Sovereign Wealth Funds, Capacity Building, Development, and

Governance  Larry Catá Backer (白 轲 )

W. Richard and Mary Eshelman Faculty Scholar Professor of Law and International Affairs

Pennsylvania State University

The Future of Sovereign Wealth FundsWake Forest Law Review 2017 Spring Symposium

March 24, 2017

Enter the Beast• Benign neglect• SWFs around in some form or another since the 1950s—at least• Repackaging of ancient need for sovereigns (who used to be individuals or

families as well) to protect their (and thereafter the state’s) assets

• Panic• Fear and lust in the wake of the economic turmoil of 2008• From protection of wealth to projection of power abroad

• Accommodation: The Rise of the Model SWF• Santiago Principles

• Defining the mechanism• Socializing it within framework of global finance and financial markets

• Disciplinary mechanisms through rich host state checkpoint rules

The Beast Repurposed?• Santiago Principles never contemplated one size fits all framework

• Lots of ”play in the joints”• Focus on the needs of host state to protect their polities and economies• Focus on the need of SWFs to make money around their own macro economic

agendas

• But even its broad constraints failed its purpose almost immediately after its adoption.• Enter resource rich developing states and IFIs

• SWFs expand the range of their utility

• But what does that mean for the project of naturalizing an idealized SWF within global finance?

From Here to Eternity• Ideological Baseline• Emerging Realities on the

ground• Reshaping the baseline?• Going Forward?

Ideological BaselineThe ideal SWF:

--operates like a private fund

--objectives irrelevant (Because they go to use of funds)

--transparency

--economic objectives paramount

--autonomy from state (subordinate political agendas)

--open foreign markets subject to the usual reservations for national security and development

--human rights obligations reserved to states or to the operating companies that made up investment universe

Beast in its New Habitat: Private Power for Public Aims • National law and policy versus

international law and norms• Macro-economic policy versus

advancing international legalization projects through private market mechanisms. • Chinese versus Norway approaches

Pix Credit HERE

New Habitats 2: SWFs as development funds• How do they tie in with development

funds?• Do they lose their character as

commercial activity?• Does it make a difference if fund

managers are not state official? Or located within the home state?• What counts as development anyway?

Must it ne internal or may it be external for internal effects?• Does it make a difference if foreign

investments are used to fund domestic projects?

New Habitats 3: SWF joint venturing in projects with other SWFs.

• Assume the character of development banks?• Russia-Korea

• Private-Public joint ventures• Credit Suisse, Qatar in Asset-Management Joint Venture

• Financing projects only or control• Use of funds versus generation of funds issue• Indirect financing trough controlled entities.

• Balance social projects with objectives of making money• A good way of hiding subsidies?

• The underlying issue of regionalism in SWF function and action.

New Habitats 4: SWFs as owners or controlling shareholders of SOEs, Real Estate and other Enterprises • Assume the character of a holding company?

• Turkish fund?

• Become the operational nexus point for outbound national macro-economic agendas? • China’s CIC?

• RE operations may trigger collateral obligations or may be used strategically to avoid them

• What is an SWF that owns SOEs?• Can an SOE “own” a SWF?• What of the SOE that hedges its excess

revenues?

New Habitats 5: Mechanism for Governance• SWFs and fiscal discipline: Resource rich/governance poor• Chile the model• Ghana; Mongolia, Angola

• SWFs and governance capacity building• SWFs as monitors• SWFs and anti-corruption efforts• The role of IFIs and lending• SWFs highest and best use is as as a technique and mechanism• Method for monitoring performance

New Habitats: Reverse SWFs and Other Outliers

• “Reverse SWFs”• Palestine Fund: vehicle for receipt of foreign

contributions• Income used to fund internal and external economic and

social projects • Generalized: special purpose funds for foreign aid

providing greater control

• In name only SWFs • Venezuela Funds: useful holding pens for funds

derived from extractives or other national sources; income used to fund social programs or stabilization funds; don’t lose their sovereign character

Reshaping the Baseline: Key Questions?• What is an SWF?• Are Financial Objectives necessarily its highest and

best purpose?• Investing or fiscal discipline?• Internal or external• What is development?• Ownership or investment?• Complex organizational structures change the

nature of the instrument and the mix of legal duties and responsibilities of both SWF and state

• Where does sovereign immunity fit into all of this?• Transparency• Human rights: states, SWFs internal operations;

SWF investment decisions

Emerging Strategies• A. Regionalization Strategies.

• 1. Real Estate and Operational Obligations.• 2. SWF Joint Ventures and Markets for Sovereign Debt. • 3. Joint Ventures suggest the Possibilities of Regionalization.

• B. Financial Objectives Strategies.• 1. Definitions beyond narrow aping of private funds but with legal consequences

for immunity, etc. • 2. Development Strategies and Financial Objectives.

• C. Governance Strategies.• 1. The Issue of Corporate Social Responsibility and Human Rights. • 2. Governmental functions and global economic activity.

Beastly Transformations: Approaches The African Example

• The regionalization strategies are perhaps the most important element in enhancing the effectiveness, power and viability of African SWFs as macro-financial and governance instruments: • 1. Create a regional working group, a regional forum, of African SWFs. • 2. Insist that IFIs, and especially the World Bank and International Monetary Fund, develop

facilities to provide technical assistance to African SWFs on a regional basis. • 3. Focus on regional intra-SWF investment and development projects. • 4. Strengthen and increase participation in non-regional multi-SWF projects.

• If regionalization is essential to the enhancement of the success of African SWFs, macro-financial strategies build on regionalism, and expand them. • 5. Refocus SWF objectives to enhance the value of specialization and to target coherence with the

portfolios of finance and development ministries. • 6. Reconsider the approach to stabilization and development models for SWFs, especially were

governance controls are weaker than they could be or in resource rich states.

• The governance strategies as well are a necessary element to creating institutionally strong African SWFs well capable of attaining the regional and macro-financial strategies suggested. • 7. Effect greater transparency. • 8. Detach SWF operations from governmental discretionary decision-making. • 9. Insist on changes to the way in which states with SWFs engage with IFIs to enhance rather than

to continue obstacles to better state performance.

Conclusion• SWFs have already started moving well beyond their idealized form,

established within the parameters of the Santiago Principles. • SWFs now advance the political and economic projects of states,

they serve to strengthen governance, they are the focal point for the normalization of global human rights in economic activities projects, and they also serve to advance the development goals of states.

• The old issues of the commercial character of these mechanisms, and of their effects of the financial markets and ownership structures of rich home states remains important, but may no longer be the central element pushing the development of SWFs. Law and regulatory structures lag far behind the realities that are taking shape on the ground.

• The public-private divide, the constraining structures of national principles of taxation and sovereign immunity are now ripe for contestation and change.

• But on what basis? That remains very much to be seen. This paper has sought to provide a glimpse both at the changes in practice and the possibilities they raise for future conduct of SWFs.

• As to the future; we will know soon enough.

Thanks!• Conference Draft may be

accessed HERE

• Author may be contacted here: lcb911@gmail.com