Pressure grows on Gulf governments to sign sovereign wealth fund code

04 April 2008
World’s second-largest sovereign wealth fund backs Abu Dhabi agreement governing investment activity.

Gulf governments are to come under increasing pressure to sign up to a code of conduct covering their sovereign wealth funds, after the world’s second-largest fund put its weight behind a recent agreement between Abu Dhabi, Singapore and the US.

The Abu Dhabi Investment Authority (Adia), the world’s largest sovereign fund, with assets of about $875bn, and Singapore’s Government Investment Corp-oration (GIC), which is worth $330bn, agreed to a deal with the US Treasury on 20 March that lays out a series of principles for both funds and countries receiving investments.

Now the Norwegian Government Pension Fund, which is second only to Adia in size, with assets estimated at $380bn, says it too supports the US drive for greater transparency.

“We would publicly support the agreement,” says Martin Skancke, director general of the asset management department of Norway’s Finance Ministry, which controls the fund. “This is a good, constructive input to the process.”

The development means that the three largest funds in the world have now agreed to the principles, which include a pledge to publish information about their activities on a regular basis.

As a result, other secretive Middle East funds will find it increasingly difficult to reject such a deal if they want to maintain access to the US and other important international markets.

Among the funds that are now likely to come under pressure to sign up to similar principles are the Kuwait Investment Authority, the Qatar Investment Authority and the Investment Corporation of Dubai, which acts through its subsidiaries including Dubai Holding and Dubai World.

Momentum has been building over the past two years for a code of conduct for all sovereign wealth funds (see Agenda pages 28-29).

Recipient countries are increasingly concerned about the opaque nature of such funds and their motives, particularly funds from China and Russia.

The IMF is planning to draw up a draft agreement by August, which is likely to mirror the deal already agreed between the US and the two funds.

The Organisation for Economic Co-operation & Development is also consulting its members on how to deal with the funds.

The Norwegian fund is regularly praised for the amount of information it publishes about its investments and performance. It prefers to take small equity stakes in companies and it has investments in several Middle East firms, including a stake in Egypt’s Orascom Telecom worth NOK51.1m ($9.9m) and a 0.4 per cent holding in the UAE’s I-mate worth NOK1.9m.

The policy principles to which Adia and GIC signed up include a pledge that investments should be made solely on commercial rather than political grounds. It also requires that funds should disclose their purpose, investment objectives and other financial information, including their asset allocation and rates of return.

In addition, funds would agree to put in place strong governance structures, internal controls and risk management systems.

In return, countries receiving investments from sovereign wealth funds would promise to treat all investors equally, not to build protectionist barriers to investments, and to ensure that predictable investment frameworks are in place.

They would also promise that any restrictions imposed for national security reasons should be proportional to the actual risks raised by a transaction.

The three say such moves would build up trust in the funds in countries where they invest.

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