Although the weekend gathering of finance ministers and central bankers in Washington was, until Monday, filled with doom and gloom, one event was very encouraging. The International Working Group (IWG) of sovereign wealth funds (SWFs) unveiled their voluntary Generally Accepted Principles and Practices (GAPP)—the Santiago Principles. The GAPP is a solid piece of work that should help to dispel some of the mystery and suspicion surrounding SWFs. The International Monetary Fund deserves substantial praise for facilitating an agreement in the IWG in a remarkably short period of time.
Is there real content in the GAPP? It contains 24 principles, some of which have a number of sub-principles. They cover most aspects of SWF operations from their legal frameworks and governance structures to their investment policies and operations.
I have made a preliminary assessment of the GAPP using the 33 elements in my Blueprint for Sovereign Wealth Fund Best Practices. The GAPP receives a “score” of 74.1 That is a good score! The GAPP is within the top group of 22 pension and nonpension SWFs out of 46 such funds. If in the future each SWF complies completely with the GAPP, they would all move into that top group.
The fact that the GAPP does not score 100 on my rating system reflects reality. It is a compromise, a negotiated document. The weakest area is with respect to accountability and transparency.2 Disturbingly, many of the principles are silent about disclosure to the general public or only call for disclosure to the fund’s owner. That approach does not promote the needed accountability to citizens of the country with the SWF or of other countries. As we knew would be the case, the IWG punts on each fund’s revealing its size even while endorsing full annual reports where that information would be redacted.
On the other hand, the GAPP is quite forthright in confronting the issue of political motivation by calling, in principle 19.1, for SWFs to declare publicly their use of noneconomic considerations in their investment policies. It also contains a number of positive principles that I did not include in my own scoring. For example, the GAPP calls for the provision of data, at least to the national authorities, and for ethical standards to govern the internal management of the funds—though it is not clear whether these standards would be made public.
Going forward, of course, the issue for the IWG is “voluntary” compliance with the GAPP. The process set up to explore the establishment of a “standing group” of SWFs to deal with implementation and follow-up issues must go ahead and produce such a group.
Also under the heading of follow-up work, the IWG’s report throws down the gauntlet to countries receiving SWF investments and in particular to members of the OECD, the organization of the world’s leading democracies and market economies. In presenting the GAPP to the International Monetary and Financial Committee (IMFC), the IWG’s co-chair, Hamad Al-Suwaidi of the United Arab Emirates said that the IWG expects “that recipient countries will not subject the SWFs to discriminatory measures to which other foreign or domestic investors in similar circumstances are not subjected” (emphasis added). Those familiar with the language of the OECD standards and codes will note the qualification “similar circumstances.” The challenge to host countries is not to interpret that phrase too narrowly; in the extreme, no two investors are in similar circumstances.
I remain concerned that members of the OECD are behind the IWG in their timetable to strengthen their investment standards. The OECD did put out some recycled material earlier this year that was also presented to the IMFC on Saturday. The final result of efforts in the OECD must have more new content.
What is ultimately produced should contain three features that currently are not present.
First, members of the OECD should commit to apply their investment standards to all non-members—not just to make their “best efforts” to do so.
Second, members should commit to bar new types of restrictions on investments from members and nonmembers.
Third, members should establish a procedure under which they and other interested countries, can examine, ex post, cases in which national authorities have turned down investments on grounds of national security or public interest criteria.
However, the good news from Washington is that through the efforts of the IMF, with an assist from the OECD, and a great deal of cooperation from countries with sovereign wealth funds, the IWG agreed on the GAPP. International monetary cooperation has a victory. We are one step closer to making the world safe for sovereign wealth funds.
1. For the curious reader, I give the GAPP a raw score of 20 out of 33 elements. However, if one eliminates four of my elements that are more descriptive or prescriptive of SWF practice, the maximum total shrinks to 29, and the GAPP scores 69 percent. If in addition, I give the IWG extra credit for six sensible, constructive, and operational elements that I did not include in my scoring, raising its score to 26 out of 35 or 74 percent.
2. On my first category, structure, the GAPP scores 86 percent, and on governance 100 percent. On behavior, it scores 67 percent, but on accountability and transparency only 50 percent.