Current Articles | Archives | Search

What is the purpose of the National Development Fund in participating in upstream oil projects?

An efficient/effective version or the most effective method for entrepreneurship

  • 26 November 2023
  • 08:08
  • News
  • 0 Comment
  • Article Rating
An efficient/effective version or the most effective method for entrepreneurship

The Public Relations Manager of the National Development Fund, in a report, has addressed the Fund's presence and investment in upstream oil projects, responding to important questions such as "Does the National Development Fund aim to replace the Ministry of Petroleum and the National Iranian Oil Company?" and whether "the National Development Fund seeks business ownership and a consistent, lasting presence in oil projects." 

According to the Public Relations of the National Development Fund, as noted in a statement by Alireza Kangarloo:

"The program of the National Development Fund's presence and investment in upstream oil projects has become one of the most controversial economic topics in the country in recent months, raising many questions, including whether the National Development Fund intends to replace the Ministry of Petroleum and the National Iranian Oil Company, whether the National Development Fund seeks business ownership and a stable and lasting presence in oil projects, whether the National Development Fund is only after collecting its claims, and, in general, what is the purpose of the National Development Fund's presence in upstream oil projects and how it has outlined the dimensions and details of this presence."

The upcoming report aims to provide a clear and explicit picture of the National Development Fund's program for participating in oil projects with a model of "non-interventionist investment" and address potential concerns about the plan.

The goal of domestic investment: Transitioning from the loan-giving stage.

The performance of the National Development Fund, over its 12-year lifespan in terms of profitability, has been close to zero percent, assuming the return of all paid resources. This is in contrast to the profitability performance of international currency funds similar to the National Development Fund, which has reported an annual rate of approximately six percent. Looking at the areas of activity of wealth funds worldwide, the average allocation of their portfolios, less than 5.4 percent of the total portfolio value, is undertaken through loan disbursement. The remaining portfolio basket is diversified across a broad range of investments, utilizing various instruments.

While it may seem that the initial investment goals of establishing these funds have been outlined due to the possibility of Dutch disease in national economies, and investment in international markets, the experiences of domestic investment by these funds have become prominent during the years of the COVID-19 pandemic, with specific precautions and considerations. They have demonstrated significant performance in their national economies.

Drawing on its own experiences, the National Development Fund, with the utilization of untapped charter capacities in domestic and foreign investment, as well as by the current conditions of the country (where the level of capital formation in the country's economy has been less than depreciation, resulting in consecutive negative net investment growth in Iran's economy over the past four years), and considering the lessons learned from domestic and international investments, as well as the unsuccessful experiences of business ownership of investment funds and pension funds domestically, has undertaken the design and implementation of various models to move beyond the loan-giving stage.

Efficient Version: Warning Against the Red Line of Business Ownership

The primary goal of investment in the country is development, and one of the key ways to achieve this is through entrepreneurship. However, one of the most fundamental challenges in this field is the entanglement of public and governmental entities in business operations, especially state-owned enterprises. The National Development Fund, based on a study of the experience of business ownership by investment holdings and pension funds, does not consider business ownership as its goal. Instead, it has embarked on designing various models of non-interventionist investment to engage in entrepreneurship (separating ownership from management). This approach aims to effectively involve the private and cooperative sectors.

Contrary to the conventional approach, entrepreneurship is not solely achieved through providing facilities but rather through various methods, some of which entail lower risks and higher profitability. This approach also removes the National Development Fund from its passive role, transforming it into a more actively engaged entity. To achieve this, the National Development Fund has evaluated a diverse spectrum of participation models, ranging from providing facilities to full-scale investment, drawing from international investment experiences and its own experiences in the country over the past few years and a type of participation at the intersection of entrepreneurship and business ownership is selected: a form of involvement called non-interventionist investment.

The options for national wealth funds for participation extend beyond mere provision of facilities or exclusive investment. There exists a myriad of participatory models between these two extremes, among which one of the most efficient and effective is the non-interventionist investment model.

What is the non-interventionist investment model, and why is it prioritized?

The National Development Fund can have two primary options: passive options (meaning solely providing facilities or solely making investments) and a wide spectrum of choices between these two main options. Considering multiple factors such as the type of business projects, their operational history in the country, the levels of knowledge applied, the competence of the project's management and shareholders, market conditions for products and raw materials, access to raw materials, distribution and sales networks, energy and water supply sustainability, social and environmental issues, financial supply structure, and industry risks, the most desirable option can be identified and implemented.

Now, considering the requirements of the National Development Fund, its participation model must be designed in a way that, while reducing the associated risks of the fund's investments, prevents its ownership of businesses and ultimately leads to the growth of the fund's resources and, the country's development.

In the past years, the National Development Fund's participation in various projects has been limited to a single tool, namely providing loans through the agency of banks. Naturally, relying solely on this singular tool cannot adequately address various types of participation and the specific requirements of projects. Different non-interventionist investment methods are responsive to these goals and needs, suitable for various participation models, and consistently consider the red line of the National Development Fund's ownership.

Types of Non-Interventionist Investment Models

Non-interventionist investment models are the result of a combination of various tools, including various loan instruments, non-controlling equity, different types of investment funds (project-based, private, etc.), various securities (currency-based, equity-based, debt-based, asset-based, and derivatives), and options-based instruments for buying/selling.

Stages of the Non-Interventionist Investment Model (I-HOPE):

The stages of the Non-Interventionist Investment Model, abbreviated as I-HOPE, consist of five components: Investment (Financial Partnership Structure), Handling (Project Execution and Construction), Operation (Production and Operation), Payoff (Outcome Models), and finally, Exit Scenario.

1. Investment: In this stage, the Non-Interventionist Investment Model is tailored to the risks associated with the selected project, and the fund's participation structure is determined. Using contractual tools and obtaining necessary guarantees, various financial options such as loans, cash payments, securities, and other methods are decided upon. Funding methods, whether direct or through banking intermediaries, including currency and real-based financing, issuance of securities, hedging, or oil receipt arrangements, are all determined in this phase.

2. Handling: This stage involves obtaining necessary permits and construction. The fund usually has minimal involvement in project management, utilizing various monitoring tools intelligently and effectively to ensure proper cost allocation aligning with project goals for improved performance.

3. Operation: Similar to the handling stage, the fund has minimal involvement in business management. Using intelligent and effective monitoring tools, the fund oversees the cost allocation process in line with project objectives and better performance. The fund's monitoring approaches during the production phase include minimal supervision, independent audit inspections, management oversight, project control, internal audit, comprehensive construction period monitoring, and membership in legal (technical) committees. Ultimately, the fund appoints an operator for the project.

4. Payoff: At this stage, the Non-Interventionist Investment Model determines how both sides of the investment benefit from the project. The fund's benefits are not limited to potential loan interest but may include a share of the proceeds from product sales or a portion of the shares of the established company.

5. Exit: The final step in the fivefold stages of the National Development Fund involves determining the exit strategy from the project based on the Non-Interventionist Investment Model. The exit scenario is usually finalized before the fund participates in the project, and after a specified period, the fund exits the project. This stage is crucial to prevent the new business model from leading to long-term ownership by the fund.

Summary: Commitment to Future Generations through Avoidance of Business Ownership

The comprehensiveness of the dimensions and details of the Non-Interventionist Investment Model of the National Development Fund underscores the fund's commitment to avoiding becoming a successor to the Ministry of Oil and the National Iranian Oil Company. It is not seeking long-term business ownership or a permanent presence in oil projects. Instead, in the guise of an intergenerational fund, it aims to efficiently and effectively fulfill the fund's demands on a macro and national scale, taking significant steps in the path of development. Throughout this journey, the fund is extremely cautious about business ownership. As outlined in the effective entry guidelines for projects, it also meticulously outlines the roadmap for exiting projects. This emphasizes the vitality of resource sustainability and wealth creation, with continuous resource circulation and the ongoing inflow and outflow of investments into projects.

Rate :

Post a Comment

Name (not required)
Email (required)

Your comments

No comments have been posted already. You can be the first commenter.