Page last updated at 23:48 GMT, Tuesday, 3 June 2008 00:48 UK

Lifting the lid on sovereign wealth funds

By Steve Schifferes
Economics reporter, BBC News, at the OECD in Paris


Xiqing Gao, president and chief operating office, China Investment Corporation

Sovereign wealth funds - government-controlled investment funds - have been one of the hottest topics at the OECD's latest gathering of some of the biggest names in global finance.

But are they really as dangerous as some fear?

Amid the hustle and bustle of the OECD annual meeting, something extraordinary seemed to be tacking place - rich countries and poor countries agreeing about economic policy.

The policy in question was what to do about sovereign wealth funds (SWFs), a topic of great concern to many Western politicians and members of the public.

Sovereign wealth funds are the investment funds established by governments in the Middle East and elsewhere, who have large surpluses of money which they wish to invest abroad.

Currently the OECD estimates that there is about $3 trillion (1.5 trillion) in sovereign wealth funds, more than the total amount held by all public sector pension schemes around the world.

And the total is growing rapidly, perhaps reaching $12 trillion within 10 years, according to private sector estimates.

'Positive factor'

Already governments or parliaments in France, Germany, and the United States have raised concerns that these funds could use their vast wealth to buy up key strategic assets or exert political leverage on Western companies and governments.

But the OECD has said that any moves against sovereign wealth funds would be hypocritical, since Western governments have long urged other countries to open their markets to foreign investment.

Abu Dhabi $800bn
Norway $400bn
Singapore $330bn
China $300bn
Kuwait $200bn
Source: OECD June 2008 estimates

OECD Secretary General Angel Gurria told the BBC that sovereign wealth funds were part of the solution to the credit crunch, not part of the problem, and they should be welcomed with open arms.

"In principle sovereign wealth funds are a good thing," Mr Gurria said.

"Their investments in financial institutions hit by the credit crunch has been a positive factor in resolving the crisis."

Speaking on behalf of the world's largest sovereign wealth fund, that of Abu Dhabi, Jean-Paul Villain, head of its strategy unit, told the OECD conference that it wanted to be a long-term passive investor.

It had no intention of either trying to run or build up controlling stakes in companies, he said.

The Abu Dhabi fund is run as an independent agency within the government, and has appointed external fund managers to run 80% of its investment portfolio.

And it has even opened, for the first time, its own press office to explain itself to the wider public.

'Fierce opposition'

Norway oil platform
Norway is investing the proceeds of its oil and gas operations in its fund.

In the same spirit of openness, the head of China's new sovereign wealth fund, speaking at a major international conference for the first time, said he was puzzled as to the fierce opposition his investments were encountering.

Xiqing Gao, the president and chief operating officer of the China Investment Corporation, which initially has $300bn of China's $1.5 trillion trade surplus to invest, told the BBC that his goals were exactly the same as other major SWFs.

"We are financial investors and passive investors. We are only seeking good financial returns with an acceptable level of risk," he said

"We plan to fully comply with all the relevant laws and regulations of both national and international bodies."

He also said that transparency was a goal.

He pointed out, however, that any large commercial investment vehicle has limits to how open it can be ahead of a major acquisition, as such knowledge would obviously move the market.

As the newest sovereign wealth fund, Mr Gao said he was dismayed that China's entry into this area was causing so much controversy that he was even getting complaints from other funds about the unfavourable press attention it was attracting.

Ethical investor

There is, however, one sovereign wealth fund that has decided to take a more active role in making political judgements about the companies it invests in - and ironically, it is the only SWF owned by a Western government.

Norway has chosen to invest the entire proceeds of its North Sea gas and oil fields in a $400bn pension investment fund which is meant to ensure the future provision for its population's old age.

The government has capped the amount it can take from the fund to contribute to its annual budget at 4% of the fund's value, despite public pressure to release more.

The government has also created a panel of experts who evaluate the 7,000 companies it invests in to ensure they meet the highest ethical standards.

As a result of their advice, it has de-invested in 27 companies, the most celebrated of which was US retailer Wal-Mart, because of what it saw as the company's poor labour rights record in developing countries.

"Our ethics council found that Wal-Mart, through the use of sub-contractors, had violated the human rights of its workers," said Norwegian finance minister Kristin Halvorsen, whose department sets the rules for the fund.

"And we are not in our sovereign wealth fund going to contribute to any abuse of human rights."

Ms Halvorsen believes that having high ethical standards has been essential to getting the support of the Norwegian public.

The rise of sovereign wealth funds is one sign of the shift in the balance of power in the world economy from the Western countries to the new emerging market giants like China and the oil-rich Middle East.

How the issue is handled will be a crucial test of the challenges to globalisation over the years to come.

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