Tanzania has moved to secure the gains from its natural gas reserves by creating a sovereign wealth fund.

The Natural Gas Reserve Fund is expected to hold proceeds from the industry in trust, for investment in other sectors of the economy, as well as finance social and economic development and build savings for future generations.

Established by the newly enacted Natural Gas Policy 2013, the fund is expected to act as a state-owned investment vehicle to ensure that Tanzanian citizens benefit directly from the profits of natural gas.

“We don’t want to take all the money from the gas sector to the Treasury as was the case with the mining sector, which led citizens to believe that mining had contributed nothing to their lives,” said Deputy Minister for Energy and Minerals George Simbachawene.

“This time around, the money will be set aside and put into the fund; it will be up to Tanzanians to decide what to prioritise when utilising the money accrued. In this way, citizens will link development directly with natural gas,” he said.

Besides establishing the fund, the policy also seeks to create a national oil and gas company, a state-owned firm that will develop and own strategic gas projects and businesses on behalf of the government, and participate in the natural gas value chain using subsidiary companies.

READ: Tanzania changes the terms of its oil and gas contracts

Tanzania will thus join several oil and gas producing countries globally that have set up sovereign wealth funds to safeguard oil revenues, spur infrastructure development, as well as provide a cushion against the volatility of resource prices, unpredictability of extraction, and exhaustibility of resources.

The funds also act as a buffer against the sudden windfall that will come when the gas reserves are commercialised; the abrupt inflow of foreign exchange could destabilise monetary policy, making exports more expensive, and negatively affecting other sectors of the economy.

In July, Kenya also announced that it would set up a similar fund to secure its newly discovered mineral wealth.

Since 2005, 32 sovereign wealth funds have been created globally; about 60 per cent are funded by proceeds from oil and gas while the rest are based on non-commodity sources, such as in Singapore’s Temasek Holdings.

The largest such fund globally is the Norwegian Government Pension Fund, an $800 billion fund where the surplus wealth produced by Norway’s petroleum income is held.

In Africa, several countries have established similar funds, the largest of which are Algeria’s $77 billion fund and Libya’s $65 billion fund.

The Libyan Investment Authority, through its $5 billion Libyan African Investment Portfolio, has a significant presence in East Africa, owning major stakes in Uganda’s Tropical Bank, Laico Lake Victoria Hotel and Oilibya, and in Kenya’s Laico Regency Hotel and Oilibya as well.

Still, Africa only accounts for three per cent of the wealth held by sovereign funds globally.

Management concern

Despite their touted benefits, the management and perceived opaqueness of sovereign wealth funds is a major concern, as are conflicting political interests.

In Nigeria, for example, the $1 billion Nigeria Sovereign Investment Authority — the third largest in sub-Saharan Africa, after Botswana’s $6.9 billion fund and Angola’s $5 billion fund — is facing opposition by state governors, who currently receive a portion of national oil revenues and would rather share the cash out now than save it for the future.

According to Mr Simbachawene, the country’s fund will be managed by an oversight authority appointed by parliament. Members of parliament in collaboration with the people will decide which projects receive financing.

“Local communities will be direct beneficiaries of the fund,” said Mr Simbachawene.

Establishment of the fund will go hand in hand with encouraging local participation in the industry, which the Tanzania Private Sector Foundation has been advocating.

Part of this strategy is to ensure that Tanzanian companies and citizens provide services to the industry according to their capacity to deliver, promote joint ventures between Tanzanian and international investors, and encourage ownership of oil and gas companies through issued shares.