Government Pension Fund – Global Managing a Sovereign Wealth Fund 25 September 2007

1. Government Pension Fund – GlobalManaging a Sovereign Wealth Fund25 September 2007 Martin Skancke Director General Asset Management Department

2. Large Sovereign Wealth Funds Source: Peterson Institute for International Economics

3. Topics Macroeconomic role Governance and transparency SWFs in an international context Conclusions

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 Extraction Path Consumption path after discovery Consumption path before petroleum discovery t Time 0

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. 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. 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. The Fund mechanism – integrated with fiscal policy Revenues Return on investments Petroleum revenues Fund State Budget Transfer to finance non-oil budget deficit Expenditures Fiscal policy guideline(over time spend real return of the fund, estimated at4%)

9. Benchmark for the Pension Fund – Global Strategic benchmark • Fixed Income 40 % • Equities 60 % • Asia and Oceania 5 % • Europe • 60 % • America and Africa • 35 % • Asia and Oceania • 15 % • Europe • 50 % • America and Africa 35 % 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

10. Topics Macroeconomic role Governance and transparency SWFs in an international context Conclusions

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

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. Ethical guidelines and corporate governance Two main ethical obligations: • The obligation to ensure sound financial returns so that future generations will benefit from the petroleum wealth. • 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. 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. Topics Macroeconomic role Governance and transparency SWFs in an international context Conclusions

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. 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. 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. Topics Macroeconomic role Governance and transparency SWFs in an international context Conclusions

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