SWF Radar OECD

Investment Executive reports that, “The Organization for Economic Co-operation and Development has published new pension fund governance guidelines for public comment.”

Helmut Reisen, head of research at the OECD Development Centre, writes at RGE Monitor that, “From the perspective of development economics, there is little need for conspiracy theories to explain what drives the funding and motivation of sovereign wealth funds.”

The Observer quotes Angel Gurria, head of the Organisation for Economic Co-operation and Development (OECD), as saying in an interview that, “We constantly preach to developing countries that they should open markets. Suddenly we become closed and protectionist. This is before sovereign wealth funds. With them, it is even worse.”

The article adds that, “Gurria has no sympathy for Britons nervous about the long rumoured prospect of Gazprom, the giant energy firm regarded by some as an extension of Russian foreign policy, buying UK energy firms. Never mind the rows between BP and its Russian partner, he says, any investment should be judged [exclusively] on competition, corporate governance and corporate social responsibility criteria.”

Thomson Reuters writes that, “Japan’s Liberal Democratic Party is set to call for a 10 trillion yen sovereign wealth fund using public pension funds, the Nihon Keizai Shimbun financial daily reported on Wednesday.”

The article adds that the LDP’s proposal comes amid calls for Japan’s $1.44 trillion state-run Government Pension Investment Fund, the largest in the world, to seek higher returns.

Categorizing an investment vehicle set up to invest the assets of the Government Pension Investment Fund as an SWF adds more vagueness to the already vague term “sovereign wealth fund.”

The Government Pension Investment Fund is, according, for example, to an OECD working paper (PDF) released in January 2008, a social security reserve fund (SSRF), defined as a fund that is “set up as part of the overall social security system, where the inflows are mainly surpluses of employee and/or employer contributions over current payouts, as well as, in some cases, topup contributions from the government via fiscal transfers and other sources.”

According to the report, SSRFs live alongside sovereign pension reserve funds (SPRF), which are “established directly by the government (completely separated from the social security system), [with] financial inflows… mainly from direct fiscal transfers from the government,” as one of two sub-categories of public pension reserve fund (PPRF).

Since the definition of SSRFs, of which the Government Pension Investment fund is an example, contains reference to “mainly surpluses of employee and/or employer contributions over current payouts”, such funds can only at a stretch be considered to relate to sovereign wealth, unlike their SPRF siblings. The acceptance of the term “sovereign wealth fund” to describe a vehicle designed to invest the assets of such an SSRF would therefore suggest that the sovereign character of assets under management is not a necessary condition for the categorization of such an investment vehicle as an SWF.

Although this may seem academic, it suggests that the concerns raised by sovereign wealth funds are not concerns about sovereign wealth per se but are in essence concerns about something else, such perhaps as the (at least potential) political manipulability of funds that invest abroad. If this is the case and if the concerns have indeed been misunderstood, then the distinction in the context of sovereign wealth fund investment between SWFs (in the form of such funds as ADIA and CIC) and, say, public pension funds may come to be recognized as one without a substantial difference.

Vladimir Putin’s denial to Henry Paulson yesterday of the existence of a Russian SWF, while the National Wealth Fund is generally considered to be an SWF, suggests (since the National Wealth Fund has yet to invest abroad) that engaging in foreign investment may be considered a necessary condition for categorization as an SWF, while the sovereign character of managed funds may not.

The fact that SOEs have always been discussed in the context of SWFs (and that the DP World and CNOOC debacles kicked of the contemporary debate now considered to be a debate about sovereign wealth funds in the first place) suggests, in turn, that fund-like character is also not a necessary condition for categorization as an SWF. Note also that Gazprom and other Russian SOEs are also often mentioned in the context of sovereign wealth investment, as are Chinese banks and steel companies, among others.

And the clearest recent example of protectionism against a foreign fund is that of CPPIB’s failed attempt to acquire a 40 percent stake in Auckland Airport, which was scuttled by the New Zealand government for questionable reasons. Although CPPIB is often mistaken for a sovereign wealth fund, it in fact shares very little in common with SWFs, and certainly nothing substantial. Yet many of the concerns raised about CPPIB in the context of the potential New Zealand investment were, in essence, identical with those raised in the west about SWFs. Again this suggests that the entire debate may not, in essence, be about sovereign wealth funds or even necessarily about foreign state investment - or that it may at least evolve into a different debate.

The Financial Times reports that, “The Organisation for Economic Co-operation and Development has launched an initiative to scrutinise the dominant role of state-owned companies abroad with the aim of setting out guidance on best practice and reform. Angel Gurria, secretary-general, said state-owned enterprises were fast expanding beyond their home territories, buying up large shareholdings and companies. However, they were little understood, lacked transparency and often aroused suspicions in host states about their objectives. The initiative follows work done by the OECD on the emerging influence on global markets of private equity, hedge funds and sovereign wealth funds. ”

The G8 finance ministers released a communiqué after their meeting today in Osaka, Japan, in preparation for the G8 heads of state and government summit that will take place in in Hokkaido-Toyako on July 7-9, 2008.

On the subject of international investment the communiqué stated that, “We affirm our commitment to an open investment policy and acknowledge that international investment is fundamental to global prosperity. We will resist protectionist sentiment at home and abroad. We welcome the work of the OECD to establish best practices for open investment regimes. We recognise the benefits of commercially driven investment from government-controlled investors such as sovereign wealth funds and, to this end encourage these investors to work with the IMF to identify and adopt high standards in areas such as governance, risk management, and transparency. We welcome ongoing discussions on mutual recognition of comparable securities regimes and encourage further progress on facilitating cross-border financial services. We also highlight the urgent need for a successful conclusion to the Doha Development Round.”

The Globe and Mail reports that, “Inflation and the Canadian dollar could both be reined in if Ottawa and the Alberta government would take their extra energy revenues and invest them systematically outside the country like Norway, the OECD says in a new assessment of Canada’s economy.”

BBC News writes that, “Amid the hustle and bustle of the OECD annual meeting, something extraordinary seemed to be tacking place - rich countries and poor countries agreeing about economic policy. The policy in question was what to do about sovereign wealth funds (SWFs), a topic of great concern to many Western politicians and members of the public.”

The article also mentions that the one SWF with a clear track record of using non-financial investment criteria is Norway’s.

AFP reports that, “Massively rich sovereign wealth funds from China and Norway, feared by some for their power, said on Tuesday [at an OECD forum in Paris] they posed no threat and wanted to be treated in the same way as ordinary investors.”

Thomson Financial reports that, “The Chinese sovereign wealth fund China Investment Corporation is just looking to be a passive investor in companies that it takes a stake in and is not looking to take control of any foreign industries, president and chief investment officer Gao Xiqing said [at an OECD forum in Paris on Tuesday].”