Transparency of Sovereign Investment
2/28/2008
by Carl Linaburg
Possible national securities implications of sovereign wealth funds may be relaxed with the aid of transparency. Although there are positive economic effects for both sides of state-owned investment funds, there will always be a question of whether or not the owners of government investment funds will use strategies that conform to their own political or personal agendas.
On one end, the foreign investor seeks to diversify the dominant origin of the country’s wealth, or seeks higher risk than offered by government treasury bonds. On the side of the domestic businesses, the economy is eager for growth, technologies, and new competition. If domestic parties refuse an investment offer by a foreign government, the investor will need to find other opportunities to spread out its wealth. Uncertainties may further lead to the call for regulation on these funds, which could not only be financially hazardous to large funds but could also destabilize the domestic economy. So far the EU and the IMF have been drafting proposals on creating a voluntary code of conduct, having transparency as one of the key tenants. Others argue that it is the duty of the country receiving the foreign investment to draft its own laws.
The Abu Dhabi Investment Authority (ADIA) was founded in 1976 by the late former ruler Sheikh Zayed bin Sultan Al Nahyan. As the rulers of the United Arab Emirates have become aware of their diminishing supply of oil, they have taken measures such as the creation of these funds to ensure future economic stability. ADIA is currently the largest state-owned investment fund at an estimated U.S. $875 billion, which makes up about 20-40 per cent of all sovereign wealth funds. Coincidentally, as ADIA is the largest fund it has low transparency and tracking the investments of ADIA may be difficult. An estimation of the investments ADIA has made in the United States comes close to 20%. If ADIA and other large sovereign wealth funds were to suddenly shift their investment strategies outside of North America, the United States could experience economic destabilization.
Transparency in respect to sovereign wealth funds means that the government owners of these funds voluntarily submit pertinent financial information to the public. Financial documentation supporting transparency provided by fund owners may include balance sheets, historical information, investments, target investments, investment strategies, and legal regulations applied by the home country. This information should be easily accessible and balance sheet statements should be updated on a monthly or quarterly basis. The voluntary release of the foreign investor’s intentions and financial information promotes the security of the domestic public and may reduce the need for a code of conduct. Funds such as the Government Pension Fund of Norway have provided transparency without the use of a code of conduct; the issue is getting the rest to follow in line.
The views in this publication are expressed by Carl Linaburg.
Carl Linaburg is cofounder and deputy director for the Sovereign Wealth Fund Institute.
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