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Corruption and the private sector
Sovereign wealth funds: a challenge for governance and transparency Pierre Habbard1 The rapid growth of sovereign wealth funds (SWFs) in the past five years has changed the landscape of global asset ownership and established a number of emerging economies as significant players in global financial markets. SWFs are comprised of assets that governments keep separate from their regular budgeting and asset management processes. The major SWFs in the Middle East, Norway, Russia and a few regional funds are based largely on revenues from oil and other natural resources. China’s SWF draws mainly on foreign exchange earnings from its huge trade surplus. Others, such as Singapore’s Temasek Holdings, reinvest budget surpluses or privatisation proceeds. Of the estimated US$3 trillion under SWF management, an estimated US$2.2 trillion is managed by just seven funds – those in the United Arab Emirates, Norway, Singapore, Kuwait and China.2 Total SWF investments are expected to grow to up to US$10 to 15 trillion by 2015.3 As with the recent boom in alternative investment assets – hedge funds and private equity – the global economic muscle of SWFs, in combination with their lightly regulated nature, if not outright opacity, has raised a series of public concerns, including: ● on the home country side, that public wealth and savings are not managed in a transparent and accountable manner and that investments are not made in line with basic ethical principles of the country; and ● on the recipient’s side, that sovereign wealth funds are misused as levers for politics, that they present conflicts of interest for governments that act both as investors and regulators, and that SWFs could be a poorly understood source of financial instability alongside hedge funds and other lightly regulated investments.
Transparency and accountability issues Little is known about most SWFs’ investment policies, governance structures and accountability mechanisms. Only Norway and Alaska release audited financial reports to the public. In the case of the Kuwait Investment Authority (KIA), disclosure to the public of the funds’ assets is actually prohibited by law, and until June 2007 the KIA would not even reveal the total value of its holdings.4 1 Pierre Habbard is senior policy advisor at the Trade Union Advisory Committee to the OECD, Paris. 2 C. Ervin, ‘Should Sovereign Wealth Funds Be Treated Differently than Other Investors? An OECD Project Has Set Out to Answer This Question’, OECD Observer, no. 267 (May–June 2008). 3 R. M. Kimmitt, ‘Public Footprints in Private Markets: Sovereign Wealth Funds and the World Economy’, Foreign Affairs, vol. 87, no. 1 (2008). 4 E. M. Truman, Sovereign Wealth Funds: The Need for Greater Transparency and Accountability, Policy Brief no. PB07-6 (Washington, DC: Peterson Institute for International Economics, 2007).