Archive for April 1st, 2019

Managing natural resources – lessons from Norway

April 1, 2019

Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway) in this speech outlines :

Norway is a small, open economy, which was transformed by the discovery of oil on our continental shelf almost 50 years ago. Back in 1970, the year after the first discovery, income levels were relatively low compared with other western countries. That picture has changed completely. Today, Norway ranks among the richest countries in the world.

For some countries, natural resource discoveries have been identified as a curse. For Norway, the discovery of oil has been a blessing. We have managed to transform oil and gas resources into real and financial assets. Luck has been supplemented with what I dare to claim is sensible resource management, based on a well-functioning democracy and longstanding and trustworthy institutions.

Key lesson?

Policymakers’ handling of Norway’s newly discovered petroleum wealth got off to a rather bumpy start. During the first 25 years of oil production, Norway experienced two deep recessions. Both downturns were rooted in wildly optimistic income expectations. In the 1970s, public spending surged before oil export revenue started to kick in. Eventually the government had to tighten fiscal policy. In the 1980s, a credit-fuelled consumption boom in the private sector led to necessary cut-backs after the oil price plunge in 1986. The turbulence made clear how vulnerable a small economy is to terms of trade disturbances. Let that part of our history stand as a warning. But lessons were learned, and formed the basis for the framework that was put in place from 1990 and onwards.

During the past 50 years, Norway has experienced how oil prices can change almost overnight in response to international politics, economic disturbances or disruptive technologies. Recently, a new risk factor has emerged. Impacts of global warming are high on the international agenda. Policy measures and shifts in consumption patterns and production methods towards lower emissions will reduce demand for fossil fuels. The change to a more climate-friendly policy may have a considerable impact on petroleum prices.

Looking ahead, Norway must now be prepared for a time when the petroleum industry is no longer expanding, but gradually declining. We will need innovation and growth in other industries to pick up the slack. We have always known that oil and gas activities will be phased out sooner or later. Oil and gas are non-renewable resources. A stricter global climate policy or a green-technological breakthrough may mean that this will occur sooner than foreseen earlier.

In contrast to Norway, Mozambique is at the beginning of its gas era. I hope the lessons from Norway can give you some guidance on your way forward.

One main lesson is that depletable natural resources must be viewed as part of a country’s wealth. Revenues from extracting oil and gas is just a transformation of this wealth and should be managed with a long-term prospective.

At the same time, the development of oil and gas reserves can have valuable spillovers to the rest of the economy. Not only demand from the petroleum industry, but also innovations and technological skills developed in the industry can be of great value to other sectors. The productivity gains to the economy can be more long lasting than the petroleum industry itself.

And never forget: The real test of how a petroleum producing country has managed its fortune, will come when the boom in the petroleum industry ends. Oil and gas resources do not last forever. Emphasis should therefore be given to further development of human capital as the primary source of long-term prosperity and wealth.

Hmm..

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How to build a public investment bank ….(lessons from India)

April 1, 2019

India has done away with all its public investment banks. Though, scholars in the West think they are still useful.

Profs. Mariana Mazzucato and Laurie Macfarlane of UCL in this piece:

In many countries, patient finance increasingly comes from public investment banks. These can be national institutions, like Germany’s KfW, or multilateral ones such as the European Investment Bank. Because these banks are typically not under pressure to deliver short-term returns, they can provide longer-term financing, place a higher priority on broader social and environmental objectives, and take a different approach to risk and reward than private-sector institutions.

Until recently, public investment banks focused mainly on infrastructure investment and counter-cyclical lending. But many have now taken on more active “mission-oriented” roles to confront the key social and environmental challenges of the twenty-first century.

The authors specify four conditions to build public investment banks:

Our work has examined how the design of public investment banks influences their role and impact. From this, we identified four lessons for structuring such banks most effectively.

For starters, the bank’s mandate is crucial. Whereas some public investment banks have a narrow remit to support particular sectors, customers, or activities, many of the more successful ones have broader mandates that enable them to support a wider range of economic objectives and respond to emerging priorities. Moreover, such banks tend to be more effective when they finance specific “missions” aligned with government policy. Banks that promote directionless economic objectives such as growth or competitiveness, on the other hand, often end up supporting incumbent firms to carry on with business as usual.

Second, public investment banks need new monitoring and evaluation frameworks that adequately capture the dynamic spillovers generated by bold, catalytic investments. This should help to reduce the (occasionally merited) criticism of these banks for “picking winners” and “crowding out” business. Rather than focusing on “fixing” market failures, these frameworks should instead measure the success of public investment banks in catalyzing new activity that otherwise would not have happened.

Third, employees in public investment banks generally have broader collective expertise and capacities than those in private financial institutions. As well as financial know-how, staff have significant engineering and scientific knowledge. As a result, such banks can base their investment decisions on a wider set of criteria than market signals alone, and are better placed to appraise social and environmental factors.

Effective governance is the final key component. Many of the problems commonly associated with public banks, such as financial mismanagement and interest-group capture, have resulted from poor governance. To avoid this, these banks need to find the right balance between political representation and independent decision-making. While public investment banks must be democratically accountable, and ideally should finance projects in coordination with government policies, their management teams should be free to make sound, long-term decisions in line with the bank’s mandate, free of day-to-day political interference.

If correctly structured and governed, public investment banks can be powerful catalysts for investment-led growth. By deciding to establish such a bank, Scotland has taken an important step toward achieving its bold ambition to become a dynamic, inclusive, and low-carbon economy. Other countries should watch closely and take note.

The fourth one is most important. India’s investment banks went down under (IDBI, IFCI etc) largely because of lack of governance.

Branches of Vijaya Bank and Dena Bank to operate as branches of Bank of Baroda from April 1, 2019

April 1, 2019

Despite stiff opposition from Dakshina Kannada of merging Vijaya Bank with Bank of Baroda, the government went ahead with the merger. Of course even Dena Bank was merged with Bank of Baroda.

RBI announced that branches of Vijaya and Dena will operate as those of BoB.

The Amalgamation of Vijaya Bank and Dena Bank with Bank of Baroda Scheme, 2019 dated January 2, 2019, issued by the Government of India was published under Extraordinary Part II-Section 3-Sub-section (i) in the Gazette of India sanctioning the Amalgamation of Vijaya Bank and Dena Bank with Bank of Baroda in terms of section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) and section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980). The scheme comes into force on the 1st day of April 2019.

Consequently, all branches of Vijaya Bank and Dena Bank will function as branches of Bank of Baroda from April 1, 2019. Customers, including depositors of Vijaya Bank and Dena Bank will be treated as customers of Bank of Baroda with effect from April 1, 2019.

Thus, two more banks fade into history.

Plugging my March 2019 piece which looks at this long history of banks that merged/closed and faded from memory.

 


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