In 1969, oil was discovered in the Ekofisk offshore field in the North Sea, marking the beginning of Norway’s oil wealth. It soon became apparent that the management of oil assets and revenues would be decisive for the Norwegian economy.
Revenues from natural resources such as oil, gas and minerals are known to be finite and volatile. When generated revenues are large enough, there are three main risks for the host country, the first two concerning governance, the third economic stability:
- From an ownership view, natural resources assets belong to the public. Politics acting as trustees for the public have to make sure, the asset values are managed sustainably so that future generations also can participate in the revenue, generated by these assets
- From a governance perspective, there is a risk of falling into “the resource curse”, by which countries mismanaging revenues suffer corruption, poverty of the local population, and even conflict.
- From an economic angle the country can experience the wasteful spending of wealth, inflation, and deindustrialisation. This phenomenon is known as the “Dutch disease”, in reference to the 1960s economic crisis in the Netherlands after the discovery of North Sea natural gas.
In the case of Norway, before the discovery of oil there was an historical tradition of state involvement in economic management and an economic model that was reliant on natural resources. Apart from fisheries and forestry, the country had developed industrial capabilities around hydroelectricity which became useful in the later development of its domestic oil industry. Therefore, when the rush of oil wealth arrived, the country already had fairly well-developed industrial capabilities and a well-established democratic administration, which limited the chances of experiencing wasting natural resources assets and the “resource curse”.
During the early years after the discovery of oil, political leaders in Norway were mainly concerned about participating in oil activities and managing oil wealth. In response to these concerns, the Storting – the Norwegian parliament – began structuring the oil industry in the early 1970s. In 1971, the “Ten Oil Commandments” were formulated to guide the nation’s petroleum policy. One year later, the state-owned oil company Statoil was created, and the Petroleum Directorate was established as a separate body to administer natural resources and regulate safety and work environment issues.
Despite these early attempts to improve the structure of the oil industry, economic risks were not being effectively addressed, and parliamentary debates in 1973 and 1974 expressed concerns that Norway might experience the “Dutch disease” itself. In response, in February 1974 the Ministry of Finance submitted a white paper, “The role of petroleum activity in Norwegian society”, explaining how oil wealth should be used to develop a better society. One of the report’s main arguments was that democratic institutions should control all aspects of petroleum policy, focusing on control over the pace of extraction operations. The idea behind this consideration was not only to promote the longer duration of resources but also to soften the fluctuation of oil prices that, at the time, were exposed to the international oil crisis. 
The public response to the report was divided, but a political consensus emerged that supported a few years of moderating petroleum activities. This position softened over time, and in 1982 the Norwegian government established a committee to review the future of petroleum activities.
The IMF defines a Sovereign Wealth Fund (SWF) as a “government-owned investment funds, set up for a variety of macroeconomic purposes. They are commonly funded by the transfer of foreign exchange assets that are invested long term, overseas.”
The idea of a Norwegian SWF as an instrument for the long-term management of oil revenues was presented in 1983 by the Tempo Committee, a group of experts appointed by the government to review the future of petroleum activities. The committee recommended that the government store oil revenues in an SWF and only spend the real return on the investment portfolio of the fund. Doing this, the Norwegian government swapped Oil assets in an Investment Portfolio. By placing oil revenues in the SWF, the state would effectively separate the volatile income from its national expenditure budget, limiting the impact of a fluctuating surplus on government spending  while maintaining the Value of the assets.
The committee also proposed investing the fund in international markets to prevent the overheating of Norway’s economy. However, the group was unsure of the state’s ability to commit to a long-term savings fund instead of spending oil revenues, and it included recommendations for budget regulation to limit public expenditure. The committee’s proposal entered the political agenda and the idea of the fund continued to mature during the 1980s.
The Norwegian SWF was established in 1990 by act of parliament, the 1990 Government Pension Fund Act. The SWF was initially called the Petroleum Fund, and in 2006 it was renamed as the Government Pension Fund Global (GPFG) – as it is known today. The fund is not a separate entity, but was established as a deposit account at the Central Bank of Norway – Norges Bank – where the government deposits petroleum revenue through regular transfers. The official owner of the GPFG is the Ministry of Finance, acting on behalf of the Norwegian people. The Ministry of Finance determines the investment strategy and ethical guidelines of the fund and monitors the operational management, which is delegated to Norges Bank. However, the Ministry reports to the Storting, which has to assent before the Bank can implement any significant change to the investment strategy of the fund. Ultimately, Norges Bank’s dedicated asset management team covers the GPFG portfolio’s daily operations, investing in the fixed-income and equity markets and – since 2011 – in property.
The GPFG is designed as a long-term investment, while allowing outflows to cover fiscal budget expenditure. Fiscal regulation limits fund outflows, so that only the expected real return on the GPFG can be allocated to the state budget. This regulation protects the real value of the fund.
The two principal objectives of the GPFG are to:
- Support the long-term management of spending the government’s revenues from oil reserves, and in this sense the fund helps the government to hedge against “Dutch disease” and protect the Norwegian economy and maintain the value of the oil assets for future generations
- Facilitate savings to finance pension expenditure under the National Insurance Scheme.
With these objectives in mind, the GPFG allows the use of petroleum revenues without affecting the general flow of income, limiting the impact of fluctuating surplus on government spending. The fund also serves an ethical objective, based on the principle of intergenerational equity. As an instrument for long-term savings, the GPFG’s investment strategy aims to maximise financial returns at moderate risk in order to secure maximum benefits for future generations. In its capacity as an instrument for state savings, the GPFG differs from traditional funds, which are generally allocated for specific liabilities and don’t protect similarly well the asset base. Compared to similar funds, the GPFG has a higher risk-bearing capacity because it is not subject to short-term liquidity requirements and has a long investment horizon.
Another important element of the fund is its mandate to operate as a responsible investor promoting sustainable development and good corporate governance. The fund’s first ethical guidelines were implemented in 2004 and were later updated in 2009. As a result, there are a number of blacklisted companies the fund does not invest in, based on either ethical or environmental grounds or both. This list is reviewed annually, and in 2017 the fund added 11 companies to its list of proscribed organisations.
Initially, the structure of the fund was designed mainly for bookkeeping purposes. Although government revenues from oil were being transferred to the fund, it was observed that the full amount was being returned to the fiscal budget on an ongoing basis to cover non-oil deficit. Economic reforms in the country led to the first net allocation to the fund in 1996. The Ministry of Finance transferred a surplus of NOK1,981,128,503 to be invested internationally in sovereign bonds in line with Norges Bank’s foreign exchange reserves.
In 1998, Norges Bank set up Norges Bank Investment Management, an asset management unit to manage the GPFG on behalf of the Ministry of Finance. That year, the unit invested 40 percent of the fund in equities in order to diversify a portfolio previously focused on government bonds. The portfolio has continued to diversify ever since, reaching a market value in May 2018 of NOK8.4 billion.
To avoid suffering from the “Dutch disease”, the Ministry of Finance implemented a fiscal law in 2001 limiting outflows of cash for government spending. The maximum amount was set at 4 percent annually, which was an estimation of the yearly return on the fund’s investments. This initiative, restricting state expenditure from oil revenues, prevented the overflow of oil money into the economy, while also protecting the value of the fund. As of April 2018, Norway’s GPFG was the largest SWF in the world.
The public impact
The fund has been successful in managing large oil and gas revenues in a responsible way, providing positive financial returns to benefit Norwegian society. The GPFG has also been essential to the short-term cycle management of the economy, acting as a tool for stimulating economic activity through fiscal policy at times when there was a risk of low employment and low growth.
The GPFG, which has been managed by Norges Bank Investment Management since 1998, is an active investor in some 9,000 companies worldwide. Through its strong ethical investment guidelines, the fund promotes good corporate governance standards and encourages businesses to implement sound environmental and social standards.
Since oil production began in Norway in the 1970s, 50 percent of oil reserves have been consumed; it is estimated that the remaining reserves will last for at least another 50 years. However, from the first transfer of NOK1.98 million in 1996, the value of the fund has increased to NOK8.4 billion as of May 2018, exceeding all expectations of the first 20 years of its existence. Overall, the GPFG has enabled revenues generated from oil to be more sustainable and long-lasting while the value of the asset base was maintained and not just spend.
The success of the GPFG is due in great part to political constraints. The government does not spend oil revenues – instead the full income from petroleum activities is invested in the fund. The government will only dispose of the expected yearly return on the fund, which was limited to 4 percent by its 2001 fiscal policy and reduced to 3 percent in 2017.
In 2016, the Norwegian economy had the highest Human Development Index value in the world and one of Europe’s lowest unemployment rates, with skilled jobs being created in the oil and gas sector for the benefit of the local population. In terms of its politics, the country has managed to remain a well-functioning and stable democracy, and was ranked in 2017 the third least corrupt country in the world. Norway has thus successfully managed to escape the “resource curse” and become per capita one of the richest countries in the world.
The fund is also known for its strong ethical standards. Most SWFs are used to maximise profits, regardless of the impact of their investment. Instead, Norway’s GPFG follows the rules determined by the Council of Ethics, a group of experts in international law, economics, human rights, and environmental policies. The fund will not invest in companies that fail to comply with its social and environmental standards, regardless of their profitability. Consequently, in early 2016, the GPFG excluded 73 companies from its investment portfolio based on ethical grounds. The group of blacklisted companies included large organisations such as Philip Morris, Wal-Mart, Daewoo International, and Rio Tinto.
Even though returns on its investments have historically been positive, the Norwegian government is aware that this might not always be the case in future. Value fluctuations are expected, and the fund investment strategy is believed to be designed to manage such risks, while contributing to a stable business climate and a sustainable world economy.
Written by Cristina Figaredo
Download case study
Public Confidence Fair
Early oil industry policy in Norway was mainly the concern of high-level political actors and technocrats, and academics and independent experts supported the technocratic approach of the government. Accordingly, the creation of the fund was largely the preserve of civil servants and economists, primarily from the Ministry of Finance.
There is limited evidence of direct public support for the creation of the fund. However, many parties in Norway are affiliated with civil society groups, including farmers, business associations, trade unions, environmental groups, and others. As a result, agreements reached in the Storting tend to represent the wider civil society in Norway, and the GPFG was created in 1990 through an act of parliament. The broad political consensus was achieved thanks to the cross-party goal of protecting the Norwegian economy from the risks that arise from substantial oil revenues.
According to Norway’s Ambassador to Canada, Mona Elisabeth Brother, the majority of Norwegians are proud of the fund, regardless of their own political opinions. Citizens often discuss such fund-related issues as the ethical guidelines and the public spending of the fund’s savings, and the ambassador considers that: “As we [the people of Norway] engage in the discussions around the fund, it is clear that Norway's GPFG is more than a national instrument for savings – it represents a nationwide philosophy to safeguard and build financial wealth for future generations”.
Stakeholder Engagement Fair
Even though economic experts were engaged to design the instrument, and broad political consensus allowed a lasting solution, there was little engagement of broader Norwegian society.
Norwegian officials frequently considered the problem of exploiting its petroleum resources from a technical and economic perspective. Academics and other independent experts were drafted in to help develop government policy in Norway. Most notably, a team of economists and civil servants was appointed in 1982 by the Ministry of Finance to form the Tempo Committee, a consultative group that proposed the idea of the fund. The committee was chaired by the economist and civil servant Hermod Skånland, who later became governor of Norges Bank. Under his leadership, the group laid the foundations of subsequent petroleum management policy in Norway. Important elements were the proposal to create a petroleum fund and the use of fiscal regulation to limit spending. The creation of an SWF aimed to end the limitation on production: the surplus generated by oil and gas activities would not put the economy at risk if it were stored in a fund investing in external capital markets.
Norwegian civil society groups were not engaged directly in the design of the policy. However, they were represented in parliament to a certain extent by the political parties to which they were linked. In Norway, there is not a clear distinction between political parties and the broader civil society. Many parties are affiliated with civil society groups such as business associations, farmers, trade unions, the Church, and environmental organisations. Consequently, parliamentary debates fulfil to some extent the role of a larger civil society. Since it was the parliamentary consensus that created the fund, the political parties associated with specific social groups would be expected to represent their own social group’s interests when deciding to create the fund.
Even though the direct involvement of potential interest groups was limited, private companies in the oil sector did play a role in transitioning to the fund-based management model for oil revenues. Oil sector companies had not been convinced by the 1974 arguments in favour of the policy to moderate production volumes. At the time, a broad political consensus in favour of protecting the economy from “the Dutch disease” prevailed. Nevertheless, as the oil sector continued to grow, so did the influence of oil companies against the self-imposed moderation policy. The creation of the GPFG put an end to the moderation on oil and gas activities, allowing oil companies to produce at full capacity without risking economic stability. Booming oil revenues were transferred directly to the fund and funnelled into international capital markets, protecting Norway from the overheating of their economy.
Political Commitment Strong
There have been several changes of government since the GPFG was established in 1990. However, regardless of who was in charge of the Ministry of Finance, all administrations agreed on – and backed – the principles and objectives of the fund.
According to the former Norwegian prime minister, Jens Stoltenberg, there is a broad consensus on the Norwegian government’s management of petroleum revenues through the pension fund and fiscal regulation. The main reason for this consensus, Stoltenberg believes, is the example of many other countries around the world being unable to manage oil and gas wealth in a sustainable and responsible way, but rather spending large revenues too quickly – examples that Norway would very much like to avoid.
Stoltenberg acknowledges that one of the challenges faced by the government was to protect the fund and “avoid using too much money too fast”. At the same time, the former prime minister considers everyone underestimated the size the fund would reach, as well as the capabilities of the Norwegian government to manage it.
The commitment of political actors has been instrumental in the fund’s successful transformation of finite oil wealth into a long-term economic resource for the country. As outlined in the Challenges section above, the risks of the “resource curse” and “the Dutch disease” result from the mismanagement of a sudden access to abundant natural resources. Norway did not want to fall into the trap of spending such revenues immediately without taking into account the adverse long-term impact on the economy.
During the first years of the fund, the government did not manage to save any revenues; instead, it surrendered to the urge to spend all the money quickly. However, the government was committed to make the GPFG work for the long-term benefit of the country, and led reforms in the Norwegian economy that resulted in the Ministry of Finance successfully making the first deposit of oil revenues in 1996. Since then, government self-regulation has continued to limit public expenditure of petroleum revenues and protect the value of the fund.
Of all the self-imposed restrictions on the management of the GPFG, one of the most laudable was the 2001 fiscal rule to limit annual government spending of the fund’s returns. The Storting adopted the proposal of the Ministry of Finance to restrict such spending to 4 percent of the fund’s value. This limit was an estimate of the yearly return on the fund, and it was aimed at preventing oil money flooding the economy. When political opposition later argued against the 4 percent limit on annual government spending, the governor of Norges Bank proposed a further reduction to protect the fund from such spending. Once again, the broad political consensus in favour of protecting the value of the fund prevailed, and in 2017 the self-imposed limit was effectively reduced to 3 percent.
In terms of managing the fund, the work and commitment of three state entities allows the ongoing growth of the fund:
- Norges Bank manages the fund’s operations with a mandate from the Ministry of Finance
- The Ministry of Finance owns the fund, deciding on the investment strategy and ethical guidelines
- The Storting approves any major changes to the fund’s investment strategy.
The commitment of political actors to intergenerational equity has been strong throughout the existence of the fund. As the former finance minister Kristin Halvorsen has pointed out: “the current generation does not have a right to ‘burn’ through the oil reserves in the course of one or two generations, but must leave some of the benefits for future generations”.
Clear Objectives Strong
The objective of the GPFG, as defined in the 1990 Government Pension Fund Act, states that the fund “shall support government saving to finance the National Insurance Scheme’s expenditure on pensions and support long-term considerations in the use of petroleum revenues”. With such long-term thinking, the GPFG avoids short-term economic instability and secures the longer duration of finite oil wealth.
Later policy and regulation have continued to clarify the objectives of the fund, shaping it into a responsible investor following firm ethical guidelines. While maintaining its commitment to the long-term sustainability of wealth creation for the Norwegian people, the GPFG also considers the ethical and environmental impact of its investments, which is uncommon among SWFs.
While the fund does not have any more specific objectives than those stated above, the Ministry sets specific objectives for Norges Bank as the manager of the GPFG to maximise the long-term return on the fund’s investment portfolio, while committing to a moderate level of risk. The relationship between the objectives of maximising return and limiting risk is a starting point for measuring the performance of the fund. Consequently, a performance metric considered in the fund’s annual reports is the ratio between excess return and relative risk, called the information ratio. Between 2013 and 2017, the average information ratio was 0.73; however, this result it is not sustainable over time, and the Executive Board has accepted a ratio of 0.42 percent since 1998 – when Norges Bank Investment Management was established.
In terms of risk limits set by the Ministry of Finance, Norges Bank is required maintain the expected relative volatility – or tracking error – below 1.25 percent. At the end of 2017, the relative volatility was 0.33 percent.
As of May 2018, the growth of the fund to NOK8.4 billion and the lack of “Dutch disease” to date in the Norwegian economy suggest that the fund is delivering so far, both as an instrument for long-term savings and in its short-term capacity of supporting the sustainable management of oil revenues.
The fundamental elements of the GPFG’s design and structure are drawn from the hard-won experience of the Norwegian authorities. Specifically, the fund has two key principles underpinning its macroeconomic policy: the government transfers oil revenues directly to the fund; and the capital is invested in international markets. These principles were consolidated after two learning experiences in different areas of the Norwegian economy.
The first lesson derived from Norway spending its oil revenues in the 1970s and 1980s on the domestic economy in a way that was at times excessive and in practice failed to follow any limiting principles or clear guidelines.
The second lesson was the experience of the Norwegian National Insurance Scheme, later known as Government Pension Fund Norway (GPFN), which was established in 1967. At the time, the Norwegian authorities had high expectations of the future importance and size of the fund. Unfortunately, the scheme was ultimately used to fund government projects, diminishing its capacity to become a reserve for the future. In the planning phase of Norway’s oil fund therefore, one of the objectives was to avoid the mistakes made in the formation GPFN. Therefore, the formation and structure of the GPFN served as evidence for the subsequent creation of the GPFG.
Norway in the 1980s and 1990s did not present legal or fiscal barriers that could limit the feasibility of the GPFG. Moreover, from an HR perspective, suitable resources were designated to support the management of the fund.
The GPFG was established under the 1990 Government Pension Fund Act, and was therefore backed by primary legislation. Similarly, the fiscal environment supported the fund’s creation, and since then Norway’s public institutions have continued to refine and improve fiscal regulations in order to protect the value of the fund. The most notable reform was the 2001 fiscal rule limiting government spending. This policy was updated in 2017 to restrict public spending even further.
Norges Bank’s 1998 creation of Norges Bank Investment Management, an asset management unit to manage the GPFG on behalf of the Ministry of Finance, provided further financial security. In the same year, the unit invested 40 percent of the fund in equities to diversify a portfolio previously focused on government bonds. The portfolio has continued to diversify ever since reaching a market value of NOK8.4 billion (as of May 2018). Having a dedicated team managing the fund’s investment portfolio has made it more feasible for the GPFG to secure the long-term value of the fund and the creation of wealth for future generations.
The management of the fund was considered fully during the design phase and was well implemented. The Storting sanctions the overall level of risk of the fund, and – based on the decision of the Storting – the Ministry of Finance adopts a general framework and guidelines for asset management to be implemented by Norges Bank’s Executive Board, which delegates certain powers to Norges Bank Investment Management. Authorisations and duties are delegated downwards through the levels of governance, while reporting on risk and return are managed upwards.
In the 1990 Act, the Storting granted formal responsibility for the fund to the Ministry of Finance. Therefore, the Ministry – representing the citizens of Norway – is the official owner of the GPFG and determines the investment strategy and ethics guidelines. However, the Ministry issued a separate mandate for Norges Bank to manage the fund.
The GPFG is set up as a deposit account at Norges Bank, to which the Ministry of Finance transfers petroleum profits to invest in international capital markets. Within Norges Bank, there is a unit dedicated to the management of the GPFG portfolio called Norge Bank Investment Management, which reports regularly on the performance of the fund. Reports are publicly available on Norges Bank’s website, including annual and quarterly reporting as well as yearly reports on its strategy for responsible investment. These reports address contributions to international standards, exercising ownership rights on active investments, and identifying sustainable long-term investment opportunities.
The measurement of the fund’s impact has historically been considered in terms of financial performance. Norges Bank’s annual and quarterly reports provide market value and financial metrics, explaining how the fund creates value.
Norges Bank’s mandate is to maximise the GPFG’s value. To this end, the Ministry of Finance sets specific objectives for risk and return, against which it measures the fund’s performance. Norges Bank reports annually on the information ratio (see Clarity of Objectives above): between 2013 and 2017, the average information ratio was 0.73, which is difficult to sustain over time, so the Executive Board is satisfied with a ratio of 0.42 percent.
Ever since Norges Bank Investment Management was established in 1998, the fund has held assets in the fixed-income and equity markets; since 2011, the portfolio has also invested in property. Historical returns on the fund’s investments indicate that the year 2017 ended with:
- Equity returns of 19.44 percent, compared to 8.72 in 2016
- Fixed-income returns of 3.31 percent, down from 4.32 percent in 2016
- Significant growth in the fund’s property holdings – at 7.52 percent as against 0.78 the previous year.
Total returns have tended to fluctuate in line with market variations over the years. However, the market value of the fund has grown steadily, reaching NOK8.488 billion at year end 2017.
Additionally, Norges Bank reports yearly on the fund in its role as a responsible investor, promoting ethical and sustainable investment standards. It has assessed 2,902 companies within its focus areas, participating in 7 academic projects, submitting 17 reports to international actors and organisations, and adding 11 companies to its investment blacklist in 2017. 
The actors involved in creating and managing the GPFG display a strongly aligned interest in protecting its investment and safeguarding the Norwegian economy. Also, from a private sector perspective, the fund put an end to the previous moderation policy, which aligned with the interest of oil companies to produce oil and gas at full capacity (see Stakeholder Engagement above).
Since the fund was established in 1990, there have been a number of governments. However, whatever their political complexion, the different administrations have supported the principles and rules of the fund. Moreover, fiscal policy has continued to develop, and further investment guidelines have been implemented in line with the GPFG’s objectives.
Norges Bank has also shown alignment with the objectives of the fund through the years, creating a dedicated unit to manage its long-term assets, implementing ethical guidelines to act as a responsible investor, making recommendations to further limit public spending of fund earnings, and contributing to the overall transparency of the fund through regular performance reports.
In terms of the broader Norwegian society, citizens are in the main proud of the fund and engage in daily discussions about fund-related issues. Norwegian civic society seems to share the GPFG’s philosophy of protecting and creating financial wealth so that it can continue to benefit future generations.