| |||||||||||||||||||||||
| |||||||||||||||||||||||
 In The Deal International Thomas E. Crocker, co-chair of the international trade and regulatory group at Alston & Bird LLP, addresses politics and its impact on foreign direct investment as a potential issue for the presidential election with the sudden growth of sovereign wealth funds.Two years after the Dubai Ports World controversy exploded into public view, foreign direct investment issues are back on page 1: the weakening U.S. dollar; the surge in foreign direct investment in the U.S.; the sudden growth of sovereign wealth funds, or SWFs; Congress' continued assertion of at least implicit political veto power over private sector investment decisions; and the possibility of debate on these issues in this presidential election year.
Beginning with Dubai Ports World and accelerating with the recent spate of high-visibility bailouts of marquee U.S. financial institutions, political questions have gnawed at the fabric of the foreign investment process. Notwithstanding the administration's support for foreign investment, reaffirmed most recently in a Jan. 23 executive order, and the well-documented benefits that such investment brings, a 2006 poll by the Pew Research Center for the People and the Press found that 53% of Americans believe foreign ownership of U.S. companies is "bad for America."
These trends provide a potentially volatile mix that could make foreign direct investment a political issue in this election year, thanks largely to the rapid emergence of SWFs. The Department of the Treasury views a SWF as a government investment vehicle funded by foreign exchange assets, managing those assets separately from official reserves. It is distinct from other types of sovereign investments, such as international reserves, public pension funds and state-owned enterprises. In fact, SWFs are neither new nor particularly novel. The Kuwait Investment Authority and its predecessors, for example, have existed since 1953. However, what is eye-opening is the rapid increase in the number and asset size of SWFs in recent years. Globally, the number of funds has doubled since 2000 (from 20 to almost 40 in 2008), with more than 10 established since 2005. SWFs currently manage total assets of approximately $1.9 trillion to $2.9 trillion. Estimates suggest that figure could grow to $10 trillion to $15 trillion by 2015. This figure is comparable to U.S. Gross Domestic Product, which currently stands at around $12 trillion. According to a recent Congressional Research Service report, Algeria, Australia, Burnei, Canada, Chile, China, Iran, Kazakhstan, Kuwait, Malaysia, New Zealand, Norway, Qatar, Russia, Singapore, South Korea, the United Arab Emirates, the U.S. (Alaska) and Venezuela, all currently operate SWFs. Others are reportedly in the process of establishing funds. In China's case, this growth has been fueled by the country's export earnings; in the case of Middle Eastern and certain other countries, by the rising price of oil. The U.S. Treasury Department has sensibly analyzed SWFs in terms of their impact on financial stability and concluded that there is "much reason to be reassured." SWFs in principle are long-term investors, are not highly leveraged and act as a force for financial stability. However, the Treasury acknowledges that SWFs also raise questions, including whether they perpetuate undesirable macroeconomic policies, represent "large, concentrated and often opaque positions" in financial markets and might give rise to legitimate national security concerns because of their control by foreign governments. U.S. policymakers thus have two broad concerns: (1) SWFs' lack of transparency and (2) their possible misuse for political goals. Given the attention that SWFs have begun to receive, it is perhaps inevitable that a backlash would develop. Indeed, legislative interest has begun to stir. At a Feb. 13 hearing, Sen. Charles Schumer, D-N.Y., criticized the lack of transparency of SWFs, ascribed their rise to economic "failures" by the Bush administration and hinted at legislation to regulate them. At the state level, California is considering legislation that would bar state pension plans from investing in funds owned or controlled by SWFs -- thus arguably committing the very type of political decision-making on investments that critics fear in SWFs. In an effort to head off a counterproductive reaction to SWFs, last October the U.S. Treasury tasked the Group of Seven and leaders of eight SWF nations to put together voluntary codes of "best practices." In response, the International Monetary Fund is currently working on a code for SWFs, and the Organization for Economic Cooperation and Development is writing a code for recipients of SWF investments. The two institutions are expected to produce preliminary guidelines this month. However, the codes are not likely to address directly the largest political issue surrounding the funds -- whether they can be used for strategic, rather than commercial, purposes. Nonetheless, the Treasury deserves credit for stepping out smartly to try to establish a constructive framework on SWFs, not only by tasking the IMF and OECD to produce voluntary guidelines but also by engaging in outreach and discussions with SWFs and market participants in order to analyze and better understand the risks and benefits associated with SWFs. Point man Deputy Secretary Robert M. Kimmitt has articulated a set of common sense principles for countries receiving SWF investments and for SWFs themselves. For SWFs, the principles include investing commercially rather than politically, implementing institutional integrity through transparency of investment policies and strong risk management systems, governance structures and control, competing fairly with the private sector, promoting international financial stability, and respecting host country regulatory and disclosure rules. As Congress sets about its educational process through hearings and studies, it will face a particular challenge to respond in kind to the dispassionate and analytical example set by the Treasury. While some members of Congress will no doubt keep their finger on the pulse of individual investment cases, Congress might well resist the temptation to politicize particular acquisitions as it goes about its business of fostering a national consensus on foreign investment by SWFs. Because some SWFs come from countries which do business with U.S.-embargoed countries like Iran or which have endemic problems with corruption or lack of reciprocity in investment policies, Congress might wisely resist the temptation to graft other agendas onto the policy review process. Categories Deal Video
    Community
 Elsewhere on The Deal.comDealwatchThe Deal MagazineCorporate Dealmaker
The Deal VideoCategories
Blog roll
Archives
| |||||||||||||||||||||||
|
|
|
|
|
©Copyright 2009, The Deal, LLC. All rights reserved. Please send all technical questions, comments or concerns to the Webmaster.
