February 2012

Mac Economic Commentary

Sovereign wealth funds: a growing opportunity or a policy concern?

By Paul Stothart

In the capital investment sphere, one of the most significant international policy developments in recent years relates to the emergence of sovereign wealth funds (SWFs) on a massive scale. Such funds reflect the active state involvement in the oil and gas industry that is seen around the world, either in the form of direct ownership and control of the industry in some countries or through active regulation and royalty income flows in others. Much of the income from this industry is being channeled into the SWFs of the sovereign states.

Fuelled by several years of $100 per barrel world oil prices, including a record $140 in 2007, sovereign wealth funds have amassed staggering levels of investment capital. This capital can then be utilized to support the future investments and priorities of the sovereign owners. In some cases, this is through investment in foreign hedge funds, government bonds and asset management firms; in other instances it is through direct investment in foreign projects and companies.

The research firm, Global Insight, estimates that the combined value of global SWFs reached $4.5 to $5 trillion as of mid-2011, a figure that is greater than the established economies of Britain, France or Germany, and three times that of Canada. It is thought that this level could rise to US$10 trillion within a decade.

Sovereign Wealth Fund News ranks 57 funds in its regular analysis, the largest wealth funds by assets being the following:

  • Abu Dhabi Investment Authority: $627 billion
  • Norway Government Pension Fund: $570 billion
  • China`s State Administration of Foreign Exchange (SAFE) Fund: $568 billion
  • Saudi Arabia’s Monetary Agency (SAMA) Fund: $520 billion 
  • China Investment Corporation (CIC): $410 billion

Over 30 countries have sovereign wealth funds in place. Some, such as the Alberta Heritage Savings Trust Fund, are established at the sub-national level. As Canada’s only SWF, the Alberta fund was created in 1976 and has generated $32 billion in investment during its history, while presently being valued at only $15 billion. In recent years, the province’s weaker commitment to net contribution and poor fund investment performance has served to limit its growth. This could illustrate a short-term fixation that arguably guides oil policy in Canada.

The relevance of SWF growth to the mining industry is that these countries are seeking to convert growing portions of investment capital from paper to hard assets. The Middle East Arab states, for example, have been actively converting oil revenues to foreign assets in recent years, to the extent that the region’s foreign assets amounted to an estimated $2.2 trillion by year end 2011, with one-third held by SWFs, according to the Institute of International Finance.

China’s SAFE fund has invested in Rio Tinto, Shell and BP among other resource firms. The China Investment Corporation invested $3.5 billion in Teck Resources in 2009, acquiring 17 per cent as part of a broader strategic arrangement. CIC has also invested in several oil firms and energy trusts internationally, and has opened an office in Toronto to better assess North American opportunities. China’s SWFs, and related government agencies have been heavy investors in Australian and African resources in recent years: China’s investment in Africa will reach $50 billion by 2015, up 70 per cent from 2009 according to South Africa’s Standard Bank.

In recent years, there has been policy debate regarding the role of SWFs – negative concerns over the opaqueness and possible political and ideological orientation of these funds, mixed with positive support of their ability to provide liquidity and stability to the global economy. The Santiago Principles were developed in 2008 to guide the operating and investment practices of sovereign wealth funds, although these principles have been described by some analysts as weak and ineffective. The much-discussed “ethical oil” issue is also relevant here. Do large consumers such as the United States wish to see this scale of their oil import revenues flow to Saudi Arabia, Iraq and Libya for their future investment, or to countries such as Canada?

Nor is the magnitude of this issue going to diminish in the future. Investment firm Goldman Sachs estimated in 2008 that some $1.8 trillion is shifting from oil consumers to oil producers each year – wealth that is directed in large part to the SWFs of oil-producing countries.

The Mining Association of Canada recently released its annual Facts & Figures 2011 document, one section of which details the estimated $137 billion that could potentially be invested in Canadian mining projects over the coming years. While each company and project would proceed in its own way, and draw upon a range of financing sources, it is quite conceivable that some of the world’s sovereign wealth funding could be drawn upon to support these investments. This will be yet another interesting dimension of the Canadian mining industry worth following in the coming decade.

Paul Stothart is vice-president, economic affairs, at the Mining Association of Canada. He is responsible for advancing the industry’s interests regarding federal tax, trade, investment, transport and energy issues.
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