Norway says won't allow wealth fund to invest in infrastructure

By Gwladys Fouche and Joachim Dagenborg

OSLO (Reuters) - The Norwegian government rejected on Tuesday a proposal to allow the country's $850-billion (598 billion pounds) sovereign wealth fund, the world's largest, to buy stakes in unlisted infrastructure projects such as roads and wind farms.

The central bank, which manages the fund, recommended last December the fund be allowed to expand its investments beyond the current portfolio of equities, bonds and property. That would be its biggest change in strategy since 2010.

Lawmakers discussing the idea since then have mentioned renewable energy projects as possible areas for new investment, but the government concluded that unlisted projects presented too much of a risk.

"In our view, a number of important factors indicate that investments in unlisted infrastructure should not be permitted," Finance Minister Siv Jensen said in a statement accompanying the government's annual white paper on the fund.

"Such investments are exposed to high regulatory or political risk. Conflicts with the authorities of other countries regarding the regulation of transport, energy supply and other important public goods will generally be difficult to handle and will entail reputational risk," she added.

The fund currently invests about 60 percent of its value in stocks, 35 percent in bonds and up to five percent in property, all outside Norway. It can invest in companies and infrastructure projects that are listed on the stock exchange.

The government also said allocations in real estate could rise to a maximun of 7 percent, from 5 percent currently, but added the increase was meant as a buffer to protect the fund from having to sell real estate assets in case of a stock market crash.

Were that to happen, the proportion of real estate investments in the fund's total investments would suddenly increase and the fund could have to sell real estate assets as it would go against its present mandate.

The government rules in a minority and will need to seek support in parliament for any changes it proposes.

"BEYOND COMPREHENSION"

The ministry's proposals are more conservative than recommendations made by a group of foreign experts it appointed, which said last year the fund should be allowed to invest up to 10 percent of its assets in infrastructure.

"It is beyond comprehension that the fund is not allowed to invest in infrastructure: this is where the best opportunities for returns are," Sony Kapoor, managing director of the Re-Define think tank and author of a 2013 study on the fund, told Reuters.

Tuesday's proposals mean the state will have less money available to take from the fund in case of further economic difficulty, because the fund will not be able to achieve its target of getting a 4-percent return on investment, he said.

The state made its first-ever net withdrawal - of 6.8 billion crowns - from the fund in January. If low oil prices force it to continue withdrawing at this pace, that could mean net withdrawals of about 80 billion crowns this year.

"Given the current oil prices and oil prices expectations, it is reasonable to assume that for the foreseeable future, the fund will not be getting fresh injections of the money from the government (from oil production)," said Kapoor.

"How much money the government can withdraw depends on how much money the fund can generate," he added.

"With this poor investment strategy, the Norwegian state may be forced to be smaller, leading to welfare cuts and lower domestic investment exactly when Norwegian society is starting to age and the economy needs support to diversify away from oil and gas," said Kapoor.

(Editing by Terje Solsvik and Tom Heneghan)