The Design and Governance of Sovereign Wealth Funds
Add these to your summer reading list:
Are SWFs Welcome Now? by Veljko Fotak and William Megginson
China’s Changing Outbound Foreign Direct Investment Profile: Drivers and Policy Implications by Daniel H. Rosen and Thilo Hanemann.
And how about a blast from the past:
The Political Economy of Fiscal Policy and Economic Management in Oil-Exporting Countries by Eifert, Gelb, and Tallroth. I just reread this yesterday and was glad I did.
Enjoy your weekend.
Ho Ching, Temasek’s chief executive, said in a speech this week that she envisaged opening the SWF up to “sophisticated co-investors” in five to eight years and then retail investors a few years after that. Why? What are the implications? Let’s speculate.
As to the question of why Temasek would open up to private investors, this policy must be about transforming this fund into a truly commercial entity. In order to do this, Temasek will need 1) greater transparency and 2) greater distance from the Singaporean government. By inviting private investors into the fund, Temasek may achieve both.
No private investors will join up with Temasek as limited partners without first being able to kick the tires. ‘Sophisticated investors’ are no longer willing to trust remarkable track records in the post-Madoff era. Ho Ching undoubtedly understands this. Greater transparency, independent audits and accountability to non-Singaporean investors will also provide some distance from the government.
What are the implications? By inviting private capital into Temasek, the very nature of the institution may be altered. SWFs are by definition without external liabilities (beyond the broader government balance sheet), and they manage assets owned by the government in accordance with the interests and objectives of the sovereign. Depending on how this new co-investment policy is structured, Temasek could have a new set of non-governmental liabilities, and it would surely be managing private money. In this case, would we still think of Temasek as a SWF? As Gwen Robinson noted yesterday,
“But the biggest question is: if an SWF opens up to outside investors, particularly to foreigners, what, then, does an SWF become? Another long-only investment fund?”
Whatever we call Temasek in the future, opening up to private investors would necessitate fundamental changes to the institution and its governance. This fact is not lost on Ho Ching. I’ll be interested to watch developments.
The first round of the US-China Strategic and Economic Dialogue was held in Washington from 27 to 28 July, 2009. It was a star-studded event that saw a candid and in-depth exchange of views on the “strategic, long-term and overarching issues concerning the development of bilateral relations.” The issue of China’s SWFs came up. In 2007/2008, Washington policymakers were particularly concerned with the behaviour of the CIC, so this wasn’t all that surprising.
However, what I found interesting from reading the Treasury press release was the way in which both sides bypassed what was once a very controversial topic. China simply reinforced its commitment to implement the Santiago Principles. The US, for its part, reaffirmed its commitment to the principles for recipients of sovereign wealth fund investment set out by the OECD. It also assured China that the CIC would be treated fairly under CFIUS.
Clearly, the press release isn’t going to tell us all that was said at the table. But I was surprised to see the tone change so much from 2007 to 2009. For example, the U.S.-China Economic and Security Review Commission‘s 2008 annual report dedicated an entire section to China’s “capital investment vehicles” (i.e. SWFs) and their implications for the U.S. economy and national security. It was pretty clear about its concerns. (See also my paper for more details on the American perception of the CIC at the time).
Perhaps the recent dialogue reflects the changing views in Washington about the CIC and SWFs more generally. In my view, this is a positive development.
The Scottish government will reportedly be advancing its case for a new oil stabilization fund next week. Finance Secretary John Swinney wants a fund to smooth oil and gas revenues so as to provide a permanent source of wealth and revenue for future generations:
“We want to harness the benefit of oil revenues now for future years. An oil fund can provide greater stability, protect our economy and support the transition to a low carbon economy. Norway’s oil fund is worth over £200 billion – despite the first instalment being made as recently as the mid 1990s – and Alaska’s oil fund even gives money back to its citizens every year.”
So the Scots look set to join the SWF bandwagon. It seems like a smart move based on sound logic. However, there seems to be two other factors at play here.
First, the announcement of a Scottish SWF seems to highlight the UK government’s failure to manage resource revenues. The UK has taken heat for this over the years, and the lack of savings has proven disastrous during the recent financial crisis (as Chilean President Michelle Bachelet recently made clear). So a SWF in Scotland is another rebuke of past UK policy. As Swinney said:
“The UK Government has wasted the resources from the North Sea…The UK Government can no longer oppose the people of Scotland enjoying the oil legacy they are entitled to and, for that to happen, the Scottish Parliament must assume responsibility for our geographical share of North Sea revenues.”
Second, the UK government announced in April the creation of a ‘strategic investment fund’ worth roughly one billion dollars. The mandate for that fund was to invest in domestic technology firms and protect the UK technology industry during the financial crisis. So perhaps the Scottish SWF reflects a ‘whatever they have, we should have’ mentality.
Whatever the motivation, a Scottish SWF seems sensible. More generally, SWFs clearly remain popular around the world. I think the Scottish fund brings the total number of new SWFs announced in 2009 to eight!
Larry Catá Backer just published the introduction to a new SWF paper on his blog, Law at the End of the Day. Backer will be releasing the paper in sections, so check back every day or wait a week and read the whole thing in one go.
I’ve also just added his website to the ‘healthy competition‘ resource page above, as he has quite a bit of pertinent SWF information on his blog.
Another batch of SWF papers for your reading pleasure:
Raising capital: The role of sovereign wealth funds by Anna L. Paulson of the Chicago Fed.
Sovereign-Wealth Funds: the institutional dimension by Dilip K. Das, Conestoga College.
Sovereign Wealth Funds and Social Arrears: Should debts to citizens be treated differently than to other creditors? by Patrick J. Keenan, University of Illinois College of Law.
The Coming of Age of Sovereign Wealth Funds by Adriana Arreaza, Luis Miguel Castill and Cristina Fernández
I was a bit distracted by some remarkable SWF developments this week (like this, this and this). So I forgot to flag up Steffen Kern’s SWF update. It is definitely worth a read, as it provides a post-crisis view of SWFs in relation to all of the other financial actors.
Anyway, it’s easy to flip through and has lots of nice graphics. Check it out.
Jamil Anderlini has an interesting article out in the FT on China’s deployment of its foreign exchange reserves. The article cites China’s Premier, Wen Jiabao, as saying that the investment of China’s reserves should take into consideration the foreign objective of China’s firms:
“We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises.”
In short, Wen wants the country’s reserve investment vehicles to consider China’s global objectives when making investments. As Brad Setser noted yesterday,
“…China looks set to use SAFE’s huge pool of foreign assets to support Chinese firms’ outward investment.”
I’m rather surprised to see this type of rhetoric coming from Chinese elites, as it seems to suggest, officially, that SAFE and the CIC will expand its list of criteria used to make investment decisions (assuming it has not already done so) from ‘what might make higher returns’ to ‘what might make China better off’.
To date, the CIC has argued that it was simply interested in the former, as the latter would be perceived in the west as ‘politicized investing’. And based on western governance models, I would have to agree that investing for the generic benefit of China’s firms is not a purely commercial investment strategy. So I’m having trouble understanding why Wen made the statement. Back to Setser:
“China’s announcement presumably was directed at a domestic audience – one that is increasingly uncomfortable with China’s growing exposure to the dollar, and one that wants China to use its foreign assets in ways that more obviously help China’s own citizens.”
In other words, domestic legitimacy of its foreign reserve investment policies could be strengthened by tying the investment of China’s reserves to a much larger national plan; ‘going out’ as an internal political tool. Interesting.
This is a bizarre development. Four months into his transition as CEO and two months from taking over, Chip Goodyear is leaving Temasek:
“Temasek said that both the Temasek board and Mr Goodyear have concluded and accepted that there are differences over certain strategic issues that could not be resolved.”
This took me by surprise. I look forward to learning more about these ‘strategic issues’. My initial guess would be that Goodyear’s views might not have been seen to be in the ‘national interest’ by fellow board members. Note that this specific objection was raised in Singapore’s Parliament in March:
“Is the government not worried that the national interest could be jeopardised by having a foreigner CEO who will have a complete overview of Temasek’s strategy and operations?”
Maybe the answer turned out to be yes.
Mubadala looks set to sign up to another joint fund with Malaysia, according to Abdul Muin Abdul Majid. Mubadala will contribute $1 billion to the new joint venture, which will invest in the energy, real estate and hospitality sectors.
Significantly, the deal will see the Terengganu Investment Authority (TIA) restructured into a SWF wholly-owned by the Malaysian Ministry of Finance, reporting directly to the Prime Minister. Indeed, TIA will become a federal SWF and be renamed 1Malaysia Development Berhad (1MDB). According to the Prime Minister’s office,
“1MDB would drive sustainable, long-term economic development for Malaysia by forging strategic global partnerships and promoting foreign direct investment for Malaysia to further enhance the multiplier effects for the Malaysian economy.”
Mubadala is having a good month, having already ironed out a similar joint fund with France. Additionally, it topped the SWF Institute’s Transparency Index.
