Wednesday, February 26, 2014

Part 15 Qatar Investment Authority--Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Funds as Regulator and Participant in Global Markets

(Pix (C) Larry Catá Backer 2014)

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme. For 2014 this site introduces a new theme:  Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Fund as Regulator and Participant in Global Markets.

There have been a number of studies that have sought to provide an overarching structure for understanding SWFs. The easiest way to to this is to find the largest and most influential funds and then extrapolate universal behaviors or characteristics from them.  This is a useful enterprise, it may erase substantial nuance that itself might provide the basis for a deeper understanding of SWFs within globalization and in the context of a state system in which not all states are created equal.  In this sense, while the large SWFs are better known, they do not define the entire field of emerging SWF activity. This study provides a brief critical inventory of the emerging communities of sovereign wealth funds. Each post will consider a different and less well known SWF.  Taken together, these brief studies might suggest the character and nature of the emerging universe of SWFs, and their possible rationalization.

This Post considers the Qatar Investment Authority.

The Qatar Investment Authority (QIA), shares many similarities with its geographical relatives in Kuwait and Abu Dhabi.   Like these funds, the QIA has been closely associated with the International Forum of Sovereign Wealth Funds, and adheres, in its own way, to its standards, especially the Santiago Principles.  The objectives of that decision is the anticipated benefit--in exchange for conformity to Santiago Principles standards and solidarity with the IFSWF (which includes important host member states), then host states, including those which are home to important financial markets, will refrain from regulating (and excluding) such SWFs from participation in host state private financial markets. The strategy has been successful. Yet like the KIA and ADIA, the QIA reflects the political realities from which it arises--and that shapes substantially both its decisions on Fund transparency and the nature of its fund objectives..  Like ADIA and KIA, QIA serves as aa means of disciplining wealth acquisition and expenditure that emerges from the exploitation of non renewable resources.  It serves both as a futures fund, and as an internal development fund.  That internal development is characterized by activity that may be different from those of less well developed states--and includes, as the ADIA example made clear--strategic investment in overseas enterprises for the purpose of more closely integrating a small state like Qatar within globalized production and financial industry streams. Thus QIA, ADIA and KIA can be distinguished from the Mauritanian Fund and even the Korean SWF treated earlier.

Previously known as The Supreme Council for Economic Affairs and Investment Article 5 of Emiri Decision No (22) of 2005 transformed the Qatar Investment Authority to what it is today with an estimated $115 billion in assets diversified between equity, real estate, and commodities (Sovereign Wealth Fund Institute, Qatar).  Similar to other Gulf state funds, the QIA has modest amount of overall transparency while the maintenance of the fund is securely held by the monarch. There is some cross over with the principal objectives of the Korean Fund, at least with respect to the overall internal development objective of financial business center. "The QIA was founded by the State of Qatar in 2005 to strengthen the country's economy by diversifying into new asset classes. Building on the heritage of Qatar investments dating back more than three decades, its growing portfolio of long-term strategic investments help complement the state's huge wealth in natural resources. Qatar's goal is to become a major international centre for finance and investment management, a vision shared by its government, people and institutions." (QIA, Home).

Governance: The stated purpose of the QIA is to “develop, invest and manage the state reserve funds and other property assigned to it by the Supreme Council in accordance with policies, plans and programs approved by the Supreme Council (Article 5 of Emiri Decision No (22) of 2005)”. The QIA is chaired by the Emir of Qatar with all positions on the QIA Board being filled by prominent government officials[3]. Due to what was seen as a conflict of interests between Qatar foreign policy and the investment strategy of the fund, in 2013 the new Emir appointed an independent head of the sovereign wealth fund[4],[5].

Finance Strategies: "The QIA does not publish its investment criteria but the criteria are based on the imperative of generating a strong financial return. The QIA takes a flexible approach, is a long-term investor, has a conservative approach to leverage, and can be considered a truly global investor. It uses sophisticated analytical tools and leverages its network of financial intermediaries to draw down extensive market research and data." (QIA FAQs).  While QIA indicates it takes ethical considerations into account, there is little to suggest the ways in which that is accomplished. "The QIA takes ethical considerations very seriously and such issues are always taken into account when selecting investment opportunities."(QIA FAQs).

Currently QIA’s investments are divided up between property, public and private equity, and commodity holdings. The single largest beneficiary of investments from the fund is Britain who has received an estimated $33.8 billion USD primarily in the banking and department store sectors[6]. Outside of Britain, Qatar has significant investments in both petroleum companies Total and Shell, manufactures Volkswagen and Siemens, as well as many high-end consumer product stores such as US jeweler Tiffany[7].

Being one of the less fertile countries in the world the QIA established Hassad Foods having “a mandate to run a profitable business with sustainable growth as well as to contribute to the food security programme for Qatar[8]”. The goal is to provide Qatar with viable sources of food from outside of the country looking forward for the next 50 to 100 years. The corporation works via joint-ventures, start-ups, and the acquisition of existing companies[9]. Hassad has offices operating in Australia and Sudan with anticipated expansion into Brazil and Argentina[10]. Finally is self-proclaimed as being a business run under Corporate Social Responsibility as a foundation for their sustainability work[11].

Outside of commodity and equity holdings, the QIA has property holdings estimated at $42 billion[12] mainly in London and Paris, owns the European football team Paris Saint-Germain[13], and has been rumored to be interested in purchasing a majority of Morgan Stanley’s Commodity trading unit[14].

 Objectives based investment:The QIA pursues a double ste of objectives in line with those of many SWFs, at least as a general proposition.  It seeks to serve as a futures fund and as a portal through which Qatari wealth may be used instrumentally to develop the state and its economic structures in ways that accord with central planning objectives.
The Qatar Investment Authority is an integral part of Qatar's strategy to diversify its finances into new asset classes, so strengthening and broadening the country's fast-growing economy which is rooted in the natural resources sector.
. . . .
The Qatar government is using this resource and the funds flowing from it to develop the country's infrastructure, including education and health facilities, and modern hydrocarbon operations. Some $130bn is earmarked for investment over the next 5 ­ 6 years, of which $65bn will be devoted to energy-related projects. (QIA Startegy).
. . . .
 Economic diversification is structured as a set of intertwined internal and external strategic objectives.  These are designed to weave together public and private  spheres in the service of an integrated set of economic objectives designed to protect the state and to project Qatari power within global markets to ensure both that protection and the strategically conceived internal structures of wealth creation through economic development.
Inside Qatar, measures have been put in place to grow the non-hydrocarbon economy. These measures include the development of small and medium-size enterprises (SMEs); promotional activities such as the Asian Games (Qatar was host to the games in 2006); the creation of the Qatar Financial Centre; property and project development by Qatari Diar Real Estate Investment Company; creation of international brands such as Qatar Airways; investments in energy-intensive industries and research and development facilities and the establishment of world-class educational institutions.

Outside the territory, the QIA is responsible for investing funds in asset classes such as equities and fixed income and private equity, as well as through direct investment. These investments will complement the state's huge wealth in natural resources. The QIA adheres to the strictest commercial and financial disciplines in line with the standards to be expected of a world class investor. (QIA Startegy)

Reporting Structures & Transparency: Overall the transparency ranking on the QIA reads a 5/10 on the Linaburg-Maduell Index, between Iran and the UAE[15]. As with other Gulf funds, investment instruments and activities are led by the board who is ultimately held responsible to the Emir.

Criticisms: Since the founding of the fund less than a decade ago criticisms surrounding the QIA have been largely involving lack of transparency and shareholder activism surrounding its stakes in publically traded companies. Unlike other funds, the QIA does directly deal with taking majority stakes in companies as well as the acquisition of and complete outright ownership of companies. Most notably in 2012 Qatar used its holdings in Xstrata, a mineral resource company who second largest shareholder is Qatar Holdings, to significantly impact, delay the buyout of, and inevitably raise the price that Glencore had to pay to buyout the firm[16],[17].

On the real estate and property side of investments, Qatar has come under criticism for singling out Britain as a main route for its investments and from France for Qatar’s proposed investments in suburban slums. The anti-immigration right wing of France, which has been dealing with a significant Islamic population influx from North Africa, has likened the major investments in predominately Islamic areas as an “Islamic Trojan Horse”[18]. With its fixed-income holdings, days after Hosni Mubarak was ousted in Egypt, Qatar invested $5 billion USD in Egyptian bonds followed by an additional $3 billion two years later[19].


[2] Article 5 of Emiri Decision No (22) of 2005


[4] better citation needed.
















No comments: