U.S. officials have persuaded Singapore and Abu Dhabi to put voluntary controls on their brimming sovereign wealth funds (SWF), a first step toward setting global rules for the often-mysterious funds that have become a powerful new force in global finance.
Concern about the impact of the funds has been rising as emerging countries, many of them undemocratic, accumulate vast reserves from the sale of commodities and manufactured goods. U.S. officials say governments have created more than 20 new funds since 2000, bringing the total to 40 with combined assets of up to $2.9-trillion (U.S.).
The U.S. Treasury Department said Singapore and Abu Dhabi and their funds had agreed not to use their wealth to advance political goals.
Under a set of principles agreed after a meeting in Washington with Treasury Secretary Henry Paulson, "SWF investment decisions should be based solely on commercial grounds, rather than to advance, directly or indirectly, the geopolitical goals of the controlling government," a Treasury release said yesterday.
The set of nine principles also commits the funds to make greater disclosure of financial information and investment objectives, have strong governance and risk management in place, respect host country investment rules and make sure private sector players have a chance to compete fairly.
For their part, countries accepting investment from the funds agree not to put up protectionist investment barriers, not discriminate among investors, to limit national security restrictions on investment to genuine security concerns and to have predictable investment rules in place.
"We see this agreement on operating principles as a positive development," David Denison, CEO of the Canada Pension Plan Investment Board said. Mr. Denison testified before a U.S. congressional subcommittee probing sovereign wealth funds in early March.
"If truly embraced by Sovereign Wealth Funds in practice they should go a long way to alleviate the concerns expressed by a number of countries around the world," he said last night.
The U.S. Congress has raised a red flag about sensitive foreign investments in the United States, heading off a bid by a Dubai-based company to buy up a U.S. ports firm. A U.S. review also put off the purchase of 3Com Corp. by China's Huawei Technologies and U.S.-based Bain Capital Partners because of security anxieties.
European governments are also concerned about the rising power of the funds. The International Monetary Fund and the Organization for Economic Co-operation and Development are working together to set up a voluntary "best practices" code so that the funds don't misbehave.
Washington-based economist Edwin Truman said the U.S. approached Singapore and Abu Dhabi because they control two of the most active, respected and best-known sovereign wealth funds. Abu Dhabi's is the world's largest.
Their agreement to the principles sets an important example for other funds, he said. It "sure beats the alternative, which is that they tell the international financial system to take a flying leap."
If other funds agree to similar controls, Mr. Truman said, it will lower the risk that Western governments will overreact to the rising power of the funds and put in place tougher restrictions on foreign investment. That could worsen the global financial picture as the U.S. struggles with a looming crisis in its finances.
"One concern is that we - Canada and the U.S. - will get paranoid about all this and raise direct barriers against this kind of investment - financial protectionism," Mr. Truman said.
© 2007 The Globe and Mail. All rights reserved.
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