NRF Key Terms

Asset Allocation: A long-term investor’s target percentage allotment between different asset classes, namely cash, fixed income assets (e.g., bonds), equities (e.g., corporate stocks) and alternative assets (e.g., real estate; derivatives). Each asset class has a different risk-return and liquidity profile.
Budget stabilization: Mitigation of government expenditure volatility by either saving revenues in a fund or paying down public debt when revenues are high, and either drawing down on public savings or borrowing when revenues are low. Government expenditure volatility is usually a product of revenue volatility since, without a fiscal rule or long-term fiscal framework in place, governments typically spend all the revenues they receive in a given year.
Collateral: Assets that a borrower offers a lender to secure a loan. In a natural resource fund context, a fund’s assets can be used as collateral on government debt. If the government stops making loan payments, the lender can seize fund assets to recoup its losses. Using the fund as collateral reduces the risk of losses to the lender, which can lead to the government being able to borrow on better terms (e.g., lower interest rates).
Deposit rule: A legal or regulatory requirement specifying which revenue streams (e.g., royalties; corporate income taxes) must be deposited into a fund, minimum deposit amounts, when deposits must be made, or which companies’ payments are to be deposited into the fund (e.g., payments from all private oil companies; payments from the national oil company).
Domestic investment: Investment in assets – including bonds, equities, human capital (e.g., education) and physical capital (e.g., machinery) – by nationals or the government inside their home country or subnational jurisdiction.
Dutch Disease: Occurs when a large increase in natural resource revenues hurts other sectors of the economy, particularly export-based manufacturing, by causing inflation or exchange rate appreciation and shifting labor and capital from the non-resource sector to the resource sector.
Equities: Stocks or shares representing an ownership interest in a company.
External accountability: Monitoring, assessment and actions by an oversight actor (e.g., civil society group; media; parliament) that is free of government influence. The aim of external accountability is to guarantee honest and candid assessments of compliance with governance rules and whether funds are being used for the public benefit.
Fiscal rule: A multiyear constraint on overall government finances defined by a numerical target (see policy brief on Fiscal Rules for Natural Resource Funds). For example, public expenditure growth may be limited to 3% per year.
Fiscal surplus: The amount by which government revenues exceed expenditures.
Fiscal sterilization: Mitigating the negative effects of large revenue inflows on the economy (e.g., exchange rate appreciation; inflation) by investing revenues in foreign assets. Fiscal sterilization can help mitigate the negative effects of Dutch Disease.
Fixed income investment: An investment under which the borrower must make payments of a fixed amount on a fixed schedule. Government or corporate bonds are types of fixed income investments.
Foreign investment: Investment in assets – including bonds, equities, human capital (e.g., education) and physical capital (e.g., machinery) – by nationals or the government outside their home country.
Fund objectives: Natural resource funds can have five possible objectives: Savings, budget stabilization, fiscal sterilization, development and ring-fencing (see policy brief on Natural Resource Fund Governance).
Independent external audit: An examination and evaluation of an organization or system by an external auditor who is free of government influence. External auditors must be members of a recognized professional accountancy association and usually submit their reports to fund oversight bodies (e.g., parliament). The goal of the independent external audit is to ascertain, candidly and with assurances of integrity, the validity of information and provide an assessment of the effectiveness of internal controls.
Independent oversight: Supervision of government behavior without political interference, including identifying noncompliance with rules, waste, fraud, abuse and mismanagement, and suggesting or enforcing corrections (see policy brief on Independent Oversight of Natural Resource Funds).
Internal audit: An examination and evaluation of an organization or system’s internal controls by an internal auditing department. The goal of an internal audit is often to study and make recommendations to improve the effectiveness of governance processes. Internal audit reports are usually submitted to fund managers or boards of directors.
Internal accountability: Monitoring, assessment and corrective actions taken by an organization’s management or executive board. The aim of internal accountability is to align the interests of day-to-day operational managers with the executive’s interests as well as prevent mismanagement and corruption by officials.
Investment rule: A constraint on the type or currency of permissible investments, or a restriction on the use of a natural resource fund as collateral to secure government loans (see policy brief on Rules-Based Investment for Natural Resource Funds).
Management: Institutional structure, staffing and internal controls (see policy brief on Institutional Structure of Natural Resource Funds).
Public disclosure: The act of making information or data easily accessible and disseminating that information widely, for example through the media, a public forum or on a website.
Santiago Compliance Index: A measure of sovereign wealth fund compliance with the Santiago Principles, a voluntary set of guidelines supported by the member governments of the International Working Group of Sovereign Wealth Funds. Available online here.
Sovereign wealth funds: The International Working Group on Sovereign Wealth Funds describes them as “special-purpose investment funds or arrangements that are owned by the general government. Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies that include investing in foreign financial assets.” Natural resource funds are a subset of sovereign wealth funds.
Truman Sovereign Wealth Fund Scoreboard: A leading measure of sovereign wealth fund transparency and accountability. Available online here.
Resource Governance Index Natural Resource Fund Scores: A measure of the quality of governance of natural resource funds in 23 countries. The natural resource funds scores are part of a larger 58 country study of the quality of governance in the oil, gas and mining sectors. Available online here.
Withdrawal rule: A legal or regulatory requirement specifying the maximum amount of any transfer from a fund, where it must go, when withdrawals from the fund can be made, or whether they need to be approved by an oversight body such as parliament.