Managing oil revenues –Norway’s experienceigmozambique.wider.unu.edu/sites/default/files/News/forum publico... · 2018/09/13 · = 100% cash flow tax 8 Photo: Colourbox. Norwegian

Norwegian Ministry of Finance

Engelsk mal: Startside

Norwegian Ministryof Finance

Senior advisor Tore Eriksen

September 13, 2018 in Maputo

Managing oil revenues – Norway’s experience


Engelsk mal:Tekst med kulepunkter

Outline

Petroleum revenues and fund mechanism

Governance

Investments

Fund performance

Responsible management

2



Petroleum accounts for a substantial part of the Norwegian economy

3

Share of GDP Share of state revenues

Share of total investment Share of total exports

12 % 13 %

21% 36 %

Source: Ministry of Petroleum and Energy (Figures as of year end 2016)

3



Human capital far exceeds the importance of total petroleum wealth

75 %

14 %

9%2%

Petroleum wealthFinancial assets

Real capital

Present value of futurelabour input

Net national wealth per capita. Per cent

Petroleum revenues and fund mechanismSources: Ministry of Finance

4


Engelsk mal: Kapittel / Temaside


5

The impacts of petroleum activities

on the non-oil economy

Non-oileconomy

Petroleumactivities

Government

DemandsFor goods and services

Use of oilrevenues, but how much?

Government net cash flow

Fund

Save, but how and where?



Outline


Governance

Investments

Fund performance


6



Possible to tax the resource rent without distorting incentives to invest

Photo: Kjetil Alsvik/Conoco Phillips

Starting point of resource rent taxation

➢ Extraordinary profits due to limited resources

➢ Immobile resources

A good tax base

7


Engelsk mal: To innholdsdeler - Sammenlikning

High government take in Norway

Petroleum tax system

➢ Production from 1971

➢ Resource rent tax introduced 1975

➢ Ordinary tax rate 23%

+ Special tax rate 55%

= marginal tax rate 78%

➢ State Direct Financial Interest (SDFI)

from 1985

= 100% cash flow tax

8

Photo: Colourbox



9

Government take from petroleum

-200

0

200

400

600

800

1000

-100

0

100

200

300

400

500

19

71

19

75

19

79

19

83

19

87

19

91

19

95

19

99

20

03

20

07

20

11

20

15

Oil

pri

ce 2

018

-NO

K p

er

barr

el

Bill.

2018

-N

OK

Taxes Gross fees SDFI Statoil dividende Oil price (r.h. scale)


Engelsk mal: Tekst med kulepunkter - 1 vertikalt bilde

Balance sheet for a country 1

10

Human Capital

Physical Capital

Machinery

Factories

Houses

Infrastructure

Financial assets

Public

Private

DebtPublicPrivate

LiabilitiesPensions…

….

+ Natural Resources Petroleum


Engelsk mal:Utfallende bilde

11

Reallocation on the Asset side:The challenge is to reallocate the petroleum wealth

into other assets in ways that increases futureproduction capabilities

• Education (Human Capital)

• Infrastructure (Real Capital)

• …

• Financial assets (Financial Capital)

This challenge is common for all countries, but all countries should pursue a long-term strategy

How to reallocate best may differ betweencountries

Balance sheet for a country 2



Petroleum revenues are temporary and volatile

Petroleum revenues not income in traditional sense

➢ Income stemming from depletion of non-renewable natural resources

➢ Transform windfall gain to permanent increase in consumption

➢ Need for separating current accrual from spending

Extraction Path

Consumption path before petroleum discovery

Consumption path after discovery

Timet0

Necessitates saving a large part of petroleum revenues

12



GPFG is fully integrated with fiscal policy

Fund

Petroleum revenues

State Budget

Transfer to finance non-oil deficit

Fiscal policy guideline

Over time spend Fund real return (estimated at 3 percent)

Return on investmentsPetroleum revenues

Non-oil revenues

Expenditures


Petroleum revenues and fund mechanism 13



Fiscal rule (introduced in 2001)

➢ Petroleum revenues should be phased into the economy in line with the development in expected real return of the Fund (estimated at 3 per cent)

➢ Considerable emphasis put on stabilizing the economy

→ Emphasis on a smooth and sustainable phasing in of petroleum revenues

→ Automatic stabilizers are allowed to operate, focus on non-oil structural deficit

→ Discretionary fiscal policy is not ruled out…

– …but fiscal policy should have a medium-term orientation


Petroleum revenues and fund mechanism 14


Norsk mal: Diagram

Spending of oil revenues. Per cent of non-oil GDP

15

0

2

4

6

8

10

12

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

0

2

4

6

8

10

12

Structural non-oil deficit

4 pct. real return

3 pct. real return

Petroleum revenues and fund mechanismSource: Ministry of Finance (RNB 2018)



Outline


Governance

Investments

Fund performance


16



Organizational chart, Norwegian Ministry of Finance

Minister of Finance

State Secretaries

Secretary General

Political adviser

Communication Unit

Economic PolicyAdministrative Affairs Asset Management Financial Markets Tax Policy Tax Law Budget

Director General

Governance

Governance 17


Governance structure marked by clear lines of responsibilities

The Storting – Norwegian Parliament

Ministry of Finance

Norges Bank Operational manager of GPFG

Government Pension Fund Act

National BudgetAnnual Report to the Storting

Material changes presented to Parliament prior to implementation

Management mandate

Regulation on risk management and reporting Guidelines for observation and exclusion

Quarterly and annual reports

Investment strategy advice

18



Hierarchy of regulation, supervision and reporting

The Storting

Ministry of FinanceSupervision: Auditor General

The Executive Board of Norges Bank Supervision: Supervisory Council and External Audit

Norges Bank Investment Management (NBIM) Supervision: Executive Board and Norges Bank Internal Audit

Internal and external managers Supervision: NBIM Compliance and Control

Reporting of performance and risk

Regulation anddelegation of authority

Governance

Governance 19



Outline


Governance

Investments

Fund performance


20



Overall investment strategy

Highest possible long-term financial return within a moderate level of risk

The investment strategy is in particular characterized by:

➢ Broad diversification

➢ Harvesting of risk premia

➢ A moderate degree of active management

➢ Responsible management

➢ Cost efficiency

➢ A clear governance structure

Investment strategy

21



1998

40 % equities

2000

Some emerging equity markets

2002

Non- governmentbonds

2004

Ethical guidelines

2005

Inflation-linkedgovernment bonds

2006 2007

High-yield bondsCommodity derivaties New risk management

requirements

60 % equitiesSmall-cap

2008

Unlisted real estate,All emerging equity

markets

Adjusted framework for responsible management

2011

First investment in unlisted real estate

2012

New benchmark index for equity and fixed income

investments

2014

The investment strategy of the Fund has evolved over time. Important decisions are anchored in Parliament

22

2016

New regulation on investments in unlisted

real estate

Investments

2017

70 % equities



Broad geographical distribution of Fund investmentsActual investments at yearend 2017

InvestmentsSource: Norges Bank 23



Outline


Governance

Investments

Fund performance


24



Considerable return volatilityMeasured in the Fund’s currency basket

-30

-20

-10

0

10

20

30

40

- 30

- 20

- 10

0

10

20

30

40

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

13.7 %

GPFG

0.27%

Equities

0.42%

Fixed income

-0.39%

Real estate

4.40%

Annual return in per cent Nominal return in th first half of 2018

25Fund performanceSources: Norges Bank and Ministry of Finance


Fund performance

Key figures at June 30th, 2018

(annualised data in currency basket)

Last 12 months

Last 3

Years

Last 5

yearsLast 10 years

Since

1.1.1998

Gross annual return (percent) 7.04 6.26 8.16 7.00 5.95

…of which relative return on equity- and fixed income investments (percentage points)

0.24 0.21 0.15 0.21 0.27

Annual price inflation (percent) 2.30 1.55 1.40 1.55 1.80

Annual management costs (percent) 0.06 0.06 0.06 0.08 0.08

Annual net real return on fund (percent) 4.57 4.57 6.60 5.29 3.99

Fund performance

26Fund performanceSources: Norges Bank and Ministry of Finance



GPFG is among the largest funds in the world

8 337

0%

50%

100%

150%

200%

250%

300%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q2 2018

Fund size as share of GDP for Mainland Norway (rha)

Market value development 1996 – June 30th 2018. NOK billion (lha) and per cent of GDP Mainland Norway (rha)

Fund performance

Fund performanceSources: Norges Bank, Statistics Norway and Ministry of Finance

27



8484

5068

-1,736 -39

1040

4151

Return attributed to individual asset classes

Real estate53

Fixed Income1,037

Equities3,062

28

Fund value broken down on sources of inceptionNOK billion (1996 – December 31th 2017)

Sources of inceptionSources: Norges Bank and Ministry of Finance



Outline


Governance

Investments

Fund performance


29



High degree of transparency in Fund management

➢ Prerequisite to ensure broad support for and confidence in the management of Fund

➢ Management mandate states; …greatest possible degree of transparency within the limits defined by a sound execution of the management assignment

→Reporting

→Holding lists

→Voting records

➢ Contributes to a robust investment strategy

→ Anchoring of risk profile with stakeholders

Governance

Governance 30



Tools employed in responsible management of the GPFG

➢ Measures in day-to-day business:

→Active ownership

→Environment-related investments

→International collaboration and contribution to the development of best practice

→Research and investigation

➢ Measures of last resort:

→Observation

→Exclusion of companies

Responsible management 31



Key lessons from Norway’s experience 1

• Income from petroleum is volatile and uncertain

• There is a need to separate current spending from current

revenues

• All countries need a fiscal rule, but the rule should be tailor-

made

• Clear definition of roles and responsibilities, and transparency,

are important aspects of any governance structure

32



Key lessons from Norway’s experience 2

• The petroleum sector accounts for a substantial part of our

economy. Integrating the oil sector in national account statistics

has been a prerequisite for understanding and analysing the

sector and for economic policy making.

• Perspectives for the oil sector and for oil revenues are an

integrated part of economic planning in Norway, in annual fiscal

budgets and in economic perspectives presented by the

Ministry of Finance to Parliament every fourth year.

33


Engelsk mal: Sluttside


www.regjeringen.no/en/dep/fin

www.government.no/gpf

www.nbim.no/en

www.etikkradet.no/en

P.O.Box 8008 Dep

NO-0030 Oslo, Norway

Telephone: +47 22 24 41 63

E-mail: [email protected]

http://www.regjeringen.no/en/dep/fin

http://www.government.no/gpf

http://www.nbim.no/en

http://www.nbim.no/en

mailto:[email protected]

Documents

Managing oil revenues –Norway’s experienceigmozambique.wider.unu.edu/sites/default/files/News/forum publico... · 2018/09/13 · = 100% cash flow tax 8 Photo: Colourbox. Norwegian