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5/29/2008
Disclosure of sovereign wealth enterprises and critical sovereign wealth fund identifiers
By Carl Linaburg
The initial thought that may be credited to the development of the Linaburg-Maduell Transparency Index, was to offer simple principles of disclosure that sovereign wealth funds could use to increase levels of trust shared among the public of the economies they invest in. By following simple measures of our transparency index, our hopes would be for funds to follow in suit without being told what to do by an internationally drafted agreement.
Major hurdles have been found during months of attempting to identify sovereign wealth funds and their enterprises. The 10-point index that we created does not give negative points or penalties for failing to disclose certain critical items, which is why we stress a score of 8 to be considered adequate in transparency. In correlation with ever-changing sovereign wealth funds, our transparency index will change in terms of rating and principles.
While some funds are easy to assess, others have discombobulated government structures, identify their enterprises on one-way roads, fail to identify their enterprises, or flat-out deny their status as a sovereign wealth fund altogether. Most sovereign wealth funds tend to not disclose their international holdings in order to avoid confrontation with the public. Contingent pension reserve funds, such as the Government Pension Fund-Global or Norway and the New Zealand Superannuation Fund, are required to disclose this type of information usually by law. Some entities, particularly in Asia but not limited to Singapore’s Temasek Holdings, deny being a sovereign wealth fund altogether. Many funds do not want to be lumped in as sovereign wealth funds; especially if an international agreement is to be adopted, forcing them to undergo increased compliance. In the case of Temasek Holdings, their argument against being a sovereign wealth fund lies in lack of government control. Their argument is not within our scope of the definition. What does identify Temasek Holdings as a sovereign wealth fund, are other key factors: establishment by government authority, funding source, and types of investing. The disclosure of funding source is partially disclosed for The National Council for Social Security Fund for the People’s Republic of China (NSSF). From the official website of the NSSF, a financial statement from 2004 reveals the funding source. Funding source disclosed from this statement is identified as ‘The National Social Security Fund, whose sources include the fiscal allocation of the central government, capital and equity assets derived from reduction of state-owned shares, capital raised in other manners with approval of the State Council and investment proceeds’. The State Administration of Foreign Exchange (SAFE) is responsible for the management of China’s foreign exchange reserves. SAFE owns a Hong Kong subsidiary called the SAFE Investment Company which makes purchases in foreign equity investments, such as investments in the French oil company Total.
The Sovereign Wealth Fund Institute recently gave a new label to a certain type of sovereign wealth fund subsidiary. Sovereign wealth enterprises are subsidiaries that complete the objectives of the parent sovereign wealth fund, which usually involves investment in international equity. These enterprises are not a new phenomenon and the amount of sovereign wealth enterprises are hastily increasing. The government structures of these enterprises originate from government authority to sovereign wealth fund to subsidiaries and enterprises. Sovereign wealth enterprises are owned indirectly through the sovereign wealth fund, where some or the entire funding source is derived. An example of a similar structure can be found through Jafza International. The funding for this organization may come from capital borrowed from non-governmental financial institutions, but given that these organizations are indirectly established through a sovereign wealth fund; this is unlikely the case. The official website of Dubai World, a subsidiary of the Investment Corporation of Dubai, lists Jafza International as one of its featured companies. Dan Chapman of the Atlanta Journal Constitution in his article ‘Hope, suspicion as countries fat with cash invest in America’, noted earlier this month the investments of Jafza International in the United States. Dubai World argued his statement regarding direct government control of Jafza International by UAE government officials. While Jafza International may not be directly controlled by the government there are other factors to note. Through the legal disclaimer of Jafza International visitors are notified that ownership lies with their parent organization Economic Zones World FZE. The Economic Zones World official website does not disclose a parent organization in its legal disclaimer. On page 10 of their prospectus, Economic Zones World FZE broadly identifies governance structure as the following:
The use of a sovereign wealth enterprise makes sense. Although governance structure may be confusing to some, there are only issues in regards to transparency when pertinent information regarding association to the sovereign wealth fund is left out and when disclosure of these types of associations goes down a one-way street. The inclusion of penalties in transparency assessment, for sovereign wealth funds that fail to disclose critical information, is unnecessary. Sovereign wealth funds need to not be worried about the negative connotation of being labeled as a ‘SWF’, but they need to be aware of the dangers of covering their tracks. When attempts to avoid confrontation are foiled, there will be severe distrust.
The views in this publication are expressed by Carl Linaburg.
Carl Linaburg is the cofounder and vice president for the Sovereign Wealth Fund Institute.
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