The Politics of Sovereign Wealth: An Overview ISTANBUL FORUM 2008: A NEW ERA AND NEW HORIZONS: “TURKEY’S STABILITY AND GROWTH DRIVE” Alastair Newton Senior Political Analyst Lehman Brothers International Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2LEHMAN to request a copy of this research. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts that are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 40 AND IMPORTANT DISCLOSURES INCLUDING FOREIGN AFFILIATE DISCLOSURES BEGINNING ON PAGE 41 Acknowledgements This presentation draws on the work of Lehman Brothers International staff in many countries and across several divisions of the firm. But special thanks are due to the firm’s Senior Relationship Management team, in particular Jonathan Fox. Alastair Newton Senior Political Analyst Lehman Brothers International Tel: +44 7769 963457 Email: [email protected] 23 April 2008 [All charts and tables sourced from Company data, Lehman Brothers estimates, unless otherwise stated.] A European Commissioner Speaks (1)… “There is, as far as I know, no instance of sovereign wealth funds acting in any manner other than responsibly up until now.” Charlie McCreevy, European Commissioner for Internal Market and Services (27 February 2008) Table of Contents I Growth and Investment Activity II European Political and Policy Response III US Political and Policy Response IV The SWF Response V Endnote I Growth and Investment Activity Where is it all coming from? Growth and Investment Activity Oil/gas and export surpluses are the main drivers Sources & Drivers Commodities Export High prices for oil and other commodities have pushed revenues in excess of current budget requirements External Surplus For export economies of Asia, FX reserve accumulation has far exceed what is needed for stabilisation Current account balances/excess reserves Investment Vehicles Sovereign Wealth Funds1 Government (country-level) investment vehicles that invest state savings, often derived from commodity export or exchange rate intervention, and are separate from the official reserves of the Central Bank or other monetary authority ___________________________ 1. Lehman Brothers’ definition is an adaptation of a definition used by the US Treasury. Diversified Monetary Authorities (DMAs) Central Banks/Monetary Authorities that have significantly diversified their investment portfolio without (or in addition to) a separate SWF vehicle Pension Liabilities Some countries have set up large, sovereign pension funds to cover the future liabilities of their pension schemes Budget allocations Sovereign Pension Funds Several have been recently established with very significant flows from budget allocations Who are they and how big are they? Growth and Investment Activity Select Sovereign Wealth Funds1 Country Fund Name Established Source of Funds UAE Abu Dhabi Investment Authority (ADIA) 1976 Oil $500-900 Norway Gov't Pension Fund - Norges Bank Invest Mgmt (NBIM) 1990 Oil $350 Kuwait Kuwait Investment Authority (KIA) / Kuwait Invest. Office (KIO) 1952 Oil $215 Singapore Government of Singapore Investment Corp (GIC) 1981 External surplus $200-250 China China Investment Corp (CIC) + Central Huijin Investment Corp 2007 External surplus $200 Singapore Temasek Holdings 1974 External surplus $110 China China - Other state vehicle direct investments (CDB, Citic, etc.) Various External surplus $50 Qatar Qatar Investment Authority (QIA) 2000 Oil and gas $50 Russia National Welfare Fund (spin-off from Stabilization Fund) 2008 Oil $32 Brunei Brunei Investment Agency (BIA) 1983 Oil $30 UAE Dubai Holding (Dubai Intl Capital, Dubai Invest Group, Jumeirah) 2004 Oil and other $25 Korea Korea Investment Corp (KIC) 2005 External surplus $20 Kazakhstan Kazakhstan National Fund 2000 Oil and gas $18 Malaysia Khazanah Nasional 1993 External surplus $18 UAE Abu Dhabi Investment Company (ADIC) 1977 Oil Oman State General Reserve Fund and others 1980 Oil and gas $10 UAE Dubai World (Istithmar, Dubai Ports) 2006 Oil and other $10 UAE Mubadala 2002 Oil $10 Total Est. Assets ($bn) 2 $10-50 $2,103 ___________________________ 1. Current assets are based on official statements and public information where available. Where official figures are unavailable (e.g., ADIA) or believed to understate true asset levels (e.g., GIC), asset levels are estimates. Some funds (e.g., Dubai) may have access to more capital as needed. 2. Reuters reported on February 19, 2008 that Korea Investment Corporation will receive an additional $10bn for a "more opportunistic, alternative investment” strategy. Who are they and how big are they? Growth and Investment Activity Select Diversified Monetary Authorities (DMAs)1 Established Source of Funds Est. Excess Reserves ($bn) Country Fund Name Saudi Arabia Saudi Arabian Monetary Agency (SAMA) and others 1952 Oil Singapore Monetary Authority of Singapore 1971 External surplus $84 China Hong Kong Monetary Authority (HKMA) 1993 External surplus $78 Total $270 $432 Total Assets of SWFs and DMAs = ~ $2.5T Other Select Sovereign Wealth Funds (not included in analysis)2 Fund Libyan Investment Authority Algeria Revenue Regulation Fund Venezuela National Development Fund Taiwan National Stablization Fund Iran Oil Stablization Fund Economic and Social Stabilization Fund (Chile) Botswana Pula Fund Azerbaijan State Oil Fund Heritage and Stabilization Fund (Trinidad & Tobago) Kirbati Stablization Fund Mauritania Hydrocarbon Fund Assets ($bn) $40 $40 $15 $15 $10 $10 $5 $2 $1 <$1 <$1 Notes Recently Announced Commodities Commodities External Surplus Commodities Commodities Diamond exports Commodities Commodities Commodities Commodities ___________________________ 1. Excess reserves are an estimate of the portion of foreign reserves that could be eligible for diversified asset allocation and/or be invested through an SWF. 2. Sources: “Libya starts to deploy $40bn fund”, Financial Times, October 17 th, 2007; Zawya.com quoting Governor of Central Bank of Iran, January 10, 2008; IMF Global Financial Stability Report, September 2007; “State Capitalism: The rise of sovereign wealth funds”, Dr Gerard Lyons, Standard Chartered, October, 15, 2007; “A few sovereigns more”, Will Devlin and Bill Brummit of the Australian Treasury Macroeconomic Group Who are they and how big are they? Growth and Investment Activity Asset Comparisons Large groups dominate O thers 18% ADIA 28% Top 7 account for 82% of the assets Temasek 4% CIC 8% Norges 14% GIC 9% KIA/KIO 8% ___________________________ 1. State Administration for Foreign Exchange (SAFE), the reserve manager for the People’s Bank of China SAMA 11% How big will they grow? Growth and Investment Activity SWFs and similar diversified reserves are already at $2.5T and growing rapidly Major Global Asset Pools 2008 ($Ts)1 Pension Funds Sovereign Wealth Funds and DMAs now represent 1.5% of the $167T in global financial assets 2 In terms of assets, they are approximately the same size as the global hedge fund and private equity industries combined (although without the leverage and high turnover) Significant portions of global FX reserves are candidates for further funding of SWFs 22.7 20.8 Mutual Funds Insurance Assets 20.5 Global FX Reserves 6.2 SWFs/DMAs 2.5 Hedge Fund Industry Private Equity 1.8 Up to $6T buying power with leverage2 0.8 SWF Five Year Growth Scenarios Actual SWF growth will depend on: Oil/gas prices Economic growth in Asia Global economy and exchange rates Political reaction/regulation Investment returns Pace of reserve accumulation and diversification $11.4T $7.7T $2.5T $5.1T $3.2T 2008 2013 Aggressive: 35% CAGR (massive inflows) High: 25% CAGR (high returns/inflows, similar to recent growth) Conservative (Base Case): 15% CAGR Weak: 5% CAGR (low returns/inflows) ___________________________ 1. Estimates are for 2008 average assets. Sources include: “The New Power Brokers”, McKinsey Global Institute; CIA; IMF; Lehman Brothers Analysis 2. “The New Power Brokers”, McKinsey Global Institute Who is next? Growth and Investment Activity There is much speculation about new funds, often sparking internal debates Saudi Arabia, the world's biggest oil producer, plans to start its first sovereign wealth fund with about $6 billion, channeling surplus crude-oil revenue into investments in foreign companies. "We still have no plans for a sovereign wealth Bloomberg, Jan 23, 2008 fund," [Indian Finance Minister Palaniappan Chidambaram] told reporters at the World Brazil will create a sovereign wealth fund with Economic Forum in Davos, Switzerland. the primary aim of intervening in foreign exchange markets to counter the appreciation of Dow Jones, Jan 25, 2008 Brazil’s currency, according to Guido Mantega, The government is planning to create a multifinance minister. billion-dollar sovereign wealth fund, a first of Financial Times, December 9, 2007 its kind in India, which aims to invest in energy assets such as oil, gas and coal across Japan's ruling Liberal Democratic Party will set up a the world. task force this week to study the creation of a sovereign Economic Times, Feb 19, 2008 wealth fund for Asia's largest economy, a party official said Tuesday. Idea of Japanese wealth fund rebuffed AFP, Feb 18, 2008 Financial Times, Feb 1, 2008 What about the sovereign pension funds? Growth and Investment Activity While overshadowed by the attention given to the commodity and external surplus SWFs, sovereign pension funds are extremely large and also diversifying1 Pension Fund (selected) Country Assets ($bn) Comments Government Pension Fund Japan $936 World's largest pension fund ABP Netherlands $270 Pension fund for Dutch government workers National Pension Corporation Korea $203 Much larger than Korea's SWF Future Fund Australia $50 The Fonds de Réserve Pour Les France Retraites (FRR) National Pensions Reserve Fund Ireland (NPRF) New Zealand Superannuation New Zealand Fund (NZSF) $45 $27 $13 To offset the superannuation liability by 2010 To reduce future burden of occupational pension schemes To fund social welfare and public service pensions (allocated 1% of GDP p.a.) To meet future liabilities of superannuation (avg. contribution of 1.5% of GDP p.a.) Additional $300B+ in inflows expected into three funds alone New sovereign pension funds are growing very rapidly through budget allocations 1 $Billions $200 Current Size $122 Target Size $50 $109 $45 $13 Australia Future Fund The Fonds de Réserve Pour Les Retraites (FRR) New Zealand Superannuation Fund (NZSF) ___________________________ 1. Sources: “World’s Largest Pension Funds” Pensions & Investments (pionline.com), September 3 rd, 2007; The Future Fund Research Note no. 43 2004-05, Parliamentary Library, Parliament of Australia; Sovereign Wealth Management, Central Banking Publications, 2007 What are they investing in? Growth and Investment Activity Rapid growth of excess reserves and wealth is prompting more aggressive investment Traditional official reserves Risk Return Appetite Government bonds FX HG Credit HY Credit ABS Often managed both in-house and with external managers with the advice of consultants Rapid Growth Equities FoHF Hedge Funds Major Direct Stakes FoPE PE Funds (Private and Public) Real Estate Alternatives: generally outsourced to external managers (increasing interest in GP stakes) + Diversification = Significant money in motion Direct Stakes/M&A: Who are the targets? Growth and Investment Activity Ten Largest SWF Transactions 2007 - 2008 Announcement Dec-07 Mar-07 Nov-07 Jan-08 Jan-08 Apr-07 Dec-07 Jan-08 Dec-07 Aug-07 Acquiror Government of Singapore Investment Dubai Holding Abu Dhabi Investment Authority Government of Singapore Investment Korea Investment Corp, Kuwait Investment Authority, Mizuho Corporate Bank, TPG-Axon, NJ Division of Investments and others Target UBS Emaar Properties Citigroup Citigroup Merrill Lynch Saad Group Temasek Holdings, Davis Selected Advisors Kuwait Investment Authority, Prince Alwaleed bin Talal, Sandy Weill and others China Investment Corp. Istithmar HSBC Merrill Lynch Citigroup Financial Institution Financial Institution Financial Institution Morgan Stanley MGM Mirage Financial Institution Consumer-Retail Sector Distribution – Deal Volume Communication 5% ConsumerRetail 11% Technology Sector Financial Institution Real Estate Financial Institution Financial Institution Financial Institution Acquired Stake 9.0% 28.0% 4.9% 4.4% 15.0% 6,600 3.1% 15.0% 6,553 6,2001 3.3% 9.9% 9.5% Total 5,620 5,000 5,0002 66,700 Sector Distribution – Deal Value Communication 2% ConsumerRetail 10% 3% Financial Institution 37% Financial Sponsor 7% Financial Sponsor 12% Healthcare Industrial ___________________________ 4% 11% Source: Dealogic 1. Includes an option to invest an additional $600mm by 28 March 2008 2. Total transaction amount; includes a $2.7bn investment in CityCentre Technology 2% Real Estate 11% Real Estate 10% Natural Resources 4% Media 3% Deal Value ($mm) 9,750 7,597 7,500 6,880 Financial Institution 63% Media 0% Healthcare 1% Industrial 4% Natural Resources 0% The Loudest Splash? It is in real estate that Gulf money is making the loudest splash. Dubai’s flagship property company, Emaar, claims to be engaged in some $65 billion-worth of foreign projects. These include four resorts in Morocco and upmarket housing projects in Cairo, Damascus, Hyderabad, Istanbul and Karachi. A rival firm, Damac, recently launched what it calls a resort city on Egypt's Red Sea coast costing $16 billion, while another Emirati developer, Al Maabar, has pledged $10 billion to create a fancy suburb for Tunis. Qatari Diar, the same state-owned company that jointly bought Chelsea Barracks, is also building office towers in Cairo and Khartoum, resorts in Syria, Morocco and the Seychelles, and a gated community in Yemen's capital, Sana'a.” “Cash is going to the poor, too”: The Economist, 23 February 2008, page 67. II European Political and Policy Response Potential Political Concerns Political and Policy Response Examples of concerns voiced around the growth of sovereign wealth funds1 Blurring the line between public and private sector – This runs contrary to longstanding precepts of promoting a private sector, market-based global financial system. Lack of transparency and secrecy – While SWFs have little incentive to disrupt markets, it is feared that their lack of transparency and extreme secrecy will create competitive difficulties for other market participants. Concerns about motivations – The worry is that SWFs will make investment decisions based on political agendas rather than strictly economic and financial reasoning. Weight of the money – the sheer size and scope of the funds raise concerns about their weight in the market and potential effect on asset prices. “Reverse Globalization” – Having reserve-rich countries become owners of financial or real assets in developed countries could lead to political tensions and pressures for protectionism. Strategic industries – Could inflame nationalistic sentiments, especially if they are seen to be targeting national champions or strategic assets (e.g. defence, financial services, media). Domestic concerns – SWFs may draw suspicion from segments of their own societies who feel less likely to benefit from their growth or who would prefer to see re-investment in domestic industries and development. ___________________________ 1. Potential issues listed are provided for information purposes only and are not intended to represent the views of Lehman Brothers or the authors of this presentation. What is the international political reaction? Political and Policy Response US Reaction In addition to the EU’s existing rules, the European Commission has called for SWFs to sign up to the proposed IMF code of conduct (see below) and set out criteria it expects that to incorporate. France has expressed the need for caution, although in practice there may be more flexibility. Germany has a draft law on foreign investment aimed at least in part at SWFs. On 20 March, the US Treasury and the governments of Abu Dhabi and Singapore issued a joint statement which included a number of “policy principles for both SWFs and host economies. In Italy, GIC and ING Real Estate recently announced a €400m JV for the acquisition of the new Roma Est shopping centre. UK Prime Minister Gordon Brown has declared Britain “open for business” to SWFs. In April, the US Treasury floated a proposal to “clarify” CFIUS’s right to vet investments below 10%. The debate in Europe primarily revolves around Russia and its potential acquisitiveness through sovereign wealth or stateowned enterprises. Senior US Treasury and SEC officials have recognised the need for monitoring and transparency but have warned against protectionist policies. US Director of National Intelligence, Mike McConnell, recently testified to the Senate Select Committee on Intelligence that US intelligence agencies have “concerns about the financial capabilities of Russia, China, and OPEC countries”. European Reaction Senator Charles Schumer has supported some deals but warned SWFs to increase transparency and accept codes of conduct. International Organisations SWF Reaction They point out that hedge funds lack transparency and are well accepted. The IMF is working towards a “technical” code of “good practice” with the SWFs themselves, which it hopes to launch in the autumn; however, the extent of “political” buy-in by either the SWFs or the G7 remains unclear. Some funds have stated their desire to work with international organisations on best practices. The OECD is looking to reconcile differences of perspective on SWFs among countries receiving investment. On 2 April, World Bank president Robert Zoellick urged SWFs to invest 1% of their assets in Africa, stressing both the investment and “public image” case for doing so. SWFs have complained that political concerns are unfounded and that they act purely as long-term, financial investors. China and the GCC are involved in high-level bilateral talks on investment in one another’s economies. A European Commissioner Speaks (2)… “Europe must remain open to inward investments. Sovereign wealth funds are not a big bad wolf at the door.” José Manuel Barroso, President of the European Commission (27 February 2008) What are the current EU rules? Article 56: Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited. A European Commissioner Speaks (3)… “Some people are afraid of what might happen in the future…. We are open for business. But…business…should follow some common principles on transparency and governance.” Charlie McCreevy, European Commissioner for Internal Market and Services (27 February 2008) What are the current EU rules? Article 57: 1. The provisions of Article 56 shall be without prejudice to the application to third countries of any restrictions which exist on 31 December 1993 under national or Community law adopted in respect of the movement of capital to or from third countries involving direct investment – including in real estate – establishment, the provision of financial services or the admission of securities to capital markets. 2. Whist endeavouring to achieve the objective of free movement of capital between Member States and third countries to the greatest extent possible and without prejudice to the other Chapters of the Treaty, the Council may, acting by a qualified majority on a proposal from the Commission, adopt measures on the movement of capital to or from third countries involving direct investment – including investment in real estate – establishment, the provision of financial services or the admission of securities to capital markets. Unanimity shall be required for measures under this paragraph which constitute a step back in Community law as regards the liberalisation of the movement of capital to or from third countries. What are the current EU rules? Article 58: 1. The provisions of Article 56 shall be without prejudice to the right of Member States: (a) […] (b) To take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on the grounds of public policy or public security. 2. The provisions of this Chapter shall be without prejudice to the applicability of restrictions on the right of establishment which are compatible with this Treaty. 3. The measures and procedures referred to in paragraphs 1 and 2 shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 56. What are the current EU rules? Article 60: 1. If, in the cases envisaged in Article 301, action by the Community is deemed necessary, the Council may, in accordance with the procedure provided for in Article 301, take the necessary urgent measures on the movement of capital and on payments as regards the third countries concerned. 2. Without prejudice to Article 297 and as long as the Council has not taken measures pursuant to paragraph 1, a Member State may, for serious political reasons and on grounds of urgency, take unilateral measures against a third country with regard to capital movements and payments. The Commission and other Member States shall be informed of such measures by the date of their entry into force at the latest. The Council may, acting by a qualified majority on a proposal from the Commission, decide that the Member State concerned shall amend or abolish such measures. The President of the Council shall inform the European Parliament of any such decision taken by the Council. What are the current EU rules? Source: 'Capital movements in the legal framework of the Community' - Annex to Chapter 5 on Determinants of international capital flows (European Economy Nr. 6, 2003, p. 322) A European Commissioner Speaks (4)… “The big difference we see in the case of sovereign wealth funds is [that] they are owned by the state, not by private firms, and their investment criteria and management are characterised in some cases, in some cases, by a high level of opacity.” Joaquin Almunia, European Commissioner for Economic & Monetary Affairs (27 February 2008) New EU “rules of the game”? On 27 February, Europe’s Internal Market Commissioner Charlie McCreevy and Economics Commissioner Joaquin Almunia jointly called for SWFs to agree this year to the draft code of conduct being drawn up under the auspices of the IMF. They added that EU heads of government would be asked at their 13/14 March meeting to back the Commission in “…its policy to help shape the IMF code and press funds to sign up to it”. Specifically, the Commission called for SWFs to make public: - The size and source of their assets; - The currency composition of their investments; - The regulation and oversight under which they operate in their home country; - “An investment policy that defines the overall objectives of SWF investment”; and -“The general principles of an SWF’s relationship with government authorities”. New German “rules of the game”? The German Economics Ministry has published for consultation a proposed amendment to the existing Foreign Business Act which commentators believe is intended to defuse domestic political pressures over SWFs and reassure the Funds themselves. If passed, the new legislation would: -Permit the Ministry to vet any investment from outside the EU involving a stake of 25% or greater in a German firm; -Give the Ministry a maximum of three months to conduct its enquiries from the date of the investment’s announcement; -Place the onus on the Ministry to identify such cases and initiate action; -Ensure full German compliance with relevant EC Treaty articles. However, Labour Minister Olaf Scholz is reportedly pressing for his ministry to be included in the vetting process and to be given the right to block investments, which could result in significant job losses. On the other hand, the länder are reportedly keen to avoid any new hurdles which could discourage inward investment and related job creation. Timing for the new legislation to be introduced to the Bundestag could be determined by efforts to reach agreement at ministerial level beforehand. But no new UK “rules of the game”? Visiting China in January 2008, British Prime Minister Gordon Brown said: “We want Britain to be the number one destination for Chinese business as it chooses to invest in the rest of the world. Tens of thousands of jobs in Britain can be created from cooperation between our two countries.” According to senior officials accompanying Mr Brown, this statement was intended to underline that the British government has: “…no difficulty with sovereign wealth funds investing in the UK…as long as [they] operate on a commercial basis and are committed to the general principles of transparency and corporate governance that operate in the UK…. We will welcome sovereign wealth funds to London.” British ministers are currently actively encouraging CIC to open an office in London. France: Total Welcomes Chinese Investment In early April, the press reported that China’s State Administration of Foreign Exchange (SAFE), which manages the bulk of China’s foreign exchange reserves, had acquired a €1.8bn stake in the French oil major Total. Although there has been speculation that this move may revive the debate in France over “economic patriotism”, Total is quoted as saying that it is used to having state funds as investors and welcomes them, noting: “These funds are no different from other shareholders”. French President Nicolas Sarkozy has said that state-owned funds are welcome to invest in France as long as they are transparent and there is reciprocity in terms of openness to inward investment. Following confirmation in mid-April of the acquisition of a £1bn/1 percent stake in BP by “a Chinese state-owned company”, neither BP nor SAFE has confirmed speculation that the latter is involved. Russia – The principal focus of Europe’s attention? Russia formally set up its new sovereign wealth fund – the National Welfare Fund (NWF) – on 1 February, the day after now presidentelect Dmitry Medvedev had stated that the Kremlin would support Russian companies looking to acquire foreign companies in order to strengthen Russia’s economy and gain access to new technology and markets. The NWF, which is controlled by the finance ministry, has initial capitalisation of $32bn; but, according to analysts, this could swell to as much as $200bn this year based on projected oil and gas revenues. Under current legislation the NWF can only invest in Russian and other sovereign bonds. But the Russian finance ministry has hinted that diversification could be approved as early as this year, albeit possibly following Norway’s strategy of limiting its stake in any one company to no more than 3 percent of the stock. III US Political and Policy Response New US “rules of the game”? On 20 March, senior US Treasury officials met with officials from the Governments of Singapore and Abu Dhabi and from GIC and ADIA to discuss SWFs. The meeting led to a joint statement which included the following: “The United States, Abu Dhabi, and Singapore, being a group of nations with SWFs and a country receiving investments from SWFs, have a common interest in an open and stable international financial system. We support the process under way in the…IMF and the…OECD to develop voluntary best practices for SWFs and inward investment regimes for government-controlled investment in recipient countries, respectively. International agreement on a set of voluntary best practices will create a strong incentive among SWFs and investment-recipient countries to hold themselves to high standards…” New US “rules of the game”? The statement went on to propose the following “policy principles” for SWFs: “1. SWF investment decisions should be based solely on commercial grounds, rather than to advance, directly or indirectly, the geopolitical goals of the controlling government. SWFs should make this statement formally as part of their basic investment management policies. 2. Greater information disclosure by SWFs, in areas such as purpose, investment objectives, institutional arrangements, and financial information – particularly asset allocation, benchmarks, and rates of return over appropriate historical periods – can help reduce uncertainty in financial markets and build trust in recipient countries. 3. SWFs should have in place strong governance structures, internal controls, and operational and risk management systems. 4. SWFs and the private sector should compete fairly. 5. SWFs should respect host-country rules by complying with all applicable regulatory and disclosure requirements of the countries in which they invest.” New US “rules of the game”? And the following “policy principles” for SWF investment host countries: “1. Countries receiving SWF investment should not erect protectionist barriers to portfolio or foreign direct investment. 2. Recipient countries should ensure predictable investment frameworks. Inward investment rules should be publicly available, clearly articulated, predictable, and supported by strong and consistent rule of law. 3. Recipient countries should not discriminate among investors. Inward investment policies should treat like-situated investors equally. 4. Recipient countries should respect investor decisions by being as unintrusive as possible, rather seeking to direct SWF investment. Any restrictions imposed on investments for national security reasons should be proportional to genuine national security risks raised by the transaction.” New US “rules of the game”? In early April, the US Treasury floated for consultation a proposal that examination of investments below a 10% threshold should in future be open to CFIUS. According to legal experts, this option has always been available; but 10% had long been considered a de facto threshold for CFIUS’s involvement. The move is believed to have been in response to pressure from Congress and may, in part at least, be aimed at defusing such pressure by clarifying the existing rules. IV The SWF Response A “Level Playing Field” High-level delegations from Saudi Arabia, Kuwait, Qatar and the UAE (including Vice President Sheikh Mohammed bin Rashid al Maktoun) are in regular discussions with senior Chinese (including President Hu Jintao) about increasing investments in one another’s economies. Speaking at a conference in Luxembourg on 9 April, the head of the KIA, Bader al-Sa’ad, criticised the EU proposals for a voluntary code of conduct, stating: “Recipient countries are placing handcuffs on sovereign wealth funds in the form of regulations termed – in the best traditions of George Orwell’s Newspeak – ‘codes of conduct’ or ‘principles of operation’ or ‘best practices’. These regulations will not solve or prevent any future financial crises… There should be a common level playing field for all… There is no evidence over the past many decades of any wrongdoing by any sovereign wealth fund… The consequences of imposing regulations on sovereign wealth funds will result in an adverse impact on global capital flows, which is not in our common interest. Regulating sovereign wealth funds will not stimulate the global economy.” To Regulate Or To “Improve”? “The underlying concern in the debate about sovereign wealth funds seems to be the fear that some governments might use their financial power to build strategic advantages. However, a far more challenging issue is how the huge increase in financial assets managed by potentially non-economic agents will affect the efficiency of the global capital market and the allocation of risk and resources. Particular regulations for SWFs would be a step in the wrong direction. Instead, we should discuss what conditions are needed for the professional management of publicly owned financial assets. The free flow of capital contributes to efficient allocation of risk and resources. Regulation of SWFs risks creating inefficiency by curbing market forces at a time when we need to strengthen both the power and the professionalism of capital owners.” “Do not regulate wealth finds, improve them” by Knut Kjaer, Chief Executive of Norges Bank Investment Management (Financial Times, 14 April 2008) China: Outsourcing Investment According to press reports, China’s three sovereign wealth funds are planning over the next three years to outsource a combined total of $320bn to foreign asset managers with a view to accelerating outsourcing thereafter. The move is believed to be in response to capacity constraints within the SWFs – China Investment Corporation (CIC), National Social Security Fund (NSSF) and China-Africa Development Fund (CAD). According to CIC, the fund has received over 200 submissions for equity mandates and another 100 for fixed income. V Endnote The City and “that ancient enemy” “The City of London appears to be at the mercy of sovereign wealth. Its electricity is supplied by a company controlled by a government of that ancient enemy, France. Perhaps… President Nicolas Sarkozy could order the lights to flicker. That would remind everyone that the source of power is in Paris.” “Sovereign wealth investment is a force for stability” by John Kay (Financial Times, 27 February 2008) Analyst Certification: I, Alastair Newton, hereby certify (1) that the views expressed in this research email accurately reflect my personal views about any or all of the subject securities or issuers referred to in this email and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this presentation. 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