Economy, Business And Markets

NDFI Facing Challenges

NDFI Facing Challenges NDFI Facing Challenges

Whimsical decision making can threaten the stability of the National Development Fund of Iran (NDFI), deputy of the fund Mohammad Ghasem Hosseini said on Thursday.  

Sovereign wealth funds are set up in various countries as a way to secure sustainable development especially in economies that depend heavily on the export of natural resources, namely oil.

While the reserves of a sovereign wealth fund are to be retained for a nation’s rainy days, sporadic withdrawals from the fund have recently become a concerning issue. Regulations regarding the fund’s annual budget frequently change, whereas if an efficient board of directors was appointed to the fund’s management the affairs of the fund could be better sorted out, the deputy stressed.

“The NDFI is a reliable financial resource which can be tapped in times of financial crisis to stabilize the market. Preserving financial resources and investing where necessary are among the top responsibilities of sovereign wealth funds. But to that end, the funds should be relied on in the long term and not limited to a single generation,” IRNA quoted the official as saying.

The NDFI was founded in 2011 after the parliament approved a law that required that the government deposit 20 percent of its oil revenue in the fund and raise the share by three percent per annum, until the end of Fifth Five-Year Economic Development Plan (2011-2016). However, both former and current administrations have refused to raise the NDFI’s share. Instead they have been adding the money to their annual budget.

Although it was suggested that the fund should be piloted for a year or so to incorporate experience from other countries, former president Mahmoud Ahmadinejad refused to give it any spare time and insisted that the fund begin operating immediately.

 Surrounding Issues

Since then, several of the problems surrounding the fund have been investigated and attended to and the situation has improved, Hosseini noted.  

Analysts believe that the NDFI has deviated from its original mandate with some attributing it to a piggy-bank that is referred to by the governments in financial trouble.

In the meantime, the parliament has recently accused the government of illegal withdrawal of around $4.1 billion from the fund’s account, a claim that has been rejected by top government officials.

The history, therefore, highlights the importance of transparency in the performance of such funds in general and the NDFI in particular. This has also been highlighted by Valiolalh Seif, the governor of the Central Bank of Iran, when he said, “It is vital to publish NDFI performance reports publicly; clarify all incomes and spending of the fund and closely supervise the additions, allocations, investments and spending based on the regulations.”

 Transparency Index

An international institute called Sovereign Wealth Funds Institute (SWFI) regularly examines wealth funds across the globe and ranks their transparency using a special index called the Linaburge-Maduell Transparency Index, developed in 2008 by SWFI for the purpose. It has since been used worldwide, by sovereign wealth funds in their official annual reports and statements, as the global standard benchmark.

The index is a method of rating transparency in sovereign wealth funds and government-owned investment vehicles where there have been concerns of unethical agendas.  It is based on ten essential principles that depict sovereign wealth funds transparency to the public. Each of the principles adds one point of transparency to the index rating. The minimum rating a fund can receive is 1; however, SWFI recommends a minimum rating of 8 in order to claim adequate transparency.

In its recent ranking in December 2014, Norway, Australia, Chile, UAE, New Zealand, Azerbaijan, Ireland have earned 10, leading the list of most transparent wealth funds, while Libya, Brunei, Mauritius and Venezuela are on the opposite end of the spectrum by earning only one.

Iran has managed to acquire five in the transparency rating which is not a noteworthy score. The country has ranked 23rd in terms of NDFI assets worth approximately $62 billion, which seems to be significant when compared to other wealth funds set up long before the NDFI.

Norway $893 billion, Abu Dhabi $773 billion, and SMA of Saudi Arabia $725.2 billion have respectively ranked the first top three. China, Kuwait and Singapore have followed in the next places, respectively.

The results further highlight the need that has been voiced from various tribunes to define more transparent mechanisms for the NDFI to increase its functionality and efficiency.  

 Keeping it Small

The fund is not looking to increase its workforce, according to Hosseini. “It is operating with 50 employees and almost all procedures are electronic to minimize man-made errors.”

The NDFI does not have provincial offices and most of its affairs are handled through banks. Limited cooperation between the central bank and provinces is one of the most important problems facing the fund when financing provincial capital projects.

Experts have recommended each province introduce a representative, who can monitor the development process of projects on NDFI’s behalf.