Sovereign Wealth Funds (SWFs) have attracted much attention particularly in the past ten months when they injected more than US$50 billion into financial institutions in the United States and Europe that were in need of liquidity as a result of the financial turmoil caused by the subprime mortgage crisis.

They acted at a critical moment when financial markets were in a crisis, contributing to market stabilisation. Also more generally, the impact of SWFs cross-border activity on our economies has so far been positive. Many SFWs have shown themselves to be professionally managed and reliable long-term investors, whose investment is highly valued by OECD companies.

Nevertheless, there exists some uneasiness about SWFs to the point where some governments are considering new regulations against these investment vehicles. The rapid growth of the SWFs, fear that they may pursue political objectives, and the lack of transparency by some of the funds have sparked intense policy debates.

BIAC is concerned that the debates may lead to inappropriate regulation on SWFs’ investment, which may unnecessarily endanger the continuing benefits that foreign investment brings to OECD economies and societies.

In a recent letter to the OECD Council members, BIAC welcomed that OECD Ministers will, at their upcoming meeting in June, take stock of what the Organisation has achieved so far under its programme on freedom of investment, and decide what still needs to be done to guide OECD countries’ approaches towards investment from SWFs. BIAC urged the Ministers to confirm that the OECD will play the leading role in the international debate on freedom of cross-border investment and that it will take leadership in shaping the understanding about the issues at stake. Based on the OECD’s unique process of peer learning, policy guidance must be developed on how to keep our markets open for all forms of foreign investments without putting national security at risk.

In view of the ongoing discussions and actions concerning approaches to foreign investment, we find it imperative for the OECD Ministerial Meeting to not only discuss, but to issue a clear, concise political message in support of open markets for investment and the existing OECD investment instruments. The message should include the following five elements:

• Confirmation of Members’ continued commitment to freedom of investment;
• Commitment not to use legitimate national security concerns as cover for protectionism;
• Commitment to provide guidance by mid-2009 on how investment procedures that are applied for legitimate national security reasons should avoid unnecessary restrictions and be made transparent, predictable and accountable;
• Confirmation that the OECD will contribute to ongoing IMF work aimed at seeking ways to effectively encourage SWFs and State Owned Enterprises (SOEs) to meet high standards concerning transparency, accountability and corporate governance;
• Invitation to SWFs and their home countries to work together proactively with the IMF and OECD in identifying necessary standards.

Such a statement will have a profound, positive effect on markets and policy makers. It would help to restore business confidence by making it clear that the current investment policy debates and actions do not represent a shift towards investment protectionism.

The emergence of SWFs

SWFs are pools of assets held by a sovereign government. They have been around for decades and today some 40 exist. SWFs mostly originate from oil exporting countries such as those in the Middle East, Norway and Russia, or from major current account surplus countries in Asia such as China, Singapore and India. Most of these SWFs owners are from emerging economies and their investments are mostly directed toward major developed countries.

Typically, SWFs cushion fluctuations in resource or commodity prices, share wealth across long time periods, and effectively mobilise financial resources globally. In recent years, their assets under management increased rapidly to US$ 2.5 trillion. This represents a small part of global financial markets but surpasses for example the combined size of the global hedge funds and private equity industries. With oil prices likely to remain high and continued global current account imbalances, SWFs are expected to grow to US$ 12-15 trillion by 2015. This represents a significant potential for investments in OECD countries.

SWFs offer various economic benefits. They help avoid boom-bust cycles in their home countries, and facilitate the savings, and transfer across generations, of proceeds from fiscal surpluses related to commodity exports and privatisations. The hosts of SWFs stand to benefit from mostly cautious, long-term oriented and commercial based investments that our companies need in order to thrive, invest and create jobs.

However, SWFs’ rapid emergence as major foreign investors has aroused public unease. Host governments have raised questions concerning SWFs potential impact on national security, financial stability and on the level playing field between the sovereign and private investors.

Important roles for the OECD and the IMF

The OECD and the IMF have been tasked to lead the international policy debate about SWFs and to help ensure that our economies can continue to benefits from foreign investment by SWFs.

Within the framework of its broader initiative entitled Freedom of Investment, National security and ‘Strategic Industries’, the OECD is developing policy guidance for OECD countries on how to keep markets open for all type of investors (i.e. private investors, SOEs and SWFs) without putting national security at risk. The objective is to avoid the misuse of legitimate national security concerns as a cover for unnecessary investment restrictions that harm our economies. The discussions focus on how to avoid investment restriction by using other remedies such as financial market regulation (e.g. disclosure rules) and competition policies (e.g. merger review). For the rare number of cases where incoming investment may pose national security concerns which cannot be addressed by other remedies, the OECD is developing guidance on how to use investment screening and authorisation procedures in a transparent, predictable, accountable and not more restrictive way than necessary to achieve national security. The OECD issued last week a report about the main findings so far which will be discussed at the June OECD Ministerial Meeting. The final OECD policy guidance is expected for early 2009.

The IMF is together with SWFs developing best practices guidance for transparency and accountability by SWFs. If properly implemented by the funds, such best practice guidance may help alleviating those concerns about SWFs which are unfounded and through this help keeping our doors open for their investment. It is expected that the IMF will present its first draft guidance in October of this year just before the IMF and World Bank autumn meeting.

The co-operation between the two multilateral organisations is of paramount importance because the work of these two organisations is complementary to each other. It is also critical that the OECD and the IMF conduct constructive dialogue with owner countries of SWFs in order to overcome misunderstandings between them.

The role of BIAC

BIAC has urged the OECD to the lead the fight against the re-emergence of investment protectionism by advising governments on how to live up to their commitments under the OECD investment instruments and how to keep markets open for foreign investment without compromising national security. Since the inception of the OECD work programme on freedom of investment in 2005, the BIAC Committee on International Investment and Multinational Enterprises (MNE Committee) has constantly provided substantive input to the discussions. In consultations with the leadership of the Organisation and the OECD Ambassadors, BIAC has increased the visibility of the technical work under way. BIAC urges the OECD Ministers now to confirm in a joint public statement their commitment to the objectives of the freedom of investment programme. We will continue to provide business input to the OECD work and urge the Organisation to ensure effective implementation of its policy guidance once it has been finalised.

Tadahiro Asam
Secretary General