SWF Global Role Growing But Transparency Uneven, Says Carnegie

Sovereign wealth funds (SWFs) have become dominant players in global finance and world affairs, controlling considerable financial assets. Though SWFs are only a relatively small investor class among other global market participants, their growth dynamic suggests that their investment and policy behavior will resonate across the global economy, according to Sven Behrendt, Carnegie Middle East Center associate and author of Sovereign Wealth Funds and the Santiago Principles: Where Do They Stand? In October 2008 a group of 26 SWFs committed themselves to transparency, good governance, and accountability standards by signing the voluntary code of ‘Generally Accepted Principles and Practices’ for SWFs – the ‘Santiago Principles’. However, their implementation is highly uneven (MEES, 5 April). “Creating the Principles was significant, but that accomplishment is meaningless without broader SWF compliance to them,” writes Dr Behrendt.

Santiago Principles implementation has been patchy, and appears to have lost some of its earlier momentum. The Carnegie paper shows that a small group of SWFs, predominantly from democratic countries, presents a high degree of commitment to the principles. A second group shows partial implementation, and a third group, mainly from the Arab Gulf region, has yet to reach satisfactory implementation levels. “The Santiago Principles and the commitment of their sponsors are an important test for the viability of new forms of global governance,” says Dr Behrendt, “but their sluggish implementation risks devaluing the principles, thereby increasing SWFs’ political risk exposure.” Increasing SWF compliance will require additional support from among the group of SWFs, and much will depend on “an implicit peer review process by which industry leaders encourage underperformers to demonstrate higher commitment.” The paper notes that, recipient economies have not paid much attention to the Santiago Principles, even though some SWFs have acquired sizable equity stakes in strategically important industries in advanced economies, having a tremendous impact on the industrial geography of recipient economies.

SWFs have been mainly quiet investors, but that is likely to change in coming years. Those with considerable investments in industrial assets in mature economies, such as Qatar Investment Authority’s investment in Volkswagen, will want a more active role in corporate leadership. “Given the current discrepancies of governance arrangements across mature and emerging economies, it should be mutually beneficial to synchronize standards,” the paper notes. Furthermore, implementing the Santiago Principles depends ultimately on the political governance arrangements of the countries that own them. “Underperforming SWFs’ commitment to the principles can only increase with the implementation of a broader domestic reform agenda,” Dr Behrendt observes. Compliance levels of SWFs from non-democratically governed countries should improve if their governments pursue meaningful political reforms. In the Arab world, the democracy and reform agenda has been in limbo for some time and produces meaningful results only gradually.

MENA And Caspian Region SWFs

Fund	Country	Volume ($Bn)
Abu Dhabi Investment Authority	UAE	395.0*
Kuwait Investment Authority	Kuwait	295.0*
Qatar Investment Authority	Qatar	70.0*
Libyan Investment Authority	Libya	65.0
State Oil Fund	Azerbaijan	14.9
Oil Stabilization Fund	Iran	13.0
Future Generations Reserve Fund	Bahrain	N/A
Total MENA and Caspian Region		852.9
Total SWF International Working Group Membership		2,288.0