Meeting of the ALDE (Alliance of Liberals and Democrats for Europe) Group – European Parliament
Brussels, 4 December 2007
Ladies and Gentlemen,
Let me start by saying that there is no commonly agreed definition of what is a Sovereign Wealth Fund. But they have common features that help to identify them. Sovereign funds are special investment funds created and owned by governments with the aim of investing in foreign assets so as to generate long term return on the investment made.
Sovereign Wealth Funds have been around for decades. The Kuwait Investment Authority has been in existence since 1953. In terms of assets, the Abu Dhabi Investment Authority, one of the biggest with almost €600bn in assets was set up in 1976. Temasek from Singapore dates from 1974. I am old enough to remember the concerns when oil rich Middle-Easterners were buying up prestigious companies and landmark London properties. As time went by and oil reserves tapered off, so did the fuss. However, such fears have come back thanks to the growth in Sovereign Funds as a result of rising energy prices and large trade surpluses. Their size and wider geographical disparity have impinged on the consciousness of policy makers and the wider public. Estimates today put the total value of such funds around €1.7 trillion. Important sums of money, but in relative terms they represent around 2.5% of global financial assets.
One thing is clear to me: Europe must remain an attractive place for investment. Without continued inward investment our economies will stagnate. We have no interest in erecting barriers to investment.
As the current financial turmoil demonstrates, financial liquidity is vital for our economies. We have recently seen firms on both sides of the Atlantic – for example Barclays and Citibank, seek out Sovereign Funds. Why? Because their finance was needed to allow these companies to carry out their strategic aims. I suspect in the time ahead we will see many more enterprises seeking investments from such funds. Cutting off access to these important sources of liquidity would be like cutting off our noses to spite our faces. In that sense I was struck by an editorial I saw in yesterday’s Irish Times commenting on the current credit crisis. It’s worth quoting from: “Sovereign wealth funds that are state controlled should be seen as a financial opportunity rather than a political threat. In the developed economies, the greatest problem now facing financial markets is that a credit crunch may precipitate a global recession. And part of any solution to the credit crisis must be to encourage those with spare capital to invest, such as sovereign wealth funds, to do so.”
But there are certain aspects of Sovereign Wealth Funds that need to be addressed.
Who controls them? What is their investment strategy? are legitimate questions. There are also concerns about restrictions on inward investments that EU firms may want to make in the countries concerned.
But in raising these issues we must avoid them being used to forment protectionist sentiments. I would not like to see the rise of Sovereign Wealth Funds, which are the by-products of increasing globalisation and benefits of international trade, being used as an argument against the entry of emerging markets investors into the First World corporate sector.
We all know that Sovereign Wealth Funds encompass a broad range of Funds and a variety of investment strategies and management. For example, several Sovereign Wealth Funds are more or less directly managed through the central bank or the finance ministry. These include Norway, Singapore’s GIC, Alaska, Russia, Qatar. Others are incorporated as private companies with at least some degree of independence such as Korea Investment Corporation and Dubai International Capital.
So it is hard to lump them all in the same basket. But I believe there are issues relating to transparency and governance that we need to engage with certain Sovereign Wealth Funds. The Norwegian Pension Fund is often held up as a good benchmark in this regard. At the end of the day, what I believe most observers want is to separate the political from the economic considerations that could influence the decision of funds under government control.
How then should the debate on Sovereign Wealth Funds be taken forward?
Firstly, we need to explain to our citizens that investments which have the potential to compromise national security can be blocked. It is often forgotten that a Member State is entitled to restrict Treaty freedoms on the basis of legitimate national security concerns. This is true in respect of all investments, be they from Sovereign Wealth Funds, state-controlled companies, private companies or whoever. Furthermore a number of Member States have, for example, measures in place that restrict investments in the defence sector. Recently the Commission proposed certain controls on investment in the energy sector. I might add we also require investors in our financial institutions to be “fit and proper”.
So there are measures that can be adopted where there are legitimate public interest concerns. The Commission (and ultimately the Court of Justice) has the task of ensuring that any such measures are justified according to public policy or public security. But as long as they are, Members States have the power to act. One issue to be considered in the time ahead is whether guidelines at EU level on investments on sensitive sectors would be helpful or not.
Secondly, we need Sovereign Wealth Funds to be transparent in their operations, preferably on the basis of an international code of best practice. We are working in international organisations and bilaterally, together with our US colleagues, to bring this about. We have also agreed at the Transatlantic Economic Council on 9th November to formally launch an Investment Dialogue to promote open investment regimes globally in a fully safe environment.
To finish, I would refer to a rather new in age terms, Sovereign Wealth Fund I set up in Ireland in 2001. Although relatively modest, with now approx. $30bn in assets, the Irish National Pension Reserve Fund publishes its investment strategy, details of its investment conduits and agents and an audited yearly report of its holdings in every company. This is what transparency is about. Anybody can find out which shares it holds and what is its strategy. This is the type of approach I would like to see other Sovereign Wealth Funds adopt.
To sum up, my approach is based on openness to investment, avoiding protectionism and engaging with Sovereign Wealth funds to encourage transparency.