GNOSIS 1/2008
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Sovereign Funds and national sovereignty |
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A new phenomenon
However, it is possible to make an evaluation of the system risks for the financial markets deriving from their activities, starting from the highest objectives and from the operative modality typical of a FSI. A first impression of the general objectives can be taken from the analysis of the typical financing sources, therefore: a diversified management for a part of the assets of international reserve; - the inter-temporal balancing of the income flows of a commercial nature; - the financial administration of the pension assets; - the inter-generational transfer of the national wealth. The generic modalities of management of a sovereign investment are in terms of: 1. Balanced funds are invested in stocks and shares, thereby avoiding direct participation in business company governance. Examples are the Abu Dhabi Investment Authority (ADIA), the Kuwait Investment Authority (KIA), the Norwegian Government Pension Fund, the already mentioned Government Investment Corporation (GIC) of Singapore, the China Investment Corporation (CIC) and the Russian National Welfare Fund; 2. Share Funds They are “vehicles of investment” on the model of the funds of private equity, which buy shares on the basis of "financial leverage" with objectives of high yield. Examples are the Fund of Singapore Temasek Holdings (14), the Fund managed by the Qatar Investment Authority (15), the emirate fund, Mudabala Development Company and the “vehicles of investment” of Dubai Istithmar (16)Investment Corporation of Dubai (ICD) (17), Dubai International Centre (DIC)(18) and Dubai Group; 3. Societies controlled by the State Examples of “public capital societies” abroad, employed in investment activities (direct or of portfolio) are the Abu Dhabi National Energy Company (PJSC), the China National Off-shore Oil Corporation (CNOOC), the Russian Gazprom and the Lukoil, and the business company groups of the Gulf Countries (for example Dubai World (19). Recently, the presence of the FSI has been placed in evidence due to the “bailouts” operated on the international credit market as partial coverage for the losses of the large world banks: in crisis over the insolvencies in the United States’ subprime loans. In Table 2 are reported the most striking cases of banks and international financing societies which ( with the exception of the transaction relative to Barclays (20) have sold out share quotas to finance
Conflicts of interest in the management of assets of the Sovereign Funds The presence of sovereign States as investors on the international financial markets generates numerous “market failures”(21):, for: a. the greater flexibility in the limitations of the State budget compared to that of a private operator; b. the greater reliability of the FSI compared to a private company. An example of the distortion created is the attribution by the agency Moody’s Investors Service of an “A1” rating to Dubai Holding Commercial Operations Group, a judgement motivated by its strict ties with the Government of Dubai. In practice, the rating is not awarded for the administrative capacity of the company, but for the guarantee of the financial power and credit reliability of the Emirate; c. the scarce transparency on the subject of governance; on the subject of the composition of their portfolio and relatively, to the criterion of choice of the objectives of investment of the FSI. The a. and b. conditions have implications in terms of “hidden information (adverse selection) and of “hidden actions” (moral hazard). The outsourcing in the assets management of a FSI determines a “agency relation” (noted in economy as “agent/principal problem”) in which the agent acts on behalf of a principal and one supposes that the agent’s actions will be to promote the interests of its principal. The problem arises when the agent and the principal have different interests, and the latter is not able to verify the efficiency in the choices operated. The informative asymmetry allows, then, the verification of opportunistic conduct of the pre-contractual type (adverse selection) and post-contractual (moral hazard). At pre-contractual level, the outside managers of the FSI can communicate only some of the information in their possession, causing the governmental administrators of the FSI to make inefficient choices. During the course of the execution of the contract, the presence of the State as a “last resort lender” of a FSI, can allow the outside managers of the FSI to reduce the precautionary expedients adopted to secure the efficient assets management, pursuing their own interests at the expense of the counterpart. For example: the outside managers, in their awareness of the fact that in case of difficulty, they can have new financing at their disposal, could involve themselves in higher risk operations, paying less attention to solvency, guaranteeing themselves, however, high commissions at the expense of the investor-State. In fact, the elusiveness of the contractual and ethical obligations in the moral hazard comes about because of the lack of sanctions and incentives. The industry of “sovereign private equity management” is already an important phenomenon due to the dimensions it has assumed. The FSI are transforming themselves into one of the principal actors in the world industry of asset management, the value of which was estimated by Merrill Lynch, in 2007, at 1.5 thousand billion dollars (forecasted to be, in a brief period, 3 thousand billion dollars), generator of commissions between 4 and 8 billion dollars. Many societies of private equity are relating directly to the Middle Eastern and Asiatic FSI, also because of the serious period of crisis that the private equity industry is facing. At the present time, at least 20% of the assets of the Sovereign Funds are administrated by teams independent of business banks, private fund managers, or investment consultants. The temptation of the offered commissions is attracting also the leading international legal companies. Charlotte Edmond and Emma Sadowski (2008) underline how “a trend can be seen where important international legal companies are aiming, in a decisive manner, at the sector of consultancy to Sovereign Funds”, undertaking ventures of a strategic character in the Middle East and in Asia (22). Therefore, a future increase is likely, of always more “structured” advisory functions, or rather, sub-divided in expertise between business banks and legal companies, with further growth in the transaction costs. An example of such “structuration “ is the scheme applied to the ‘start-up’ of the new fund of private equity which is being constituted between the China Investment Corporation (which has brought 4 billion dollars) and the United States, JC Flowers, with the involvement of six legal companies (23). As far as condition c. is concerned, behind the mentioned scarce transparency in the management of the FSI, often, an elevated delegating in the operative management is hidden. In this case, not to the outside manager of the Fund, but rather to the ‘general partner’ (24)., or to the majority shareholder who operates the choices. In this case, the risk of ‘hidden action’, or of the non-observance of certain actions, is inherent in the governance of the business. Frequently, in fact, the FSI choose to renounce actively presiding at the Administration Councils or to possess holdings that give power of command or societal control, for the declared reason of wanting to avoid the controversies which animate these directional bodies (25). These representations would appear to identify larger potential risks for the sovereign investor than for the counterpart (fund administrators, participatory firms). In reality, the assumption of these risks by the FSI could be motivated by ‘secret’ objectives for the pursuance of which the investor-States could also benefit from ‘connivance’ on the part of the same outside fund managers or from the same participatory firms. In this regard, when listening to the Committee on Banking, Housing and Urban Affairs of the United States Senate, Professor Edwin M. Truman, (Peterson Institute for International Economics of Washington)(26), placed emphasis on – apart from the great risks of uncertainty and instability caused by the management of international assets by States (27) and the pursuance of goals to acquire economic or political power in the Countries which are objects of the sovereign investments (28) – the conflict of interests in the international fund management, where managers handle, contemporaneously, both the management of the assets of the Sovereign Funds, and individual or institutional portfolios (national or foreign). The risks emphasized by Truman, principally, regard corruption (29), a preoccupation which has found support in the alarm launched by the United States Security and Exchange Commission (SEC), relative to possibility of insider trading (30), tied to the potential illicit usage of sensitive information to which the FSI could have access through the business plans of important world groups in which they are shareholders. Jeffrey Garten, (professor at the Yale School of Management and ex-official of the United States Department of Commerce under the Clinton Administration) has stated that, in the future, the FSI will direct their offer of financing towards increasingly complex instruments, which will render both the tracing of the investments and the evaluation of their dangerousness, extremely difficult. On the other hand, the FSI already find a growing demand for funds on the part of the societies of private equity, due to restrictions in the offer of credit from the banks. To the growing request for funds is added the offer of know-how in the financial technologies – skills for which the FSI have particular need. The availability of asset management skills will tend to progressively decrease with the growing mixture of investments of a Sovereign State, hedge funds and Sharia’a-compliant banking (31). Such specific expertise will favour a strong concentration of the consultancy functions and further conflicts of interests. So, it becomes important to conjecture the future trends in the composition of sovereign portfolios, given the pursuit of returns on the investments, but in consideration of a certain aversion to risk. Stephen Jen and Luca Bindelli, of Morgan Stanley, have formulated an hypothesis, distinguishing each asset on the basis of the prospects of future interests for the FSI: 1. Natural resources In the last 20 years, crude oil has generated returns inferior to the levels expected, thus showing an elevated volatility, also, and above all, in relation to share courses. It is, therefore, likely that some Countries (in particular, the Gulf Cooperation Countries (GCC) will invest their oilfield income in the share markets with superior expectations of return; 2. Share markets of the emerging Countries In the last 20 years, the shares of the emerging Countries have generated over 700 more basic points of returns with respect to State bonds. Since many of the principal FSI belong to emerging Countries, the natural inclination to invest in their own markets results decidedly greater; 3. Share markets of the industrialized Countries The hypothesis of a generalized rebalancing of the portfolios towards the economies of the emerging Countries will imply, over a long-term period, less weight in dollars and euro in the FSI coffers, and a greater importance for the Japanese yen and the Chinese yuan; 4. Risk/yield relation The management of structured financial products requires high specialization (32). The difference in the costs of management varies in a significant way, in relation to the typology of risk/yield and to the attitude of the managers.
In the ambit of a period of alpha management guaranteed by outside managers (much more competitive), it is likely that many FSI accept also a larger beta component in their portfolio, in order to start-up an autonomous management of their assets (33). A similar trend could also be favoured by the existence of a diaspora of Asiatic and Moslem bankers (with very high experience in the principal business places of the world) ready to re-enter their Countries of origin and assume important roles in the management of national Sovereign Funds. In the future, therefore, always more FSI will prefer to invest in emerging Countries. The trend is already visible in certain projects, such as, for example: - of China Investment Corporation (CIC) and Government of Singapore Investment Corporation (GIC, the latter, in the infrastructural sector and restructuring of State enterprises) to the benefit of economic activities inside China; - of the Gulf Corporation Countries, interested in investing a quota of their own Sovereign Funds in development projects in Asia (in particular, Dubai International Capital has programmed investments, in China, India and Japan, for circa 5 billion dollars, in the next three years); - of the joint venture “ADIC-UBS Infrastructure fund – l” between Abu Dhabi Investment Company and UBS, which has set aside an aliquot of their initial endowment (500 million dollars) to investments focused on the Middle East and North African region; - of Temasek Holding, whose investment managers, Fullerton Fund Management, have communicated that funds invested in the Middle-East and North Africa will be placed on the Asiatic market. The placing of the funds will be done by EFG-Hermes Asset Management. There remain, however, motives of strong profitability of sovereign investments in the United States. Viktor Fleisher (2008) has shown, in fact, the existence of tax exemptions for the investment of funds (or controlled entity) of foreign States. Section 892 of the Internal Revenue Code exempts foreign Governments from the tax on income from passive investment activities, while it imposes on individuals and foreign companies the payment of aliquots up to 30%, according to the bilateral agreements and the nature of the investment. In this way, the Code has the implicit effect of “subsidizing” the capital of foreign States, particularly, if they are sources of financing for the internal companies, but still “wrong footing” private investment. The phenomenon allows a margin of very high “fiscal arbitrage”. According to Fleisher, the FSI should, on the contrary, be taxed in the same way as the private investors, thus reducing the comparative advantage in the arbitrage realized by a FSI. Such a measure, however, would not be seen as a “competitive equity measure” (placing the FSI at the level of any foreign private investor) but as a “protectionist measure“, intended to diminish the present investments, to discourage future ones and to arouse criticism and protest from the different financial lobbies, insomuch as the introduction of a tax would increase the tax of income required to be able to consider the investment profitable. Managing the interference In the search for a solution to the problem of relations between sovereign funds and national sovereignty, the alternatives for managing the interference (which is taken as an undisputed fact in the case of a financial presence of a foreign State in internal public and private sectors) in a prospective of global and nationalgovernance, are two: - a set of international “best practices” (“soft” solution, where the adjective corresponds to the consideration of the “smallest” aspects of a sovereign investment which could collide with the national interests); - the improvement of already existing regulatory measures or the introduction of others (“hard” solution, where the adjective corresponds to the applicative difficulty caused by the opposition that the various lobbies would create. The conclusion that one can draw from the discussions in the governmental areas, reported by the press, is that of a net preference for the “soft” solution, or rather, for an international agreement on some “best practices” (voluntary adoption) to apply to the sovereign investments, in such a way as to guarantee a minimum level of informative transparency although without discouraging the investments themselves. Vice versa, the “hard” solution would require the improvement of the national, EU and international regulations, relative to already existing phenomena (for example, the hedge funds(34). , calibrating them to the innovative aspects introduced by the FSI. Soft solutions (inter-governmental) In the final Declaration of the G7 of Heiligendamm (Germany), of June, 2007, we already find the commitment to minimize national restrictions to the foreign investments (35). One can identify within the group of industrialized Countries, two large axes along which the debate on the FSI is developing: Europe (United Kingdom, France and Germany) and the United States, with Canada and Japan as residual actors (for the moment) and Italy as a passive actor. In Europe, the debate is very fragmented and strong differences are registered at both EC and national levels. The two stable points of reference of the European Union with regard to the FSI are represented by the declarations of the President of the European Commission, the Portuguese, José Miguel Barroso, in Oslo, (25th February, 2008 (36), and from the document “A Common European Approach to Sovereig n Wealth Funds”, discussed at the European Council of the 13th and 14th of March, 2008 (37). The principal preoccupation of the European Commission is to avoid an “uncoordinated reply” to the FSI, and instead, facilitate and stimulate the cooperation of the Member Countries in the formulation of a “code of conduct”, which the International Monetary Fund (IMF) and the Organization for Cooperation and Economic Development are preparing (38). This “code” is, in substance, a set of “best practices” whose adoption is voluntary on the part of the FSI, and keeps account of the prerogatives of the recipient Countries of investment. The contradictions that emerge from the Community position are various: - the vulnerability recognized by the Irishman, Charlie McCreevy, European Commissioner to the Internal Market, relative to the presence in Europe of “societies” (rather than assets) controlled by States (like Gazprom) (39) which seem will be considered in the ambit of the “code of conduct” being compiled; - the split within the European Union between the option of “direct Community response “ to the FSI (hoped for by Paris) and of an “adjustment” to the multilateral code of conduct (the solution thought to be more appropriate by London; - the position of Berlin, which seems to be preparing a reform of the country’s internal legislation (the “Foreign Business Act”) to protect German societies from acquisitions by foreign States through sovereign investments (40); - the “clear declarations” of interest expressed with regard to a hypothetical institution of a national Sovereign Fund, by the Minister of the French Economy, Christine Lagarde, who demonstrated interest in a FSI hypothesis, with initial endowment taken from the State fund “Caisse des Dépôts et Consignations” (41); - Ambassador John Bruton, representative of the EU in the United States expressed his personal hope of the creation, in Europe, of a verification mechanism of the American type of “Committee on Foreign Investments in the United States” CFIUS. The attitude towards the FSI, in the United States is of great diffidence and uniformly substantial both at government and congressional levels. The Undersecretary of the Treasury Department, David McCormick, in his testimony of the 5th of March, before the Under-committee on Financial Services of the American House of Represents, explained how “….) the protectionist sentiments derive, to a large extent, from the absence of information and comprehension relative to the Sovereign Funds of Investment (…). Better information and comprehension of both sides of the investment is, therefore, necessary”. There already exists, in the United States, a thorough and binding verification mechanism of the direct foreign investments, represented by the CFIUS (42). Notwithstanding this, within the Congress, the New York Senator, Charles Schumer, has pushed forward the study of a provision of law to improve the transparency of the FSI and ensure that, through these, “non-economic motivations” can be pursued. Contextually, a bi-partisan taskforce has also been instituted, (coordinated by the House Financial Services Committee) to study the effects of the sovereign investments on the United States’ economy and national security. The principal anxiety of Congress is that the multilateral “first best” (IMF/OCSE) can fail. In this case, a legislation that can represent a bilateral “second best” would be hypothesized (43). The preoccupation of reaching an “agreed” position on the part of the G7, and the search for a negotiation with the controller Governments of the FSI has created a perception of growing “hostility” towards Europe a and the United States, also in the emerging Countries. In the Arab world, the declarations of the President of Dubai World, Sultan Ahmed Bin Sulayem, are representative of this perception. He admonished Europe on the risks of a deviation of the investments caused by an increase in the rigidity of the regulations for the FSI (44). Sulayem has also denied that the FSI can be subjected to an excessive political interference by their Governments(45). As far as Peking is concerned, in the last quarterly Report, the Chinese Central Bank affirmed “the greater intensity of the monitoring, by the United States and Europe, of the investments of Sovereign Funds of emerging Countries will be the cause of new commercial friction and negative effects on the global economy”(46). Analogously, the Chinese Foreign Minister, Yang Jiechi, hoped that “all the principal actors of the international system can have a voice in the creation of rules to apply in the investments operated through Sovereign Funds of Investments”. (47). In Moscow, Vladimir Putin has more than once hoped for “a major protection of the Russian economic interests in the world”(48). On the occasion of the announcement (1st February, 2008) of the Russian FSI, the National Welfare Fund (NWF), the Minister of Finance spoke of initial “prudent management” of the fund, excluding aggressive strategies(49). With the aim of showing transparency and clarity in its investment policy, 15 objectives of its own next investments were made public. (50). Hard solution (national) This alternative holds that the “intrinsic” interference in the sovereign investments must be managed at a national level and in a manner which is not different from any other “investment vehicle”. The opinion that the threats to the national economic security of the FSI have been highly overestimated compared to those of other instruments of investment, has many supporters. According to this statement, to see the “tree” (i.e. the FSI) we have lost sight of the “wood” (i.e.the non-regulated part of the fund management industry). According to the ex-Undersecretary to the United States Treasury, Randal Quarles (51), the Sovereign Funds represent a “moderate force”, in terms of dimensions and influence (with their 3 million billion dollars), compared to, for example, the United States Pension Fund, whose assets amount to, according to Quarles, an overall 53 million billion dollars (52). The criticism of Quarles is born out in the fact that the mixtures between Sovereign Funds and Pension Funds are becoming always stronger. For example, if one considers California as a national economy, with its pension funds taken together, CalPERS (259 billion dollars in assets) and CalST and RS (169 billion dollars), it would have the second largest Sovereign Fund in the world. The preoccupation increases with news that the Canada Pension Plan Investment Board (CPPIB, the capital of which at 31.12.2007, was evaluated at 120.4 Billion dollars) has announced the opening of an office in Hong Kong to study opportunities of investment in Asia (China, Hong Kong, Japan, South Korea and Taiwan) in the private equity and real estate (53) sectors. But more important is the fact that also China has begun to consider the ambit of the Pension Funds in the sense, of furnishing a different image to its sovereign investments (54)and, of refinancing its domestic pension system (55). In support of the idea of a general regulated approach (“hard” solution, instead of explicitely addressing the FSI), Stephen Jen of Morgan Stanley has illustrated, in a diagrammatic way, the differences existing between Sovereign Funds and other instruments of investment (such as public and private pension funds, official reserves and the hedge funds).
capital” to carry out particular transactions. In other cases, the leverage is even higher.
Graft 2 refers to the propensity to risk and to the investment horizon. In this context, the FSI are characterized for a medium-long horizon with a medium propensity to risk. The medium-long investment horizon is a positive characteristic of the FSI, insofar as privileging non-speculative behaviour, these investments have a stabilizer function of the markets. The already discussed choice of many FSI. i.e. not to actively participate in the governance of participate societies, has been seen as an indicator of medium-long period behaviour. In reality, the acquisition of shares with limited rights could conceal other considerations. An example is constituted by the acquisition by China Investment Corporation (CIC), in June of 2007, of 9.3% of Blackstone, United States private equity fund, with an investment equal to 3 billion dollars. The executive of CIC underlined both the long-term character of the investment (57) , and the exclusion of proposals in the sharing of the governance of Blackstone,(for the characteristics of the quotas of capital of the CIC with
ral islands of Abu Dhabi) where the circuit will be constructed. Seen in these terms, it is difficult to fear the Sovereign Funds. The problem arises when the investments are realized within the national territory and, perhaps, in technologically advanced sectors. Until today, Italy has not been held very attractive to start up important investments, in consideration also of the political instability which characterizes us. And there is nothing to rejoice in with regard to certain considerations such as those of Alessandro Daffina of Rothschild Italia, who, in an interview with the Sole 24 Ore newspaper, to the question “shall we see the arrival of Arab sovereign funds also in Italy?” answered:“I doubt it”. In the same way as I do not see significant foreign investments in Italy. The Country--system, unfortunately, is decreasingly attractive. The excessive bureaucracy and the slowness of the justice system is burdensome. But above all, the major deterrent is the elevated taxation. (…) The result is that always more foreign companies refuse to inv est in Italy” (60) Apart from the non-economic obstacles, Italy possesses a high technological capacity (in the creation of patents and innovative solutions) and a logistics network of great value (not only from an economic point of view, but also military) for any foreign Country which necessitates ‘transport junctions’ in the Mediterranean Basin.
An important component of the national patrimony is also represented by the ‘intangible capital’ of its historical and cultural assets: fashion and design; the scenery and the tourist and hotel industry; the agricultural and food traditions. In a recent interview, Gianfranco Imperatori, banker and Secretary-general of Civita (61), has quantified the artistic, cultural and scenic patrimony of Italy in terms of GDP, as more than 100 Billion Euro. (62) Conclusion In a world sub-divided between industrialized and emerging Countries, the search for cooperative solutions to the problem of interference caused by sovereign investments is a process in course only by the industrialized Countries. On the contrary, the position of the emerging Countries is that of “waiting on the sidelines” and is critical. The questions on the risks and on the opportunities furnished by the FSI represent reasons for discussion in the principal multilateral financial forums (the International Monetary Fund, the World Bank, the European Union, World Organization of Commerce), in the European and United States’ governmental and financial circles, as well as between share-holder communities or in the trade unions (63). In the relation between sovereign funds and national sovereignty, the alternatives for managing the interference in the perspective of global and national governance have been identified as follows: - a set of international ‘best practices’ (“soft” solution); - in the improvement of regulatory measures already existing or in the introduction of others (“hard” solution). Of the two alternatives, the “soft” solution requires an acceptance from the emerging Countries (in their voluntary adoption of the “best practices” defined at IMF and OCSE) Vice versa, the “hard” solution is unilateral and is consolidated in an internal activity of “calibration” of the existing regulatory measures to the new dynamics of financial globalization. The necessity of the latter adjustment (“hard” solution) represents a highly prominent matter, also for the FSI. In fact, when the phenomenon of the sovereign investments emerged, it coincided with a serious crisis on the world financial markets – not only a crisis of cash flow, but above all, of credit and solvency. The “rescues” operated by the FSI on the international credit market to partial coverage of losses caused by the insolvency of American subprime loans, on the one side (as already mentioned), set in motion a “financial dependence of these firms on the FSI (and consequently, on the Governments that managed them), but on the other side, they “infected” the purses of the Sovereign Funds, increasing the risk levels in their investments. In fact, the characteristics of the present financial crisis go back to the existence, on the market, of the international credit of a considerable “shadow financial system” (Roubini, 2008) composed of non-banking financial institutions (principally, investment banks, hedge funds, Special Investment Vehicles – SIVs – money market funds). This “shadow” financial system presents many similarities to the banking system (high leverage, preference towards the short-term loan and the utilization at medium/long term, risk of credit and market), but unlike banks, the institutions involved cannot have access – in case of contingent necessity – to the refinancing of the “last resort lender” (represented by the Central Bank) because the non-banking intermediaries do not follow the precautions requested by the official credit system. This implies that the risk of liquidity (caused by the potential incapacity to pay out, with the stock of liabilities at short term maintained in the portfolio, to a demand of withdrawal of all entrusted assets, formulated in the same moment) could determine default situations which could reverberate in firms and institutions connected to the non-banking intermediaries due to transactions of considerable importance . In the presence of “conflicts of interest”, caused by multiple management of managers dedicated, contemporaneously, to FSI assets and to individual or institutional portfolios (national or foreign): also for the Sovereign Funds, risk of losses can come to the surface, and, in general, risks of qualitative deterioration of their own portfolios (hidden information, or ‘adverse selection’; hidden actions, or ‘moral hazards’; increase of transaction costs caused by an excessive structuration of the consultancy functions; scarcity of experts due to a progressively growing operative complexity; corruption and ‘inside trading’). The influence of the two alternatives, “soft and “hard”, on the potential conflict of interests is different because the risks on which the two solutions concentrate are different: - the “soft” alternative concerns a risk that is exogenous to the investment (the foreign wish to interfere in sensitive sectors of the economy of the investor-Country), which is very difficult to put into action in a really “hidden” way, thanks to those “institutional” mechanisms typical of the protection of interests and of the national security (which are mainly constituted by the Intelligence); - the “hard” alternative concerns a risk that is endogenous to the investment (the risk of conflict of interests inherent in the deterioration of the “agency mechanism”, maintained extremely confidential between the parties of the transaction. In the “soft” solution, there would be a “mere endeavour” (in the case foreseen by the multilateral “code of conduct”) to communicate information on the management intermediary, so as to allow the various Authorities of national vigilance to evaluate the opportuneness of “monitoring” the investment. With the “hard” solution, the endeavour would become an obligation imposed by internal regulations (national, Community or international). The greatest necessity of a “hard” alternative is represented by the dangerousness of the endogenous risk, when this is “accepted” by the administrators of the FSI in the pursuit of objectives exogenous to the investment for which the investor-States could also make use of “connivance” on the part of the intermediaries involved at various points in the transactions. It is opportune that also Italy should proceed – choosing one of the two indicated positions – to a pondered evaluation on the modalities through which the risk of interference, inherent in the sovereign investments, can be contained, without resorting to protectionist instruments. This, with the aim of having to face only the medium-long term effects of the phenomenon. In fact, a significant number of the financial sectors of the industrialized Countries are passing into the hands of societies and Governments of the emerging Countries. In the next few years, this “transfer of economic power” will correspond to a “transfer of political and diplomatic power”, to which we shall have to report, inevitably.
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(1) GIC and ING 593 million dollars Italian property buy, Reuters, 5.2.2008
(2)Relative to the acquisition, the President of GIC, Seek Ngee Huat, stated how: “in the area of the retail sector, real estate investments, like that of the commercial centre of Rome-east, are difficult to find in Italy . It is a very promising new asset with all the key characteristics : position, operative and management potential - characteristics which we seek in an investment opportunity. We are confident in its long-term growth potential and believe it is an excellent addition to our investment portfolio in the retail field” (3) Singapore to buy stake in Sintonia holding, Reuters, 11.3.2008 (4) Sintonia has shares in Atlantia, Adr, Sagat and Telco, this last holder of 24.5% of Telecom Italia. (5) This sensitivity might not exist in the Investor-State. In such a case, an Investor-State could take over – through its sovereign fund – the property of an important world pharmaceutical group and impose a change of the investment programmes to the detriment of the interests (employment or development) of the objective-State – or a Government investor could ask favourable clauses for the investments of its own Sovereign Fund as a compensation for sustaining a certain peace process (Iraq, Palestinian territories or other sensitive areas). (6)A interesting reference : Robert M. Kimmitt. “Public Footprints in Private Markets” in Foreign Affairs. Vol. 87. No.1. January-February, 2008. (7)The first of such funds was instituted in 1956, to administer the income from phosphate deposits of Great Britain in the colony of the archipelagos of the Gilbert and Elise Islands, in 1979, later becoming the State of Kiribati. (8)The absorption is on a scale equal to the aggregate cost of the private and public sectors. (9) The data of the Table is taken from Truman (2007) Lyons (2007) and Deutsche Bank (2007) besides Press updatings. (10) The ADIA administers the most important Sovereign Funds in the world. The President of the Fund is Sheik Khalifa bin Zayd Al Nayhan, President of the Arab Emirates and Governor of Abu Dhabi. The policies of management have been entrusted, since the 80’s, to Jean Paul Villain, who comes from BNP Paribas. (11)The Norwegian Government Pension Fund is managed by the “Norges Bank Investment Management” (NBIM). The Minister of Finance is responsible for the management of the Fund and has delegated the operative management to NBIM. The capital is invested in non-Norwegian financial tools, in 42 emerging and developed stock markets and in 3l currencies for the tools at fixed income. NBIM manages the Fund also with the auxiliary of outside managers. (12)The Central Hujin Investment Corporation, which controls the three major Chinese banks, is the owner of the China Investment Corporation CIC. (13) See Johnson (2007 (14) The known shares of Temasek are the 19% in Standard Chartered Plc (bank of business affairs in London, particularly active in Asia), the 54% of Singtel, the 75% of Asia Mobile Holdings, the 100% of Mediacorp, the 49% of Shin Telecommunications, the 2.1% of Barclays, the 9.9% of Merrill Lynch, the 68% of Neptune Orient Lines, the 27.8% of Basslink, and the 42% of Australand. (15)Among the largest shares of the QIA is the 15% of the London Stock Exchange together with Dubai Stock Exchange 50% controlled by the Investment Corporation of Dubai) as well as the 7% of the French Lagardere, one of the principle share holders of the European Consortium EADS. Furthermore, in February, 2008, the QIA bought a little less than 2% in Credit Suisse, consolidating a privileged relation with the Helvetian Institute of Credit which foresees an investment between 10 and 15 billion dollars within the next two years. Recently, financial rumours have attributed to QIA also the purchase of 50 million shares of the Royal Bank of Scotland (RBS). (16)Istithmar, through the International Hotel Investment, controls the Metropole of London, the 2.7% of the Standard Chartered Plc (with an investment equal to a billion dollars) as well as the 3% of the Hedge Fund GLG Partners. (17)Its portfolio comprises shares of Emirates Airlines, Dubai Aluminum, Emirates NBD, Dubai Stock Exchange, Shuaa Capital, Dubai Islamic Bank, Emaar, Dubai World Trade Center and Jebel Ali Free Zone. (18)Dubai International Capital LLC, subsidiary of Dubai Holdings dedicated to international investment, holds an unknown quota of Sony (inferior to 5%, insomuch as it has not been communicated to the Japanese Government, the 9.9% of the fifth most important hedge fund in the world, the American Och-Ziff Capital Management Group (investment equal to 1,1billion dollars) an unknown quota in the capital of the Hong Kong and Shanghai Banking Corporation (HSBC) Holdings Plc and the 3.12% of EADS (share bought after a mega made by the Emirates carrier for airbus aircrafts. (19) Dubai World holds 9.5% of the American MGM Mirage, the second most important society in the world in the entertainment sector. In addition one of its subsidiaries, the Limitless, has concluded an agreement for a joint-venture with the Russian RDI Group to develop a city of 12 thousand inhabitants near Moscow. (20) The shares investment of the Chinese Development Bank (CDB in part, controlled by the China Investment Corporation) and of Temasek in Barclays, represents an acquisition of a strategic type, given the present of the British Bank in London, New York and in Asia. (21) This expression refers to the cases in which the conditions of optimum ‘parettiano’ are not satisfied. (22) 80% of the assets of the largest Sovereign Fund in the world, the Emirate ADIA, are handled by outside managers. In the summer of 2006, and Inside Division was created, which takes care of “stock selection” strategies similar to those practiced by the hedge funds and of the principal societies of asset management, more oriented towards a major level of leverage (to increase dimension and influence). The portfolio of the ADIA Fund includes, among others, shares in Citigroup, Toll Brothers EFG Hermes (one of the largest Arab investment banks) and the Tunisian Banque de Tunisie e des Emirates. (23)The New York law firm of Barrie Covit, John Walker and Thomas Bell will guide the “Simpson- Thacher team” which will take care of the consultancy for JC Flowers, while the New York law firm, Christine Spillane, Rodgin Cohen , and Chun Wei will guide the “ Sullivan & Cromwell team” in furnishing consultancy to CIC. (24)A participative societal form that provides for a limited personal responsibility in relation to the debts of a firm is defined “limited partnership”. This corresponds only to the attitude assumed by the passive investors. In contrast to this is a form of unlimited personal responsibility, defined as “General Partnership”. (25) Examples could be the absence of the Government of Singapore Investment Corporation (GIC) in the Administration Council of UBS, of Temasek Holdings, in the AC, of Standard Chartered of the Abu Dhabi Investment Authority in the AC, of Citigroup, of Gazprom, European Aeronautics Defence & Space (EADS) in the AC, and so on. (26)Object of same, held in November, 2007, was “Sovereign Wealth Fund Acquisitions and other Foreign Government Investments in the United States: Assessing the Economic and National Security Implications”. (27)“ (…) the risk that governments will mismanage their international investments to their own economic and financial detriment and with negative consequences for the global economic and financial systems”. (28) “(…) the risk that governments will manage those investments in pursuit of political or economic power objectives – for example, promoting state-owned or state-controlled national champions to global champions.” and “(…) the risk of an outbreak of financial protectionism in host countries, in anticipation of the pursuit of political or economic objectives by the owners of the investments or in response to the actual actions of those government”. (29) “(…) the risk that in their management of their international assets, governments will contribute to market turmoil and uncertainty” and “(…) the risks of conflicts of interest for government owners of the international assets and the domestic or foreign institutional or individual managers of those assets with an associated potential for corruption”. (30) See Scheer, 2008. (31) The investment in Sharia’a-compliant financial instruments is structured exclusively with respect for the Islamic Law. The correctness of the transactions are certified by special Sharia’a Boards, created within both the Islamic financial institutions and within the Western financial institutions that intend to operate in the Islamic finance. (32) The China Investment Corporation (CIC) has employed managers specialized in the bond market in the management of capital in fixed-income products. Among the experience requirements, at last six years in the management of fixed-income assets, and a portfolio at least equal to 15 billion dollars is necessary. (33) Felix Salmon (www.portfolio.com) has proposed an example of the ineffectiveness of legislation intended for only Sovereign Funds: If I open a hedge fund in London or in Connecticut , this is a private fund and I am obliged, on the basis of the legislation in force, to make little information public. If I sell 95% of my capital to a Sovereign Fund, and through me this S.F. invests 50 billion dollars, at this point, the hedge fund is a sovereign fund in all senses but name, and re-enters into the limited legislation proposed for the hedges. (34)An excerpt from paragraph 11, reads that “ such restrictions must be applied to a very limited number of cases, referring, principally to the protection of the national security. The general principles to be followed in these cases concern the non-discrimination, the transparency and the predictability. In each case, the restrictive measures must not exceed the scope, the intensity and necessary duration”. (35) In his intervention in Oslo, Barroso proposed a “common approach” at EC level, avoiding distortions in the single market with “national” answers to the FSI phenomenon. Amendments to the legislation in force in the Union are not foreseen, inasmuch as the requirement of transparency is on a voluntary basis, but neither will it be allowed to the non-European Funds to act with unclear modalities, or to conduct geopolitical strategies to the detriment of Europe. The “cooperation effort” must be realized between beneficiary Countries, Sovereign Funds and their sponsor Countries to establish a set of principles of transparency, reliability and in compliance with regulations. Barroso made as an example the Sovereign Fund of Norway, indicated as an example of transparency, governance and trustworthiness. (36)The Community position refuses a mechanism of screening of the type of the American “Committee of Foreign Investments of the United States” (CFIUS),or the introduction of golden shares to protect important firms from hostile bids. The Community approach, as it emerged from the European Council, concerns: a) the commitment to maintain an investment environment open, both in the EU and elsewhere, including 3rd World Countries in which the FSI operate; b) support to multilateral activities in international ambit (IMF, OCSE – Organization for Cooperation and Economic Development) and use, at Community and national level, of existing instruments; c) respect of the obligations deriving from the EU Treaty and of the international agreements, (as for, example, the WTO); d) reciprocity and transparency. Among the requested standards of governance are clarity in the distributions of responsibilities, definition of the policy of investment and the assumption of the risks by the Sovereign Fund, transparency in relations between the FSI and the Government Authority of the Investor-State and in the principles of governance within the FSI. (37) A preliminary rough draft of the “best practices” should be ready by March, 2008, and the final formulation should be presented by the end of 2008. (38) To his own question “What’s the difference between a state-owned enterprise and a sovereign wealth fund?” formulated with reference to the dependence of the EU on Russia in the area of energy provision, McCreevy left the reflection open. However, to this question, we can add another: how will the situation change, in the case of State-controlled societies, with the presence of important private shares, but, however, of minority interest? (39)The new law in elaboration would allow foreign societies to acquire a maximum quota of 25% in important German societies for the national security or active in the strategic infrastructures. (40) Se Fortson, 2008, So as to clarify the role of the FSI in the financial markets and what governmental strategies to adopt, the same Minister, Lagarde, has commissioned Alain Demarolle, Economic Consultant to the previous Prime Minister, Dominique Villepin, to carry out a study on the subject. The delivery of the first draft of the report should be ready by the beginning of next April, while the final version should be delivered at the beginning of next May. (41) Since 1988, the process of revision of the foreign investments has been based on the Exon-Florio Amendment (EFA) of the Defence Production Act of 1950, which authorized the President of the United States to prohibit or suspend foreign acquisition of United States societies if considered to be a credible threat to the national security. Since 2007, the Foreign Investment and National Security Act (FINSA) has been in force, which provides for a verification mechanism by the SFIUS , in accordance to which the Committee, presided over by the Secretary to the Treasury Department, his recommendation once elaborated, presents it to the President for decisions in the matter. (42)Of importance is the agreement of the 20th March last, between the United States’ Treasury and the Governments of Singapore and Abu Dhabi, of a set of principles relative to the sovereign investments, emphasizing the characteristics of informative transparency, non-politicization and competitiveness. See Dennis Moore, US Treasury, Singapore, Abu Dhabi agree on sovereign wealth fund policies, Thomson Financial News, 20.3.2008. (43) “If someone comes with regulations that make it difficult for someone from certain geographical locations to invest in Europe or the West, people will take their investment somewhere else”. (44) “If you put a politician in charge of an investment, believe me, that investment fund will not last for a very long time”. (45)The recently failed agreement of the cession of 3Com to Bain Capital Partners and Huawei Technologies (failed due to the cause of the role of 3Com as supplier of informatics technologies to the United States Army) has accentuated the clash between Peking and Washington. Following negative rumours perceived at the CFIUS, 3Com preferred to withdraw the request for approval by the Committee, rather than be formally rejected. In the original agreement, Bain would have bought 3Com and then would have ceded 15.3% to Huawei Technologiese. (46)Jiechi also added “It’s in everyone interests to make good use of sovereign funds in line with international financial rules. But of course, the rules of games should be set up by everyone involved.” See An Lu, “Rules of games for sovereign wealth funds should be made by all”. 12.3. 2008. (http://news.xinhuanet.com/english/2008-03/12/content_7772637.htm) (47)Even in the face of proposals of cautious administration, the statements of Dmitri Medvedev to the annual Congress of the Russian Industrial and Entrepreneurs (31st January, 2008, were not mild in tone,(“you must acquire control of companies abroad, like many Countries in the world are presently doing – in the first place,, China”). S ee Vladmir Sapozhnikov, Medvedev to the Russian entrepreneurs: “Invest abroad as the Chinese do” Sole 24 ore, 1st February, 2008. (48) On the 31st January last, the Russian Stabilization Fund was divided into two new funds, the Reserve Fund and the market. The initial endowment of the new Reserve Fund is equal to 125.4 billion dollars, while the new National Welfare Fund has an initial endowment of 32 billion dollars. Some delegation in matters of ‘asset management’ of the NWF will be transferred to the Russian Central Bank, in particular, relative to the Stock Market and from the derived instruments. The period of outsourcing in matters of sovereign assets management is held to be fundamental in the creation of an internal “expertise in the management of risks” without having to resort to outside managers. (49) The list released by the Russian Minister of Finance (in charge of the fund) comprises the British “Network Rail MTN Finance Plc”, the German “Kreditanstalt furWeideraufbau Bankengruppe” and “Landwirtschaftliche Rentenbank” the Iberian “Instituo de Credito Oficial”(ICO), the Austrian “Autobahnen un Schnellstrassen FinanzierungsAG” (ASFINAG) and “Oesterreichische Kontrollbank Actiengesellschaft” (OGK), the Canadian ”Export Development Canada” (EDC), the Dutch “Bank Nederlanse Gemeenten”(BNG), the United States “Federal Home Loan Banks”(FHL Banks) and Federal Farm Credit Banks” (FFCB), the French “Dexia Group” ”Caisse d’Amoretissement de la Dette Sociale” (CADES), “Credit Foncier de Fance” (CFF), Ref. Russia confirms list for Wealth Funds Investment. Agency Reuter; put on www.guardian.co.uk of 21.2.2008. (50)Ref: Rummell, 2008 (51)A bill of law under examination in California (AB 1967) has the objective of blocking the investment activities of the “California Public Employees’ Retirement System” CalPERS and of the “California State Teachers’ Retirement System”, CALST and RS, in private equity societies held completely or partially by Sovereign Fund of Investment. The CALST and RS has estimated that lost earnings deriving from the approval of this provision could be equal to 1.5 billion dollars in the next five years. (52) After the hearing of last March 5, at two sub-committees of Congress, David Denison, President and Administrator of the CPPIB, invited the United States politicians to examine the structural characteristics and the model of governance which distinguishes the CPPIB from a Sovereign Fund. Denison affirmed that the CPPIB was not a sovereign fund insomuch as it does not manage governmental assets and is not controlled by a Government. The CPPIB has also raised informative transparency standards similar to those of the public societies. (53) According to an exponent of the Chinese Academy of Social Sciences of Peking (cited in Zhu and Lin, 2008) the need to constitute a Sovereign Pension Fund lies mainly in the wish to contain the criticism of its own present sovereign fund (people in the Western Countries see the Sovereign Funds of investment as if they were aliens or monsters, but if you make a pension fund, it is seen as if it were an “angel”). (54)At the end of 2007, the existing “ China National Social Security Fund” (NSSF)”lender of last resort” for the Chinese pension schemes, had assets of 72.53 Billion, including overseas share investments equal to 1.66 Billion dollars. (55) Contrary to the international reserves (which are by definition 100% in foreign currency, and do not have explicitly connected liabilities) it is not necessary that the FSI be 100% in foreign currency even though, for the greater part, they should be. (56) The ‘lock-up’ of the participation (or rather, the period in which one cannot ask for the reimbursement of the held quotas was fixed at 4 years, but the Blackstone management has declared that it will maintain the quotas invested for 5-7 years. (57) See Savona, 2008 (58)Mubadala Development Company is a society entirely controlled by the Government of Abu Dhabi. (59)Alessandro Graziani: “The Challenge of Agreement and Generalities” (4.1.2008) (60) ‘Civita’ www.civita.it is a non-profit organization founded by a group of firms, public research organizations and universities. They were originally united to handle the problem of the deterioration of Civita of Bagnoregio, ancient village of Upper Lazio. Today, Civita , with 160 associated companies, is strongly committed, at a national level, to the “promotion of culture”, through research, conventions, publications and projects. (61) See Anna Di Martino, 101 Billion (and we didn’t know we had it) Il Mondo newspaper, 7.3.2008. Second Article (Italian Museum industry counts 470 thousand employed (2.l% of the total labour force) who, in 2006, directly produced 41 Billion of the GDP. Then there is the GDP generated by the valorisation of the patrimony, starting with the cultural tourism. According to ENIT (Italian National Tourist Authority) the artistic objective comprises 85% Japanese tourists, 80% American, Spanish and Portuguese, 70% Indians, 60% Dutch and Scandinavian, and 52% Swiss and French. The turnover of cultural tourism in 2006 was equal to 28 Billion of the GDP. The total, 69 Billion Euro represents an incidence of 4.8% on the total GDP. According to the estimate of Civita, in a period of a few years, the manifesting of an action at 360° could increase the contribution (direct or indirect) of the GDP up to 67 Billion Euro, and the contribution tied to cultural tourism up to 34 Billion for a total of 101 Billion Euro, and an incidence on the GDP of 6.5%. (62)One of the principal American trade unions, the “Service Employees International Union” reacted against the cession of the international consultancy society, Booz, Allen & Hamilton, of the unit dedicated to the function of “government t advisory” to the Carlyle Group. The Union .- considering the negotiation as a threat to American national security because of the presence of Emirate Mubadala funds in the capital of Carlyle Group (the Booz, Allen division had received circa 1.2 Billion dollars in contracts with the United States Defence Department in 2007) - claimed a political intervention to suspend the transaction. (63) In the recent case of United States subprime loans, the crisis has been transmitted to European banks, due to certain banks involved in the concession of credit to subprime clientele, in an indirect manner (or rather, through the instruments of the ‘shadow financial system’). The losses recorded by these banks were proportional to the increase of the taxes of default of the above-mentioned category of debtors. A further group of non-banking intermediaries, who had underwritten structured securities beneath which included also subprime loans, has to proceed to devaluation of their own assets. In general, the tensions determined on the monetary markets due to the uncertainty over the effective amount of the losses and their distribution have led to the scarcity of funds and increase of the relative costs. |