Sunday, February 09, 2014

Part 6: Iran National Development Fund--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 Iran National Development Fund.

The National Development Fund of Iran (NDFI), like a number of others we have considered, appears to be a product of efforts to Shepard national resources in the wake of the financial downturn and global economic recession of 2007-10(ish).  In th case of Iran, the politics of its SWF is closely tied to its nuclear policies and economic relationships (including embargo politics) with the West.

The NDFI was established in 2011, but not out of whole cloth.,  Rather it is the successor to another find, the Oil Stabilization Fund which, to the surprise of no one, was established in the rush of developing states with exploitable resources to better manage that exploitation and to provide a mechanism against national temptations to squander these resources. "The National Development Fund of Iran (NDFI) can be traced back to the Third Development Plan of Iran (2000) when a Foreign Currency Reserve Account (known as Oil Stabilization Fund) was established to stabilize the annual budget and prevent the oil prices fluctuations. The other objective of OSF was to save a portion of oil revenues for future generations through making productive investments." (NDRI, About Us, Fund History).

The Oil Stabilization Fund was eventually deemed a failure and its assets reorganized.
Due to the failure of OSF, it was in the Fifth Development Plan (2011) that NDFI was formed to save the shares of future generations and transform a portion of oil revenues to productive investments, while the OSF remained in place only with the single task of keeping the annual budget balanced. Half of OSF balance at the end of each year is transferred to NDFI regularly. NDFI is mandated with transforming a portion of the revenues from export of oil, gas, gas condensates and oil products to sustainable wealth and productive investments, as well as saving the share of future generations from these resources. Based on the law, 23% of the hard currency revenues from the above mentioned sources go to NDFI in 2013. This share will reach to 32% by the end of 2016. ((NDRI, About Us, Fund History)).

The NDFI is a member of the International Forum of Sovereign Wealth Funds.  As a consequence, its operations exhibit a greater adherence, in its formal institutionalization, to the Santiago Principles.  NDFI is also measurably more transparent, at least with respect to information it is willing to share, though its website disclaimers a are worth a careful read (NDFI, About Us, Disclaimers).  A procedural chart has been produced in English (NDFI About Us, Procedures).
The organization of the NDFI was set out in the Articles of Association of the National Development Fund of Iran, Article 84 of the Fifth Development Plan (2011).  It is supplemented by the fund By Laws (Manual of Terms & Conditions for Granting Facilities (V. 6-4-1391), enacted on 26 June 2012, by the National Development Fund’s Operating Board of Directors With reference to Article 84 of the Fifth National Development Plan of the Islamic Republic of Iran and the Budget Law for the current Iranian calendar month (started 21 March 2012)).

Its governance structure is centered on a three way relationship among a board of trustees, a board of supervisors and a managing board (composed of the NDFI executives) (NDFI, About Us, Governance Structure). The current head of the executive board of directors is Dr. Sayyed Safdar Hosseini, who is served by a three member managing board (NDFI, About Us, Governance).The Board of Trustees sets overall investment parameters and investment goals, and appoints the Managing Board.  The Trustees include the ministers of finance, labor and social affairs, oil, and thre president of the central bank if Iran.  The  Head of Iran Chamber of Commerce, Mine and Industry, and the head of the Chamber of Cooperatives have observer status.  The Board of Supervisors has, as the name implies, a monitoring function. The articles provide:
In order to make sure that the goals of the Fund are realized and its performance is under supervision, and in order to prevent any probable deviation from the provisions of the Articles of Association, policies and guidelines of the Fund, the Board of Supervisors shall be formed comprising of the heads of the State Audit Organization, State Financial Tribunal Organization, and the State Inspectorate Organization. (Articles, F)
That supervisory function is not exclusive and the articles specifically suggest a role for the State Inspectorate Organization or the State Financial Tribunal Organization. (Ibid). Here is the organization chart posted to the NDFI website:

In mid February 2014, the NDFI was reorganized. "Chairman of Board of Executive Directors of National Development Fund of Iran announced changes to the structure of the National Development Fund of Iran, setting up the Department of Economic affairs as well as Portfolio and Risk assessment committees."  (News Release, President of NDFI Met the IMF Delegation, Feb 10, 2014)
Like other SWFs derived from management of exploitable natural resources, the NDFI is funded through the proceeds of  income derived from its mostly petroleum industries.
H-Resources of the Fund
a. At least equivalent to 20 percent of the revenues from exporting oil (crude oil, gas liquids, gas and oil products) during the period of the Fifth Development Plan and the determination of its value in annual budgets 
b. At least 20 percent of the value of barter exports of the above-mentioned items
c. Shares of the resources described in paragraphs A and B, shall increase on an annual basis by three unit percent
d. Fifty percent of the cash remaining balance at the end of the 1389 Iranian calendar year (2011) and following years
e. Resources exploitable from international monetary markets under the permission of the Board of Trustees in accordance with related rules
f. Net profit of the Fund during the finance year
g. Revenue generated from the interest of the Fund’s account with the Central Bank of Iran, equivalent to the average interest rate of the Central Bank of Iran’s deposits in foreign markets, with calculation and payment every three months 
h. Twenty percent of resources subject to Part D of Paragraph 4 of the 2011 Budget Law (Articles, H).
The NDFI is not operated as an autonomous legal person but is instead represented as funds in the Central Bank of Iran. The operation of those funds in the Central Bank of Iran is elaborated in the By Laws (Part 2). However, it is established to be autonomous og government, which strengthens its ability, at least formally to serve as a disciplinary device over government spending and investment. "No government entity has access to NDFI resources and they have no authority to withdraw from the NDFI accounts. Definition of governmental sector is much tighter in NDFI regulations. Capital share or managerial share of government in an entity more than twenty percent, makes it ineligible to enjoy NDFI loans, facilities or resources. "(Press Release, NDFI Response to Spiegel, 30 Dec. 2013).

The NDFI's spending reflects both the internal development goals of the NDFI as well as as its investment strategy for raising revenue to enhance the NDFI's position.

I-The Fund’s Spending
a.  To offer financial facilities to the private sector and cooperatives and economic enterprises owned by public non-governmental institutes to be used for production and investments with economic, financial and technical justification
b. To provide financial facilities for Iranian private companies and cooperatives which win international tenders to export technical and engineering services, through the Fund’s resources or syndicated facilities
c. To grant financial facilities to buyers of Iran-made goods and services in the country’s export target markets
d. To invest in foreign financial and monetary markets
e. To offer financial facilities to foreign investors on competitive and economic viability grounds in order to attract and support investors in Iran in accordance with Article 80 of the Constitution
f. To pay for costs of the Fund (Articles, I))
The financial facilities are subject to some overall parameters and can be paid to a wide range of organizations including religious foundations (Articles, J). The constraints on developing these financial facilitates are set out in the By Laws.  In effect, the Articles suggest both the inward looking nature of the NDFI, as a facility for directing state wealth to development, and the secondary place of the source of revenue raising through investment in foreign markets.

Attention, though, is paid to the investment ethics of the NDFI.  These were drawn from the Santiago Principles. The investment policy suggests general wealth maximization in economic terms.  "The investment policy of NDFI is "optimum return on investments", "moderate risk" and "diversified investment portfolio strategy", founded on optimal resilient portfolio management. . . . NDFI assets are inter-generational and shall be invested for development objectives, taking the share of current generation, eco system, optimum return and moderate risk into account in order to achieve sustainable development (as an inter-generational issue)." (Investment Ethics of the NDFI).  Curiously, the NDFI statement carries over the strangely incompatible goals of conforming to the legal requirements of host states and of constraining its investment universe by recourse to transnational (or Iranian) principles of governance and corporate conduct: "NDFI activities in the receiving country shall observe all the rules and laws as well as disclosing requirements of the receiving country. NDFI activities in other countries are purely economic without following any political interest. . . . The firms from which NDFI buys shares or provides facilities for, are required to observe the basic rights, environmental concerns, human life, hygiene and public health." (Ibid).

Unlike some funds that seek to appear to emphasize the private methods of their public functions, the NDFI has fully embraced the idea that it is sovereign, and that its transactions are sovereign as well. For what it is worth, and in many host countries it may be worth less, the NDFI proclaims: "The NDFI, its property and assets, are immune from every form of judicial process. Nothing herein shall constitute a limitation upon or a waiver of these and other privileges and immunities of the NDFI, which are specifically reserved." (NDFI, About Us, Disclaimers).  In the U.S., as in other host states to varying extent, though, this declaration has some but more modest effect.
Given their commercial nature, the typical investment activities of SWFs generally fit within the commercial activity exception of the FSIA. Nonetheless, the statute still provides some procedural advantages and privileges to SWFs even when they are not immune. For instance, pre-judgment attachment of property is excluded unless immunity from such attachment has been specifically waived and there is a showing that the attachment is to secure satisfaction of later judgment, not to obtain jurisdiction. In addition, if a civil action is brought in state court against a SWF, the defendant may remove it to the federal district court in that district, where any trial will be before a judge without a jury. The SWF has a presumption of immunity under the FSIA, which the plaintiff has the burden of rebutting by showing that the action falls into one of the statute’s exceptions. If the plaintiff fails to make such a showing, then the SWF will be afforded immunity, unless, of course, it has otherwise waived immunity. (Clare O’Brien, Tania Mattei, and Naveen Thomas,  Sovereign Wealth Funds:  Evolving Perceptions and Strategies, Bloomberg Law (Sherman and Sterling, 2012)).

With the loosening of trade sanctions against Iran, it is likely that the NDFI will move more aggressively toward foreign financial interventions. Thus for example, it was reported in December 2013 of efforts to project NDFI investment in Spain.  "Based on [Seyed Safdar Hosseini, NDFI President], the two countries can have joint investments, co-finance projects; participate in syndicated loans to the projects of both countries as well as third countries. NDFI is particularly interested in financing investment projects in Spain by Iranian contractors, purchasing Spanish bonds and asked for easing business to business negotiations." (Press Release, NDFI President Talks with Spanish Ambassador to Tehran: Spain appropriate destination for NDFI investment, 10 Dec. 2013).

Beyond the NDI is the older and substantially less transparent Iranian Oil Stabilization Fund (Sovereign Wealth Find Institute, Iran Oil Stabilization Fund). The IOSF was established well before the NDFI, around 1999 and created as an inter generational wealth fund to which the state is said to transfer around 20% of its petroleum revenues ((Iran to Use 18% of Stabilization Fund for Oil, Gas Industry, RIA Novosti Sept. 3, 2012). Some, however have suggested that the IOSF was established more mor etraditional stabilization objectives:
The economic rationale for creating an oil stabilization fund is based on three main considerations. First, there is the necessity and desirability of eliminating, or at least lowering, the costs of stop-go public expenditures associated with ups and downs of crude oil prices in the world markets. The second objective is to maintain fiscal discipline through decoupling public spending from oil price volatility so that planned levels of annual government expenditures would be maintained regardless of the behavior of world oil prices, or the size of export revenues. And third, there is the goal of avoiding excessive real appreciation or depreciation of the national currency resulting from fluctuations in annual oil exports receipts. (Jahangir Amuzegar,  Iran's Oil Stabilization Fund: A Misnomer, Middle East Economic Survey, VOL. XLVIII, No 47, 21-November-2005)

It was established as a foreign currency account at the central bank and is managed by an executive committee made up of the Minister f Finance and Economy, the head of the Management and Planning Organization, the Governor fo the Central Bank and two Parliament members. (IMF Country Report 04/308, Islamic Republic of Iran; 2004). Its investment arm  is organized in corporate form to manage and expand Iranian holdings abroad and provides financing for projects mostly in the Middle East with a few in Africa and Europe ((Sovereign Wealth Find Institute, Iran Oil Stabilization Fund) with around $23 billion to invest (Ibid).  Recently, its wealth has been directed inward toward redevelopment of Iran's oil and gas industry (Iran to Use 18% of Stabilization Fund for Oil, Gas Industry, RIA Novosti Sept. 3, 2012).    Through 2005 it was said that  the "formal balance sheet of the OSF, despite a clear mandate by law, has never been submitted to the Majlis by its board of trustees, or published".  (Jahangir Amuzegar,  Iran's Oil Stabilization Fund: A Misnomer, Middle East Economic Survey, VOL. XLVIII, No 47, 21-November-2005).This assessment was reinforced by another analysis in 2012 with geopolitical implicaitons:
Based on an analysis of data from the Central Bank of Iran and the IMF, Revenue Watch believes the government has violated its own rules for oversight of the revenues. In an unintended consequence, international sanctions have also strengthened the economic power of Iran's Revolutionary Guard Corps, whose expanding role in the oil sector has also marginalized Iran's private sector in the most important part of the economy, further undermining economic development and democracy. (Antoine Heuty, Iran’s Oil and Gas Management, Revenue Watch, 29 Feb. 2012).
Another source suggested: "Ahmadinejad has already subverted the Oil Stabilization Fund, which was originally designed to save excess oil revenues in a rainy day fund. He tapped the fund to support higher spending levels. " (Fareed Mohamedi,  The Iran Primer; The Oil and Gas Industry, The United States Peace Institute, )

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