I support the comments made by George Gilligan decrying the game of political football recently played out around the appointment of a new chair to the Future Fund in Australia.  It is a shame there is not a more informed debate going on in Australia about the merits of establishing Sovereign Wealth Funds and their regulation.

In recent years Sovereign Wealth Funds have become a critical source of international capital, improving the liquidity of financial markets.  Sovereign Wealth Funds are currently estimated to hold capital of approximately $4 trillion growing, to $5.5 trillion by the end of 2012.  Sovereign Wealth Funds are estimated to hold assets greater than global hedge funds and global private equity funds combined.

Foreign direct investment into Australia has been critical to Australia’s growth and continues to be needed for the development of infrastructure and to support Australia’s population growth.  Sovereign Wealth Funds should be a welcome investor in this country.

While Sovereign Wealth Funds come in all shapes and sizes, Sovereign Wealth Funds funded by commodity exports represent more than 60% of the assets of all Sovereign Wealth Funds.  Prominent examples are the Norway Government Pension Fund, the Abu Dhabi Investment Authority, the Kuwait Investment Authority and the Qatar Investment Authority (all oil revenue funded).  Notable new commodity based funds established in recent years include the Russian National Wealth Fund and the Sovereign Fund of Brazil.  Commodity based funds are typically stabilisation funds set up by countries with abundant natural resources to provide budgetary support and general economic protection against volatile commodity prices and finite reserve lives.  Surely there is a strong case for the establishment of a commodity fund in Australia having regard to the expected future budget surpluses driven by the resources boom.  As an asset class, Sovereign Wealth Funds offer greater diversity of investment flows than official foreign exchange reserves.

The investment activities of Sovereign Wealth Funds continue to be a critical component of global foreign direct investment.  The role of Sovereign Wealth Funds as backstop investors to global financial institutions during the 2007 financial crisis has been much commented upon.  However, it does not end there.  It has been estimated that Sovereign Wealth Funds have invested more than $250 million in cross-border mergers and acquisition transactions in recent years.  Some prominent recent foreign direct investment transactions include the investment by China Investment Corporation into Thames Water ($1 billion), the investments by Qatar Investment Authority into Harrods and Fairmont Raffles ($3 billion) and the investment by International Petroleum Investment of the UAE into Unicredit SPA ($2.3 billion).

In Australia much of the political debate around foreign direct investment into Australia remains xenophobic in time.  The 2008 Lowy Institute on Australian attitudes to foreign direct investment reported that 90% of those surveyed believed that the Australian Government has the responsibility of keeping Australian companies majority Australian controlled and 85% said that the investments by companies controlled by a foreign government should be more strictly regulated than investment by foreign private investors. 

A frequent concern expressed about Sovereign Wealth Funds is a view that their activities lack transparency and that their activities may be susceptible of Government influence so as to pursue national political objectives rather than be driven by commercial considerations.

Those concerns seem overblown.  There is no evidence of Sovereign Wealth Funds being driven by agendas other than commercial considerations. 

The International Working Group of Sovereign Wealth Funds establishment of the Santiago Principles, designed in conjunction with the IMF, has also had a significant impact.  In a recent report, the subcommittee of the International Forum of Sovereign Wealth Funds reported that the voluntary Santiago Principles have had a high degree of takeup by member countries.  The Santiago Principles go a long way to developing improved transparency of decision making, clearer commercial risk management frameworks and structural and governance independence.

The Foreign Investment Review Board of Australia continues to have unreasonably strict notification requirements for Sovereign Wealth Funds.  All foreign investment by foreign Sovereign Wealth Funds irrespective of size must be notified to the Australian Government for approval.  The Australian foreign investment regime remains one of the most restrictive globally for regulating foreign direct investment through its pre-notification requirements.  With the Santiago Principles now in place, there is a good case for arguing that Sovereign Wealth Funds acting in compliance with the framework should be afforded greater investment flexibility without the need for foreign investment approval.  This is an area the Australian Government, as a member of the International Working Group, should look at.

For more on the regulation of Sovereign Wealth Funds in Australia see Greg Golding and Rachel Bassil,  'Australian Regulation of Investmens by Sovereign Wealth Funds and State-Owned Enterprises' in Fry, McKibbin and O'Brien (eds.), Sovereign Wealth: The Role of State Capital in the New Financial Order (London: Imperial College, Press 2010); see also Greg Golding,  'Australian Regulation of Foreign direct investment by Sovereign Wealth Funds and State Owned Enterprises: Are Our Rules Right?' (2010) 38 ABLR 213.