More Sovereign-Fund Openness Sought

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More Sovereign-Fund Openness Sought

 

As financial capitals around the globe increasingly soak up cash from sovereign-wealth funds, political capitals are fretting.

 

Prodded by the U.S. and Europe, multilateral institutions are writing guidelines for sovereign-wealth funds that would keep the money flowing from oil nations and export-rich Asian governments. But the codes aren't likely to directly address the biggest political issue surrounding the funds: whether they will be used for strategic purposes rather than commercial ones.

 

The growing financial importance of the SWFs, as some have taken to calling the essentially government-owned investment vehicles, was demonstrated yesterday when China Investment Corp., with about $200 billion in assets, agreed to invest about $5 billion in Morgan Stanley, which has been reeling from the global credit crunch. That followed investments from the governments of Singapore and Saudi Arabia in UBS AG of Switzerland; Abu Dhabi in Citigroup Inc.; and China in Blackstone Group's initial public offering. In all of the cases, the foreign firms took minority stakes and said they wouldn't be active in management.

 

Joseph Quinlan, a senior market strategist at Bank of America, said 'SWF' should stand for 'salvaging withering franchises.' He estimates that the funds have invested roughly $60 billion in Western financial companies since the second quarter of the year.

 

Nevertheless, there is still widespread suspicion in Washington and European capitals that the funds -- especially those owned by Russia, China and oil states in the Middle East -- could use their burgeoning wealth to steer investments for political purposes. Many of the funds release little information about their investment aims or holdings, further deepening the anxiety.

 

There are about three dozen sovereign-wealth funds, with about $2 trillion in assets. In the next decade, Britain's Standard Chartered estimates, the funds' assets might reach as much as $13 trillion, depending on the global economy's growth. That is a lot of capital that could translate into a lot of political capital, if so wielded.

 

In October, after a meeting of the Group of Seven nations -- the U.S., Britain, Japan, Canada, Germany, France and Italy -- and leaders of eight sovereign-wealth funds, the two sides agreed to put together voluntary codes of 'best practices.' The International Monetary Fund is working on a code for sovereign-wealth funds; the Organization for Economic Cooperation and Development is writing a code for the recipients of investment. The two institutions are expected to produce a preliminary set of guidelines in April.

 

'The benefits of SWF investments to the recipient countries depend on the extent to which the behavior is economically driven . . . rather than politically driven,' Treasury Deputy Secretary Robert Kimmitt writes in a coming issue of the magazine Foreign Affairs.

 

But a senior IMF official said in an interview that 'political issues and national-security issues aren't in the purview' of the IMF and that those issues won't be part of the codes.

 

Instead, the IMF is focusing on guidelines that would help sovereign-wealth funds operate more professionally, like a private investment fund. There would be rules on setting up investment strategies and making sure investment decisions fit those strategies. Other guidelines would look at the structure of sovereign-wealth funds, including oversight boards and committees to manage purchases. The IMF would also make suggestions on what kind of financial information to disclose, how often and to what authority.

 

The proposals fall well short of plans to directly constrain SWFs. Tuesday, Swiss National Bank Vice Chairman Philipp Hildebrand said the guidelines 'need to spell out upper limits to investment stakes in foreign private companies.' A proposal by Arvind Subramanian of the Peterson Institute for International Economics, a Washington think tank, would turn to the World Trade Organization to negotiate enforceable rules for sovereign-wealth funds.

 

The IMF officials say such proposals are well beyond the IMF's reach and are bound to be rejected by sovereign-wealth funds, many of which already feel they are being unfairly singled out. In a meeting at the IMF last month, sovereign-wealth-fund managers said they were participating because they feared a political backlash in the U.S. and Europe if they didn't.

 

In the past, the IMF has been able to pressure reluctant nations to take actions, such as publishing a wide range of financial data on the IMF's Web site, because those nations needed IMF loans. But nations with sovereign-wealth funds have such rich financial reserves that they no longer need the IMF. 'This will truly be voluntary, as opposed to 'voluntary,'' said Edwin Truman, a former Federal Reserve official now at the Peterson Institute.

 

If sovereign-wealth-fund recipients are concerned about a fund's political influence, the nations can enact laws regulating investment, said the IMF officials. The U.S., for instance, screens foreign investments if they pose national-security problems. Germany and Canada are considering toughening their laws on foreign acquisitions.

 

The Organization for Economic Cooperation and Development codes will cover countries that receive investment and will try to ensure they treat SWF investments uniformly and don't discriminate against any particular SWF. Reviews of SWF investment should also be predictable and open to outside scrutiny, said Adrian Blundell-Wignall, deputy director of the OECD's enterprise and financial affairs directorate.

 

Both the OECD and the IMF are focusing on issues of 'transparency,' advising the funds and the recipient nations to be more open about the choices they make. But that may not be enough to assuage popular concerns. 'Is this all about cleaning the windows and seeing more clearly?' Mr. Blundell-Wignall said. 'But if we clean the windows, is there something left that still bothers us?'

 

The fundamental issue is whether the sovereign-wealth funds have some independence from the state, Mr. Blundell-Wignall said. He pointed to national pension funds, which invest vast amounts of money abroad. They don't face political backlash because their motivations are seen as purely commercial.

 

Sovereign-wealth funds should adopt a structure similar to that at many of the pension funds, Mr. Blundell-Wignall said. The fund manager then would have a fiduciary responsibility to the country's citizens to obtain the highest possible financial return. And the investments should be handled by external financial managers, he said.

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