Government allies run critical eye over Norway's wealth fund

Fri Mar 21, 2014 10:44am EDT

* Reforms to fund expected to be announced in April

* May give fund leeway to broaden range of eligible investments

* More oversight may be needed, say Liberals, Christian Democrats

By Joachim Dagenborg and Gwladys Fouche

OSLO, March 21 (Reuters) - Norway's huge sovereign wealth fund might need to tighten its regulatory framework, two parties the government relies on to stay in power said, sharpening a debate about reforms that could see the fund expand its range of investments.

Activities of the fund, the world's largest with assets of $840 billion, are currently limited to stocks, bonds and real estate - lower-risk assets that help it generate a regular income for the state from Norway's oil revenues.

But the centre-right government of Erna Solberg plans reforms, due to be announced in April and aimed at improving the fund's rate of return - which has undershot its 4 percent target since it was established in its current form in 1998.

These may include allowing it to invest in potentially higher yielding but less transparent categories such as private equity and infrastructure - a vexed issue following the fund's investment in Formula One motor racing.

Formula One cancelled plans for an IPO after the $1.6 billion investment was made, technically putting the fund in contravention of a regulation that only allows it to buy stakes in unlisted companies if they plan to float.

The fund's head has since acknowledged mistakes were made in connection with the investment.

The government has a minority in parliament and, to push the reforms through, will need the support of two small centrist parties, the Liberals and the Christian Democrats.

Both have expressed concerns about how the fund's current structure would cope with a broader range of investments.

"For the moment I am not judging anyone. But we need to get some clarity about how the organisation is planning to deal with an investment strategy that will be more demanding," the leader of the finance committee in parliament, Hans Olav Syversen of the Christian Democrats, told Reuters.

He said the investment in Formula One showed levels of risk were higher when the fund invested in unlisted firms.

"How you should build up the competence you need to implement a new strategy must be a central question in the coming parliamentary hearings," said Syversen.

ETHICS AND OVERSIGHT

The Liberals said tighter supervision of the fund's management may be required.

"An important question to ask is whether the formal structures to control the fund are good enough," Terje Breivik, financial spokesman for the Liberals, told Reuters.

"I am not convinced parliament's need for control is well catered for under the present structure."

He suggested the auditor general's office, which probes the finances of public bodies, could be allowed to audit the fund.

Sony Kapoor, a close watcher of the fund's activities, said a solution may be to create an "Oil Fund Watch" that would provide independent financial expertise advice to parliament.

"As the size of the fund becomes bigger and invests in illiquid assets, only a strong parliament drawing on specialist expertise can oversee the fund in a manner that is necessary to maintain legitimacy," said Kapoor, a senior visiting fellow at the London School of Economics.

Another issue of debate is whether the council on ethics, which makes recommendations on companies it deems are not ethical enough for the fund to invest in, should be made a part of the fund's management.

The council's head told Reuters he was not in favour, as that would make decisions to exclude a company, and the reasons behind them, less likely to be published, as they are today.

"We should report back to the people of Norway," Ola Mestad said in an interview. "And there is a strong interest internationally in such assessments."

The fund has so far blacklisted 63 firms, including makers of nuclear arms, anti-personnel landmines, cluster bombs and tobacco producers.

The fund may also be told to invest more in renewables and developing countries, something the parties in power agreed on when they formed government in October. (Editing by John Stonestreet)

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