Santiago Principles Research Articles

Governing the Wealth of Nations: The Santiago Principles at 15

Governing the Wealth of Nations: The Santiago Principles at 15

TÜRK VARLIK FONUNUN REGÜLATİF (DÜZENLEYİCİ) YAPISININ YENİDEN GÖZDEN GEÇİRİLMESİ ÜZERİNE KISA BİR ÇALIŞMA

ABSTRACT
 
 A sovereign wealth fund is generally structured on state-owned financial assets to protect citizens’ long-term economic interests. Sovereign wealth funds are owned by states and generally operated by executive branches of government as private business entities. Sovereign wealth funds are beneficial not only to support large-scale projects financially by stabilizing countries’ economies but also to increase investment opportunities in domestic and international financial markets. Legal problems arising nature of the complexity of sovereign wealth funds need to be monitored carefully while adopting effective rules and regulations for risk mitigation. The Turkish Wealth Fund was established as a joint-stock company and subjected to the principles of Turkish private law in 2016. The current regulatory structure of the wealth fund brings some legal problems such as challenges for board members of the wealth fund. The Santiago Principles which provide effective administrative law principles to governments ought to be adopted into the current Turkish legislation to promote accountability and transparency in the domestic financial markets. In particular, the paper proposes that the appointment of the board members should be exercised by the executive and legislative branches collaboratively while board members ought to be accountable for their business operations. In addition, the Turkish Wealth Fund should adopt a vigorous public disclosure regime to increase its transparency in the domestic securities market.
 
 Keywords: Sovereign Wealth Funds, Transparency, Accountability, Santiago Principles, Administrative Law Principles

Transparency Is A Key Indicator Of The Activity Of Sovereign Wealth Funds

This article examines and analyzes the criteria for maximum transparency, which is the main criterion for evaluating the effectiveness of sovereign funds. Two globally recognized methods for assessing the maximum transparency of sovereign wealth funds have been analyzed. The Santiago Principles and the Linaburg-Madwell Transparency Index, approved by 26 member countries of the International Monetary Fund and based on generally accepted rules, have been studied and analyzed in detail. Foreign experience in ensuring maximum transparency of sovereign wealth funds has been studied. A number of problems in ensuring the maximum transparency of the Fund's activities, which are the main criteria for assessing the effectiveness of the Fund for Reconstruction and Development in our country, were analyzed and scientific and practical suggestions and recommendations were made to ensure maximum transparency of the Fund's activities.

Sovereign Wealth Funds as Sustainability Instruments? Disclosure of Sustainability Criteria in Worldwide Comparison

Sovereign wealth funds (SWFs) are state-owned investment vehicles intended to pursue national objectives. Their nature as long-term investors combined with their political mandate could make SWFs an instrument suited to promote sustainability. As an essential precondition, it is important for SWFs to commit to sustainability criteria as part of an overarching strategy. In the article, we present the sustainability disclosure index (SDI), an original new dataset for a selection of over 50 SWFs to investigate whether SWFs disclose sustainability criteria covering environmental, social, economic, and governance aspects into their mandate. In addition to an empirical measurement of the disclosure rate, we conduct multiple regressions to analyze what factors help to explain the variance between SWFs. We see that a majority of SWFs disclose at least some of the sustainability criteria. However, until today, only a small minority address a broad selection as a possible basis for a comprehensive sustainability strategy. While a high-state capacity and a young population in a country as well as a commitment to the international Santiago Principles are positively associated with a higher disclosure rate, we find no evidence for strong effects of the economic development level, the resource abundance, and the degree of democratization of a country or of the specific size and structure of a fund. Identifying favorable conditions for a higher commitment of SWFs could help to initiate pathways to become functional sustainability instruments.

When United Nations Sanctions Impact International Financial Governance: Lessons from the Libyan Sovereign Wealth Fund

This article examines the interaction between United Nations Security Council sanctions and the transnational governance of sovereign wealth funds through the lens of the experience of the Libyan Investment Authority, the sovereign wealth fund of Libya. The fund is a member of the International Forum of Sovereign Wealth Funds, a group of sovereign wealth funds whose members endorse the Santiago Principles, a set of guiding principles aimed at improving the governance, independence, and transparency of such entities. In early 2011, the United Nations Security Council requested States to freeze the assets of the Libyan Investment Authority because of their potential utility to then Libyan leader, Muammar Gaddafi, as a source of funding for his regime, which was engaged in a civil war with rebel forces. These assets remain frozen, seven years after Gaddafi’s death in October 2011. This article critically analyzes the establishment and governance of the Libyan Investment Authority, and the impact of the continued sanctions on its assets. The article questions the contemporary validity of the narrative summary of reasons provided by the Libya Sanctions Committee for the fund’s present listing, arguing instead that the latter stems from the threat of potential misappropriation as a result of governance issues. The article proposes that engagement by the fund with international financial institutions such as the International Monetary Fund, the World Bank, and the International Forum of Sovereign Wealth Funds and adherence to the Santiago Principles are vital for its better governance and could equally help to address longstanding problems related to transparency and risk management. At the same time, such institutional engagement will help the fund to meet its objectives as laid out in its constituent law and to operate for the benefit of the people of Libya, for whom it was established.

Sovereign Wealth Fund (SWF) Policy Options for Philippine Off-shore Energy Resources

This study aims to stimulate discussion of the country’s policy framework for managing existing and potential energy resources. It argues that a well-designed Sovereign Wealth Fund (SWF) can positively transform the country’s management of proceeds from energy resources as well as bolster Philippine sovereignty over those resources. Towards this goal, we set three specific tasks: (1) to provide a survey of the literature on SWF, with a focus on instructive examples from the region; (2) to derive policy standards and other lessons from selected case studies of SWFs in the region, particularly Singapore, East Timor and Indonesia and (3) using these lessons, to discuss policy options for a Philippine SWF. Existing discussion of SWF in the Philippines tends to start with a privileged set of putative universal or international norms for the design of SWFs, namely, the so-called Santiago Principles promoted under the aegis of a working group of the International Monetary Fund. Instead of presuming global consensus, the study unpacks the historical and political backgrounds of SWFs of the three case studies. The study formulated the insights derived from the case studies in terms of policy standards, political conditions, and consequences. The paper then applied these insights to the question of designing a Philippine SWF. It approached this question by reimagining the Malampaya Fund as a SWF, thus laying down policy options that avoided resource plunder and promoted better outcomes in terms of transparency, governance, and benefit to Filipinos. Finally, it provided a discussion of the potential contribution of SWF to Philippine sovereignty, with a specific commentary on the management of the yet-to-be developed resources of the Philippine Rise.

The Assessment of Mongolian Sovereign Funds

Mongolia is the one of the resource rich countries facing natural resource curse, relatively transparent with satisfactory resource governance. Some would argue establishing sovereign wealth fund (SWF) is beneficial those countries with natural resource curse while others against it. Mongolian government established several SWFs and namely Human Development Fund (HDF- afterwards renamed as Future Heritage Fund) and Fiscal Stability Fund (FSF) but still facing to create an efficient SWF. Some scholars would agree that it is important to find causal relations between management of SWF and its efficiency to establish an efficient and beneficial SWFs. There are several ways to reveal such relations, however, most research centres are using following major methods such as Resource Governance Index (RGI), Truman scoreboard and Linaburg- Maduell Transparency Index (LMTI) and Santiago Principles. This paper is examined Mongolian SWFs namely Human Development Fund (HDF) and Fiscal Stability Fund (FSF) using some of these methods.

Sovereign Wealth Funds Definition: Challenges and Concerns

The main purpose of this paper is to bring a better understanding of the phenomenon of sovereign wealth funds (SWFs) by dealing with their definitional issues. Our objective is to understand why it would be difficult to have a standard and common definition of SWFs and how this definition concern could present a problem, especially for academic research. We analyzed the history of SWFs, their creation objectives, their sources of funding, the performance of their investments and their governance structure and compared them with other types of funds. We find that the lack of a common definition stems mainly from their: i) hybrid nature: SWFs are created and controlled by governments, but their investment strategies are similar to private funds; ii) high heterogeneity: SWFs have different structures, sources of funding and other creation objectives; iii) lack of transparency. Despite the establishment of Generally Accepted Principles and Practices for SWFs know as Santiago Principles, SWFs remain opaque structure and iv) similarities with other sovereign and private investors, especially in their investment strategies. These definitional problems could explain the lack of consensus on empirical studies about SWFs and the issues about the regulation of their activities. Otherwise, this study targets to contribute to the global debate on the regulation of their transactions, essentially by clarifying their subtle differences with other investment vehicles.

Promoting responsible sovereign lending and borrowing: the role of sovereign wealth funds

Purpose This paper aims to investigate the idea of building responsible borrowing and lending into sovereign wealth fund (SWF) decision-making. SWFs, which currently manage US$8 trillion in assets, are influential institutional investors, but their role in sovereign debt markets needs to be further explored. In this context, this paper aims to critically assess the linkages and convergences between the Santiago Principles on SWF and the United Nations Conference on Trade and Development (UNCTAD) principles on responsible sovereign lending and borrowing. Design/methodology/approach This paper draws on legal scholarship, reports, policy papers and other open-source data to explore the role of SWFs in sovereign lending, borrowing and debt restructuring. Findings Building responsible borrowing and lending into SWF decision-making is feasible and justified on the grounds of both ethics and public duty. It is also justified in financial terms because it would protect SWFs from irresponsible lending and borrowing practices at the micro level while contributing to global financial stability at the macro level. Originality/value This is the first comprehensive study to juxtapose two important normative processes, the Santiago Principles and the UNCTAD Principles.

The Political and Governance Risks of Sovereign Wealth

Sovereign wealth funds are designed to solve crucial domestic policy problems. Poorly managed SWFs and SWFs that are managed as tools of economic nationalism or mercantilism will present problems for both the sponsor country and for host countries that receive SWF investment. This article discusses some of the major concerns presented by sovereign wealth, addressing both domestic and international risks. As described in the article, these risks fall along four dimensions: domestic political risks, domestic governance risks, international political risks, and international governance risks. The IFSWF’s Santiago Principles provide a basic framework to manage and mitigate each of these types of risk, although it has limitations as a form of soft law that relies on the SWFs’ own internal compliance efforts. Notwithstanding these concerns, SWFs have proven themselves to be generally benign investors, suggesting that present governance and host country regulatory structures have successfully mitigated risks to this point. The same is not true, however, of domestic risks presented by SWFs, which remain a serious concern for governments and, to a lesser extent, markets generally.

Brazilian Social Funds: The lessons learned from the Norway fund experience

Since the middle of the last century, the world has seen the emergence of Sovereign Wealth Funds (SWF). According to the Sovereign Wealth Funds Institute (2012), these legal entities can be defined as “a state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from resource exports.” The SWFs are governed by the Santiago Principles, a document constructed by the IMF's International Working Group of Sovereign Wealth Funds (IWG) to recommend and to standardize the applications and investments of this kind of fund. SWFs are created in order to meet macroeconomic demands, using a series of investments strategies, which including foreign assets acquisitions. For instance, the Norwegian Government Pension Fund is one of the world's model SWFs. Its revenue is obtained from petroleum exploitation and is considered a savings fund, although part of the financial return can be applied in budget deficit. Following this example, Brazil created the Pre-Salt Social Fund to invest pre-salt petroleum revenues, and consists of a savings fund, according to the IMF classification. The present article focuses on the analysis and comparison of the legal structures of the Norwegian Government Pension Fund (GPF) and the Brazilian Pre-Salt Social Fund (SF), aiming to understand if the Brazilian fund applies the Norwegian standards.

What Responsibilities Do Sovereign Funds Have to Other Investors?

With trillions of dollars in assets, sovereign wealth funds (SWFs) play a major role in financial markets around the world. With billions (and probably well over a trillion) dollars’ worth of equity investments around the world, the investment behavior of SWFs is of primary concern to regulators, portfolio firms and other investors. The routinely cited perils of sovereign investment, such as politicization, corporate espionage, and mercantilism, are typically seen as emanating from equity investments by SWFs. On the other hand, SWFs offer the promise of patient, sustainable investment by engaged stewards who take a long view of the impact of their investments. This essay, prepared for a Wake Forest Law Review symposium on sovereign wealth funds, seeks to provide a realistic appraisal of the benefits and potential costs of SWF investment for other investors. Most work on SWF investment has focused on the challenges that SWFs present to regulators, portfolio companies or their own domestic constituencies. Although a few studies have examined SWF investment price impacts, SWF analyses have tended to ignore the effect of SWF investment on other investors. What, if anything, do SWFs owe to other investors? The essay calls for sovereign investors to recognize the special responsibilities they have to co-investors. While these responsibilities may not constitute actionable fiduciary duties, SWFs should embrace a model of transparent, engaged ownership that will benefit their co-investors and their common portfolio companies. The essay first outlines the concept of fiduciary duties generally, and describes the way that such duties (or their civil law equivalents) impact SWF governance. The next section addresses the complex question of the object of SWF duties. The sponsor government, at least, has claim to these duties, but what of other impacted constituencies, such as citizens? The essay then turns to the issue of investor obligations, and notes that while investors typically do not owe one another fiduciary duties, they can mutually benefit by minimizing costs for one another as they adhere to basic principles of transparency and predictable investment behavior. The essay then evaluates the ability of the Santiago Principles to encourage this kind of transparency and predictability through a review of recently completed SWF self-assessments of compliance with the Santiago Principles.

The “Santiago Principles” for Sovereign Wealth Funds: The Shortcomings and the Futility of Self-Regulation

The risks associated with sovereign wealth funds (SWFs) transactions are essentially two-fold: political, to the extent that SWFs could be used as the armed wing of States’ foreign policy, and economic, since there is a risk of public subsidization or other types of market distortions through their investments. It is within this framework that the idea of international best practices aimed at a better regulation of SWFs was envisaged. This led to the adoption of the “Generally Accepted Principles and Practices” for SWFs, also labelled as the “Santiago Principles”. While the Santiago Principles may be useful for a better regulation of the relationship between fund managers and owners, they are nevertheless absolutely futile for considering and protecting the interests of the host States of sovereign investments. Thus, the Santiago Principles go against their founding objective. To this extent, the Santiago Principles shall not be regarded as a genuine form of international regulation, but rather as a veneer of respectability to improve the way recipient States perceive sovereign investors.

The EU and Member States: FDI, Portfolio Investments, Golden Powers and SWFs

This chapter investigates the regulation of SWFs' investments in the EU and its Member States. The chapter starts with an overview of the latest multilateral initiatives concerning SWFs and national security-related concerns, namely the Santiago Principles and the OECD Guidelines for Recipient Countries Investment Policies relating to National Security of 2009. The aforementioned multilateral initiatives, also supported by the EU Commission, aim at avoiding national (over)reactions, and a downward spiral into protectionist. Furthermore the chapter emphasizes that the admission and establishment of foreign investments (direct investments of third countries' SWFs included) in the EU is primarily (but not exclusively) governed by the freedom of circulation of capital. This internal market freedom encompasses the fundamental principle of non-discrimination, which is also mentioned in the OECD Guidelines as a sound basis for national investment policies. Nevertheless, the aforementioned freedom is not absolute. Under the Treaty's rules it is subject to reservations and (possibly) Member States' derogations, when genuine public order and security reasons exist. In this respect, the chapter highlights that free circulation of capital and the case-law of the CJEU thereon gives Member States quite limited possibilities to lawfully resort to investment restrictions. That notwithstanding, some Member States (such as Germany and France) have tightened their foreign investment control procedures for public order and security reasons in recent times. The chapter argues that such national schemes are not in line with the principles developed by the CJEU in its case-law on the matter. Moreover, after the entry into force of the Lisbon Treaty the EU has acquired exclusive competence to legislate on the admission of FDI. The conclusion is drawn that a European harmonization is needed in order to address Member States' genuine public security concerns related to direct investments of third-countries' SWFs.

Perspectives on the Santiago Principles and the Nigeria Sovereign Wealth Fund

The process of nation building is framed around the effective management of resources by government and its equitable distribution to the citizens. The failure of many leaders to effectively manage the nation’s resources has left their countries at the nadir of development with high incidences of poverty, unemployment, inequality, illiteracy, women/child/drug trafficking, maternal/infant mortality rates and social vices. In resources rich countries like Nigeria, there is no correlation between the revenue generated by government and the standard of life led by majority of the citizens. Scholars have attributed this development to corruption and fiscal indiscipline. The poor culture of resources governance has undermined the efforts of government to create inter-generational wealth and a cushion for resources glut or resource inertia. The paper therefore examines the propriety of the sovereign wealth fund in addressing inter-generational inequity in Nigeria. The paper asserted that the effective management of the NSWF in line with the Santiago Principles will go a long way to bridging the inequality gap in Nigeria. The paper argued that the prudent management of the sovereign wealth fund would bring about job and wealth creation and sustainable development. The paper is however apprehensive of the danger posed to it by a corrupt oligarchy but asserted that the success of the policy lies on the political will to create the environment for the efficient management of the funds.Key Words: Sovereign Wealth, Santiago Principles, Disclosure, Inter-generational Equity

Sovereign Wealth Funds: Problems of international law between possessing and recipient States

As the influence of Sovereign Wealth Funds (SWFs) is increasing in the world economy, the legal problems between the possessing States and recipient States become very important. The famous Santiago Principles are self-pledges of the governance and activities of SWFs by the possessing States and do not regulate the legal problems between the possessing States and the recipient States. This article considers the following relevant problems from the point of international law: (A) restrictions on foreign investment, (B) sovereign immunity, (C) taxation and (D) responsible investment. As to (A), although restrictions on foreign investment for national security reasons is generally permitted under international law, they should be guided by the principles of non-discrimination, transparency of policies and predictability of outcomes, proportionality of measures and accountability of implementing authorities. As to (B), when SWFs are involved in a civil action concerning holding shares in a company, they canno...

Issues of Governance : Transparency and Accountability of Sovereign Wealth Funds in Muslim Countries

Sovereign Wealth Funds (SWFs) have been growing in number and size over the years, in both Muslim and non-Muslim countries. Their importance in terms of potential impact on the economic, social and political fronts of both the home countries (managing the SWFs) and the host countries (receiving the investments of SWFs) has drawn increasing attention to the operations of these funds. The basic concerns about these funds are the issues of governance, transparency and accountability at a global level. This paper aims to highlight these issues with a specific focus on SWFs sponsored by the members of the Organisation of Islāmic Cooperation (OIC), or Muslim countries in short. It discusses the gaps arising in the governance, transparency and accountability of SWFs in Muslim Countries (SWF-MC) and proposes some recommendations to improve their practices with a view to enhance their impact on social and economic developments in Muslim countries. It also discusses the Santiago Principles which have been developed as a comprehensive set of voluntary codes to serve as a framework of international best practices in the area of governance for SWFs. It is found that SWF-MC such as Libya, Qatar, Sudan, Nigeria, Oman, Brunei and others are the least compliant funds with regard to the Santiago Principles based on the Truman scoreboard. Moreover, the overall level of transparency of SWF-MC, based on the Linaburg–Maduell Transparency Index (LMTI) is also very low. Based on these findings, it is deemed crucial that SWF-MC should be properly set up and governed by international best practices.

Sovereign Wealth Funds: The Good Guy Investment Actors?

Sovereign wealth funds (SWFs) have been portrayed in some quarters as potential bad guys in global financial markets due to their supposed political as opposed to commercial intentions and influence. However, two key international developments during and since the 2008/2009 Global Financial Crisis have prompted some abatement in the hostility and mistrust displayed towards SWFs. First, SWFs provide substantial and growing sources of much-needed liquidity in global capital markets. Secondly, the Generally Agreed Principles and Practices – GAPP (The Santiago Principles) were created in 2008, which are a multilateral initiative to directly address governance issues associated with SWFs. Thus, SWFs have become a more accepted element of global financial markets and more is now known about how they operate and where their investment priorities tend to lie. However, there is still much to learn about the important roles that SWFs are likely to play in global markets, particularly how they may contribute to the public good. Accordingly, this article considers the good guy potential of SWFs by elucidating how SWFs may not only be a facilitative economic mechanism but also an important tool for societal benefit. In so doing, this article focuses on the role that they might play in domestic investment in order to stimulate the growth of social capital and nation building in their home country, as well as progress made by SWFs themselves to improving their standards and processes of governance.

Enhancing the Transparency Dialogue in the 'Santiago Principles' for Sovereign Wealth Funds

Compliance with the Principles for sovereign wealth funds (SWF) remains measured. This underlines the inherent political nature of SWFs, as they reflect the norms and conventions of their sponsors as regards transparency. Like any voluntary standard, compliance relies on the goodwill of the organization, and ultimately the organization's sponsor. Compliance is furthermore complicated when varying interpretations are present as to the requirements of the standard. In this short essay, I offer an explicit treatment of transparency in its different forms such that SWFs, their sponsors, and external analysts have a discursive device for evaluating and communicating when and why (and why they think) certain non-disclosures are legitimate, or, more importantly, when and why transparency in one domain may diminish the significance of disclosure in other areas, thus reducing the significance of non-disclosure in those areas. The aim, then, is to encourage dialogue on non-disclosure in conjunction with the Santiago Principles, as doing so leads, in my view, to increased transparency overall.

Game theory and sovereign wealth funds

Purpose – The purpose of this article is to assess strategies available to recipient states for managing the putative risks posed by sovereign wealth funds (SWFs) in the context of global, liberalized, and capital markets. Design/methodology/approach – The paper employs a game theory analysis in assessing these risks. Four basic scenarios are outlined whereby recipient states may interact with SWFs: “unselfish recipient state – unselfish SWF” (Option 1); “unselfish recipient state – Selfish SWF” (Option 2); “Selfish Recipient State – unselfish SWF” (Option 3); and “Selfish Recipient State – Selfish SWF” (Option 4). Findings – In the light of this analysis, and the balance of risks which the authors perceive recipient states are exposed to in practice, the authors claim that recipient states ought, rationally, to adopt a selfish regulatory strategy irrespective of the strategy which SWFs adopt in practice. Originality/value – This claim does not deny the importance of voluntary international measures – such as the “Santiago principles” – in the way SWFs are regulated. Rather, it seeks to show that according to a game theory analysis, and an attempted application of that analysis in practice, undue reliance by recipient states on international “soft law” regulatory initiatives to regulate SWF activity (which constitutes the current international consensus) is strategically unwise.