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Ashby Monk, Ph.D., executive director of the Global Projects Center at Stanford University and a senior research associate at the University of Oxford, has been blogging about sovereign and pension funds since 2008. 

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The Constitutionality of Nigeria's SWF

March 27, 2012 at 5:00 AM EST

The Nigerian government officially set up its new sovereign fund(s) in May last year. The new Nigerian Sovereign Investment Authority then received its first official cash injection ($1 billion) in October. In November, the NSIA announced it was hiring. Clearly, the government was finally getting on top of its resource revenue management in a bid to overcome the resource curse. All was going well...right?

Wrong. After the NSIA legislation was enacted (and, more importantly, after the election), Nigeria’s Governors turned against the fund and indicated that they would sue the Federal Government to try to stop it from coming into formal existence. Specifically, the 36 State Governors challenged the legality of the decision to transfer money from the (now defunct) Excess Crude Account into the NSIA’s three sub-funds.

The case has gone all the way to the Supreme Court. But, yesterday, the Supreme Court did little to resolve the situation, indicating that it had decided...not to decide anything – at least not until May. (The Federal Government had pleaded with the Court to allow an adjournment to enable resolution of the dispute amicably, and the Court accepted this request.)

In sum, the NSIA’s existence remains in jeopardy (and, with it, much of Nigeria's future economic prospects). So I’m very curious to understand some of the details of the Governors' case against the new fund.

This is where Joen Ezean of The Fletcher School’s SWF Initiative comes in, as he recently published a nice analysis of the current state of Nigeria’s sovereign funds that includes a detailed description of the constitutional debate. Here’s his take on things:

“The big elephant in the room as far as the future of the Funds is concerned is the continuing doubt as to the constitutionality of the initiative as presently designed. It is doubtful that the action of the FGN in unilaterally mandating the diversion of part of the revenue accruing to the other federating units to fund the Funds will pass the constitutionality test. The State Governors initially sought to block the inauguration of the Funds on the ground that the Act infringed on constitutionally guaranteed State rights, and threatened to mount a legal challenge against the operationalization of the Act. The FGN countered with the claim that it had consulted with the Governors prior to the enactment of the Act and that the Governors had consented to the substance of the bill that it subsequently submitted to the National Assembly. The Governors retorted that what they had approved was not what was eventually enacted...

However public opinion was decidedly against the governors and in favor of an initiative that was seen as an attempt to sanitize the usually messy management of Nigeria’s crude oil revenue. The general opinion was that the Governors had consented to the initiative so as not to alienate the public at a time they were preparing for general elections, but once the elections were over and they had secured their re-election they suddenly realized that the Act infringed on the constitutional right of States. The combined weight of public opinion and reassurances from the FGN persuaded the State Governors to withdraw their opposition and allow the inauguration of the Authority to proceed. However, despite the capitulation of the State Governors, the initiative remains constitutionally suspect. The Act does indeed contain provisions that reinforce the narrative that Nigeria practices neither true federalism nor true democracy...

With or without the acquiescence of the State Governors, it was presumptuous of the FGN to enact legislation that disposes of revenue due to the other federating units. This is a violation of the Constitutional provision that all revenues lodged in the Federation Account (which is the special account created by the Constitution for the lodgment of all revenues accruing to the Federation) must be shared between the Federal Government, the States and the Local governments in accordance with a revenue allocation formula to be determined by the National Assembly; and that all revenue going to the States collectively as a result of the revenue allocation process must subsequently be distributed amongst the States in accordance with a formula to be determined by the National Assembly...

Similarly, it was presumptuous of the State Governors to have given their consent to such legislation by the FGN, either initially or subsequently after expressing their opposition thereto, without the authorization of their Houses of Assembly, the legislative arm of the State governments. This is a contravention of the provisions of the Constitution to the effect that all revenues accruing to a State shall be paid into a Consolidated Revenue Fund for the State, that no money paid into the Consolidated Revenue Fund shall be expended other than in accordance with prescriptions by the Constitution or as authorized by an Appropriations Law or other Law passed by the State House of Assembly, and generally that “no moneys shall be withdrawn from the Consolidated Revenue Fund of the State or any other fund of the State except in the manner prescribed by the House of Assembly”.

In short, it’s far from resolved. And the Governors have a pretty solid case...

Comment
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Thanks for the comment. 1) I'd like to see your MA thesis! 2) I wonder how the public opinion will play out here, as I understand the public is staunchly on the side of the federal government. Will that drive the Governors to accept the NSIA...even if it is (as it looks to be) unconstitutional? Cheers, Ashby

Apr 26 2012 at 1:07 AM EST

Ashby Monk
 

Hello Ashby,

Thanks for your piece and your link to Mr. Ezeani's analysis of the NSIA. In my MA thesis on the Nigeria Sovereign Investment Authority, I too have come to a similar conclusion: the NSIA is constitutionally suspect, and that the federal government and state governors should allow the Nigerian Supreme Court to once and for all determine the constitutionality of the NSIA or it might become like the ECA. The FG government makes some interesting legal arguments to justify the congruence of NSIA with Nigeria's fiscal federalism. These claims (at least for the Stabilization Fund or Future Generations Fund) may hold up in court if the Supreme Court finally decides to hear the case.

Apr 21 2012 at 8:57 PM EST

Cynthia Ugwuibe
 

Good comment, John. I'm looking forward to hearing your take on how things are progressing. Cheers, Ashby

Mar 29 2012 at 6:09 AM EST

Ashby
 

Thanks Ashby for your plug of my piece in the Fletcher SWF Bulletin on the Nigerian sub-funds (I've quickly embraced your reference to the three funds as sub-funds). I am humbled by your kind comments. I'm currently in Nigeria and am working on a follow-up piece that warns the Nigerian government against papering over the cracks through its negotiations with the governors. The constitutionally defects will remain a huge risk even if the Governors back off the fight. I'll forward to you my further thoughts on this when I'm done articulating them. By the way, I forgive your misspelling of my two names as 'Joen Ezean'. I am John Ezeani. Best regards

Mar 28 2012 at 2:22 PM EST

John St. Claret Ezeani