What is a Sovereign Wealth Fund (SWF)?
According to Investopedia, a sovereign wealth fund (SWF) is a state-owned investment fund or entity which comprises of pools of money derived from a country’s reserves. Reserves are funds set aside for investment to benefit the country’s economy and its citizens. The funding for an SWF comes from central bank reserves which accumulate because of budget and trade surpluses. This money is then invested in areas of growth like property, development projects, bonds or shares.
The amount of money in an SWF is substantial. According to the World Economic Forum, Norway’s sovereign wealth fund is the largest in the world exceeding US$1 trillion, while the UAE’s fund is worth about US$683 billion.
Why have SWF’s been created?
SWF’s have mostly been created by countries dependent on earnings from one commodity like oil and gas. The main reason cited for creating SWF’s is the need to diversify the revenue streams and to reduce vulnerability to price variations. All the Middle Eastern SWF’s and the Norwegian SWF fall under this category. But nowadays there has been a proliferation of SWF’s from countries like China, Mexico, and Canada, etc. that are not based on commodities. Pension funds are also considered as SWFs.
Understanding the scale of investment
The scale of investment is best understood by examining the big-ticket investments of Middle Eastern SWF’s in London. An article by Antonia Filmer in the Sunday Guardian Live, titled “Qatar is the largest owner of London Property” lists some of them. The Qatar Investment Authority’s (QIA’s) properties include the London Olympic Village, the Shard (the tallest building in London), Claridges Hotel, the Park Lane Inter-Continental Hotel, Harrods (the world-renowned department store) and the site of Chelsea Barracks. Qatar also holds 20% of the London Stock Exchange.
The Kuwaiti properties include City Airport and City Hall, the headquarters of the London Mayor.
Moving out of the UK, QIA has stakes in the Russian oil behemoth Rosneft and even owns the famous Paris St. Germain football team. UAE is not far behind in football- it owns the English club, Manchester City.
Growth of SWF’s over the years
SWF’s have grown in a big way from the creation of Saudi Arabia’s SAMA holdings in the 1960s to today’s $1 trillion SWF of Norway which has $667 billion shares in over 9000 companies worldwide.
SWF’s were earlier investing primarily in safe places like US treasury bonds. They continue to do so, but nowadays they have become more aggressive due to the pressure for increased returns. A good example of this is the case of pension funds in countries with an ageing population like Japan. Due to the reducing working-age population and growing burden on the state for providing pensions, there is pressure on the pension fund to generate more returns which has led to increased investment in private equity.
Fears associated with SWF’s
Chart created by author
There are fears regarding the actual motives of the SWFs. Doubts have been raised as to whether their investments are just for the purpose of wealth creation or for stock manipulation and geopolitical benefits for their own countries. The lack of transparency and a corporate governance structure is the main reason for this. However, Badr Al Sa’ad, the Managing Director of the Kuwait Investment Authority dismisses these concerns by saying, “There is a lot of worry about sovereign wealth funds, but all of them are assumptions, they are not about real cases.” (as stated in an article in KeepCalmTalkLaw UK titled, “Striking a balance between sovereign wealth funds and national security”)
Breeding grounds of Corruption
SWF management can lead to corruption as seen in the 1MDB Malaysia SWF scam in which some Goldman Sachs executives are said to have paid bribes to get the rights to handle investments of 1MDB in a way that the former Malaysian PM Najib Razak was able to get $600-700 million of the fund into his personal accounts.
There can be a sudden drop in stock markets if the owner countries decide to dip into SWF reserves because of a lack of funds in the domestic economy due to a variety of reasons, like say the falling prices of oil and gas. As SWF’s are like institutional investors who withdraw large amounts in one go, there can be a stock market crash due to a negative ripple effect on smaller investors who also start selling their shares.
Threat to national security
Sovereign wealth funds, in general, are said to lack transparency and a corporate governance structure. It is feared that by buying up shares of companies they can get access to sensitive technology, national secrets, gain control of industries of strategic importance and an ability to influence governments of the host countries. The host country’s capacity to act will be reduced if many of its key assets are owned by foreign SWF’s.
A good example was the battle for control of a US oil producing company between a US corporation and the China National Offshore Oil Corporation (CNOOC). Ultimately, the US Congress had to intervene to resolve the dispute.
Human rights concerns
SWF owning countries are mostly Middle Eastern regimes that have scant respect for human rights. Therefore, certain human rights activists say that western countries are in a way complicit in these violations by accepting these funds just like the case of ‘blood diamonds’ and produce involving child labour. The irony is that the worst human rights violators are making huge gains by investing in countries that call themselves as the ‘champions of human rights.’ Saudi Arabia which till recently did not allow women to drive and enforces laws that have been called ‘draconian’ had huge investments in Canadian companies till the time Canadian Embassy in Saudi Arabia posted a tweet calling for the immediate release of women’s rights activists Samar Badawi and Nassimah al-Sadah. This tweet calling out Saudi Arabia for its human rights record is said to have irked the Saudis so much that they snapped diplomatic ties with Canada.
Another example is that of African dictators buying prime properties in Paris by siphoning off money that had come as an aid to lift their countries out of poverty. These can be considered as ‘personal sovereign wealth funds’ for the purpose of the argument. Peter Allen writes in Express UK that Ali Bongo, President of Gabon, has at least 39 properties, and Denis Sassou-Nguesso, President of the Republic of the Congo, has 16 in Paris. Bashar al Assad, the President of Syria who has been accused of killing his own citizens in a chemical attack and deposed dictators like Ben Ali of Tunisia and Hosni Mubarak of Egypt are also believed to own vast properties in France.
It is not as if the recipient countries have not woken up
There have been efforts to control and review SWF funding to weed out risky investors. But there is a disagreement on what is threatening and what is not. Even in a bloc as cohesive as the EU, these efforts can go to waste if the countries competing for foreign investment decide to reduce risk review measures just in order to outdo the other. It is not in the interest of the liberal, capitalist world of the West to yield much power of scrutiny and certification to bureaucrats as that could lead to increased protectionism and corruption.
Measures like the Santiago Principles and the OECD guidelines for SWF investment exist but they are not very effective as following them is not compulsory.
The SWF of Norway is a standout example even though some of its decisions may be controversial. It had withdrawn its investments from companies suspected of being human rights violators and environment polluters like Vedanta (the Niyamgiri case) and Sterlite according to an article in The Wire titled “Why the World’s Largest Sovereign Wealth Fund is Leaving Indian Companies in the Cold and What That Tells Us About Make in India” by Aruna Chandrasekhar. The fund has also decided to divest from coal and oil companies in view of promoting sustainable development.
Now let’s look at India!
After seeing the scenario of SWFs all over the world, it is time to examine the situation in India. What most us do not know is that India also has something close to an SWF called the National Investment and Infrastructure Fund (NIIF) in which the Indian government has a 49% stake. The rest is owned by HDFC and some SWFs like Abu Dhabi Investment Authority and Temasek of Singapore. This fund is envisaged as a game changer given that India needs $4.5 trillion for infrastructure development by 2040 according to the 2018 Economic Survey released by the Ministry of Finance.
SWFs are also being called upon to take up the role of venture capitalists in the growing startups of India especially in the emerging areas of artificial intelligence, blockchain, drones, robotics, and digital payments.
Calls for investment to improve human lives
In a speech in 2008,the former World Bank President, Robert Zoellick said “Today, sovereign wealth funds hold an estimated $3 trillion in assets. If the World Bank Group can help create the platforms and benchmarks, the investment of even one percent of their assets would draw $30 billion to African growth, development, and opportunity.”
This very idea could be pursued by imposing a social obligation on SWFs on the lines of Corporate Social Responsibility (CSR).It would be a type of ‘giving back to society’ and ‘structural adjustment’ of the system that allows the richest 1% to own 82% of the global wealth. (Figures according to a widely cited 2018 Oxfam Report).
There is however a group of scholars who are not optimistic about the ‘one-percent solution’. They say that this money would end up in the pockets of the rulers similar to the case of aid by western governments.
Today the world is talking about Sustainable Development Goals (SDGs) which include ending poverty and hunger. Of these, it is agreed by many that the 17th goal, i.e.‘Partnership for the goals’ is the most important of all and with the kind of money that SWFs have they can forge some of the best partnerships. After all of what use is money if it cannot create happiness?
Role of SWFs in the future
SWFs are needed. They cannot be done away with. But these funds need to be channelized properly. The twin concerns of national security and openness of capital investment have to be reconciled in order to have a win-win situation. More efforts have to be made to increase transparency and ensure that standards are enforced.
Human rights concerns and corruption would remain challenges that have to be overcome through increased awareness, cooperation, and capacity building.
The decision taken by some SWFs to divest from fossil fuels is good news for India as India needs a huge amount of funds for infrastructure development and the renewable energy sector. What helps India is the slew of reform measures allowing for increased Foreign Direct Investment (FDI) and better Ease of Doing Business in recent times and the fact that it is poised to remain one of the fastest growing economies in the world in spite of a pathetic 5.8% GDP growth in the last quarter and the unemployment rate at its highest in over 45 years. Investments from SWF’s could provide the much-needed ignition to the Indian economic engine and take it to the goal of a $5 trillion economy with double-digit growth.
Rajesh Saravanan is a student at Hindu College, University of Delhi. He has a keen interest in foreign policy and aspires to be a diplomat. He is doing his internship with The Policy Times and occasionally blogs at Indian Zest.