And The Award For Best Commodity Fund Goes To…São Tomé and Príncipe?

Ashby Monk

Why does the possession of natural resources all too often lead to economic and political trouble? Well, there are plenty of reasons, and the Kennedy School’s Jeffrey A. Frankel has decided to put many of them down in a new primer on the natural resource curse. In it, he outlines the various determinants of the curse and also talks a lot about possible solutions.

Drawing on the work of Acemoglu, Easterly, Hall, Levine, Jones, Rodrik, Subramanian, Trebbi and others, Frankel makes the argument that institutions are the all important factors that determine whether a country will overcome the curse. One of these institutions is the commodity fund, a type of SWF. However, Frankel recognizes that the mere creation of a SWF is not enough; sound governance is the all important factor preventing sovereign funds from turning into political slush funds.

So, Frankel sets his gaze on the world’s commodity funds in an attempt to determine which one offers the best model for resource rich, developing countries. In an unexpected turn, he viewed the much vaunted ‘Norwegian model’ as inappropriate for developing countries due to the politicized nature of investments decisions:

“…the fund is managed with political objectives that go unnoticed when held up as an example for developing countries to emulate.”

He’s right; the GPF-G has an explicit mission to include ethical criteria in its investment policies, which can result in the politicization of its operations.

Accordingly, Frankel sought out a different “model SWF”. Surprisingly, he fell on the commodity fund of São Tomé and Príncipe, which, in Frankel’s words, has “extensive restrictions guiding how the oil revenues are to be saved, invested, or spent.”

I have to say, this is the first time I’ve heard of the São Tomé and Príncipe National Oil Account (a fund that isn’t even tracked by the SWF Institute) being held up as the exemplar for other developing countries. What’s the deal? I had to get a bit more information: Dr. J. Peter Pham had the best description of this fund I could find:

“…the Santomean National Assembly unanimously passed and President de Menezes signed in late 2004 a landmark oil revenue law that was drafted with the help of a team of experts from Columbia University’s Earth Institute and after fifty-five town hall meetings throughout the country. The law creates a single National Oil Account which will receive all hydrocarbon revenues due to São Tomé and Príncipe. The account will be held at the U.S. Federal Reserve and there will be but one annual transfer from it to the budget as approved by the National Assembly and requiring the signatures of four separate officials. The maximum amount of the transfer is determined according to a fixed formula indexed to stages of oil exploration and actual production, while everything else is put into a sub-account, the Permanent Fund, that cannot be expended but which would form a “national endowment.

Management of the National Oil Account is entrusted to a committee composed of representatives of the president, the prime minister and cabinet, and the National Assembly, including the political opposition. They are legally limited in the financial decisions they can make, including provisions barring investments in São Tomé and Príncipe itself and against using petroleum resources to secure credit. The committee, in turn, is accountable to an independent public oversight board, the Petroleum Oversight Commission, which includes representatives of civil society and members of the general public. The legislation also includes provisions for enhancing transparency as well as criminal penalties for violations thereof.”

This does sound like a remarkably well-governed fund; it has a clear mandate, direct lines of accountability and steadfast rules dictating the use of assets. It appears that Frankel is right, this SWF — sponsored by an island nation off the coast of Africa — is perhaps a better model for developing countries looking to set up a commodity fund than Norway’s GPF-G.

5 Responses to “And The Award For Best Commodity Fund Goes To…São Tomé and Príncipe?”


  1. 1 PvW March 28, 2010 at 11:11 am

    But unfortunately STP has no oil revenue yet and it is also not clear whether it will ever manage to get any of these revenues. The legislation has therefore not been tested and for people familiar with STP: it would be a (very) positive surprise if it actually would be enforced in its current state if the oil revenues would stream in….


  1. 1 SWF Debate Resuscitated in India « Oxford SWF Project Trackback on March 17, 2010 at 10:31 am
  2. 2 Avoiding the Resource Curse « Oxford SWF Project Trackback on March 23, 2010 at 9:43 am
  3. 3 Norway Chooses Ethics Over Efficiency « Oxford SWF Project Trackback on April 6, 2010 at 10:59 am
  4. 4 The Ultimate Governance Challenge: An Afghan SWF « Oxford SWF Project Trackback on June 14, 2010 at 11:55 am

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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