Many developed nations are skittish about some tough new players on the global financial stage, state-owned investment funds, and understandably so. These funds have roughly $3-trillion (U.S.) at their disposal, earned largely through the export of energy or cheap manufactured products. Most of them are opaque: They do not disclose their investment guidelines or their holdings. Other governments do not know if these "sovereign wealth funds" operate according to commercial considerations, or if a foreign government is pulling the strings for its own purposes.
This tricky oversight challenge is plaguing many governments, including Canada, which is wrestling with the clear need for stricter national security regulations. Unfortunately, new U.S. regulations to impose tougher security reviews of fund investments may be far too draconian, inadvertently sideswiping the Canada Pension Plan Investment Board (CPPIB) and consequently the retirement prospects of 17 million Canadians. CPPIB executives recently told two U.S. Congressional subcommittees - which are drafting regulations that could lower the investment threshold for national security reviews - that they should not subject all funds to the same heavy-handed treatment.
Along the way, those executives and their colleagues have provided all developed nations with a model for effective national-security assessments of such funds: the CPP fund itself.
The key is transparency. Board CEO David Denison argued persuasively that the CPPIB is not a sovereign wealth fund because it is independent from government. It does not submit its business plans for approval, there are no government officials on its board, and its chairman is legally required to take appropriate action if governments try to meddle in support of national or political goals. Sovereign wealth funds, for their part, would do well to adopt the CPPIB's way of doing business. It is independently audited. And its investment policies, along with a full list of its holdings, are publicly available on its website. Anyone can measure the fund's actions against its stated objectives. Any sovereign fund that followed similar guidelines would be fairly easy to assess.
Such clarity is in short supply among most of about 40 such funds, unfortunately; the mammoth $900-billion Abu Dhabi fund, for example, reveals almost nothing about anything it does or holds. It is no wonder that the International Monetary Fund, with U.S. and European encouragement, is drafting a voluntary code of conduct.
There is an irony here. Only two months ago, the governments of South Korea, Kuwait and Singapore, who have such funds, provided lifelines to two U.S. financial institutions that lost billions of dollars in the credit crunch.
But there is also an opportunity for reform. Those funds will likely become bigger players on the international scene. More financial institutions are likely to totter, and require help. The governments behind the funds, in turn, are often anxious to secure investments in the vital resources that fuel their economic booms. Developed nations would be more open to foreign investment, if the investors themselves were more open about their intentions.
© 2007 The Globe and Mail. All rights reserved.
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