedly, in order to ensure sound management of the revenues from our oil and gas sector, the deficient Natural Resource Fund (NRF) Act 2019 was repealed and a new NRF Act 2021 enacted. Among what the PPP/C Government considered deficiencies in the earlier iteration, it identified what it described as an opaque and unnecessarily complicated formula for determining the ceiling on withdrawals from the Fund and the complete absence of a Board of Directors or similar governing body and fundamental weaknesses in the governance arrangements. We comment briefly on these.
A Natural Resource Fund, better known as a sovereign wealth fund, has myriad variables and several purposes with considerable uncertainties and changing circumstances. It is not something that can and should be reduced to simplicity. Oil prices are relatively high at this time but are likely to fall in the medium to long term. The formula used in the current Act allows for the automatic withdrawal of $1,250 million, or 62.5%, of the first US$2 bn. earned in any year. As mentioned in our piece on the Dutch Disease, such huge injections of foreign currency into a small economy can have significant consequences. It is also worth noting that that amount is not an absolute ceiling: further withdrawals in the same year are permitted for emergency financing, leaving the balance, if any, to serve as a stabilisation fund, a source of revenue and intergenerational savings.
While the new Act provides for a Board of Directors, those persons will have modest functions and little power. Furthermore, they must submit to the withdrawal rules in the First Schedule and the imposition of Floors and Ceilings for investments in the Second Schedule. In any case, it is unclear who the directors report to or the Fund’s legal status. There is nothing in the Act that makes the NRF a body corporate body which raises questions about the Directors’ fiduciary duty to what Chief Justice Ian Chang referred to as a none-entity.
Additionally, the 2019 Act allowed for the income from other non-renewable resources to be placed into the Fund. The 2021 Act does not. It is therefore not a Natural Resource Fund Act but a Petroleum Resource Fund Act.
Importantly, Ram & McRae is concerned whether the injection of the money in the Fund is properly represented in the Financial Plan. Section 16 of the Act clearly states that withdrawal from the Fund can only be used for national development priorities and essential projects related to the effect of major natural disaster. As it is shown in the Estimates, the draw down is purely Budget Support which we doubt is permitted under the Act. It would seem that the most appropriate thing to do would be to include in the Estimates a separate Natural Resource Fund Statement.