1. 1 Government Pension Fund – Global Managing a Sovereign Wealth Fund 25 September 2007 Martin Skancke Director General Asset Management Department

2. Norwegian Ministry of Finance 2 Large Sovereign Wealth Funds Source: Peterson Institute for International Economics

3. Norwegian Ministry of Finance 3 Topics Macroeconomic role Governance and transparency SWFs in an international context Conclusions

4. Norwegian Ministry of Finance 4 Wealth management – from theory to practice Stabilization: Spending must be separated from current (volatile) oil & gas income Savings: Fiscal policy must take account of transitory nature of revenues t 0 Extraction Path Consumption path after discovery Time Consumption path before petroleum discovery

5. Norwegian Ministry of Finance 5 What can a fund do? A petroleum fund can support fiscal management if it:  Enjoys wide political and public support  Operates under clear rules  Stores genuine savings

6. Norwegian Ministry of Finance 6 What can a fund not do? A fund can never be a substitute for sound fiscal management  Main priority must be to  design a good budget process which integrates oil revenue  develop a sustainable fiscal policy strategy  build institutions that are competent, transparent and accountable  only THEN does it make sense to think about the role of a fund

7. Norwegian Ministry of Finance 7 The Norwegian petroleum fund model Fund is fully integrated with the state budget  a tool to strengthen the budget process  building on existing institutions Fund is only invested abroad in financial assets  protect domestic economy  risk diversification and maximize returns  financial investor A high degree of transparency  build public support for management of oil revenues  minimize risk of bad governance and corruption

8. Norwegian Ministry of Finance 8 Return on investments Fund Transfer to finance non-oil budget deficit Revenues Expenditures State Budget The Fund mechanism – integrated with fiscal policy Fiscal policy guideline (over time spend real return of the fund, estimated at 4%) Petroleum revenues

9. Norwegian Ministry of Finance 9 Benchmark for the Pension Fund – Global Equities 60 % Fixed Income 40 % America and Africa 35 % Asia and Oceania 15 % America and Africa 35 % Europe 60 % Asia and Oceania 5 % Equity index: FTSE All-Cap Index Approx. 7000 equities Fixed income index: Lehman Brothers Global Aggregate/Global Real Government / Agency / Corporate / Securitized Approx. 7500 bonds Strategic benchmark Europe 50 %

10. Norwegian Ministry of Finance 10 Topics Macroeconomic role Governance and transparency SWFs in an international context Conclusions

11. Norwegian Ministry of Finance 11 Pension Fund - Global Governance Structure Ministry of Finance  Regulations  Performance reports Norges Bank Investment Management / NBIM Norwegian Parliament  Pension Fund Act  Performance reports and strategic changes reported in National Budgets and National Accounts Legislator Principal Manager  Management agreement Office of the Auditor General Norges Bank Audit Advisors  Advisory / consultancy agreement Founded on Act, regulations and separate contracts

12. Norwegian Ministry of Finance 12 Asset management: Clear lines of responsibilities Ministry of Finance – “Owner”  overall responsibility  strategic asset allocation (benchmark + risk limits)  monitoring and evaluating operational management  ethical guidelines  reports to Parliament Central Bank – “Manager”  implement investments strategy (benchmark)  active management to achieve excess return  risk control and reporting  exercise the Fund’s ownership rights  provide professional advice on investment strategy

13. Norwegian Ministry of Finance 13 Ethical guidelines and corporate governance Two main ethical obligations: 1)The obligation to ensure sound financial returns so that future generations will benefit from the petroleum wealth. 2)The obligation to respect fundamental rights for those who are affected by the companies in which the Fund invests. Exercise ownership rights – corporate governance Avoid investments in companies whose practices constitute an unacceptable risk that the Fund is or will be complicit in grossly unethical activities Future work on ethical guidelines: International seminar on ethics in investment management– January 2008 Evaluation process to be initiated in 2008, report presented to the Norwegian Parliament in spring 2009

14. Norwegian Ministry of Finance 14 Benefits of transparency Builds trust – necessary to achieve public support and legitimacy in managing sovereign wealth Disciplinary effect – pressure to deliver sound financial returns Contributes to stable international financial markets

15. Norwegian Ministry of Finance 15 Topics Macroeconomic role Governance and transparency SWFs in an international context Conclusions

16. Norwegian Ministry of Finance 16 SWFs’ growing role in international financial markets – selected aspects (1) Well functioning financial markets are good for everyone:  Allow capital exporters to  Decouple consumption and current revenues  Improve risk/return ratio on savings  Allow capital importers to  Decouple investments and domestic savings  Improve productivity through productive investments A sensible management of oil-producing countries’ petroleum wealth in well functioning financial markets is in everyone’s interest

17. Norwegian Ministry of Finance 17 SWFs’ growing role in international financial markets – selected aspects (2) Typical characteristics of SWFs are: Long investment horizon No leverage Absence of imminent claims for the withdrawal of funds SWFs in general have strong risk-bearing capacity and may provide a stabilizing role – offsetting possible predominance of short-term investors

18. Norwegian Ministry of Finance 18 SWFs’ growing role in international financial markets – selected aspects (3) SWFs’ are large – potential market movers  Lack of transparency may make SWFs less predictable and even increase volatility in some situations  Regulation and supervision? State controlled investment vehicles – suspicion of whether political objectives are guiding investment decisions  May encourage financial protectionism, but equal treatment of shareholders is a fundamental principle

19. Norwegian Ministry of Finance 19 Topics Macroeconomic role Governance and transparency SWFs in an international context Conclusions

20. Norwegian Ministry of Finance 20 Conclusions A well functioning international financial market is to everyone’s advantage  This should be the backdrop of any discussion on the role of SWFs SWFs may contribute to increased stability in financial markets  Long time-horizon  No liabilities  Little or no need for liquidity in the short term Transparency is key  Builds trust and confidence – domestically and internationally  Has disciplinary effect on management