Global systems Analysing the role of sovereign wealth funds Simon Oakes Philip Allan Publishers © 2015

Philip Allan Publishers © 2015

Global systems Analysing the role of sovereign wealth funds

Simon Oakes


Presentation outline

• Political factors and economic decision-making.

• Role of governments in economic globalisation.

• Sovereign wealth funds (SWFs) of nations.

• Why other places rely on SWFs.

• Global patterns of SWF investment.

• SWFs as a superpower strategy.


How political factors affecteconomic decision-making

• Economic factors, such as the cost of labour and emerging markets, play an important role in accelerating globalisation.

• The growth of globalisation is aided by political factors too.

• Some governments decide to invest their money abroad.

• Other governments decide to allow foreign investment to take place within their own borders.

• Global financial flows and systems depend as much on the removal of barriers to capital movement as they do on the capital movements themselves.


How political factors affecteconomic decision-making

The success of London’s Canary Wharf can be linked with (a) UK government deregulation policies and (b) the foreign direct investment this policy attracted. This place is now a global financial hub.


Role of governments in economic globalisationNational governments become players in globalisation when they adopt policies that encourage foreign investment inside their borders:

• Free-market liberalisation is associated with Margaret Thatcher’s policies in the 1980s. Restrictions were lifted on how companies operated.

• Deregulation of the City of London in 1986 removed ‘red tape’ and helped London become the leading global hub for financial services.

• Privatisation of important state assets, such as the railways and energy supplies, took place after the 1980s. Running these services often proved costly for the government and so they were sold to private investors. Over time, ownership of many UK assets has passed overseas. For instance, the EDF energy company is owned by Électricité de France.

• Sovereign wealth funds have been allowed to invest in British assets.


Sovereign wealth funds (SWFs)• An SWF is a government-owned investment fund or bank.

• SWFs are typically associated with China and countries that have large revenues from oil, like Qatar.

• Only a minority of countries operate SWFs.

• Two different spending models are used:

• (a) Direct state purchasing (Kuwait’s US$500 billion fund, dating back to 1953, works this way)

• (b) Purpose-built investment banks (Singapore has two, called Temasek and GIC).


What is the source of SWF money?

Oil and gas (e.g. Norway and Qatar want to

re-invest their enormous

petrodollar income)

Minerals(e.g. Chile’s

government has copper wealth and

Bolivia sells diamonds)

Balance of payments surplus (Money generated when a country’s

exports exceed the value of its imports

e.g. China)


Country Sovereign wealth fund name(s) Assets (US$ bn)

Origin

China China Investment CorporationSAFE Investment Company National Social Security Fund

1,500 Since 1997, several SWFs manage US$1.5 trillion (derived from exports). Could be worth US$12 trillion by 2025

Abu Dhabi (UAE)

Abu Dhabi Investment Authority Abu Dhabi Investment Council

1,000 From 1976 onwards, oil wealth has been fed into several wealth funds with a combined value of US$1 trillion

Norway Government Pension Fund 900 The largest SWF, funded by oil since 1990Singapore Government of Singapore

Investment Corporation (GIC)Temasek Holdings

500 Two bespoke investment banks handle Singapore’s trading wealth since 1974

Qatar Qatar Investment Authority 300 Funded by petrodollars since 2005Australia Australian Future Fund 100 Founded in 2006Russia Reserve Fund

National Welfare Fund160 Funded by oil revenues since 2008

Alaska (US) Alaska Permanent Fund 55 A fund set up in 1976 (oil)

How many places use their oil income to fund their SWFs? Which is a state, not a nation?


Why dos the UK government increasingly rely on SWFs?

• The UK is the most popular destination for SWF investment.

• Foreign states, notably China, already own major stakes in Britain’s railway lines, airports, water companies, sewers, central business districts and half of the House of Fraser department-store chain.

• After the global financial crisis (GFC) of 2008–09, the UK government actively encouraged investment in the UK by overseas SWFs.

• This was because of a shortfall of money for new projects (without raising taxes or the UK’s national debt).

• The government’s National Infrastructure Plan identifies a need for half a trillion pounds of spending on transport, energy and cities before 2020.

• To get these big projects off the drawing board, the UK government has been forced to look to overseas investors for support.


Why dos the UK government increasingly rely on SWFs?

Which countries’ SWFs are ‘buying

British’?


• By 2025, China will own an estimated £100 billion of UK energy, property and transport investments.

• Democracy and rule of law make the UK a low-risk investment site for Russian, Singaporean and Middle Eastern SWFs.

• Sheikh Mansour bin Zayed Al Nahyan of Abu Dhabi bought Manchester City football club (more than £1 billion has been invested, including the cost of a training academy).

‘I’m not embarrassed that (China) own 10% of our

biggest water company or a big chunk of Heathrow

airport. I’m proud. Tell the other Chinese investors –

come to London; spend your money.’

UK prime minister David Cameron


Global patterns of SWF investment

• The UK is not the only place where SWFs invest.

• Singapore owns almost half of New Zealand’s Viaduct Quarter (a major residential and commercial development in Auckland).

• Angola is investing its US$5 billion oil-derived assets on infrastructure and hotels in neighbour states.

• Norway, the world’s largest SWF, is a major Facebook shareholder.

• SWFs play an important role in the global land grab phenomenon.


Global patterns of SWF investment

What factors can help explain this global pattern?


The role of SWFs as a superpower strategy

• A superpower is a nation with the means to project power and influence anywhere in the world.

• SWFS can be an important part of a country’s power strategy.

• SWFs allow some governments to carry out foreign land grabs. These are large-scale agricultural land acquisitions in developing countries made by overseas governments.


Evaluating SWFs

• Some national governments are strategically re-investing national savings in profit-making assets on a global scale.

• In part, these actions are informed by the principle of sustainable development. State funds are being invested in order to provide an income for future generations. SWFs operate as ‘inter-generational wealth carriers’ that also serve to project global power and influence.

• Not everyone in the UK agrees SWF investments made here are a good thing. Because ownership passes to foreign governments, rather than foreign companies, critics say SWF purchases represent a loss of sovereignty. The UK government is ceding power over national assets to foreign governments (some of whom do not operate democracies).

• Should the UK allow Chinese or Russian SWFs to have a major ownership role in sensitive sectors such as energy? What do you think?


Further research

• A good starting point for SWF research: www.swfinstitute.org

• A look at Norway’s SWF: www.bbc.co.uk/news/world-europe-24049876

http://www.swfinstitute.org/

http://www.bbc.co.uk/news/world-europe-24049876

http://www.bbc.co.uk/news/world-europe-24049876


This resource is part of GEOGRAPHY REVIEW, a magazine written for A-level students by subject experts. To subscribe to the full magazine go to: http://www.hoddereducation.co.uk/geographyreview

http://www.hoddereducation.co.uk/geographyreview

Documents

Global systems Analysing the role of sovereign wealth funds Simon Oakes Philip Allan Publishers © 2015