By: Omar Khattaly
Researcher & Consultant on MENA Political Economy and Sovereign Wealth Funds
Should governments in the U.S and Europe be concerned with the presence and the growth of these government owned investment funds? In recent years, many in the U.S. Capital and within the EU countries have expressed concern and have started to pay close attention to SWFs activities within their borders.
The Libyan Investment Authority has had 4 changes in chairman and CEO positions since 2012. At the same time, the Libyan Prime Minister’s office has been occupied by four different ministers and government changes during this same time period. This lack of continuity in leadership and executive management has raised flags within the financial world and within concerned governments, particularly in regards to the ownership and transparency in reporting and internal governance of the $67-billion-dollar fund.
Critics of SWFs worry that as this asset pool continues to grow in size and importance, that it could have an impact on national security and affect their internal markets. Many worry that the purpose of these investments is not solely for financial profits, but, instead may be to secure control of strategic industries for political gain.
This concern may be driven by the fact that many SWFs lack transparency on size, source of funds, investment goals, internal checks and balances and perhaps most importantly, disclosure of relationships with holdings in private equity funds.
In my research I have found no case of major disputes between government and SWF over investment issues, but there have been many examples of small countries with an excess of capital coming to the rescue of large economies in recent history. One example is the injection of billions of dollars into struggling US companies during the financial crisis of 2007. Foreign investors were hailed as saviors of large banks such as Citigroup, UBS and Morgan Stanley. It is my opinion that such acts can result in stronger political relations.
Since 2007, SWFs and key world powers have addressed many of these concerns by adopting the Santiago Principals, but some governments have adopted their own protocols:
The U.S government passed the Foreign Investment and National Security Act of 2007, which established greater scrutiny when a foreign government or government-owned entity attempts to purchase a U.S. asset. SWFs will face more intense investigations when purchasing more than 10% of a U.S.-based company.
On March 5, 2008, a joint sub-committee of the U.S. House Financial Services Committee held a hearing to discuss the role of foreign government investment in the U.S. economy and financial Sector. The hearing was attended by representatives of the U.S Department of Treasury, the U.S Securities and Exchange Commission, the Federal Reserve Board, Norway’s Ministry of Finance, Singapore’s Temasek Holdings and the Canada Pension Plan Investment Board.
On August 20, 2008, Germany approved a law that requires parliamentary approval for foreign investments that endanger national interests. To be specific, it will affect acquisitions of more than 25% of a German company’s voting shares by non-European investors; however, economics minister Michael Glos has pledged that investments reviews would be extremely rare. The legislation is loosely modeled on the US’s Foreign Investment and national Security act o 2007.
The international Working Group of Sovereign Wealth Funds comprised of the world’s major SWFs, met during a September 2008 summit in Santiago, Chile. during this summit, they agreed to a voluntary code of conduct first drafted by the International Monetary Fund. This set of 24 principals, now referred to as the Santiago Principles, were made public after being presented to the IMF governing council on October 11,2008. It is worth noting that the Santiago Principles are voluntary and non-binding.
In June 2008, the OECD Ministerial Council adopted a framework between governments and SWFs; this agreement is called the Declaration. Similar to the Santiago Principles, the Declaration is voluntary and non-binding.
World financial capitals around the world welcome and try to make it as easy as possible for SWFs to do business within their borders. The U.S government has for this purpose established a multi-agency government body. The Committee on Foreign Investment in the United States (CFIUS) was created for the purpose of easing the entry into the U.S market. Companies interested in buying large shares of U.S companies submit a voluntary request for approval to make sure that such entry does not violate any national security laws. This Committee is administered by the U.S Treasury Department and the U.S president can be consulted on such applications. Historically, CFIUS has worked very effectively with companies looking to enter the U.S. market.
In 2008, U.S Treasury outlined four guiding principles of SWFs:
A statement of policies that investment decisions should be based solely on economic grounds rather than political or foreign policy considerations.
World-class institutional integrity including transparency about investment policies and strong risk-management systems, governance structures, and internal controls.
Fair competition with the private sector.
Respect for host-country rules.
On March 20, 2008 the U.S. Treasury and the governments of Singapore and Abu Dhabi issued joint statement welcoming policy principals as the basis for SWF best practices with a concentration on transparency and governance. These three countries also issued a statement of principles for countries receiving SWF investment.
At the same time, the EU was also busy in setting up a working frame work SWF. On February 28,2008 The Commission of the European Communities issued a statement of preferred standards of governance and transparency for the SWFs.
The commission agreed on the following:
Governance, a clear allocation and separation of responsibilities between the government and the SWF.
Investment policy that defines the SWF’s overall objectives, and the operational autonomy to achieve those objectives.
Public disclosure of the principles governing the relationship between the SWF and its governmental authorities.
Internal governance that provides assurance of integrity and appropriate risk management policies.
Transparency. Annual disclosure of investment positions and asset allocations, disclosure of the use of leverage, currency composition of assets, and the size and source of the fund’s resources. The full disclosure of the home country’s regulation and oversight governing the SWF.
❖ The commission advocated that the countries of SWF to open up their markets to EU investors to secure fair and equitable treatment for them through free trade agreement negotiations.
we must keep in mind that all these statements are recommendations for the mutual benefits of both sides: SWF countries and recipient countries. Financial capitals around the world are excited about the presence of SWFs and consider them important participants in economic growth. On October 19, 2007, the group of Seven (G-7) Finance ministers and central bank governors declared ”sovereign wealth funds are increasingly important participants in the international financial system and that our economies can benefit from openness to SWF investment flows. We see merit in the identifying best practices for SWFs in such areas as institutional structure, risk management, transparency and accountability. For recipients of government-controlled investments, we think it is important to build on principles such as nondiscrimination, transparency, and predictability”.
In my research two issues seem to come up often and are a major concern to governments when dealing with SWF: transparency and internal governance.
As of 2015, SWFs total investments are valued at over $5 Trillion. As these funds continue to invest in many different regions across the globe, there will an important question of how this industry be better regulated and monitored. I believe during the next decade world governments, particularly in the U.S and Europe, will start paying close attention to the flow of this money from areas that lack political stability and are out of the OECD group of countries. As the threat of terror increases, there will an increased demand to look into issues such as money laundering, financial support of terrorism and taxation
Where did SWFs invest their money in 2013? Real estate represents a significant majority of SWF investments. According to the same report, the top 5 sectors SWFs invested in were Real estate on top with 27%, Financials 17%, Materials 14%, Energy 10%, Utilities and infrastructure
8%, and other mix sectors at 24%.
I think real estate will continue to top the list in 2015 and for many years to come.
I have previously published this paper as part of a large study on sovereign wealth funds in 2014. Due to the importance of the subject at this point, I am republishing it with updates due to the current economic and political climate in Libya.