LETTERS TO THE EDITOR

Autumn 2008

by John McFall

RELATED ARTICLES:

---

Roland Koch is right to say that policymakers have legitimate concerns over sovereign wealth funds operating in Europe. It is also true, however, that Europeans have benefited enormously from open markets and foreign direct investment. Actions by a minority of sovereign wealth funds should not be allowed to put these economic benefits in jeopardy.

The key issue here is transparency. Policymakers are worried about sovereign wealth funds and their investment aims because it is so difficult to learn anything about them. How are they controlled? How are investment decisions made? Greater openness – through the publication of an annual report, for example – would help people to decide whether a particular fund posed any threat and what should be done about it.

Given the lack of transparency in many sovereign wealth funds, there is a tendency for them all to be tarred with the same brush. We should avoid this. These funds range from those financed by oil revenues to those funded from normal budget surpluses; some are more than 50 years old, others were created this year. They also differ enormously in their degree of independence and in their investment approach. Some of them even reject the label of sovereign wealth fund.

These differences are often hidden from outsiders due the funds’ tendency towards secrecy. This will get them into trouble if they continue to ignore the legitimate concerns of policymakers. Roland Koch finds the apparently strategic aims of the Chinese and Russian sovereign wealth funds a reason to advocate broad-brush, protectionist policies to fend off all such funds. Other policymakers may soon start to agree, even though few people would gain from this approach.

Sovereign wealth funds should learn the lesson of the private equity industry in Britain. Private equity firms initially refused to acknowledge the need for transparency; this was rather counter-productive, as it resulted in a public backlash and a great deal of media attention. It also prompted an intensive Treasury Committee inquiry last year. An industry working group was quickly set up to establish some new guidelines on disclosure. It was no surprise when British hedge funds created their own set of guidelines early this year, in a bid to avoid criticism of their own industry. In June, Danish private equity businesses followed suit. And in July, sovereign wealth funds from around the world met in Singapore to discuss their own voluntary code of conduct.

We need to maintain pressure on these financial operators to ensure that their guidelines are robust. For example, I doubt we have heard the last word on disclosure from the UK private equity industry, particularly in light of comments by the working group’s chairman, Sir David Walker, and the much tougher guidance announced by the Danes. If voluntary procedures are to be successful, they must inspire confidence among the public and policymakers. Otherwise, Roland Koch’s legislative approach may become the order of the day.