President of the National Council for
Economy and Labour (CNEL)
Sovereign funds and sovereign States
In the context of a series of meetings organized annually by the Training School AIS with scholars and experts on issues of institutional interest to enhance the knowledge of those working in the field of Intelligence, we propose certain of the most significant passages from the speech given by President Marzano.
…What are sovereign funds?…
They are investments funds, like many others, but State owned or rigorously controlled by the State. They were already existent in the 50’s, they are not something new.
Kuwait started with the “Kuwait Investment Fund”. However, only in the subsequent decades have they acquired an ever increasing potential for important activity, and are, by far, among the highest of the existing investment funds in the world.
…. What is the historical origin that has allowed these sovereign funds to have such a similar potential? Was it a similar financial platform? Why have they grown? Have they been reinforced?...…
The financial potential of these funds has been historically fuelled, above all, by surplus currency of the balance of payments of the respective Countries. And from the stock of foreign currency reserves that have been accumulated.
… The stock and the surplus currencies, in their turn, what are they due to? …
The causes of these surplus currencies and of these growing stocks of reserves are various, but the first factor, which summarizes others, is an unbalanced exchange rate regime. When a currency is undervalued on the foreign exchange market, this increases the competitiveness of that Country and favours the formation of surplus of the balance of payments.
The second factor is the type of economic policies implemented by these Countries: to support the economy, the demand for domestic goods can be supported or else the foreign demand. If a Country grows and holds down the salaries, it is sacrificing the internal demand and, at the same time, the low salaries being a further factor of competitiveness, is making a policy to support foreign demand. Assets of the balance of payments and inflows of currency reserves may follow.
The third factor is represented by the policies of price increases of the strict demand products, as in the case of oil, raw materials, of the commodities, in general. The last factor, duties and protection with respect to the rest of the world. There are Countries where this mix exists almost entirely. It concerns, therefore, producer Countries of oil and gas or generally, of commodities because, as we know, there is also copper, normally of the emerging Countries or of new industrialization, mostly of Middle Eastern or Asian Countries. I should add that the crisis of the Western institutions of financial credit, in the 2000 decade, reinforced the international role of these sovereign funds.
I would apply a distinction: there are proper and improper objectives. The proper objectives are those that could pursue any normal investment fund; then there are possible and eventual improper goals.
The funds originate also to seek the stabilization of prices of the exported products. But there may also be objectives of diversification of the financial assets of the Country. Or also of development in various types of activities, including real assets, not just financial. These are the proper objectives. The improper objectives are, instead, political, rather than financial.
… And what do these funds do? Where do they invest? …
The principal investments are shares of National and foreign companies. Almost 50% is in shares. Shares mean, according to the percentage on the total, also control of some corporate company. Bonds, government bonds, but also private bonds and derivatives, make up the rest.
… And what are the principal sectors?...
First, finance and foreign insurance make up almost 60%. The Emirates entered Unicredit, per example. Second, real estate investments also: The Qatar in Milan, for example; the Dubai in Sesto San Giovanni. Third, energy, the Qatar in Rovigo. Fourth, the industrial technology: the Emirates are in the Piaggio aircrafts. Fifth, transport and logistics: Singapore is in a society called “Sintonia”.
There will also be other examples and also these should be verified because the shares change. However, this is the typology: above all, finance and insurance, but also real estate and Energy, high technology and, finally, transport and logistics, the infrastructures, in general.
… These are the sectors, but the occasions? …
Often, the fertile ground consists in financial difficulties of the companies, or the need to restructure a company. Restructuring, in the world of globalization, is a frequent phenomenon and, to avoid harmful spins, must be done quickly. But there are also cases in which, on the contrary, there are promising prospects and here the conduct is that typical of any investment fund. There are also cases of States in difficulty that welcome the flow of this type of capital, to underwrite the Government bonds issued. There could be States in difficulties because of their problems of development. The Philippines had a financing problem for the infrastructures. In these cases, normally, the assets of sovereign wealth funds are desired and solicited.
… But why are there then also doubts and questions? …
There could be various reasons. The sovereign funds could have improper goals, not typical of finance, not necessarily declared, and not transparent.
For example, I shall cite four cases.
The first is the acquisition of positions of control, or almost control, or of strong conditioning. The know-how in strategic sectors is desirable. Second: acquisition of dominant positions of a monopolistic nature. Again, one can acquire the control of an enterprise in order to procure the intellectual property, the trademarks, the patents and so on. Sometimes, there is the risk that one would acquire the control of a company to have its market share. Third case is the financing of infrastructures or logistic positions, i.e. of a sector that branches throughout the national territory and is, in certain ways, conditioning. Fourth: the financial and currency destabilization.
All these objectives are hypothetical, but are possible.
These improper objectives, political more than economic-financial, should be balanced against the need for security of the Countries, with the need of the National interest.
… And what is the endowment of these sovereign funds? …
The estimates on the absolute values of the overall financial power of these funds differ. But, more important is to understand the proportions rather than the absolute values of the fund assets.
Many derive reassuring signs from these proportions. The International Banking System is 20 times more provided than these funds. The total of the Stock Exchanges is 16 times larger than these funds. The pension funds and those of world-wide insurance are 8 times, some say more than 8 times, compared to the potential of SWFs. The difference is, however, that in the sovereign funds, the power of decision is concentrated in a few influential people. In the second place, these funds have fewer problems of refinancing or, if you will, financial leverage, being funded by the corresponding State. Therefore, it is true that the consistency of the financial world is multiple compared to the funds in question; nevertheless, in these, the power of decision is concentrated and the operating limits are wider.
….How does one prepare oneself in facing this phenomenon of the sovereign funds? …
The answer should be divided because there are three types of possible answers, which I would classify in this way: there are macroeconomic policies, monitoring policies and microeconomic policies or, if you will, legal micro reaction. Let us start with the macroeconomic policies.
…What do they stem from?..
I attribute a lot of importance to these policies. The exchange rate regime is unbalanced and it is necessary that the economic policies aim for its rebalancing. The exchange rate regime alters the competition. This is violated by the advanced Countries, especially, in the agricultural sector, with a negative impact on those Countries that are fundamentally agricultural. However, it is also true that there is damage to the western economy, which derives from unbalanced exchange rates. Therefore, the first policy is an international-economic policy to be developed in the international judicial forums.
…What can be done to change things radically?...
For example, with a different participation in the International Money Fund of Countries which, today, count very much, but do not have, in this context, a proportionate role: it can be clearly distinguished, in exchange for a correction of the exchange rate policy. Another problem is the policy of the prices on strict demand. For example, the policy of the energy made by the single Countries is weaker than the energy policy at the European level. The joint bargaining power of the Countries that demand raw materials, oil in the specific case, would be greater than the bargaining power of the single Country.
And, finally, the policies of competitiveness and growth, because also with competitiveness and growth the currency imbalances are corrected. The monitoring policies are the second part of the arsenal. There are various indexes of monitoring. That of Truman, or the index of Lindburg and Madwell. This is based on 10 criteria of evaluation of the so-called disclosure. Disclosure is basically the type of information that the Fund is disposed to give and, therefore, its degree of transparency. Then the index of Kaufman to evaluate the degree of responsibility in behaviour, of stability through time, of efficiency and, also, of the legislation quality of the Country of origin. These indexes gather a significantly inverse statistical coefficient between the degree of democracy of the Country of origin and transparency of the respective funds. The less democratic the Member State, the less transparent is the sovereign fund. Incidentally, I should remind you that the national origin of the funds is 46% from the Middle East, 35% from Asia and 18-19% from Europe, from American and from the other Countries.
The third category of reactions is the micro-measures. The Golden Share or the approval of limits to the entity of the capital participation of the societies operating in the State of “arrival” of the financing of the funds; or limits of sector. For example: in Germany, there is a Bill providing for the government authorization for acquisitions that exceed 25% in any sensitive sector for the national public security. France has provided for public authorizations for 11 sectors in which foreign investments participate. In the United States, there is a Fund Investment and Security Act to block, or to submit this type of acquisition by foreign sovereign funds to particular conditions
… And Italy? …
Rumours, ideas have circulated, but with little outcome. The ideal would be a European fund of control, and Paris suggested a common European fund of contrast. The needs of the various Countries, however, are different. A Country that aspires to be the principal world financial market has a different attitude from the Country that cares for its own manufacture. The positions of the Countries are different also from the viewpoint of the government debt. There are Countries which have problems of debt placement and which thinks differently from a Country which, instead, has, all things considered, a normal volume of debt. Also this European front has difficulty in reaching a unified position both for the divergences of interests, and because of the different policy evaluations, relative to the optimal degree of regulation of the spontaneous movements of capital.