Press Briefing on the International Working Group of Sovereign Wealth Funds by Co-Chairs, Mr. Hamad al Suwaidi of the Abu Dhabi Investment Authority, and Mr. Jaime Caruana of the International Monetary Fund, with David Murray of the Australia Future Fund and Chair of the IWG's Drafting Group

Transcript No. 08/02
October 11, 2008
Washington, DC

MR. AL SUWAIDI: Ladies and gentlemen, thank you for joining us today. Clearly you do not need me to tell any of you that we are living in exceptional times, a world that is challenging the foundations of our global financial system. Uncertain times demand a greater sense of responsibility from all of us, both you as journalists covering global developments and sovereign wealth funds and as major participants in the global market. I believe it is for this reason that what we are able to announce today is of even greater significance than it might have been when we started out on this challenging process.

For over 30 years Abu Dhabi has been a global institution of investors. With this has come responsibility, a responsibility to demonstrate robust risk management, strong governance, and a clear connection between performance and investment strategies and objectives. And as this process has shown, this is a responsibility that is recognized and keenly felt by all the other sovereign wealth funds around the world.

Ladies and gentlemen, as we meet today in these uncertain times, never has this responsibility been greater, so if we are to perform this role in a responsible manner, we will have to be rigorous in adhering to the principles that we have developed in Santiago. We believe that the principles announced today represent an important step forward in clearing up any confusion with regard to the agenda of the sovereign wealth funds.

The Santiago Principles are composed of 24 principles that reflect the overarching objectives for sovereign wealth funds. First, to comply with all the applicable regulatory and disclosure requirements in the countries in which they invest; second, to invest on the basis of economic and financial risk and return-related considerations; third, to have in place a transparent and sound governance structure that provides for adequate operational controls, risk management, and accountability; and, fourth, to contribute to maintaining a stable global financial system and free flow of capital and investment.

Much has been written and will continue to be written about sovereign wealth funds, but there remains some confusion as to which funds should be included in this category, so for the purpose of clarity, sovereign wealth funds are defined as special purpose investment funds or arrangements that are owned by a general government that have been created for macroeconomic purposes that hold, manage or administer assets to achieve financial objectives and that employ investment strategies that include investing in foreign financial assets. In agreeing to these principles, sovereign wealth funds are making it clear that SWFs are open to being more transparent. Indeed, in what is a clear indication of SWFs' commitment to broadening the understanding of their objectives, six of the principles and four of the sub principles in the GAPP specifically commit sovereign wealth funds to make public disclosures in a variety of different areas. But sovereign wealth funds must not be put at a competitive disadvantage in the marketplace. I believe that the process we have undergone over the last four months represents a significant step forward and will contribute to enhancing the way sovereign wealth funds are perceived around the world. For me, this process is about one word, it is all about trust. It is about collectively doing everything in our power to ensure that trust lies at the heart of everything we do, so make no mistake, our achievements to date have been significant, but we must also recognize that we cannot let up in continuing to meet the high standards that we have set out for ourselves. I would urge all of you to read carefully the full GAPP principles for more detail on the points I have just raised. Thank you. And with that, I would like to turn to Mr. Jaime Caruana for his comments.

MR. CARUANA: Thank you. I would like to just add a few words from the perspective of the Fund. We have been facilitating, we have been cooperating with the sovereign wealth funds in developing these principles, and what I would like to add is that the process in itself, not just the principles that finally were written, but the process leading to the principles has been very important. It has created very good dynamics, and it was not an easy process because the diversity and the very different institutional settings and arrangements that different sovereign wealth funds have from the beginning, so I think it has required a considerable effort on the part of the sovereign wealth funds to get these common principles.

I would like also to agree with Hamad that the Santiago Principles are a true milestone but are perhaps more important today because of the situation that we are living in the markets, and in this situation I think that the fact that we have different kind of investors, the fact that we have investors that can take decisions with long-term horizons is an element that can contribute to financial stability, and this is an important element. That is exactly the role that sovereign wealth funds can play because they have this kind of long-term horizons.

I hope that this document that has been very well received by all Ministers will help to understand better the sovereign wealth funds, how they work, how they organize, and that will help, as Hamad was saying, to build trust, which is one of the main purposes of this exercise, and again on the process, it was very important interaction between the sovereign wealth funds and the recipient countries that has happened every time that the sovereign wealth funds have met in different locations.

Finally, I think it is also very important the establishment of a standing group of sovereign wealth funds that will study the future of how they are going to organize and how the sovereign wealth funds and the IMF interact in the future. I think all of these elements are very promising, and I would like to thank both Hamad Al-Suwaidi and David Murray for their excellent work in developing these principles. David?

MR. MURRAY: Thank you. I would just like to turn to the structure of the document itself. In dealing with the terms of reference that we had starting our drafting work, the thing that remained most on our mind was that we had to establish trust in recipient countries that the activities of sovereign wealth funds were all based on an economic orientation. In formulating the architecture of the GAPP, we had to formulate it broadly for the reasons that Jaime just gave about the very different starting points of sovereign wealth funds but at the same time give a very comprehensive coverage and deal with all of the things that would give confidence. It is important in reading the GAPP that in each principle there is also a commentary. Because of this broad coverage and differences, it is very important to read the commentary to understand why the principle is important and how it applies differently to different organizations. One important issue in setting up the document was the position of funds that are new and are only in a transitional phase in getting themselves established. Being new, it is very, very difficult for a fund to demonstrate a track record of performance, a track record of decision making, and so the GAPP allows them time to get established.

So let me just talk to the structure and why it is such a complete document. We have built it in three parts - the legal framework, the institutional framework and governance, and the management of risk, the operational management and risk management. The legal framework sets out the form legality charter, sources and uses of funds, and why in fact the sovereign wealth fund is established. That is the most powerful signal of intent to recipient countries about how a sovereign wealth fund is likely to behave in its investing activity. From there we move to the institutional framework and governance structure, the governing body, the separation from government, ethical behavior, accountability, and transparency, and these things are linked to the legal framework to demonstrate why the intent of the governance is likely to produce an economic orientation.

In terms of accountability and transparency, there are different models in different sovereign wealth funds. The accountability issue should be read to look at the commitment to accountability of audit, of presentation to financial statements of owners, and the transparency issue. It is very important to understand that there are limits and a commercial reality to sovereign wealth funds protecting the confidentiality of transactions they enter into with counterparties in the market.

In the management and risk management area and operational area, we move into translation from governance into action. We look at investment policies, risk exposure, interface with market, investment decisions, the requirement not to use privileged information from government, and to deal with the exercise of ownership rights. This gives evidence of alignment with both intent and governance, and if you like, closes the loop on a full set of principles.

The last principle deals with the ongoing review of the GAPP as market circumstances change and sovereign wealth funds change, so we have decided to establish a standing group. We will progress that in the new year, and we are looking forward to the considerable value that that can provide in better understanding the application of the GAPP, adaptation of the GAPP, capacity building and working together as sovereign wealth funds, outreach to the rest of the world to better understand sovereign wealth funds, and continuing to deal with recipient countries of the like that we dealt with, not just the IMF who helped us out in the technical work, but the European Commission, OECD, the many countries we dealt with in formulating the GAPP in addition to the World Bank.

Our task was to convince the world of our commitment to openness in an economic orientation. We think the GAPP in such a short time that it has been formulated goes a long way to achieving that. Thank you.

MR. AL-SUWAIDI: Thank you. We are ready to take your questions now, please.

QUESTION: I wonder if the Australian Fund or the Abu Dhabi Fund is considering investing in any of these U.S. troubled assets. If you are, what kind of investment are you looking at?

MR. AL SUWAIDI: ADIA, as you know, has invested in Citibank, so they already have invested. They are reviewing the proposals. They are coming in daily. So we are evaluating our options with the other financial institutions.

MR. MURRAY: Under our legislation we worked to investment managers so our investment managers in terms of the mandates we have already given would be able to take up some forms of investment, but let me just say generally that sovereign wealth funds are all different with different strategic asset allocations and different positions in the market. They do compete with one another, and so it is generally up to each sovereign wealth fund to determine whether they like to participate in any issues of capital in the banking system, and it has to be dealt with on a fund-by-fund basis.

QUESTION: One follow-up from that question, then a specific on the principles. In the last press conference the Managing Director was talking about capitalization of financial institutions. Do you feel that sovereign wealth funds, as government entities, have any special responsibility in terms of their investments to look now toward capitalization, toward investments in financial institutions because of the crisis? That is the more general question.

Then, it struck me that your principle number 17 was sort of the basic principle to deal with political concerns, the main political concerns in recipient countries, and it talks about financial information being disclosed. The question I have there, is there any guidance in terms of disclosing the size of the fund, the purchases of the fund, or the allocations that are - you talk about the allocations, but would it be every year that you would update the allocation? Thanks.

MR. MURRAY: Just let me deal with the second question first. It is important to read the explanation and commentary to that principle because we actually think, as we went through it, we believe that size is not necessarily indicative of trust in terms of economic intent, whereas a demonstration of strategic asset allocation, benchmarks, investment policy, and those things which give rise to the real risk appetite and decision making of the sovereign wealth fund are more likely to build trust than just an exposition of size. So it is important to look at all of the disclosures that are intended in the principles and the commentaries rather than just deal with size. I know people are carried away with size, but I think that is not the main issue.

In terms of capitalizing financial institutions, as I said, this is a decision for individual sovereign wealth funds. If people are confident that they are acting from normal economic imperative, then they should be confident they would look at transactions as a normal investor, the return for risks, the diversification of the portfolio, all the normal factors would be taken into account. To do otherwise would be to suggest that the exercise we have just embarked on should not have been necessary or wasn't needed. It was very important to us to demonstrate our economic imperative and to build trust in recipient countries.

I think Mr. Caruana pointed out that as patient long-term investors, generally with little leverage in their funds, sovereign wealth funds do already play a role in an otherwise unstable system at the moment, and that is a very important role, and it is important also that users of capital in various countries or in companies be able to get access to sovereign wealth funds in the mix of capital that they want to raise. Otherwise they will have a mix of some impatient investors and miss out on the patient investors, so if I was a very large corporation, I would want to encourage sovereign wealth funds to be investors in my corporation for the reasons I've given.

QUESTION: I wonder if as important participants in the market you have had a chance to take a look at the statement coming out of the G7 yesterday, the IMFC today which made a number of points, it was a five-point package to try to stabilize the situation in the market, if you think that should be enough to improve the rather turbulent situation of the past few days and weeks?

MR. AL SUWAIDI: Unfortunately, I have not had a look at the mentioned statements.

QUESTION: I was wondering if you had any feeling as to whether the hostility that was expressed by certain elements within certain countries, such as United States, Germany, France to give three examples, whether that had perhaps been dissipated by the work that you have done or, indeed, whether the hostility had vanished simply because corporations are so desperate for capital that they have dropped their hostility?

MR. AL SUWAIDI: I think that hostility was greatly reduced when we started our process, and the more information that came out of our effort, the less hostility, if there were ever hostilities we have seen. So I would subscribe to the former reason.

QUESTION: What about the last reason?

MR. AL SUWAIDI: We are in the middle of uncertain times. We just came out publicly with the GAPP. We should wait and see.

QUESTION: You just mentioned, for example, that some of these wealth funds are already reviewing their investments in the case of Citibank. Do you expect, especially in light of these crises, that we might see a next wave of investment by sovereign wealth funds in their own domestic countries, especially to try to perhaps help revive local domestic markets and companies?

MR. AL SUWAIDI: I cannot speak for all of the funds. They each have their own objectives and investment policies, but we have seen many sovereign wealth funds investing in their own countries, and maybe most of them this is how they started. It is very difficult for me to speak on behalf of the other funds.

MR. MURRAY: I can perhaps give you a bit of color in my own situation. The gap between overnight money and 90-day bank bills in Australia had normally operated between about zero and 30 basis points historically, and that moved at one point to 115 basis points, even though the country has a AAA rating and no net debt, and the banks, the major banks are all still, the four of them, four of twelve remaining double A rated banks in the world. We were in transition getting our portfolio invested, and that was one of the easiest decisions on earth to make, to buy a very substantial quantity of bank bills, so it can happen that way. By the way, our board has no government representative, no ministerial representative, no government official on it, and we were able to make those decisions independently of anybody in government. It is just that it was too easy a decision, the money was too good to not back.

The other issue will be that I think as institutional investors, including non-sovereign wealth funds, one consequence of decisive and concerted action by governments to deal with this problem will be a significant increase in bond issuance around the world, and all institutional investors will finish up taking quite a deal of those bonds, and in that way support the sorting out of the current crisis.

MR. CARUANA: Thank you. I do not know if there are more questions? These last two, and thank you very much.

QUESTION: Just following on from one of the last questions, do you see ADIA stepping in in the U.A.E. should any of the Emirates or companies run into difficulties with issues such as project financing? We have heard a lot from emerging market countries such as the African Finance Ministers that they are concerned about, you know, reductions in donor funding from the traditional donors. Does ADIA see a place for itself in stepping in in these situations? Thank you.

MR. AL SUWAIDI: With regard to the first question, ADIA's mandate is to invest outside U.A.E. There are other institutions that might deal with the issue you have raised.

Now, with regard to the second question, ADIA's mandate is to invest on a commercial basis, nonpolitical investments, so that is the guiding objective of its investments.

MR. CARUANA: Last question.

QUESTION: Thank you for giving me another opportunity. You have obviously set out the principles that will increase your openness and accountability and so on. I was just wondering whether you had seen any evidence that funds had actually changed their practices to sort of be more western friendly, as it were, whether it is reducing government involvement in terms of membership on the board, you see what I mean? It is not just the openness, have funds actually taken action to be more friendly to recipient countries to do what they want you to do?

MR. MURRAY: Can I have a shot at that? They weren't being unfriendly in the first place. The oldest of these funds is more than 50 years old. I think the biggest indication of the commitment that has been made here was that it did not really have to be done. There is no evidence of this sort of behavior and problems, so this is an amazing commitment in such a short period of time in these circumstances, and I think having been through the drafting process, it is quite amazing how much learning has gone on amongst the group, and what we have all learned about governance structures, accountability, and so on on the way through, and by holding together as a group, we are all going to find out a lot more and be able to advise our respective governments about great systems for sovereign wealth funds, so that is the background, and that is why I think this is such an amazing commitment.

MR. AL SUWAIDI: Thank you very much for being with us today.