When Norway struck black gold in the North Sea in 1969 its economy grew rapidly. Such was the extent of the newly tapped oil and gas reserves, the Scandinavian nation found itself with more money than it knew what to do with.
In the 1990s, the Government Pension Fund Global was established – with the first deposit being made in 1996. It invests in almost 9,000 companies worldwide and owns hundreds of buildings.
Currently valued at close to €1.8 trillion, it is the largest of its kind – and carries significant clout. Just last week it made headlines after it voted against a proposed Tesla pay deal for Elon Musk which stood to make the electric car boss the world’s first trillionaire.
As the seventh-largest shareholder, the fund said it was “concerned” at the size of the award.
RM Block
Its sheer scale dwarfs any ambitions Ireland might have for its fledgling sovereign wealth funds, but it provides the model the State wants to emulate.
With tens of billions of euro in corporation tax rolling in every year, the Government last year signed off on plans to start putting some of it away in two funds – the Future Ireland Fund (FIF) and the Infrastructure, Climate and Nature Fund (ICNF).
The National Treasury Management Agency (NTMA) has hired the founding chief executive of Norges Bank Investment Management, Knut Kjaer, to map out a plan of action.
He, along with five other members of an advisory investment committee, was given the job of devising a long-term strategy for the money. That plan is complete and awaiting sign-off from the Government.
[ NTMA invests initial €6.3bn in two new sovereign wealth fundsOpens in new window ]
Should the corporation tax bonanza continue – and stock markets remain buoyant – the funds could total well in excess of €100 billion by 2035.
The objective of the FIF is that it supports “State expenditure” from the year 2041 – while the ICNF is designed to store away money that could be drawn down for environmental projects in the event of an economic downturn.
Michael Somers was boss of the NTMA when the original National Pension Reserve Fund (NPRF) was established here in 2001.
Irish business grandee Gary McGann on working with Michael Smurfit, the fall of Anglo Irish and the current state of the Irish economy
“They had just sold off Eircom and there was five or six billion euro hanging around,” he says.
“I remember discussing with [former minister for finance] Charlie McCreevy what to do with it. He said to me he had already reduced taxes, he wasn’t going to spend any more – and he wasn’t going to reduce the national debt. There was a lot of talk about unfunded pension liabilities at the time and we came to the conclusion the best thing to do was to put it aside to deal with that”.
Somers notes that the fund was meant to be left alone for a quarter of a century.
“McCreevy put into the law that no money could be taken out until 2025 – but we all recognised a Government could change the law if it wanted to – which is what they did”.
[ NTMA taps experts from Norway to New Zealand for new sovereign wealth fundsOpens in new window ]
Somer’s successor Eugene O’Callaghan took over the running of the NPRF in 2010 – just as the fund was being raided in order to prop up Ireland’s failing financial system.
He says that if the two new funds are to hit over €100 billion it will depend on two things – continued windfall tax revenues – and resisting the political pressures to spend the money before then.
“Of course, the huge uncertainty is around whether the contributions will keep on coming,” he says.
“Corporation tax revenues are fragile – and over the medium term they are very fragile. If contributions to the funds were to be suspended – either through a fall in taxes or from political pressure – the fund will never get to that size.”
The other big consideration, says O’Callaghan, is the increased pressures on sovereign wealth managers to invest “responsibly”.
He notes that Norway last week suspended its ethical investing rules – as they would have forced a sell-off in its shares of Amazon, Microsoft and Google-owner Alphabet.
Each of those multinational companies does work for the Israeli government.
The fund in Oslo has come under increasing public pressure to divest in its Israeli holdings.
According to Norwegian finance minister Jens Stoltenberg, it also came under pressure from the United States – for selling off shares in Caterpillar after its bulldozers were used in the Palestinian territories.
“There are always controversial issues,” says O’Callaghan. “Ultimately sovereign funds need a mechanism for dealing with them. In the case of Ireland it is currently done on a bit of an ad hoc basis.
“Some legislation has been very helpful – like that on cluster munitions – which makes it illegal to invest in them. That makes it very easy. It’s where you need to have trade-offs where it becomes tricky.
“Over time, the funds would need some forum or mechanism to deal with the trade-offs a country has to make. Microsoft is a huge employer in Ireland, as just one example. It’s going to be like this until a more comprehensive framework is put in place”.
The NTMA says it is “acutely conscious” of the public desire that money be invested responsibly and sustainably – and that a “comprehensive” framework will be developed to ensure this happens.
Former chairman of the Irish Fiscal Advisory Council John McHale says it would be hard to imagine the new funds ignoring the big technology companies.
He says the current environmental, social and governance (ESG) rules do not prohibit investments like these – and are instead designed to restrict investments in large polluters, such as energy companies.
For McHale the bigger question is whether the money will be there at all to invest.
“The bigger point – and it would be good if there was a little bit more recognition of this – is that it is all close to pointless unless you are running surpluses,” he says.
“The projected [general government] surplus for next year is down to 1.4 per cent of national income – that could disappear quickly and all of this could become moot.”
He is critical of the Government for not yet publishing its latest medium-term fiscal and structural plan. That will set out the projected surpluses for the next five years, taking into account the latest budget.
Putting aside the issue of whether the money will be there or not, McHale does see some value in the type of longer-term fund being envisaged.
“The FIF is really a response to demographic pressures we know are coming, and is all about preparing for that.
“The fact that they won’t be touching it until 2041 allows the State to be a bit more risky in its investment strategy. You can push the boat out on the FIF – and take advantage of higher returns on more illiquid investments.”
The other big concern hanging over the project is rooted in memories of the past.
Much of the money invested in the pension reserve fund didn’t last long enough to help deal with the demographic pressures it was ostensibly designed for – and was ploughed into AIB and Bank of Ireland.
Eugene O’Callaghan, who inherited that crisis, is cautiously optimistic that these funds should ultimately serve their stated purpose.
“The financial crisis was a once-in-a-multigenerational event, not something that happens every 20 and 30 years – maybe every 100 years,” he says.
Instead, political pressure to spend the money before 2041, says O’Callaghan, is a more likely threat.
