The Steven Bradbury of Sovereign Wealth Funds
By Eric EllisMarch 18, 2012
Many nations sock money away for harder times. Some invest carefully, some cravenly. Others - like East Timor - just get lucky!
LONDON, New York, Tokyo, Hong Kong, Dili.
Perhaps Timor-Leste's raffish capital doesn't have quite the 24/7 hubbub, the power suits and the Crackberry-obsession that mark the world's better-known financial centres. But for a few golden months, back in 2008-2009, the apprentice capitalists who modestly manage this nascent nation's sovereign wealth fund achieved what obscenely rewarded smarties elsewhere couldn't - they made money.
That's because Norway, Singapore, Abu Dhabi and China, which dominate the international sovereign wealth fund rankings, to which Australia's Future Fund aspires, found themselves long with struggling investments at precisely the wrong time - when the global financial system was melting down.
As banks were rescued by taxpayers, lest the entire system fail, shares of these too-big-to-fail giants of world finance plummeted and sometimes disappeared in ugly scenes the world is still paying for, pace the euro's never-ending crises. It left deep scars on the bottom line, and on the reputations of supposedly prudently managed SWFs in important places.
Much of that fiscal prudence occurred in Dili, in a land that hadn't been a nation for even 10 years. It was a nation which lacked any substantive economy to speak of. Set up at East Timor's 2002 independence, Dili's Petroleum Fund dutifully socked away rainy-day oil and gas revenues from the Timor Sea fields into boring US Treasury Bills, about the world's most conservative investment.
Meaningful diversification into racier investments such as shares required the near-unanimous support of Timor-Leste's unruly parliament. And anyone who'd spent five minutes in then difficult Dili knew that to be impossible. So as global banks were collapsing, the $6 billion Timor fund was receiving the Washington-guaranteed one to two per cent back from the T-bills - way better than the embarrassing 30 per cent haircuts grown-up SWFs were enduring. One fund board member with an eye on the Winter Olympics called it "Steven Bradbury economics."
Not all sovereign wealth stories read like Cinderella. These funds come in a range of shapes, sizes and successes, and all have their own complications and intrigues. With billions at their disposal, and many controlled by some of the world's least democratic regimes, the rise of SWFs raises compelling questions for the world economic order. Are these funds independent investment houses, separate from political influence? Or are they instruments of state control - nationalisation of economies by another means? Whatever they are, as the world economy sputters along, with investment capital in short supply, they are impossible to ignore.
A sovereign wealth fund is one of the first things a newly-independent nation sets up, in these heady days of enlightenment. But, as autocracy inevitably sets in - one thinks immediately of resource-rich Central Asia - it doesn't take long for them to become political footballs as covetous fingers reach for the till.
Sometimes SWFs are like Norway's, whose USD575 billion Government Pension Fund is a virtuous paragon of independent management and transparency. And sometimes they are more like Nauru's. This tiny Pacific nation blew its abundant superphosphate bounty in a miasma of failed 1970s schemes, like West End shows that flopped. Today, it's broke, which helps explain why it is desperate for "Pacific Solution"-led investment from Canberra.
From Kiribati to Kuwait and points in between, The Global Mail looks at how some have been managed, used and abused.
AGENT OF FOREIGN POLICY? Singapore has two sovereign funds, Temasek Holdings and the Government Investment Corp, with a combined estimated USD500 billion in assets. The Lee family is involved with both; Prime Minister Lee Hsien Loong chairs the GIC, recently taking over from his father, Lee Kuan Yew, who remains a 'senior advisor'. PM Lee's wife, Ho Ching, runs Temasek, where a principal asset is Singapore Telecom, run for years by her brother-in-law, another Lee. Try as Temasek might to portray itself as an "Asian investment company", it can't escape the fact that it is 100 per cent owned by the finance ministry, which was run for a long time by PM Lee. The GIC invests Singapore's foreign reserves, Temasek holds the state's stake in strategic assets - Singapore Airlines, arms-maker Singapore Technologies, DBS Bank. Temasek-related investments have helped keep Burma's junta afloat.
National interest rules and that's led to big problems for Singapore Inc: a cosy 2006 deal in Bangkok with then Thai PM Thaksin Shinawatra precipitated a coup that ousted him, ushering years of red-yellow turmoil that's still simmering. India and China allow Singapore government investment, but only to a point. In neighbours Malaysia and Indonesia, where Singapore isn't much liked, any attempt at investment invariably ends in a spat as Singapore trips up at the intersection of politics and business interests — often the same thing. Free marketeers have called Singapore government investment the re-nationalisation of their private economy. And at home, Temasek's domination of Singapore's domestic economy means few private players dare to compete with it, so it can be an impediment to a fully-flowering economy.
Size is another issue. The Singapore SWFs are so huge in Asia that it's inevitable the types of assets they're interested investing in are strategic; airlines, the financial sector, telcos. Witness the Temasek-owned Singapore stock exchange's failed bid to buy the Australian Securities Exchange in 2011, or how it waded into Indonesian telcos in the early 2000s when Indonesia was wobbling under an Islamist resurgence and an uncertain democracy. Many Indonesians posited that Singapore just wanted to listen in on their phone calls. Ultimately though, in a tiny country ruled by the politics of fear, it's all about maintaining Singapore's viability, a city-state without any natural resource except its harbour and an industrious people.
ECONOMY-IN-EXILE: In 1990, Saddam Hussein's army waltzed into Kuwait and claimed it as Iraq's "19th province". That was tricky for those in Kuwait, but it didn't mean the end of Kuwait as an economic entity. Because the Kuwait Investment Authority kept functioning in exile from London, investing all those petrodollars, keeping the Al-Sabahs in Rolls-Royces and flash hotels, and helping fund the US-led war that ousted Saddam five months later. Founded in 1953 to manage the surplus from tiny Kuwait's oil bounty, the KIA was the original, modern SWF. Today, its USD300 billion asset base is the world's sixth biggest, with major stakes in companies such as BP - some feat for a country of just four million, and most of them not Kuwaitis.
LOOK AT ME: Qataris don't really need to get out of bed every day to go to work. Foreigners do that for them, including investing the USD200 to 300 million this tiny Gulf peninsula earns every day from the oil and gas that spouts from beneath its sands and territorial waters, firing the stoves and heaters of Europe. Qataris are the world's richest people and its sovereign fund, the Qatar Investment Authority, is making sure they stay that way. Europe is Qatar's preferred locale, in effect investing the money Europeans pay for Qatar's gas back in the continent. Qatar owns London's tallest building, Harrods department store, large portions of Canary Wharf and the area around Trafalgar Square, myriad football clubs from Malaga to Paris Saint-Germain and, for a time, Miramax Movies as well. Oh, and did we mention how it's financed a few uprisings and a war in these recent Arab Spring times? Still, the democracy it's helping others to flower hasn't yet bloomed in Qatar itself, ruled benevolently and autocratically by the absurdly wealthy Al-Thani dynasty.
MY OWN PRIVATE ATM: One of the wars Qatar financed was in Libya, to knock out Muammar Gaddafi. It succeeded, bloodily, and today Gaddafi's successors are arm-wrestling what to do about or, more to the point, where to find all of the supposed USD60 to 70 billion in assets held by his oil-fuelled Libyan Investment Authority. If the stuff found in the homes of the family is any indication, the coffers of pornographers, drug-dealers and whisky producers would be a start. The new Libyan authorities believe billions of LIA cash were stolen by the family. A Paris magazine last week reported that 50 million euro of Gaddafi's cash ended up in the re-election fund of French President Nicolas Sarkozy. Before he was lynched last October, Gaddafi's Libya boasted stakes in auto giant Fiat, various London hotels, vast tracts of Andalucian forestland, the now defunct Dutch-Belgian bank Fortis, Italy's Juventus football club and Pearson plc, owner of London's Financial Times newspaper. Last year, Tripoli's interim authorities, seeking to release Libyan offshore assets frozen when Gaddafi started killing his citizens, said more than USD3 billion was missing from the fund. Is that all?
SOVEREIGN HEDGE FUND: China has foreign reserves amounting to a staggering USD3 trillion, and then some. It's the world's biggest cash pile, and it's managed by the Beijing-based State Administration of Foreign Exchange, or SAFE. It's a pile of cash so large, and so opaque, that everyone subject to it (read all and any of us whose livelihoods are subject to the on going integrity of the international financial system) hope and assume it's appropriately managed by people most of us have never heard of, China hardly being Norway when it comes to transparency.
But it's also so big that China can, if it so desires, manipulate and profit from any market it chooses, simply by doing something, anything, as a hedge fund might aspire, to guarantee profits. Economists have likened this power to the tactics of the notorious Bunker Hunt brothers, who attempted to corner the world's silver market in the 1970s and made billions doing so. China could corner any market it liked.
Most of China's reserves are US dollar-denominated. But imagine if it telegraphed its accumulating Euro or Australian dollars with vigour, or took a stake in a major world bank or oil company. Those markets would come alive as lemmings piled in after them. Prices would soar.
IT'S ALL RELATIVE: Founded in the 1950s to manage its phosphate revenues, Kiribati's Revenue Equalization Reserve Fund has about USD500 million. That doesn't sound like much but Kiribati only has about 100,000 people. That's USD5,000 invested for every i-Kiribati, as the locals are known. Now compare that to Australia's Future Fund - USD73 billion divided by 22 million equals USD3,318. Who's better off?
Readers have noted the inappropriateness of comparing Australia's Future Fund and Kiribati's sovereign wealth fund. The reference was intended to highlight that even tiny Kiribati, where the biggest employer is the civil service, has such a fund, while referencing the debate about extending the Australian fund beyond its founding precepts.