Deputy US Treasury Secretary Robert Kimmitt on GAPP / Santiago Principles

By Brett Keller

Mondo Visione has posted remarks by Deputy US Treasury Secretary Robert M. Kimmitt the recently released Generally Accepted Principles and Practices (GAPP), which are referred to by the IMF as the “Santiago Principles.” Kimmitt was speaking to the United States Council For International Business, and much of what he said concerns recipient country policies.

After urging open investment policies through the current financial crisis, Kimmitt said that transparency, proper risk management, and regulatory frameworks that protect investors and maintain stability are all important in capital markets:

In this context, the work of the IMF-sponsored International Working Group of Sovereign Wealth Funds offers timely guidance for SWFs as they become increasingly significant actors in global markets. Similarly, as recipient countries consider policies to address capital market vulnerabilities, we are well-served to remember that openness to capital from abroad is a source of economic strength not economic vulnerability.

Earlier this year, I wrote an article for Foreign Affairs [“Public Footprints in Private Markets“] in which I laid out our “operating assumptions” with regard to sovereign wealth funds… SWFs as a group, but particularly the more longstanding funds, have a track record of making investment decisions on sound economic and financial grounds… As part of [Treasury’s] efforts, Secretary Paulson reached agreement with Singapore and Abu Dhabi on a set of broad policy principles for SWFs and recipient countries in March of this year… While bilateral efforts are essential, Treasury has consistently taken the position that policy issues surrounding sovereign wealth funds – as well as recipient country inward investment regimes – are best addressed in a multilateral context.

On the significance and impact of the Santiago Principles:

The result is the Generally Accepted Principles and Practices or “Santiago Principles,” which were drafted and agreed in less than half a year. This agreement represents a milestone in enhancing the openness and transparency of the global financial system and in promoting open investment worldwide…. The Santiago Principles address many of the key macroeconomic, financial market, and investment issues raised by the rapid growth in the size and number of SWFs, as well as specific concerns highlighted by recipient countries, such as transparency and commercial orientation of SWFs… Even before the Santiago Principles were released this week, they had already produced tangible results. The Government of Singapore Investment Corporation released its first public report a month ago on how it manages the Government’s portfolio, including key information on its governance framework, investment processes, asset mix, and long-term returns. Temasek, Singapore’s SWF, already publishes detailed information annually. The Abu Dhabi Investment Authority has disclosed its broad asset allocation and is engaged in an ongoing process to enhance disclosure in all these areas, including compliance verification.

On recipient country policies for foreign investment:

I will begin with what is perhaps the foundational open investment principle: non-discrimination between domestic and foreign investors. This principle holds that countries should treat similarly domestic and foreign investors in like circumstances… Governments, of course, must be mindful of particular risks that may arise in some investments from abroad… Some countries employ extensive investment screening mechanisms, which consider broad factors such as “net benefit,” “national interest,” industrial policy, or other broad economic factors. In our view such expansive measures are too easily susceptible to, and sometimes actually serve, protectionist sentiment or goals… CFIUS [Committee on Foreign Investment in the US] continues to focus solely on genuine national security concerns and reviews annually only a small portion of transactions – fewer than 10% of transactions involving a foreign investor and a U.S. business. In 2007, for example, there were over 2,000 cross-border deals, of which only 125 came before CFIUS, none of which was blocked.

And on recipient country transparency principles:

The transparency principle holds that governments should explain clearly how the investment review process works and what its objectives are, and then implement measures fairly and in a predictable manner… We have maintained CFIUS’ procedural efficiency, including strict timelines, which increases predictability for investors. In 2007, CFIUS maintained the pace of concluding action on over 80% of transactions within one 30-day review.

Will the Santiago Principles be effective?

The Santiago Principles’ effectiveness in helping to reduce protectionist pressures and contribute to global financial stability ultimately will depend on their widespread adoption and implementation by SWFs. We expect that the successor to the IWG – an international Standing Group of SWFs – will address implementation issues and proposals for further work. Ultimately, SWFs will be judged on how they apply the Principles in practice, especially in their investment decisions.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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