SWFs wrestle with self-regulation

Whether the aim is nuclear non-proliferati-on or ending whale hunts, getting governments to agree on multilateral accords can be notoriously difficult. Getting them to then stick to those agreements is the diplomatic equivalent of Mission Impossible. It is, therefore, little surprise that self-regulation of the $3 trillion (Dh11.01trn) sovereign wealth fund (SWF) industry has struggled with few funds complying with rules put in place 18 months ago to govern their behaviour.

This is what happens when your membership includes countries as diverse as Libya, Iran, the United States and Timor-Leste – getting them to agree to anything must be like wrestling cats.

While understandable, the difficulties facing the SWF project are a great disappointment. The principles agreed by the world's 26 largest SWFs are an important step towards bringing these government-owned investment vehicles into the heart of the capitalist system. But according to the Carnegie Endowment for International Peace, a think tank, the average compliance rating among SWFs is just 51 per cent. Only four funds [all Western owned] have come close to complying with the requirements laid out in the Santiago Principles, as the SWF code of conduct is called.

The hope was that the Santiago Principles would bring greater transparency to the activities of SWFs in regions such as China, Russia and the Gulf. This matters because there has been widespread fear in western markets that SWFs are being used as a tool of foreign policy.

Despite the importance of the project, the Carnegie Endowment said that Iran's Oil Stabilisation Fund has zero compliance with the Santiago Principles.

The Libyan Investment Authority has complied with about 15 per cent of the requirements while the Kuwait Investment Authority, which owns a 7.6 per cent stake in Daimler, the carmaker, is 40 per cent compliant.

The Abu Dhabi Investment Authority, the world's largest SWF with assets estimated at more than $700bn, is only 50 per cent compliant, despite being an early proponent of the Santiago Principles. Carnegie's fear is that failure to take the Santiago Principles seriously could damage the code's credibility to a point where it becomes irrelevant. Fund managers working for SWFs might be inclined to think "so what" as a succession of Western companies and governments come to them with begging bowls seeking finance.

The credit crunch and subsequent recession in Europe and the US has shifted financial power to resource-rich nations and SWF cash is in hot demand. But cast your mind back a couple of years and the situation was very different.

When the Qatar Investment Authority proposed a £10.5bn (Dh57.36bn) takeover of J Sainsbury, the British supermarket chain, three years ago, there was criticism from workers, union bosses and politicians about how the deal would impact jobs and food prices.

One union boss said at the time: "How on earth can it be in Britain's interest to allow Sainsbury's to become the nationalised property of a Gulf state?" The takeover fell apart.

The £3.9bn acquisition of P&O ports by DP World in 2006 was not strictly speaking a SWF deal but it was an important catalyst in creating the Santiago Principles. The problem was that DP World was going to gain control of key ports such as New York, New Jersey and Baltimore and this caused uproar in the US. DP World eventually had to exclude these ports from its takeover deal.

Sven Behrendt, the author of the Carnegie report, says that the Santiago Principles became necessary because SWFs were "perceived to support their governments' distinct foreign and national policy agendas through economic means, unwittingly injecting considerable fuzziness into international affairs, obscuring the boundaries between international economics and geopolitics".

The Santiago Principles, which require SWFs to disclose their legal framework, ownership, policy purposes and governance structures, were an attempt to diffuse some of these geopolitical concerns. The rules are not particularly onerous and yet funds are still struggling, or simply not bothering to comply. This is a mistake because concern about sovereign ownership of these funds has not gone away.

Self interest may be encouraging Western markets to turn a blind eye at the moment but that will not always be the case. If SWFs cannot demonstrate they are serious about transparency, they may wake up one day to find themselves locked out of deals or facing the imposition of more rigorous rules.

Multilateral agreements are difficult to agree and even harder to enforce but the SWF industry has to make a better fist of the Santiago Principles.

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