Wealth Fund aims to smooth Gulf relations

Robert Hamilton
For Al-Shorfa.com
2008-06-24

U.S. Congressman Jim Moran, Virginia Democrat

A U.S. sovereign wealth fund (SWF) task force arrived in Abu Dhabi this week for high-level talks aimed at smoothing relations between the Gulf’s powerful state-backed funds, and Western governments.

The Congressional delegation will hold meetings with officials from Abu Dhabi investment vehicle Mubadala Development Company on June 23, before heading to Saudi Arabia and Dubai for similar talks.

The task force, headed by Congressmen Jim Moran and Tom Davis, aims to educate fellow lawmakers on wealth funds and show how important they are to the U.S., a spokesperson for Moran said, adding that the task force hopes to prevent a repeat of the DP World scandal in 2006. In that case, the Dubai-owned ports operator was forced to sell U.S. port terminal operations it acquired through its takeover of UK-based P&O amid a political firestorm, with U.S. senators claiming that the deal posed a threat to American national security.

SWFs, many of which come from oil-rich Gulf states and Asian countries with large trade surpluses, are thought to control assets worth an estimated $3 trillion, which could grow to grow to $12 trillion by 2015, according to some analysts.

Investments by SWFs have increased dramatically over the past year as governments in the Gulf and Asia look to invest record budget surpluses. Driven by western banks’ need for fresh capital, investments reached $24.4 billion in the first two months this year, already almost half the volume of last year, according to data from analysts Dealogic. SWFs saw their investment surge 165 percent to $48.5 billion in 2007, compared with $19.2 billion in 2006 and $8.2 billion in 2005.

Abu Dhabi Investment Authority (Adia) is currently the world’s largest SWF, controlling assets worth around $875 billion. It was among several wealth funds that came to the rescue of U.S. and European banks in the wake of the subprime mortgage crisis and ensuing credit crunch.

U.S. Congressman Tom Davis, Virginia Republican, addresses business leader at a C.I.O. conference

However, the growing influence of wealth funds has raised concerns in the West over transparency and accountability, with some claiming foreign governments may harbour political motivations when investing in the U.S. and Europe.

Voluntary investment codes of conduct have been drawn up in both the U.S. and EU, and the International Monetary Fund (IMF) has set up a working group with 25 wealth funds to draft the first ever ‘best practice’ guidelines. Still, wealth funds have so far resisted calls for increased regulation, stating that restrictions on investment will see them take their money elsewhere.

In Saudi Arabia, the kingdom is on the verge of approving the launch of its first SWF, with an initial capital of $5.3 billion. The fund, which will be set up by the state-controlled Public Investment Fund (PIF), will act as “a portfolio investor, focusing on maximising long-term rates of return”, according to the PIF’s secretary general, Mansour Al-Maiman.

Al-Maiman added that the new fund could raise its capital or increase the size of assets under management as needed. PIF is attached to the Finance Ministry and invests exclusively in local assets, and the new SWF’s main investment focus will be on domestic projects.

Mohammed Al-Jasser, vice governor of Saudi Arabia's central bank, told newswire Reuters in January that Saudi Arabia could “live without it” if debate about suspected abuses by similar foreign investment vehicles continued.

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