Thursday, March 23, 2017

Posting Preliminary Conference Draft,"Sovereign Wealth Funds, Capacity Building, Development, and Governance" for the Conference "The Future of Sovereign Wealth Funds" March 24, 2017 Wake Forest Law School

It is my great pleasure to announce an upcoming conference: The Future of Sovereign Wealth Funds, sponsored by the Wake Forest Law Review 2017 as their Spring Symposium. For conference information please see HERE.

This post includes the very preliminary draft of my conference Paper, Sovereign Wealth Funds, Capacity Building, Development, and Governance, which I will be presenting on March 24. I post it in the hopes of generating comments and discussion among those interested in the subject.

The paper considers the way that SWFs may be transformed by and are transforming the framework of global finance and production relationships. SWFs have already started moving well beyond their idealized form, established within the parameters of the Santiago Principles. SWFs now advance the political and economic projects of states, they serve to strengthen governance, they are the focal point for the normalization of global human rights in economic activities projects, and they also serve to advance the development goals of states. The old issues of the commercial character of these mechanisms, and of their effects of the financial markets and ownership structures of rich home states remains important, but may no longer be the central element pushing the development of SWFs. Law and regulatory structures lag far behind the realities that are taking shape on the ground. The public-private divide, the constraining structures of national principles of taxation and sovereign immunity are now ripe for contestation and change. But on what basis?

PowerPoint of presentation--HERE.

The paper and abstract follow.  

Sovereign Wealth Funds, Capacity Building, Development, and Governance  
Larry Catá Backer

Abstract:  Though operating in some form or another for over half a century, sovereign wealth funds (SWFs) did not become an object of general attention until the early part of the 21st century when a combination of the need of developed states for investment and the growing acceptability of state investment in private markets abroad made them both threatening and convenient.  Assured by the framework of the Santiago Principles most states now view SWFs as a useful multi-purpose sovereign investment vehicle.  Yet over the last decade or so, SWFs appear to have developed the potential to become an important instrument in good governance and development, especially for resource rich and capacity poor developing states.  Following the lead of Chile, and with the patronage of IFIs, these SWFs have begun to serve objectives as and with development banks both within and beyond their home state.  This paper considers the capacity of SWFs to serve ends beyond mere fund value maximization as envisioned in the Santiago Principles.  It explores the value of SWFs as a means of enhancing governance capacity in weaker states, its utility in enhancing development objectives, the emerging landscape of joint ventures among SWFs for development and their intersections with emerging infrastructure and development banks, and their importance in enhancing the operationalization of emerging international business and human rights standards not only within their own organizations but through their investment activities.  A brief assessment of these trends ends the paper.   Lastly it develops a set of transformative changes in approaches to SWF instrumentality that SWFs, especially the smaller SWFs and those in developing states,  might deploy in structuring and operating their SWFs within a globalized economic order. These strategies are meant to avoid the circular characteristics of current discussions grounded on premises of finance instrument silos and state based systems that no longer accord with the realities of, and fail to take advantage of the possibilities now offered through, global finance and can be grouped into the three transforming categories suggested in Section III: regionalization strategies; financial objectives strategies; governance strategies.

Section I. Introduction.

Once upon a time, and not so long ago, there existed the Empire that is (or was) Globalization, one in which monsters might be spawned, and thus spawned, such monsters might be set free to terrorize the inhabitants of the many kingdoms that together constituted this transnational order. With the rise of each monster, in turn, all seemed lost, or at least diminished. But for every beast whose ravings threaten the good order of the global system arises those great defenders who wield regulatory reform, like music in William Congreve’s play, The Mourning Bride (1697), with “Charms to sooth a savage B[r]east, To soften Rocks, or bend a knotted Oak.”  

Enter the beast:  though operating in some form or another for over half a century, sovereign wealth funds (SWFs) did not become an object of general attention until the early part of the 21st century when a combination of the need of developed states for investment and the growing acceptability of state investment in private markets abroad made them both threatening and desirable. This was the beast set loose on the kingdoms, especially those realms grown fat on the profits of global production but who now found themselves at the mercy of a monster whose potential appetite could reduce these cash starved realms to the sort of penury they could not contemplate—at least not contemplate if they meant to keep their kingdoms stable and their heads on their shoulders. 

And how to sooth this beast? Through the music of a narrative that would provide both food to the beast and put the monster to work for the preservation of the realms which it might otherwise have threatened.  That master narrative both framed a rationale understanding of the sovereign wealth fund, and embedded them within emerging global financial systems. No longer a threat, the best became an ox, and its masters now welcomed into the cub of those who ate well—and they have, eaten well that is.  And its story—of its apparent threat and the manner of the breaking of the beast—shearing its monstrosity for the stoic utility of the ox, became one fit for retelling as an important marker of the scope and triumph of the global financial master narrative.

Thus, the beast that was the rogue SWF served two purposes.  The first was its contribution to the productivity of capital and investment across global markets, enriching those societies in which it might graze—as long as it played by the rules.  The second was its contribution to the mechanics and language of narrative, and its articulation of the mechanisms of the regulatory order (in soft and hard national and international rules) that served the beats as yoke and plough. The kingdom that is Globalization also generates stories of triumph over threats to the good order of the global political-economic and social system.  These are the stories elites like to tell themselves over what passes for the campfires of community bonding—academic conferences, meetings of eminent persons at national and international organizations, and the sausage making that is regulatory governance in this age—an age that might itself be coming to an end—of global regulatory networks that provide the basis of good order for transnational economic activity.

What were the components of this mater narrative that reframed discourse and activity? The first created a strong case of classification that made the SWF, so defined, amenable to management that would reduce it potential threats to good order. This classification system distinguished between the beast—which might forage and feed upon the financial instruments of foreign states and other financial instrument livestock stomping around global financial and operational markets.  SWFs were to be encased in a precise and narrow definition. These excluded both State Owned Enterprises (whose taming and use would be dealt with through a different regulatory narrative) and other forms of investment vehicles that feel outside the definition.

The second encompassed the even larger project of socialization muted what for the political community constituted the most dangerous aspects of SWFs. The principles that emerged as the bars of the cage that made the SWF palatable had a single object—to de-nature the public element of the mechanism and to produce the illusion, and perhaps sometimes the reality, that these instruments would operate on the same basis as their non-state analogues. That provided some advantages to the host states—the power to regulate the activities of these instruments in their home territories like other private enterprises, and the right to develop systems that might allow them to void such investments as they deemed threatening.  These usually were meant to protect sensitive industries, but could also be used to protect national development schemes. There were some odds and ends to be sure. The issue of sovereign immunity required some action.  The issue of state subsidies and of the need for a wall between the political and investment arms of the state also had to be considered.   

What was then required was a simple and straightforward application of well-worn hard and soft law regimes to tame the SWF, or at least to create a more or less fungible investment vehicle that could be regulated and evaluated much like any other private investment fund. All of this was nicely framed within  the general principles developed at the height of that epoch, now sometimes called the Great Recession,  when the lust of western states for investment inflows into their capital markets exceeded their fear of rapidly developing and cash flush states now seeking to project their financial power into the capital markets abroad. This was undertaken by a collective allegiance to the principle that such states would forego the use their financial power for political ends by projecting investment as an enhanced weapon of international relations.

                  The result was the compromised compromise that are the Santiago Principles. Its twenty four principles were affirmed by the International Working Group of SWFs (IWGSWF) and welcomed by the IMF’s International Monetary Financial Committee in 2008.  The IWGSWF’s successor organization, the International Forum of Sovereign Wealth Funds (IFSWF), formed in 2009 (Kuwait Declaration 2009).

And to some extent, the Santiago Principles proved useful.  It served as a global centering element around which rational discussion could be organized.  It produced an ideology of sorts.  The ideology was framed around a core set of principles:

To help maintain a stable global financial system and free flow of capital and investment;  To comply with all applicable regulatory and disclosure requirements in the countries in which SWFs invest; To ensure that SWFs invest on the basis of economic and financial risk and return-related considerations; and  To ensure that SWFs have in place a transparent and sound governance structure that provides adequate operational controls, risk management, and accountability. (ISFWF, Santiago Principles 2008).

That ideology has been furthered through the tireless work of its own quasi governance apparatus.  From this Secretariat has emerged useful storytelling and examples of appropriate conduct (IFSWF, Santiago Principles: 15 Case Studies 2014). 

Assured by the narrative-framework that is the Santiago Principles, most states now view SWFs as a useful limited-purpose sovereign investment vehicle. As Allie Bagnall and Edwin Truman suggested in 2011, the Santiago Principles represented an “admirable but flawed  transparency.” The flaws, of course, provided states, civil society and academics much food for thought (e.g., Buhi, Monk, Bassan, Rose, Backer, Truman, Norton, Behrendt, Gelpern, Schicho, etc. ).  And it might as well have been used as a set of metrics for gauging the performance of SWFs as a class (Bagnall & Truman).  

Yet over the last decade or so, SWFs appear to have developed the potential to become an important instrument in good governance and development, especially for resource rich and capacity poor developing states.  Following the lead of Chile, and with the patronage of IFIs, these SWFs have begun to serve objectives as and with development banks both within and beyond their home state.  They are also viewed not merely as a vehicle for training in fiscal discipline, but also as a means through which anti-corruption strategies can be realized. They appear also to be useful  as the means through which state to state development ventures may be undertaken.

This paper considers the capacity of SWFs to serve ends beyond mere fund value maximization ideology  envisioned in Santiago Principle 19. It explores the value of SWFs as a means of enhancing governance capacity in weaker states, its utility in enhancing development objectives, the emerging landscape of joint ventures among SWFs for development and their intersections with emerging infrastructure and development banks, and their importance in enhancing the operationalization of emerging international business and human rights standards not only within their own organizations but through their investment activities.  Section II considers the emerging realities on the ground.  Particular attention will be paid to SWFs as means of projecting state policy through its investment decisions and as an active shareholder, SWFs as development funds, SWF joint venturing in projects with other SWFs, SWFs as owners or controlling shareholders of SOEs, and SWFs as a means for strengthening governance in weak governance zones. Section III than considers the compatibility of these changes within the normative framework of the Santiago Principles and some emerging regulatory issues—from transparency initiatives in hard law, to national extraterritoriality projects, to the emerging business and Human Rights frameworks in operations and financial transactions. A brief assessment of these trends ends the paper. 

Section II The emerging realities on the ground.

The traditional SWF has roughly sought to participate in its investment activities like private funds. At least this is generally the case.  Certainly, most funds are organized for the purpose of making money, or better put, of augmenting the interests of the fund.  Yet even here there are some differences with the ordinary course private funds.  Private funds have hungry investors who enjoy the bounty of returns paid often.  The time horizon of such funds tends toward the shorter term.  SWFs have the luxury of a longer time horizon, perhaps even as long as the anticipated life span pf the state whose assets are thus aggregated for projection abroad. That difference in time horizon, of course, opens a very large door through which the political, macro-economic, and legal regulatory agendas of states might creep into decision making in a variety of ways.

For traditionally constituted SWFs, those longer term time horizons affect not merely approaches to returns, but also the principles around which SWFs manage their investments, and the management of the investment universe within which the SWF will choose securities. But they also have appeared to open the door for a more instrumental use of SWFs that are meant to achieve short and medium term purposes far removed from economic return, on the promise, sometimes quite tenuous, that in the long term the SWF will indeed reap the economic rewards understood in Principle 19 through the exercise of securities ownership compatible with Principle 21. This section considers the emerging broad range of uses of SWFs that have emerged since 2008.

                  A. SWFs as means of projecting state policy through its investment decisions and as an active shareholder.

This might be considered the first deviation from the ideal of the Santiago Principles.  But it is also one that the Santiago Principles recognizes. Principle 19 sets the general principle that SWFs ought to be operated to make money.  Yet there is an exception.  Principle 19.1 provides “If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.”  But this principle, that appears open ended, is itself constrained by another sub principle (19.2): “The management of an SWF’s assets should be consistent with what is generally accepted as sound asset management principles.” The same principles apply to the exercise of active ownership (Principle 21).

To some extent all SWFs tend to exhibit a little of this tendency to use SWF investment strategies in the service of public policy.  Where this approach is the most limited are those instances in which the SWF is itself managed by professional managers—usually resident outside the territory of the home state, and where the SWF is offered a substantial measure of autonomy.  That autonomy, of course, is subject to limits.  And those limits usually correspond to public expectations of SWF use or objectives, broadly understood.  

But there are those SWFs that quite consciously push the envelop, and of course for perfectly good reasons of public policy.  The first are those SWFs, the objectives of which are to make money but only consistently with the implementation of international standards, at least as transposed into national law.  The Norwegian Pension Fund Global is the usual example. Its complex structures, Ethical Guidelines, Parliamentary objectives, and its development of review and examination procedures through an Ethics Council and the decision making authority of Norges Bank, is the epitome of the use of a SWF to make money but to do so in the long term in a way that advances the project of internationalizing Norwegian conceptions of international law and norms. To that end, companies are examined and either excluded form the investment universe or put under observation through a complex and sometimes serendipitous process.  Sometimes these exclusions or observations are imposed by statute—for example the divestment of coal using enterprises (Here). Most of the time, the Ethics Guidelines provides the normative framework, which is exercised through discretionary decision-making at the Ethics Council and Norges Bank.

The other broad category are those funds that are managed again to make money in the long term, but the discretionary investment decisions are substantially constrained by a requirement to conform to state macro-economic policy for internal development and for the protection of its supply chains abroad. Some of the Chinese SWFs are fair examples of this type of operation. In this context, the SWF is viewed as another manifestation of socialist modernization and the development of productive forces that must be directed by both state and Party to effect development within contemporary historical stages of development. Thus, for example, the One Belt One Road policy might tilt Chinese SWF investing toward infrastructure enterprises.  The need to protect supply sources might tilt Chinese SWF investment into companies that operate in the extractive and petroleum sectors.

                  B. SWFs as development funds and “Reverse SWFs”.

Over the last half decade or so, it has become quite fashionable to deploy SWFs as development funds.  This is especially the case for developing states.  It has been encouraged by International Financial Institutions as a means of ensuring fiscal discipline, and as we will see in discussion below, as a tool of capacity building in weak governance zones.

The Palestinian Fund might be a special case—yet it represents the potential use of SWFs as funnels for inbound as well as outbound investment. "PIF’s mission is to promote a strong, sustainable and independent Palestinian economy, that will be a cornerstone of the independent Palestinian State with Jerusalem as its capital." (PIF Annual Report 2012, p. 9).  Its vision is to promote sustainable growth in Palestine through in-country investment. (Ibid). The focus of its activities are investment within Palestine. "The firm prefers to invest in Palestine region with a focus on Jerusalem, Jordan Valley, and Dead Sea. It also manages portfolio for its clients. The firm invests in the public equity and fixed income across the globe. It can take both direct majority and minority stakes in its portfolio companies."  (Company Overview of Palestine Investment Fund PLC, Bloomberg, Business Week, updated 2-14-2014).  The object is to provide through PIF a structure through which money received can be devoted to a core set of development missions. In a sense, then, the PIF begins to acquire the character more as a vehicle for the disbursement of foreign aid than as a means of channeling sovereign wealth.  The context may make this inevitable in this time in Palestinian history.  But in a sense, the PIF is most interesting for the possibilities it offers as a means of serving as a "reverse" SWF. 

Outside of developing states, some of the larger petroleum rich states have also sought to use their SWFs as development funds with a particular twist. The Korean Fund was used as an investment vehicle for the purpose of wealth enhancement and strategic development of key sectors. It is in a sense a future fund, but one operated for the purpose of enhancing the aggregate economic potential of Korea. Among the sectors to be developed through the KIC is the financial sector itself. “The strategy called for the transformation of Korea into a regional financial hub led by the asset management industry. As a part of this strategy, the Korea Investment Corporation (KIC) Act was passed in March 2005 and KIC was officially launched on July 1, 2005.” (KIC FAQ. No. 19).

The Russian Direct Investment Fund (RDIF) is structured as an international development fund.  The operations of RDIF is managed through a subsidiary of Russia's state development bank and its operations are said to be overseen by a Supervisory board (Sovereign Wealth Fund Institute, Russian Direct Investment Fund). What makes it distinctive if that it operates as a set of managed and overlapping joint ventures with other development oriented SWFs, international financial organizations and private finance entities.  Indeed, it is mandated to co-invest with an internal investor (Sovereign Wealth Fund Institute, Russian Direct Investment Fund).  This is a practice, made official with the structuring of the RDIF that has already become part of the functional operation of other funds, especially the Russian  National Welfare Fund (RNWF).

The Italian SWF represents a curious throwback.  While it may be operated in sovereign wealth form, and even adopt the long term shareholder language of SWF master narratives, it remains, at its core, a means of providing strategic resources to enterprises that the state would like to favor.  But it is presented in new form,.  As a strategic development fund it funnels money from the Italian state to the Italian private sector.  And it hopes, like a bank, to make money in the process.  But it is a very different organization from SWFs with the aim to project their economic power abroad directly through fund investment. (HERE)

                  C. SWF joint venturing in projects with other SWFs.

As discussed above with respect to the Russian Fund, SWF to SWF investment, in the form of joint investments or jointly sponsored projects, has also become more visible.  These are not confined to developing states or even to state on the financial markets periphery, like Russia. For example:

The Russian Direct Investment Fund (RDIF) and the Korea Investment Corporation (KIC) have signed a memorandum to form the Russian-Korean Investment Platform. The signing ceremony took place in the presence of Russian President, Vladimir Putin, and Korean President, Park Geun-hye, in Seoul.

The investment platform will focus on cross-border investments which fulfill Russian-Korean strategic interests. The parties intend to invest in companies and projects that facilitate trade and encourage investment cooperation between the two countries. (
RDIF and KIC launch Russian-Korean Investment Platform, Russian Direct Investment Fund, 13 Nov. 2013).

Since 2014 East Asian and Gulf funds also sought to pool funds for joint investment, but not necessarily for development aims (see here). One such joint investment fund partnered QIA and KIC (Ibid).

                  D. SWFs as owners or controlling shareholders of SOEs, Real Estate and other Enterprises.

SWF operations as development funds and to further strategic policies including but sometimes beyond mere macro-economic policies has become a more prominent feature of some SWFs in recent years.  Even traditional funds, like the Qatar Investment Authority now has a vigorous program of strategic investing for purposes other than growing money. QIA As 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”. (Here). 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. (HERE) Hassad has offices operating in Australia and Sudan with anticipated expansion into Brazil and Argentina. (HERE).

QIA also has extensive holdings in property, not unlike many other SWFs. QIA has property holdings estimated at $42 billion (HERE) mainly in London and Paris, owns the European football team Paris Saint-Germain (HERE), and has been rumored to be interested in purchasing a majority of Morgan Stanley’s Commodity trading unit (HERE). These investments are useful in long term strategic planning, and they are even more welcome to some extent by host states.  Real estate serves as a useful way of holding state assets hostage, especially in forms that are not as inconvenienced by sovereign immunity.

Real estate holdings of SWFs can be quite sector driven.  Since 2016 Singapore’s funds have been increasing its heavy investment in ownership of student housing, especially in Germany (HERE) and elsewhere.  In September 2016 , Singapore’s GIC bought a student housing portfolio in the UK from Oaktree Capital Management  covering 7,150 beds, which will be managed in partnership with student accommodation operator GSA, was reportedly sold for around £700m (€811.1m) according to media reports.  (HERE). "The sleeper in the investment world – student accommodation – is suddenly wide awake. A record €14.4bn in new capital has gone into the long-overlooked sector in the past 18 months as institutional investors jostle for position." (Florence Chong, "Student Housing: A sleeper emerges," IPE Real Estate (May/June 2016)).  The value of this investment is that it provides income generating investment while offering substantial appreciation, not just as a going concern but also with respect to the underlying value of the real restate. The Canada Pension Plan Investment Board (CPPIB), has also invested over €2.4bn in student housing. (HERE).

The China Africa Development Fund is particularly interesting for its hybridity.  It combines the focus on development, with the flexibility to work together with other SWFs in projects.  What makes it most interesting is its mandate to serve as a vehicle to finance Chinese SOEs in their efforts to comply with State directed outward investment programs.   Wen Jiabao, then China’s Premier, noted on 2009, that “We should hasten the implementation of our ̳going out‘ strategy and combine the utilisation of foreign exchange reserves with the ̳going out‘ of our enterprises.”(Jamil Anderlini, China to deploy foreign reserves, The Financial Times (2009)). At the time it was noted by “Qu Hongbin, chief China economist at HSBC, [that]: “This is the first time we have heard an official articulation of this policy ... to directly support corporations to buy offshore assets.” (Ibid).

                  E.  SWFs as a means for strengthening governance in weak governance zones.

Many of the stabilization funds created around extractives wealth in developing states might be understood to serve not just as a means of fiscal stability and futures funds (revenues for when extractives derived wealth depleted) but also as a means of strengthening governance in weak or developing governance zones. The Fundo Soberano de Angola (Angola SWF) (FSA) is an interesting effort to use SWF forms to discipline spending, but one in which the almost picture perfect formal organization has been dogged by charges of Corruption.  It is also notable for making explicit the agenda of international development and lending organizations, like the International Monetary Fund, to think about SWFs as an important disciplinary tool that ought to be in the toolkit of developing states with large reserves of natural resources, especially petroleum. By 2011 Angola was reporting to the IMF of its efforts to establish what it then called an Oilf for Infrastructure Fund: "In the medium term, we see a need to enact policies that avoid the disruption caused by the boom-bust cycles associated with oil price volatility. . . . For the time being, an Oil for Infrastructure Fund was set up in February 2011 (but is not yet operational) in order to secure financing for very high priority investments, mainly in water and energy." (IMF Country Report No. 11/346 (Dec. 2011) Angola—Fifth Review Under the Stand-By Arrangement, ¶ 31) This fund will is fully integrated in our budget."This was to serve as a stabilization Fund (Ibid., "We are continuing to consider alternative fiscal rule, perhaps to be formalized in legislation for a stabilization fund, which would help to smooth public spending over the oil price cycle and prevent the disruptive and sharp contraction of investment spending recorded in 2009–10." ¶31).  

Building on this the IMF proposed that 

"The OIF should be used as a fiscal buffer. To be effective in this regard, the OIF would need to be fully funded, and withdrawals judiciously managed until absorption capacity is strengthened. This would allow a gradual scaling up of investment, and protect priority projects from detrimental stops and starts. The OIF could also help sterilize liquidity." (ANGOLA, Staff Report for the 2012 Article IV Consultation and First Post Programming Monitoring, IMF Country Report No. 12/215, June 28, 2012, ¶ 56

The IMF Report noted that "under an OIF-like mechanism, Angola would be able to set aside excess
revenues in a stabilization fund while gradually scaling up investment. In the event of a repeat of the 2008 oil price shock, investment program could go forth uninterrupted by drawing on the resources set aside in the stabilization fund." (Ibid., App. 1, ¶ 6). All of this was viewed positively by the global investment community. "Angola's decision to set up a sovereign wealth fund is positive news, Fitch Ratings says. It reaffirms our view that government policies are reducing the economy's exposure to movements in the oil price, and laying a foundation for sustainable growth. "(Sovereign Wealth Fund Plan Positive for Angola, Fitch Ratings, Oct 23, 2012).

It was reported at the time of its establishment that the "money will target domestic agriculture, water, power generation and transportation to attract foreign investment to Angolan infrastructure projects, according to fund documents. Hotel projects including a hospitality school in Angola are part of the fund’s plans." ((Candido Mendes and Colin McClelland, Angola Starts Sovereign Wealth Fund With $5 Billion, Bloomberg, Sustainability,  Oct. 17, 2012)). Among projects initially identified for promotion are a dedicated Hotel Fund to promote the hospitality sector and projects to finance infrastructure projects in Sub Saharan Africa.  (FSA Investments). Interestingly it also includes a social charter that, were it to be operationalized to any significant degree would serve as an innovative and useful mechanism for economic progress among the poorer segments of a political community.

The Mongolia may serve as an example of its value to IFIs and its risks where governance is weak and discipline even harder to come by.  Outside analysts, at the time of the creation of the MFSF were not convinced that the state was stable enough and its governance cultures deep enough to implement its plans for the MFSF.   (Loch Adamson, Press Release:Institutional Investor: Mongolia Aims to Join the SWF Ranks, Institutional Investor via Origo Partners, 2011). These analysts do recognize the appeal of what they call resource nationalism, and its manifestation in the techniques of sovereign wealth funds. (Ibid).  Further impetus for the establishment of an SWF came from the international Monetary Fund, which, as in the cases of its investment in other developing states, viewed with favor the establishment of such a fiscal disciplinary device.

Directors emphasized the need for a clear policy to ensure that the Development Bank of Mongolia (DBM) can help meet the long-term infrastructure needs of Mongolia in a macro-economically sustainable manner with minimal fiscal risks. In particular, public investment projects financed by the DBM should be taken into account when setting the path of fiscal policy, consistent with the new fiscal framework. Directors welcomed efforts to explore the establishment of a sovereign wealth fund, which could be an important complement to the fiscal framework. (IMF Executive Board Concludes 2012 Article IV Consultation and Third Post-Program Monitoring with Mongolia, Public Information Notice (PIN) No.12/131, Nov. 21, 2012, p. 3).

At the time, the IMF Staff report also noted "Implementation of the [2012 Social Welfare Law] should be a priority and the establishment of a sovereign wealth fund would be an important complement to the FSL’s counter cyclical fiscal policy framework." (Ibid., § 57 (Staff Appraisal)).  Indeed, in order to understand the establishment of the MFSF, one must understand the intermeshing of international financial institutions (World Bank and International Monetary Fund), their development of fiscal management principles, and their coordination of client states in the implementation of these principles across the globe. This was noted in a recent World Bank related report: "As part of its reform efforts and with the assistance of the World Bank and the International Monetary Fund (IMF), the government began an intensive south-south exchange, notably with Chile, another major copper producer, on strengthening the policy environment. The dialogue proved critical in the passage of several landmark laws within the space of a few years, including a fiscal stability law modeled after Chile, and the accompanying integrated budget and procurement and social welfare laws." (Rogier van den Brink, Arshad Sayed, Steve Barnett, Eduardo Aninat, Eric Parrado, Zahid Hasnain, and Tehmina Khan, South-South Cooperation: How Mongolia Learned from Chile on Managing a Mineral-Rich Economy, The World Bank: Economic Premise, September 2012). See also Adam B. Robbins, Case Study: World Bank Engagement with Mongolia’s Sovereign Wealth Fund, Sovereign Wealth Fund Secretariat World Bank Group, Number 85818, Feb. 2014).

          Intermeshing is an important notion in the construction of "cultures" of sovereign wealth funds common to states understood as occupying similar socio-economic sovereign space. The concept was developed by the German academic, Gunther Teubner in the context of theorizing the development of governance systems in globalization. (Gunther Teubner, "The Corporate Codes of Multinationals: Company Constitutions Beyond Corporate Governance and Co-Determination," in Conflict of laws and Laws of Conflict in Europe and Beyond: Patterns of Supranational and Transnational Juridification (Rainer Nickel, ed., Oxford: Hart, 2009).) For Teubner, intermeshing involves the Europeanization of multinational regulatory enterprises. Just as the Member States of the European Union together might create broader and more powerfully effective cross state norms, so too might multinational "states" do the same within cooperative regulatory communities. Thus he notes "the emergence of inter-company networks as an extension of the corporate code onto an entire production network. Global commodity chains have developed, which constitute neither market relationships nor integrated multinationals." (Id., at 9). These are "networks of independent companies, which have generated their own governance structures." (Id). In the context of SWFs, intermeshing involves the internationalization of sovereign investing through the nexus institutions of the IMF and World Bank. These serve to create regulatory communities bound together through the economic power of the IFIs.

It is in this context that one can understand the inter-connectedness, the intermeshing, of the Mongolian Fiscal Stability Law of 2010, the IFIs and the establishment of the MFSF under the tutelage of the Chilean SWF managers. "Mongolia passed it Fiscal Stability Law in 2010 as part of its Stand By Agreement with the IMF which expired on the 30th of September 2010." (Richard Dutu, Managing Mongolia's Wealth: Constructing and Stimulating a Formula for the Fiscal Stability Fund, 2nd Report, 5-8-2012 § 4.4.1). "The World Bank has been supporting the Mongolian government to improve the design of their Sovereign Wealth Fund. The MTAP and Governance Partnership Facility provided funds to support the Ministry of Finance with this task. Central to support has been involvement of experts from Chile and in organizing an international conference on SWFs. . . . Policy dialogue was extended to discussion of the objectivesof the fund and its governance. . . .  Panama, Colombia, and other countries have also adopted rule based fiscal policies with integrated SWFs that perform counter-cyclical functions." (Adam B. Robbins, Case Study: World Bank Engagement with Mongolia’s Sovereign Wealth Fund, Sovereign Wealth Fund Secretariat World Bank Group, Number 85818, Feb. 2014, p. 3, 4 ("Beginning in 2008, the World Bank and Mongolia have worked together to improve the country’s mineral revenue management framework, drafted and passed a rule-based fiscal policy law, maintained dialogue of fiscal policy, and pursued the design of an effective Sovereign Wealth Fund (SWF)." p.1)).

But internal development in Mongolia is also meant to be funded through its recently established Development Bank. 

In 2011 the Mongolian government created a state-owned development bank with a mandate to finance railroads, roads, power plants, and water supply. The inventory of possible projects is large by any standard. Mongolia scores 118 out of 142 countries in quality of infrastructure, as rated by the Global Competitiveness Report 2011–2012 (in comparison, other countries with large mining sectors like Chile rank 41st, Peru 88th, and Botswana 92nd). The majority of roads are unpaved. The funding requirements for rail lines alone run in the multibillion dollar range, in comparison to Mongolian GDP of $3 billion in 2010. The government guarantees the debt issued by the development bank, which is now a contingent liability that will have to be backed by future mining revenues. (Theodore H. Moran, Avoiding the "Resource Curse" in Mongolia, Policy Brief, Peterson Institute for International Economics, July 2013, p.3)

The MSFS is among the smaller SWFs.  By 2017, the dream was over for Mongolia—in its current iteration.  Its SWF strategies veered from the Chilean to the Singaporean Model in reports published in 2015 (HERE), and retraining on a Canadian model in 2016 (HERE) and by 2017 all had collapsed, requiring an IFI bailout and a reboot of the economic model (HERE, and HERE).

Section III Breaking Through the Santiago Principles Cage

What might these trends in utilizing SWFs tell us about the value of the framework  memorialized as the Santiago Principles? From the standpoint of aspirational goals consistent with the basic structures of globalization more or less stable through 2016, they continue to define the ideal form of state to state investment in their respective markets.  Though the Santiago Principles are centered the “ideal transaction”—public funds  invested in the private markets of foreign states—it is as useful for structuring state to state transactions as well. Yet even the brief survey of developments described in the preceding section suggests some fundamental shifts in the reality of SWF operation across the increasing number of states that find the “SWF vehicle” useful.  This section suggests some of the emerging tensions and issues that may result as reality pulls away from the Santiago Principles ideal, as well as the growing prominence of issues that the Santiago Principles tended to avoid, including the compatibility of these changes within the normative framework of the Santiago Principles and some emerging regulatory issues—from transparency initiatives in hard law, to national extraterritoriality projects, to the emerging business and Human Rights frameworks in operations and financial transactions.

                  Taken together, the emerging trajectories of SWFs activity among all SWFs, each different in its own way and some more common to specific sorts of SWFs than others, can be grouped into three distinct strategies for change.  These are regionalization strategies; financial objectives strategies; governance strategies. Each is considered in turn.

                  A. Regionalization Strategies.

                  1. Real Estate and Operational Obligations.  SWFs have, for a long time, also invested in real estate.  That makes sense, especially for those SWFs with a very long term time horizon.  Yet SWFs have now discovered a means of combining both a long time horizon for wealth maximization and the possibility of generating potentially substantial returns in the short and medium term--by entering into the market for the exploitation of education services.  But rather than enter this market at its core--by investing in universities--the smart SWF is now investing in peripheral but essential services.  These include student dorms, food services, tutoring and the like.  These investments, when projected into foreign states has another benefit--they avoid any political or societal obligation that a state organ might otherwise bear to its own people.  Investing in peripheral services in foreign states permits the state to avoid any public service burden.  And, because they operate as a quasi private capacity, they might owe only a corporate responsibility to respect human rights, rather than a state duty to protect them. The obligations of states and enterprise sunder the UN Guiding Principles for Business and Human Rights might suggest otherwise.

More generally, SWFs that take controlling positions in enterprises might well convert those into variations of SOEs. Indeed in that context might an SWF not be considered a holding company operating to further the ultimate political aims of its owner? The Santiago Principles have little to say about this,.  Moreover, the inverse can be as troubling—the SOE that itself hedges by taking equity or debt positions in other companies.  The SOE, to some extent, is then functioning in part as a SWF, though it hardly fits the definition.  Should that matter? The SOE, it could be argued, presents a unique variant on the SWF. Though it is neither a fund, nor was it created for the purpose of investing in other entities, an SOE might naturally engage in such activities. But it does so in the context of maximizing its own business operations rather than as an end in itself. Yet those business operations, as classically understood, are themselves undertaken to maximize the interests of the entity (and its shareholders). If there is a unity between shareholder and corporate interests (for example where the entity's shares are wholly owned by the state, then it would be logical to assume that the maximization of state value in such enterprises includes the political value of that enterprise's operations. On the other hand, even if that is the case, at least with respect to its global operations, such an entity (and its state owner) would be liable in host jurisdictions, for breaches of duty, abuse of power, looting and the like in its relationships with its foreign owned subsidiaries. Consequently, the similarities in result may mask significant differences between state's as owners of SWFs and states as sole shareholders of operating entities that may also inverts in foreign undertakings.

2.  SWF Joint Ventures and Markets for Sovereign Debt. There is nothing inherently contradictory between the conventional model of SWFs and the notion of SWF joint venturing or asset pooling. Yet both the objects of pooling assets for funding investments, and also the potentially more radical notion of pooling sources of income for investment can take the SWF in radically new directions. At their extremes, these arrangements can begin to function not just like development banks, but also like IFIs.  With a large enough pooling of assets, SWFs Joint ventures could conceivably begin to project its financial power into the business of conditional lending that has been the province of IFIs and the largest private lenders backed by the usual “Clubs”.  The political ramifications could be significant.  At a minimum, and with enough funding, SWF funding in this sector could affect the basic presumptions of sovereign debt financing, especially with respect to the standard package of conditions that tend to be imposed. On a smaller, and perhaps more realistic scale, such joint ventures could serve as a means of both hedging income sources (where the joint ventures derive fund income from different sources (petroleum, copper,  agricultural products, etc.)) to smooth  variations in income flows and of providing value added regional development that takes advantage of broader markets and thus augments investment returns.  Alternatively, they might also serve to produce a more targeting investment strategy directed toward those sectors of greatest interest to the macro-economic strategies of the venture partners. There is an intimation of this in current practice; the possibilities have yet to be fully explored.

3. Joint Ventures suggest the Possibilities of Regionalization. Regionalization appears to be the silent elephant in the room of SWFs and SWF strategies. Yet it is inherent in the way that SWF differentiation is already moving.  When one thinks of the functional differentiation of SWFs—stabilization funds. Futures funds, strategic development funds, pension funds, etc.—one is already creating those categories that suggest amalgamation by time.  It is a very small step from functional differentiation of funds, to the notion that functionally differentiated funds  should begin pooling.  And that pooling can range from expertise and capacity building to the pooling of assets and operations.  Already there is a move in that direction in stabilization funds.  The work of the IMF and the Chilean Fund in creating a template for similar funds among states with similar needs points, in rudimentary form to be sure, to this future.  Whether or not it will be realized remains unclear—but the door has certainly been opened and tentative steps have been taken, even if substantially unconscious.

                  B. Financial Objectives Strategies.

1. Definitions. One of the realities of current realities on the ground is that the once vibrant and intellectually stimulating focus on the definition of SWFs has been overtaken by inconvenient facts. Here the Santiago Principles may actually be helpful.  It has always recognized that “SWFs have diverse legal, institutional, and governance structures. They are a heterogeneous group, comprising fiscal stabilization funds, savings funds, reserve investment corporations, development funds, and pension reserve funds without explicit pension liabilities.” (Santiago Principles pp.3).  Yet even here there is tension.  The Santiago Principles’ definition is constrained by three principles (Santiago Principles App. 1)—government ownership, investment in foreign financial assets, and investment to achieve financial objectives.  It is certainly the last two that may require reconsideration in light of current practices.  More importantly, it is not clear that the division between SOEs and SWFs can remain undisturbed.  Though clearly, in their classical states, the two point to very forms of government investment, SOEs focus on investment in operations while  SWFs focus on investment in securities and estate, the two converge when SWFs own controlling interests in operating companies and when SOEs operate SWFs.

And at the margins, the SWF form itself appears to disintegrate in different directions.  At one end one notes the Palestinian SWF which suggest that the SWF form can be inverted. Here is a SWF that invests sums it receives from others (perhaps even from entities that are themselves attached to foreign SWFs) and whose primary purpose is to funnel outside investments into Palestinian territories. At the other end are the Venezuela Macroeconomic Stabilization Fund (Fondo para la Estabilización Económics (FEM) and the National Development Fund (Fonden) (HERE). But these have been utilized interchangeably under the presidency of Hugo Chavez and his successors. Two principal points are relevant here.  The first is that the NDF is meant to serve internal investment administered by the Venezuelan government.  The second is that the NDF is neither autonomous from the state nor are its operations transparent. This later point has raised issues of accountability." (Miguel Octavio, Is $29 billion missing from Hugo Chavez'sFonden development fund?, Christian Science Monitor, Aug. 30, 2011).   This does not make it unique but it does suggest that the fund will have limited reach in private global markets except perhaps indirectly.  Yet this is consonant with the moves to embrace a state to state ideology of trade that is reflected in the construction of the ALBA regional trade association (HERE).

And indeed, even as the Venezuelan state has starved FEM, it has continued to fund  NDF for local development (abandoning in effect the stabilization function of the FEM--which is viewed ideologically as contrary to the socialist ideology of the current government). "Despite a fitful US dollar flow, the Venezuelan government has instructed both the Central Bank of Venezuelan (BCV) and oil giant Pdvsa to transfer USD 11.7 billion to the National Development Fund (Fonden) this year." (Mayela Armas H., Central Bank of Venezuela to transfer USD 3.7 billion to Fonden, El Universal, Jan. 24, 2014 "The move may have an impact on Venezuela's international reserves, currently at USD 20.8 billion, a level that is not sufficient to meet the country's economic needs." Ibid). This suggests that Venezuela has also joined the growing number of states that have functionally differentiated their SWFs among stabilization, development, investment and other functions, but also that in Venezuela's case these funds appear to be operated more as facilities for budgeting than as investment vehicles. For purists, the question then becomes, is this a SWF? And if so what does that tell us about the evolution of the concept, or has it become so broad that it ceases to have meaning?

2.  Development Strategies and Financial Objectives. One of the more interesting developments has been the broadening of financial objectives that tend to blur the line between development and investment.  Yet there is a case to be made that development, even domestic development invest (especially in targeted sectors and infrastructure) have important global secondary effects. This is not just the conventional notion that development better embeds the developing state in global production chains.  Instead the notion is that such development bring with it the possibility of investment in foreign enterprises that are connected to those production chains now more directed to the SWF home state.SWF investment, then, can be used to produce greater investment opportunities in foreign enterprises but that are targeted to the enterprises that have the greatest economic and political effects on the SWF home state through their position in global production chains. 

                  C.  Governance Strategies.

1. The Issue of Corporate Social Responsibility and Human Rights.  The issue of the application of national and international soft and hard law touching on the human rights duties of states as the owners of SWFs, and the responsibilities of SWFs to respect human rights in their own right touch on core issue of the character of the relationship between these entities, and the legal character of their relationship. The core legal issues are fairly straightforward. All states may regulate their own entities and exact such obligations and responsibilities as their polities desire or are willing to tolerate. States that venture into the territory of another may subject themselves to these regimes as and to the extent the host state desires or is able to enforce.  Typically, that power is mediated by treaty (bilateral and multilateral investment and related treaties) and the rules that provide a special deference to state assets located n the territory of another (rules of sovereign immunity subject in turn to their own waivers).  States may also have obligations under international law that certainly apply to them, and under some circumstances may also reach its instrumentalities and others. Lastly states and others operate in globalization within a rich matrix of declarations, standards, guidelines, and the like that set sometimes important expectations that may be better enforced through societal and private mechanisms than through the traditional formal mechanisms of law.

This web of law and norms apply with particular emphasis in the context of human rights.  For SWFs and the states that own them this raises two distinct issues.  The first is the extent to which the SWF, as a commercial vehicle operating within the strictures of the “ideal investor” standards of the Santiago Principles, has a responsibility to respect human rights under instruments like the U.N. Guiding Principles of Human Rights and the OECD Guidelines for Multinational Enterprises. This, in turn, raises two subsidiary issues.  One is the extent to which these responsibilities applies to the organization and internal operations of the SWF itself.  The other is the extent to which these responsibilities also apply to the investment decisions of the SWF, and the way in which the SWF exercises its shareholder rights. Public organization consensus has been moving toward the position that the SWF responsibility expends to both. The second touches on the extent to which the state itself, in its operation and control of the SWF, has a duty, cognizable under international law, to protect human rights.  This duty may be constrained by the scope of international human rights obligations a state may have embraced, and may be expanded by the state’s own constitutional principles. But the extent of the state duty itself may impact the autonomy of the SWF and may reshape the understanding of the financial objectives principles embedded in the Santiago Principles.

                  2.  Governmental functions and global economic activity. The public-private divide between the SWF (or SOE)  and the state that owns it also has ramifications that acquire a different character as the function and operation of SWFs change, and as the differences between SWFs and SOEs begin to blur.  Among them are issues of standing in investment treaty arbitration regimes (e.g., HERE). They also suggest issues in sovereign immunity regimes that are worth considering (e.g. HERE). In both cases, the legal regimes were constructed for instrumentalities that no longer resemble the emerging forms of either SOEs or SWFs.  That creates the usual problem of fitting doctrines into the reality of function.  And it invites the sort of strategic behaviors that may bring disorder and regulatory reform the value of which would be difficult to gauge. Related issues apply to tax regimes (e.g., HERE, pp. 6-9).                


Section IV. A brief assessment of these trends and a Look Forward.

                  The essence of the changes in SWFs really serve as variations on a potentially transformative shift in the object of SWFs—from mere investment vehicles, or even as normalizers of global rules, but now also of capacity building for states, and discipline in the conduct of economic activity. One sees the movement toward this view in the operations of most SWFs.  For the largest SWFs, the objet may be global legal and normative capacity building.  Norway serves as a great example.  For China it may be to operationalize approaches to state based multilateral economic relations. And most importantly, for developing states, the turn toward capacity building underlines efforts to use SWFs to build government capacity, to develop anti-corruption cultures, and to serve as models of fiscal discipline.

But the largest SWFs run out of the most developed and powerful host states tend to be able to take care of themselves.  Their wealth and the power of their home states tend to overcome the strictures of  soft law, and in any case, their actions invariably tend to provide  legal “glossing” in action.  These funds make the rules of the community by their actions and through the acquiescence of markets, especially those in rich host states.

On the other hand, it is for the much larger group  of large funds operated by small states, and funds operated by developing states or states with weak governance structures, to which the untapped potential of the SWF device, hinted at in the preceding section, offers greater possibilities.  These might well transform the SWF from a construct that reflects the desires and consensus of key host and home state, to one that better serves the requirements—not all of them grimly situated in wealth maximization through programs of conventional hedged investment in foreign and domestic markets (and reinvestment).

Consider in this context the possibilities for SWFs in the context of regionalism and development.  In the context of African funds it might produce a move toward a set of transformative changes in approaches to SWF instrumentality. Consider nine strategies that African SWFs might deploy in structuring and operating their SWFs within a globalized economic order. These strategies are meant to avoid the circular characteristics of current discussions grounded on premises of finance instrument silos and state based systems that no longer accord with the realities of, and fail to take advantage of the possibilities now offered through, global finance (first presented HERE).  The strategies can be broadly understood as falling into the three transforming categories suggested in Section III: regionalization strategies; financial objectives strategies; governance strategies.

Note that I use the African SEWFs as a matter of convenience.  Regionalization is not limited to Africa—a similar set of challenges might also produce similar approaches for Latin American SEWFs, for instance, and others.  Nor are these strategies dependent on territorial alignment.  Any grouping of funds with similar objectives or challenges could as easily adopt most of the strategies to augment their positions in global finance and for the advancement of their public and macro-economic/political objectives.

The regionalization strategies are perhaps the most important element in enhancing the effectiveness, power and viability of African SWFs as macro-financial and governance instruments:

1. Create a regional working group, a regional forum, of African SWFs. This regional forum can operate along the same lines and in parallel to the global forum established through the International Monetary Fund, the creator of the Santiago Principles, that now operates as the International Forum of Sovereign Wealth Funds. But it ought not to be part of the IFSWF. African SWFs could of course participate as members of both, but Africa needs its own regional forum as a space where Africans can focus on African issues while engaging in the global discussions about SWFs, macro-finance and governance.

This regional forum of African SWFs might be located within the architecture of the African Union, or exist independently. It might be sponsored solely from and out of the revenues of the African SWFs that choose to participate. And critically, it must use those funds to establish a permanent Secretariat, and an African Sovereign Wealth Fund Institute, to generate research, discussion among experts, and provide autonomous monitoring services and technical assistance.

Perhaps the most useful early objective might be to develop and African Santiago Principles—a set of standards for the ethical and appropriate operation of SWFs that incorporate African values and practices as both home and host states. The overall objective here is to get Africans speaking authoritatively about African issues and to break the usual pattern of global discourse where Africans voices are rarely heard authoritatively—talked to about themselves by well meaning foreigners and expected to listen. That requires an African think tank worthy of the name.

2. Insist that IFIs, and especially the World Bank and International Monetary Fund, develop facilities to provide technical assistance to African SWFs on a regional basis. IFIs should be prodded by African SWFs to develop deep capacity to cluster SWF strategies. That capacity should not be limited to technical assistance, but also include monitoring and assessment capacity. Perhaps loan work might be creatively re-imagined within a regional as well as national context as well. The objective is to get IFIs to begin to think and act regionally, as well as within a national context.

3. Focus on regional intra-SWF investment/development projects. Multi-SWF projects, especially intra-Africa projects, may well serve as a better source of discipline through the aggregation of effort and the positive deployment of self interest in joint work. Infrastructure development that ends at national borders are far less useful for the development of robust private economic activity than regional projects. If nothing else the histories of the United States and Europe ought to have taught that lessen (as flawed as those lessons might be). Larger markets increase collective economic power. And that increase can translate into a more substantial political voice in the transnational sphere. On a more practical level, aggregation, with its larger capital base, can provide for more effective investing.

This strategy need not lead to consolidation of national SWFs as much as suggest the power of coordination on projects that may be valuable to shifting groups of such funds. Developing the flexibility to engage in joint efforts with different groups of funds, and to coordinate that activity regionally produces greater likelihood of social and developmental objectives than purely national efforts constrained as they are by borders developed in the capitals of Europe in the 19th century. The strategy looks to the creation of coordinated SWF cross border regional investment in partner states that deepen those webs of cross investment which in turn facilitate the growth of private economic activity.

4. Strengthen and increase participation in non-regional multi-SWF projects. It is becoming quite common for SWFs to develop coordinated strategies and engage in joint projects. Recent agreements of this kind among funds from China, Korea, Russia and the Middle East, among others, have begun to exploit the logic and power of aggregation of resources to meet common ends. African SWFs might also use these vehicles for a number of objectives. First, as part of deals with investor states seeking to exploit African natural resources, it might be useful to tie such deals to coordinated investment projects overseen through the SWFs of each of the participating states. Second, like intra-Africa SWF coordination and joint project work, these activities can be used to enhance governance and fiscal discipline. Third, these provide yet another method of leveraging financial power of small funds, especially with respect to projects or investments to which they would have been able to participate on their own.

If regionalization is essential to the enhancement of the success of African SWFs, macro-financial strategies build on regionalism, and expand them.

5. Refocus SWF objectives to enhance the value of specialization and to target coherence with the portfolios of finance and development ministries. Among the more important cluster of issues to consider in this regard are the mixed objective SWFs that are sometimes deployed either as single or multiple vehicles. Mixed objective SWFs do not seem to do well. They cannot be all things to all people. They encourage abuse by reducing the clarity of objectives and serving to justify more easily than appropriate decisions that may have more importance to the decision maker than to the SWF itself.

Adoption a strategy of significant separation by objective—stabilization, development, futures funds, and the like—may better rationalize approaches to operation and enhance monitoring and accountability. Specialization of SWFs, especially in Africa, combined with regional organization of these specialized entities, would target objectives and leverage power more effectively, especially in global markets in which individually each of these funds may be quite insignificant. These strategies, of course, build on the regionalization that I have suggested as essential to the success of African SWFs.

While coherence requires specialization within SWFs, it requires coordination with other actors that shape the macro-finance behaviors of states. I will mention three. First, competition with development banks results in waste, confusion and duplication. SWFs, whatever their investment objectives must work with and not against development banks (much less the central banks). Second, failures of coordination with state owned resource extractive enterprises produce a weak link in the production of wealth. The passive relationship between SWFs and state owned enterprises ought to be reshaped to enhance coordinated efforts. Third, coordination with government ministries responsible for selling rights to extractive resources ought to be better coordinated as well. The system of wealth production ought to be seamless from the operation of enterprises, to the public policies that operationalize those enterprises, to the investment strategies that augment and manage the wealth production made possible through those enterprises.

6. Reconsider the approach to stabilization and development models for SWFs, especially were governance controls are weaker than they could be or in resource rich states. One of the oddest aspects of stabilization and development SWFs is their quite instrumental approach toward intervention in domestic markets in the context of a global order that increasingly emphasizes organic and markets driven development. In a sense, SWFs can be misapplied as a vehicle for the kind of public central planning of the national economy that is both inimical to the logic of globalization and which has been discredited in virtually every state in which it has been applied aggressively, irrespective of the political ideology on which the state is organized. The use of SWF as a means of governmental direction of economic planning or operation is perhaps a substantial misuse of the SWF form in an endeavor that fights against rather than complements the logic of the global financial and economic rules of play that are now dominant—and to the detriment, ironically enough, of the development that such planning vainly seeks to enhance.

In a sense such approaches to development or stabilization objectives echoes Ancien Regime sectorial protection or enhancement efforts in an effort to approach the industrial revolution in France more instrumentally than that of the United Kingdom. That was a dismal failure though it did produce one of two industries that have been quite well celebrated—hardly enough though to justify the effort. Closer to our own time it suggests the central planning taken to more extreme lengths by those states practicing Soviet economic practices and which lingers on in an attenuated way in perhaps only one state.

Rather than spending instrumentally to subsidize targeted activities, something we have heard spoken of here today, SWF stabilization/development spending might be better used to fund and develop the foundations on which private markets can grow of their own accord and consonant with economic conditions in context. SWF development spending ought to enhance but allow the market to determine which sectors should develop, and in what way. Reducing barriers to private economic activity rather than supporting a favored few is a more effective way of building economic strength with a broader base. SWFs that protect bottom up economic development, which manages but does not oversee this development, will likely serve their people better in the long run.

To that end, building market capacity rather than industry capacity better leverages spending. Infrastructure development, well planned, is also essential and good work for the instrumentalities of the state, as are institutional structures protective of private economic activity. To this end, ownership of external operations or supply flows in industries critical to national economic activity and that affect internal markets might be the best way to spend development funds. Even resource rich states require productive capacity along supply and value chains, access to which might be enhanced through SWF ownership or control. Thus the paradox—development SWFs might be most effective when investing outside of the home state and in industries critical to internal development—that is at development choke points in globalized economic activity. The Chinese model of sovereign investing has certainly demonstrated the value of this approach, and its viability.

The governance strategies as well are a necessary element to creating institutionally strong African SWFs well capable of attaining the regional and macro-financial strategies suggested.

7. Effect greater transparency. Transparency has become a standard rhetorical gesture when speaking to SWFs. It has become fairly meaningless in soft law efforts like the Santiago Principles. Yet beyond its utility as rhetoric, robust transparency can be effectively used to strengthen SWF in the delivery of financial and governance enhancing products. Yet transparency is not very useful when understood in its conventional sense as a one-size-fits-all disclosure strategy.

Instead one can start by rethinking transparency as a more nuanced and complex set of vehicles for engagement and communication. One ought to consider transparency in two aspects. Internal transparency is necessary to ensure engagement with national stakeholders (including the political and business establishment) and to reduce an unhealthy detachment from elected officials. External transparency is necessary to ensure adequate communication with investors and investor markets, including IFIs.

Internal transparency focuses more on engagement strategies within states and among the appropriate sectors of the government apparatus. Its purpose is to broaden consultation in the formation of policy (an ex ante function) and to ensure broad bases of accountability (ex post function). External transparency might be better used shorn of any pretense to engagement. Its objective might be better understood as focused on communication of performance and operations in the manner of financial performance reports of enterprises whose securities are traded in securities markets.

8. Detach SWF operations from governmental discretionary decision-making. The engagement potential of transparency must be constrained to avoid abuse. While deep participation may be useful for developing policy, it is far less useful for the decision making required to operate a SWF with respect to specific investment decisions and internal operations. It is therefore necessary to adopt a strategy that would institutionalize deep constraints on engagement by officials (including elected officials) and the political community generally, especially respecting investment decisions. The only exception would touch on Norwegian type SWFs established specifically as a public instrument for leveraging national policy through targeted interventions in private markets.

Beyond that quite specific sort of SWF, constraint strategies would require a strong functionally effective routinization of contributions and withdrawals and of investment decisions by formula and related methodologies. These ought to target conduct well beyond the usually elegantly drawn formal division of authority posted to virtually every SWF’s web site. In particular, the discretionary power to deviate from formula, or to vest a high ranking official with authority to direct specific investment, powers usually embedded in the fine print of SWF operational rules, requires sustained attention and substantial tightening.

Along with these measures SWFs might consider strategies that strengthen internal management controls and oversight, and which make these appropriately transparent. These internal controls ought to be coherent with whatever external controls are developed.

9. Insist on changes to the way in which states with SWFs engage with IFIs to enhance rather than to continue obstacles to better state performance. IFI conditionality, technical assistance approaches and monitoring regimes should better target rewards for good SWF performance in attaining fiscal results, improvement in governance, and incorporation of technical assistance in which states have enjoyed effective consultation. While a broad and politically charged topic, I can think of three fairly direct methods that might be useful measures of success for this strategy. First, IFIs might incorporate investor loan cost reductions (interest, fees and the like) that are triggered on attaining certain performance markers. Second, IFIs might incorporate principal reduction terms for meeting goals alone similar lines. Third, and perhaps most important, IFIs might more aggressively, with the cooperation of African SWFs and their governments, more effectively incorporate international norms on business and human rights as a measure of the effectiveness of SWF investing decisions. This would include the incorporation of the methodologies of human rights due diligence in investment decisions and oversight that are central to the U.N. Guiding Principles on Business and Human Rights. There is a great disciplinary mechanism that is transnational in scope and helpful to the people who are the ultimate beneficiaries of the work of African SWFs.

Taken together these strategies suggest the trajectories of developments in SWF operations  whose uneven and tentative appearance has been evident in the actions of SWFs described in Section II. These strategies also suggest tease out some of a set of fairly broad and aggressive possibilities inherent in current practice that would also substantially disrupt the current narrative f the ideal SWF and its “bargain” with rich host states. If would surprise no one, then, to suggest that many of these strategies are no doubt controversial. Some are aspirational. All are based on the assumption that the application of late 20th century political models in an environment of 21st century globalization, in which borders are more porous and permeable, in which public power is fractured, and in which investment operates under the complex logic of polycentric governance systems, will neither serve Africa, nor the global community of which Africa is an important part.


V. Conclusion

                  SWFs have already started moving well beyond their idealized form, established within the parameters of the Santiago Principles. SWFs now advance the political and economic projects of states, they serve to strengthen governance, they are the focal point for the normalization of global human rights in economic activities projects, and they also serve to advance the development goals of states.  The old issues of the commercial character of these mechanisms, and of their effects of the financial markets and ownership structures of rich home states remains important, but may no longer be the central element pushing the development of SWFs. Law and regulatory structures lag far behind the realities that are taking shape on the ground.  The public-private divide, the constraining structures of national principles of taxation and sovereign immunity are now ripe for contestation and change.  But on what basis? That remains very much to be seen. This paper has sought to provide a glimpse both at the changes in practice and the possibilities they raise for future conduct of SWFs.  As to the future; we will know soon enough.

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