McCrone Report: How Norway's oil fund works and why it's successful

Norway did not waste this money - instead realising early on that the revenue generated should be used cautiously, unlike the UK Government as we detail in our McCrone Report series.

In 1990, the Norwegian parliament passed legislation to create what is now known as the Government Pension Fund Global with the first money deposited in 1996.

​One day, the oil will run out. But rather than let the money follow the same path, the fund means Norway thinks long-term and allows it to safeguard the future of the economy.

The National has spoken with various academics on why the fund is so important and how the model might be replicated.

Read more from our McCrone 50th Anniversary special edition here:

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What is the fund and how does it work?

While revenue from oil and gas production is transferred into the fund, these deposits actually only account for less than half of its value – which, in 2017, passed the $1 trillion mark.

The most recent figures show that value has since increased to more than $1.3tn.

Professor Paul de Leeuw of Robert Gordon University told The National: “Norway has used the fund in smart ways. It is a shining example of using revenues for the benefit of the country for the next generation.”

Most of that staggering profit has been earned through clever investing – the fund owns 1.5% of all shares in the world’s listed companies.

It owns holdings in around 9000 companies worldwide as well as investing in real estate which also generates income.

It is estimated to continue to fund Norway's social costs for 300 years and is worth roughly $250,000 per Norwegian citizen. 

Through spreading investments widely and by creating a diverse portfolio, the risk of losing money is reduced should the prices of oil and gas fall.

In terms of structure, the Norwegian parliament laid down the formal framework for the fund and the Ministry of Finance, together with the Norges Bank Executive Board, are tasked with the management of the fund.

The CEO of Norges Bank Investment Management is then responsible for implementing the requirements defined by the Executive Board.

Why has it been so successful?

Professor Rob Bauer of Maastricht University in the Netherlands explains that the best way to understand why the fund works so well is to compare it to what other countries have done wrong.

“The best way to explain it is actually to say how it doesn’t work”, he said.

“The Dutch for example found gas and they used it to finance their yearly budget rather than saving money.

“Norway, admittedly with a very small population, saved for a long time and set up a long-term oriented fund which means they can take investment risk because risk can lead to extra return.”

What is the money invested in and how is it structured?

Both De Leeuw and Bauer highlight that, despite its value, the fund should not be treated as a piggy bank.

“It uses the fund in smart ways. It can take some of the returns out to balance the books which is clever but generally they’re putting it away for the future so they can’t use it now," De Leeuw explained.

According to the fund’s website, the Norwegian government can only spend a small part of what is generated although this still represents almost 20% of their budget.

The website explains that “deficits are covered with money from the fund” but that there is a rule whereby they do not spend more than the expected return.

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This way only the return is spent rather than the fund’s capital.

The money is invested in some of the world’s largest companies including Apple, Nestle, Royal Dutch Shell and Microsoft.

It also holds stakes in prime real estate locations including some in the Champs Elysée in Paris, Times Square in New York and Regent Square in London.

In 2019, the parliament authorised investments into renewable energy, buying a stake in solar plant and wind farm projects in Spain and Iberdrola.

It is also used to finance pension expenditure. Overall, statistics show it is invested in 9228 companies in 70 countries around the world.

Transparency is key

It would of course take time for one country to generate the level of revenue which Norway has over time, and it would require clever investment, but both De Leeuw and Bauer believe it could be replicated.

There have been calls for Scotland to adopt the model down the years.

For example, in the wake of the news that the fund had broken the $1 trillion mark, SNP MP John Nicolson tweeted: “What might have been for Scotland. Alas we listened to the wrong political leaders.”

Above all though, both academics stress that transparency is central to making the fund work.

“The fund might make decisions which don’t directly financially benefit an individual. They may do it for ethical or sustainability decisions”, Bauer explained.

“I have no say on this so there is a big obligation on those running it to explain what they are doing and why they are doing this.”

As Bauer points out though, by the very nature of democracy, elected representatives are chosen by the people and therefore “their decisions are our decisions”.

De Leeuw added: “Everything is a political choice. Nothing is straightforward but you can put something together which benefits those in the future."

To view information on which companies the fund is invested in and where, click HERE.