FT : Setting rules for sovereign wealth

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February 18 2008 18:54

The timing looks suspicious. Australia may well have been looking at how to deal with sovereign wealth funds before this month’s $14bn dawn raid by the Chinese state-owned mining company, Chinalco, on shares in Rio Tinto, the Anglo-Australian mining group. But the six principles set out by Canberra for subjecting state-controlled investors to greater scrutiny are as much a result of its desire to protect strategic assets as they are a model of corporate governance.

The proposed screening programme will look at whether a sovereign fund investing in an Australian company operates at arm’s length from its government. Financing and governance arrangements will be examined too.
The emergence of sovereign wealth funds, some controlling the vast foreign exchange reserves of oil-rich Middle East nations, has been beneficial for the target companies in which they have invested. US banks suffering the effects of the global credit squeeze have been able to tap desperately needed capital. Many funds, moreover, are sophisticated, long-term investors, less sensitive than private equity and hedge funds to volatility in financial markets.

But the political influence these funds could wield, if they acquired controlling interests, raises valid concerns. Especially when so few funds publish even management structures or investment objectives.

For Australia, whose economic boom is founded on strong Asian demand for its natural resources, this lack of transparency is a problem. China is one of Rio’s biggest customers. It has every right to invest in an industry on which it depends. Equally, Canberra may be justified in raising pressure on the Chinese to be more open. But it is also in Australia’s interest to be seen to behave fairly.
In drawing up individual rules for dealing with sovereign funds, the risk for recipient nations is that they lose the goodwill of investing countries. A much better course is to draw up a global code of conduct.

Work has started on this. The International Monetary Fund has already asked Singapore, Norway and Abu Dhabi to come up with disclosure benchmarks for sovereign wealth funds. Levels of transparency vary. Abu Dhabi’s fund does not disclose even the amount of assets it controls, let alone how it is run. Norway’s fund has exemplary disclosure standards.

If adopted widely, the Norwegian approach could eliminate the need for national regulation and act as a stabilising force in financial markets. It promises better results than a descent into protectionism.


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FT : Australia to step up scrutinity of wealth funds

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Financial Times, Tuesday February 19, 2008
Peter Smith, in Sidney with additional reporting by Henry Sender in New York.

Australia is to step up its scrutinity of investments made by sovereign wealth funds in what is believed to be the first case of a coutry taking concrete action to vet the activities of increasingly prominent investors.

The government published six principles it said were intended to "enhance transparency of Australia's foreign investment screening regime".

The country will in future consider wether "an investor's operations are independent from the relevant foreign government". In keeping with that principle, its Foreign Investment Review Board will consider whether prospective investors operate at arm's length from the government.

This couldprove challenging for many sovereign wealth funds. With the notable exception of Kuwait, most Middle Eastern sovereign funds receive allocations of money and make investments at the behest of ruling families. There is little distinction between these families' private wealth and public money.

Sovereign wealth funds, large governments investment vehicles, have been in existence for decades, but have attracted attention after a string of high profile investments in banks on both sides of the Atlantic.

In Australia, a company owned by Aluminium Corporation of China, the state-owned aluminium group, and Alcoa of the US, recently spent $14bn to buy 9% of Rio Tinto, the Anglo-Australian mining group that has rejected a hostile $147bn offer from rival BHP Billiton.

Wayne Swan, Australia's treasurer, said the rules were not aimed at China. A top Chinese official last mounth said the developed world should not discriminate against funds from developing nations or subject them to "financial protectionism".

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