Welfare for many generations

Op-ed by Governor Svein Gjedrem in Morgenbladet 19 March 2010.

Oil Fund's losses in 2008 is largely won back.

A wise man from Trøndelag characterized developments in the Fund over the last two years with a maritime picture. The water does not disappear even if it is low tide, he said. In 2008, there was strong ebb in global financial markets. A year ago the Government Pension abroad - often referred to as the oil fund - just put forward its worst results ever. During 2008 the fund lost over 23 percent of its value measured in international currency. The losses were due to two main factors: the weak developments in global equity markets since the 1930s, and that the fund had an in conditions not suited holdings of bonds. The large losses contributed to an engaged debate about the fund's investment strategy.

State authorities were, however, stuck on the strategy and failed to make a little over-weighted decisions during the crisis.

Capital markets have now reversed, and the results in 2009 were the best ever. The return was over 25 percent, and most of the losses in 2008 were won back last year. Each year the fund was invested in the same international business community. The bond fund owned by the last turn of the year, matched to a large extent with the portfolio a year earlier. Market conditions are the main reason for recycling.

Autumn 2008 was marked by fears that global financial markets and payment systems would collapse, with dire consequences for the development of production and value creation. The probability that this would happen was hardly great, but still a risk. It helped to push down the prices of stocks and bonds that the fund owned.

The market for many of the fund's interest-bearing securities ceased to function during the most critical phases of the financial crisis in autumn 2008. This market is organized in a different way than most stock exchanges where investors trade with each other. Rather's trade for many types of bonds directly with the major investment banks.

In autumn and winter of 2008 had more of these banks enough to keep my head above water. Thus disappeared the markets for several types of bonds. Much of the small turnover still took place, was due to investors who were forced to sell their securities. The turnover can be likened to a fire damage sale.

Fund had not had any fire. We appreciated, however, the bonds that the value of them corresponded to sales price of similar securities that were actually acted.

In the spring of 2009 began the markets for bonds issued by other than nation-states slowly working again, and during the summer and autumn, the more effective. The value of many of the fund's investments in bonds could thus written considerably.

Savings Plan
The international financial markets has improved faster than we dared hope a year ago. Developments over the last two years, however, illustrates an important feature of the Fund, namely the long-term public.

The state uses the fund to convert assets on the shelf to the ownership of shares and bonds, which are entitled to a share of future value creation in the world. From the first oil was taken up from the Norwegian continental shelf in the early 1970s, it took approximately one generation to the first deposit was made on the Fund in 1996. As it now seems, the state will regularly add money through the approximately one generation.

With a lot of money in the bank to the Norwegian economy is a good piece on the way protect from the effects of the great financial crisis in 2008 and 2009.
The structure of the Fund is also about to make Norway a major source of financing of public expenditure in the decades to come. How important are disclosed in this calculation exercise: In ten years the fund equal to two times the annual value added (GDP) in Norway. Public expenditure is just under half of GDP. Withdrawals from the fund equal to the real return that is estimated at 4 percent can thus finance 15-20 per cent of government expenditure in ten years. It can be sustained without the fund's capital is reduced. Fund will lead to cuts in welfare state arrangements are clearly less than they would be without the Fund, as the elderly population is evident in public budgets.

Here are the prospects in many other industrialized countries much worse, since they must use a substantial portion of its government revenues to cover interest on government debt.

Does not inhibit investment in Norway
The State may choose composition, required rate of return and risk profile of their investments without squint to finance the needs of Norwegian companies. Norwegian companies in turn can choose loan and equity structure, independent of the government's financial investments. Between the state as investor and corporate capital is a capital market. State savings plans out there do not affect the availability of funds and the demand for the return of Norwegian companies must provide to their investments.

Profitability in state investments are calculated on the basis of a kalkulasjonsrente of 4 percent. It provides the same required return as the state, even after the weak returns in the crisis year 2008, can expect to achieve in the oil fund over time. A question is still whether there is a queue of good and profitable projects that will have to wait because of a too tight line in state budgets.

It is difficult to find evidence. In the National Transport Plan 2010-19, which we might assume is representative of government spending, are drawn up plans for investments in the road for around 140 billion. For approximately two thirds of the projects are accounted for profitability. The calculations captures saved time and reduced costs of accidents and the environment. Investment costs and future operating expenses deducted. Projects show an overall loss of 20 billion.

Community Economic returns, as calculated here, can not be the only criterion for selection of projects. On the other hand, when projects can not be expected to increase future income in society, it is important that the financing of current government revenues and within the long-term framework that is sustainable. Alternatively, they can be paid by the users which are enough. A road, old asphalt and infrastructure can provide the benefit and enjoyment over time, but they're not very liquid and do not provide a continuous cash flow in return that can be used. If the investment comes at the expense of savings plan, pension fund, it will go out of future generations.