Sovereign Wealth Funds: the Case of Norway

Abstract

Sovereign Wealth Funds that emerged in the mid-twentieth century and whose numbers have largely grown since then, have become an important issue at the heart of discussions today. In this context, The Government Pension Fund-Global, established under the name of Government Petroleum Fund in 1990, attracts the attention as the largest sovereign wealth fund in the world today. Particularly good governance, transparency, importance of ethical values in investments, consistently dynamic structure are the main factors that feature in the development of the fund. Hence, in the study, The Government Pension Fund-Global has been examined in terms of guiding to Turkey Wealth Fund, established in 2016 and one of the world's newest fund.

Full text

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DOI: 10.26650/PB/SS10.2019.001.037
SOVEREIGN WEALTH FUNDS: THE CASE OF NORWAY
Hüseyin Burak ÖZGÜL1
Abstract
Sovereign Wealth Funds that emerged in the mid-tweneth century and whose numbers have largely grown since
then, have become an important issue at the heart of discussions today. In this context, The Government Pension
Fund-Global, established under the name of Government Petroleum Fund in 1990, aracts the aenon as the
largest sovereign wealth fund in the world today. Parcularly good governance, transparency, importance of
ethical values in investments, consistently dynamic structure are the main factors that feature in the development
of the fund. Hence, in the study, The Government Pension Fund-Global has been examined in terms of guiding to
Turkey Wealth Fund, established in 2016 and one of the world’s newest fund.
Keywords: Sovereign Wealth Funds, The Government Pension Fund of Norway, The Government Pension Fund-
Global, The Government Petroleum Fund of Norway
JEL Code: F30, G23, G38.
1. Introducon
The term “Sovereign Wealth Fund” was rst used in 2005 by Andrew Rozanov, one of the State
Street Bank of America. Rozanov indicated that by beerment of macroeconomy, terms of trade
and nancial stability of a country and implementaon of nancial spending limitaon policy,
budget surplus and foreign trade surplus accumulate. He stated that therefore, to manage the
surplus at issue, investment instuons were established, and they could be called Sovereign
Wealth Funds (Ping & Chao, 2009: 2).
There are three key features of Wealth Funds. First of these features is that Wealth Funds are
stated-controlled. Second, they mainly invest abroad. Third, they are established in accordance
with long term objecves, by and large to implement macroeconomic objecves. Thus, assets of
the Fund, is dierent from the Central Bank reserves, the purpose of which is only to equilibrate
balance of payments and should not be confused with other instuons, and establishments,
and funds (IWG, 2008: 27)2.
Sovereign Wealth Funds, though it emerged as a nancial issue in 21st century, they date back
to a long me. In literature, it is stated that the rst modern sovereign wealth fund in line with
IMF denion is the one established in Kuwait in 1953 to manage surplus of income from oil
(Alheshel, 2015: 2).
The Funds which were few in 1950s, from the end of 90s, increased enormously in number
and the Funds at issue spread to the world. Today, there are 78 Sovereign Wealth Funds in 50
countries in total (SWFI Instute, 2019).
1 Res. Asst., Istanbul University, burak.ozgul@istanbul.edu.tr
2 For further informaon on sovereign wealth funds. See: (Özgül, 2018).

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Among these funds, Government Pension Fund is the subject of this research, as it has the
biggest asset value and it is shown as a model in terms of transparency.
2. Government Pension Fund Global (GPFG)
According to Sovereign Wealth Fund Instute data, by 2019, GPFG is the biggest fund in the
world with an asset value higher than 1 trillion dollar3. Moreover, on LMT index, used by the
instute as transparency index, it scored 10 over 10. The fund at issue is commonly described
as a transparent and well-managed and it is praised by the media around the world for leading
the responsible investment enterprises on ethical and social grounds (Clark &Monk, 2010: 14).
2.1. Historical Development
The Sovereign Wealth Fund of Norway is directly linked to the drilling of oil resources in the
country. In Norway, oil was rst discovered in the North Sea in 1969. Two years aer its discovery,
the oil producon began. And in 1990s, a signicant revenue from oil producon accumulated.
Norwegian Government launched Government Petroleum Fund as a means to support long-
term management of ever-increasing oil revenue. The Fund at issue was founded by passing
of Government Petroleum Fund Law by Norwegian Parliament in 1990 (Backer, 2009: 132)4.
One of the most signicant reasons to found the fund was to make clearer how the oil revenue
was used. In this context, it was aimed to compile the menoned revenue under a fund and
use them to cope with dicules that might occur in public nance in long term because of
the uctuaons in the oil revenue (Norges Bank, 1998:4) By doing so, it is aimed to create a
long-term prosperity source to nance the social security spendings that might occur as a result
of the populaon growth in the future and to benet future generaons (Legislave Council
Secretariat, 2014: 1).
Fund mechanism was designed in a way that transfer to Fund could be made only when there is
budget surplus. For this reason, between 1990-1995, no transfer was done to the fund. Because,
due to the recession in the country in the rst half of 1990s, budget decits occurred. Aer
this period, rst budget surplus occurred in 1995 and capital transfer to the fund from that
year’s budget surplus took place in 1996 (Skancke, 2003: 318). The fund which was renamed
‘’Government Pension Fund’’ in 2006 (Clark &Monk, 2010: 14), from 1996 when it acquired
the rst capital transfer to today, it has been ever growing and in 2019, with its asset value
of more than 1 trillion dollars, it has become the biggest sovereign wealth fund in the world.
(SWFI Instute, 2019).
3 The value at issue constutes %13 of the total value (as of 2019 8,144 trillion dollars) of all the sovereign wealth
funds.
4 Aer oil was discovered in 1969, it was realised by the Norwegian Government that the oil revenue would be
high. And also, it was weel-understood that the oil revenue is not a renewable income and it would be aected by
economical uctuaons. For these reasons, managing the oil revenue and spending of the state became important
and the idea to establish a sovereign wealth fund was rst suggested by Tempo Commitee in 1983. And in the
long term programme released in the spring of 1986, the Norwegian government supported the idea (Norwegian
Ministary of Finance, 2013: 7).

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2.2. Governance Structure
As is today, The Government Pension Fund consists of the Government Pension Fund Global and
Government Pension Fund Norway (Government Petroleum Fund Act, 1990). The Government
Pension Fund Norway involves (Folketrygdfondet) Naonal Insurance Scheme Fund Norway
(Norwegian Ministry of Finance, 2006: 5-6). Along with this, well-known in the world, displaying
sovereign wealth fund features i.e. making investments abroad, The Government Pension Fund
Global (GPFG) is the main subject of this study.5
GPFG has not got execuve board or administrave personnel. According to law, GPFG is
administrated by the Ministry of Finance. Administraon of the fund is divided into three
parts. The rst part includes formaon of general policy. This funcon belongs to the Ministry
of Finance. Ministry of Finance sets out principles of ethical and instuonal management
principles along with fund’s investment strategies (Norwegian Ministry of Finance, 2006: 6). The
second part is the administraon. The operaonal administraon of the fund is transferred to
Norway Central Bank (Norges Bank). Within this scope, a management agreement was made
between Ministry of Finance and the Norway Central Bank to regulate the task sharing (Figure
1) (Norges Bank, 2008: 6).
It’s not possible that the operaonal management of GPFG is regulated and administrated in a
detailed manner by the Ministry of Finance. The authority of regulaon only states the general
investment strategy. Norges Bank is responsible with making investment decisions independently
of The Ministry. The responsibility to accept investment strategies and other high aairs belongs
to Execuve Board in Norges Bank. Daily operaons are given to the chair of the Norges Bank
Investment Management (Norwegian Ministry of Finance, 2018: 58). In this context, the chair
of the Norges Bank Investment Administraon reports to the Norges Bank manager monthly;
however, does not parcipate in the internal discussions on Central Bank’s general monetary
policy (Skancke, 2003: 330).
5 Norwegian Wealth Fund carried on its acvies as State Oil Fund from 1990 to 2006 and in 2006, it was renamed
Government Pension Fund, with the merging of Goverment Pension Fund-Norway which involved Naonal Insurance
Fund and Government Pension Fund-Global which was connituaon of Government Petroleum Fund.

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Figure 1. Governance Structure of GPFG
Source: Norges Bank, 2008: 7.
Third part is the supervision (Figure 2). Norges Bank les a detailed annual report about the
management of the sovereign wealth fund. These public reports, explains how the fund is
managed and includes a list of the companies the fund invests in. These reports also include
informaon such as the investment view and the elecon process of the exterior managers. In
addion, Norges Bank les quarterly reports including main revenue and cost data. Apart from
all these, Norges Bank reports to an independent company too. The reports of this company
are public and published online as the Norges Bank’s reports (Skancke, 2003: 328-329).
The Ministry of Finance, to which the Fund is aliated, every year at the spring session, presents
a report (White paper) about the management of the fund to the parliament. These reports
are public. In the aachment of the report, the annual report presented by Norges Bank is also
available. In the reports presented by the Ministry of Finance, the general issues about the
management of fund capital are presented. More general topics, such as; the management of
the oil revenue, the role of the fund in the economy and how much of the oil revenue is to be
spent are discussed in the autumn session along with the nancial year budget (Norwegian
Ministry of Finance, 2006: 7).

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Figure 2. Audit of GPFG
The fund is also audited by the Oce of the Auditor General of Norway. The oce is responsible
with the ulmate audit of the fund and reports directly to the parliament (Backer, 2009: 139).
2.3. Operaonal Mechanism
The revenues of GPFG are provided from the cash ow coming from the oil-related acvies
which is transferred from the scal budget, from the results of nancial transacons -related
to oil-related acvies, and returns of the fund capital. In compliance with the decision made
by the Norwegian Parliament, the capital of the GPFG can be only used in the transfers to the
scal budget (Government Petroleum Fund Act, 1990).
Figure 3. Fund Structure
Source: Skancke, 2003: 321.

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As shown in gure 3, in this context, the spending of the fund consists of the annual transfers
to the Treasury to close the budget decit which occurs apart from the oil revenue in the scal
budget (Skancke, 2003: 322).
However, the transfer is limited. Authories made a regulaon in 2001 to allow only %4 of the
fund-asset of that year to be transferred to close this decit. In determining %4 rao which is
also called the scal rule, fund’s expected rate of return from its investments was considered
(Wirth, 2018: 184) and this rao was reorganized as %3 in 2017. It is expressed that, by this
means, the transfers which are to be made to the scal budget from the fund would be levelled
in me to the fund’s expected actual rate of return (Norwegian Ministry of Finance, 2019).
While on one hand, the Norwegian Ministry of Finance asserted that the oil income was not
permanent and could be aected by the nancial uctuaons easily, on the other hand it
emphasized that fund’s expected net return could nance the budget decits in me as a
permanent income. It is assumed that thereby the eect of the nancial uctuaons on the
budget could be prevented (Norwegian Ministry of Finance, 2006: 8).
2.4. Investment Strategy
As menoned earlier, Norway Wealth Fund got the rst capital in 1996, aer its formaon in
1990. Unl 1998, the fund capital was managed in the same manner as Norway Central Bank
foreign exchange reserve. In the beginning, GPFG only made investments in xed-income security
including government bonds and government-guaranteed investment grade securies in only
8 countries (Norwegian Ministry of Finance, 2014: 15).
The Fund started preparaons to invest in equies in 1997 and established a new department
called Norges Bank Investment Management in the rst quarter of 1998 to manage these
investments and transferred the assets which was 14 billion euro at that me to this department
(Skancke, 2003: 330). The fund started to invest equity investments with %40 inial share aer
this. The idea behind this spurt was that equies would bring more prot than government
bonds in the long term. By this means, it was predicted that invesng in mulple asset classes
would help spreading the risk (Norwegian Ministry of Finance, 2014: 15).
In 2000, some developing markets were included in the equies and fund investments was
expanded to include 21 countries. In 2002, non-government guaranteed bonds were included in
the xed-income benchmark. In 2007, the share of equity investments was raised from %40 to
%60 (%70 today). In 2008, the scope of equity investments was expanded even further including
all the developing markets6 (Norwegian Ministry of Finance, 2014: 17).
Again, the fund was allowed to make real estate investment up to %5 (%7 today) in 2008. First
real estate investments were made in big European cies. Aer 2013, investment strategy of
GPFG was changed so that real estate investments could be done in global scale (Norwegian
Ministry of Finance, 2014: 18).
6
These markets are all markets dened by FTSE Group as Advanced Emerging and Secondary Emerging. For more
informaon see hps://www.se.com/products/indices/country-classicaon (26.02.2019).

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Chart 1. Investment Distribuon of GPFG (Third Quarter of 2018) (%)
Source: Norges Bank, 2018: 4.
Today, the funds make investments in more than 9000 companies in 72 countries (Norges Bank,
2017: 26). As shown in Chart 1, the biggest percentage of GPFG’s investments is consists of
equity investments with %67,6. It is seen that most investments are made in nance, industry,
and technology sectors (Chart 2).
Chart 2. Sectoral Distribuon of Equity Investments (Third Quarter of 2018) (%)
Source: Norges Bank, 2018: 7.
As shown in chart 3, the biggest percentage in regional distribuon of GPFG’s investments
is in North America region. That is followed by Europe with %36. Country based, %36 of the
distribuon is in the U.S., %8,8 in the U.K, and %8,7 is in Japan (Norges Bank, 2017: 27).

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Chart 3. The Regional Distribuon of The Fund’s Investments (End of 2017) (%)
Source: Norges Bank, 2017: 27.
The biggest reasons why GPFG became the biggest wealth fund and the investments developed
this much are good management and transparency. In many reports reviewed and arcles
wrien, it is seen that aenon is drawn to the understanding of transparent management
since its formaon. The important part of this is The Council on Ethics.
2.4.1. The Council on Ethics
Besides being ocially aliated to the Ministry of Finance, at the same me, GPFG is the
property of Norwegian cizens. Thus, it can be aected by the public. In 1998 when the fund
started making equity investments, it was opined by the cizens that the fund should not only
be used for intergeneraonal jusce, but also it should contribute to the universally accepted
values and norms. Because, in those years, it was revealed in report that the fund was invesng
in many companies which took part in unethical acvies (Wirth, 2018: 186).
Upon this, in 2002 The Ministry of Finance formed a commission. In the report released by the
commission in 2003; internaonally accepted ethical values regarding human rights, governance,
and protecon of environment depending on UN and OECD principals were dened. In the
report, in parcular the necessity of two main values was underlined. The rst of the menoned
values was the compulsion to intergeneraonal distribuon of the oil revenue even if petroleum
revenue was low. The second was company that are to be invested in have to be respecul to
the basic rights and liberes. At the end of 2004, the parliament passed the Ethical Guidelines
for the GPFG (Wirth, 2018: 186-187).
Also, in this session The Council on Ethics was established. The council is an independent one
responsible for counselling the Ministry of Finance and Norges Bank
7
. The council’s responsibility
is to check whether the companies that are to be invested in comply with accepted ethical
criteria. Unl today, the council has given advice to Norges Bank on many companies that
7 The investment advice was passed to the Ministry of Finance unl 2015, then directly to Norges Bank.

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violate the ethical rules. And most of the me, Norges Bank followed their advice, though it is
not compulsory for the bank to follow the given advice (Council on Ethics Government Pension
Fund-Global, 2005: 5, 2017: 7)8.
3. General Evaluaon
For the nancial authories in a country, the priority should be the development of cauos and
long term strategy for nance policy. However, if this strategy requires the state to accumulate
its resources and form a sovereign wealth fund, then there is the necessity to make the detailed
regulaons for the menoned fund. The success of the fund requires high consensus, transparency,
and accountability. As in the example of Norway, it was possible that an instuonal frame could
be formed in 1990 when the fund was established. Because, at that me, the Central Bank
had vast experience on how to manage the foreign exchange reserves and a well-funconing
reporng and control systems. Addionally, for nancial policy strategy and the operaons
of the central bank, there is the long tradion of transparency in the country. Moreover, the
contract between the Ministry of Finance to which the fund is aliated and the Central Bank
that runs the operaonal management of the fund helped the good management of the fund
by stang the dues and responsibilies of the pares clearly. Correspondingly, it is required
for the countries that take GPFG as an example, they should develop the instuons to regulate
transparency, accountability and budget operaons, and establish a tradion of transparency
(Scancke, 2003: 333).
4. Conclusion
The total value of sovereign wealth funds whose numbers are 78 today, has risen to 8.144
trillion dollars today. %13 of the total value belongs to the GPFG alone. The fund having got the
allocaon of capital for the rst me in 1996, rstly made investments in xed income securies
and then started making equity investments. Today, it is the biggest wealth fund in the world
invesng in more than 2000 companies in 72 countries.
It is the subject of another research whether the wealth in the countries of the sovereign wealth
funds establish before and aer the fund at issue is more than Norway. However, as from 1990
when Norway Wealth Fund was established, it is a signicant fact that it was realized that the
oil source of the fund would not be a permanent income and to nance the ever since growing
elderly populaon’s expenses in the future, by managing the menoned oil resources well it
reached it’s success today. The most important reasons behind this success are that the rst
day the fund was established on, transparency and accountability were priorized and well-
planned management of the oil revenue.
8 Council in the companies to be invested; It pays aenon to the existence of many situaons such as human
rights violaons such as murder, torture, child labor and all forms of child exploitaon, severe environmental
damages, arms producon, greenhouse emissions, corrupon and serious violaons of basic ethical norms (Council
on Ethics Government Pension Fund-Global, 2005: 6).

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