West Still Afraid of SWFs? Sometimes

Ashby Monk

With news out that China may make a rival bid for PotashCorp (perhaps via Sinochem or CIC), Ottawa may finally be getting a bit nervous about China’s “commercial” interest in Canada’s natural resource wealth (…the FT’s Kevin Brown says China’s motivation is “entirely political“…) . According to an article in The Globe and Mail yesterday by Brenda Bouw:

“Ottawa will scrutinize any state-owned company bid for Potash…to ensure its motives are in line with a free-market economy and not government interests…”

Moreover, Industry Minister Tony Clement said Monday :

“We have specific rules about state-owned enterprises…to ensure that they are acting in a way that is consistent with a market-based economy, rather than as an agent for a foreign government’s interests…”

And so, the behavior of Canadian policymakers would seem to suggest that the West is still afraid of SWFs’ motives, which means that we haven’t come that far since 2008. Question: weren’t the Santiago Principles supposed to alleviate this type of concern and stop political and strategic investing by SWFs? After all, recall what GAPP 19 says:

“The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds.”

And what does that mean? Well, it means that SWFs should avoid investments that put country ahead of portfolio. And, you ask, why do Western countries seem to care about this? In short, they’re afraid that ‘strategically oriented’ SWFs will become national security threats by secretly advancing geopolitical interests via investments in technologies or resources. (Quick note: China needs potash and lots of it.) Clearly, the Santiago Principles aren’t having the intended effect among certain Canadians (and one could also say the Chinese).

Now, while Canada frets about the strategic interests of China’s state actors, I came across a remarkably candid interview with an emerging market SWF executive that, in effect, explains his SWF’s strategic and political value to the sponsoring country. In light of the Western fears on display in Canada this week, I found this interview to be utterly astounding.

However, to make things interesting for you (…or at least for me…), I’m going to anonymize all the identifying information in the excerpts I’m reposting below (I’ll explain why later…just go with it). So, let your mind wander while reading these remarks; basically I’d like you to think about how you would react if you learned this Executive was at ADIA or CIC or the National Welfare Fund in Russia or any other SWF for that matter. But remember, the following are actual comments from a real executive of a real SWF. This is not a wind-up. Over to you, SWF Executive:

“If you look at the different priority areas where [this SWF] deploys its capital, you’ll see that there’s a very good fit between what’s articulated in [our national strategy] and what we do. We invest in highly innovative industries that play to [our country’s] strengths and competitive advantages…”

“This investment was a good fit: [this metal is an] energy-intensive business and relies on a multifaceted transport infrastructure, both of which we have. It also creates the type of employment we think will be quite beneficial for [our nation]. So in many ways, it meets our priorities. Now, there are many opportunities for deals we might make to support [our state owned enterprise operating in this business]. For example, we want to diversify and secure our upstream supplies. We don’t necessarily have a target in mind, but we will look for potential transactions.”

“…all our deployments of capital, even from a financial perspective, have had a strategic twist…We have many examples of investments that start out as financial investments but take on a strategic angle…” (emphasis added)

So, what do you think? Now, what if I told you that the above SWF Executive is in fact Jin Liqun of the China Investment Corpation? Concerned? Worried? Rustling around for the name of your local MP or Congressman? Well, relax, it’s not Jin Liqun.

It turns out, this is an interview with Mubadala’s Chief Operating Officer, Waleed Al Mokarrab Al Muhairi (kudos to McKinsey on this). And the reason I went to the trouble of anonymizing the discussion above was to illustrate the extent to which the West seems to treat SWFs differently; certain funds are given the freedom to invest ‘strategically’, such as Mubadala, while others are all but forbidden from investing this way (such as the CIC — even though it’s pretty clear it does anyway).

I’ve increasingly been thinking about why this is the case. Now, I don’t have any profound insights here, but I do have some initial thoughts. The foremost explanation has to be transparency of motive. Mubadala is a highly transparent entity that offers private sector levels of detail on its investment strategy and allocations. Let’s refer back to the interview:

“Because of our bondholders, we are committed to being very transparent about our financials, which we release twice a year. We have our pro forma midyears and then we have final statements we release at the end of every year. We’re committed to doing that and think that’s done wonders, from a transparency perspective, for Mubadala.”

And so, even though the fund has unabashedly strategic and political motives, it sets the target countries at ease. On the flip side, take the Qatar Investment Authority, which is also a highly strategic investor. It scores poorly (relative to Mubadala) on transparency, and, as a result, it has been taking quite a bit of flack in Australia for investments in farmland to ensure food security for Qatar. (Though, to be fair, most of its high profile investments in the UK, and even the acquisition of UK icon Harrods, haven’t raised too much concern.)

Next, a big part of Mubadala’s ‘freedom to operate’ stems from its ongoing (and credible) focus on a “double bottom line”. Put another way, it acknowledges its focus on both strategic and financial returns (most other SWFs do not):

“…we always use financial returns as the first filter when making an investment. If it passes the financial test, we look at the strategic metrics and see if, together, the financial and strategic metrics create a cluster or businesses that make sense from an Abu Dhabi perspective.”

Finally, I feel obliged to mention that the West probably pays less attention to Mubadala’s strategic ambitions because its sponsor, Abu Dhabi, is…well…to be blunt, it isn’t China. And that seems to matter a lot these days. In my fieldwork, I’ve come across quite a bit of Sinophobia in policy circles (some off the record and some not).

Anyway, if you read the paper I posted to the website yesterday (which you almost definitely did not…but if you did), you’d know that Gordon and I have a sneaking suspicion that most SWFs will eventually revert back to strategic investing. What will (can) the west do about that?  If you want to know more, read the paper.

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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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