Policy frameworks for SWF investments: OECD and host-country perspectives

Working in parallel with the International Forum of Sovereign Wealth Funds, the OECD has developed a framework for recipient country policies towards SWF investments promoting openness, non-discrimination, transparency and restrained and disciplined use of investment measures related to national security. This framework can be viewed as the host-country counterpart to the SWFs’ Santiago Principles – together they form an emerging framework of international norms governing SWF investments. The purpose of the chapter is, first, to describe the OECD guidance and then to take stock of where recipient countries are in terms of living up to these commitments since they were formally adopted in early 2009. There are four key findings. First, most countries have maintained formal policy stances that are largely receptive to international investment in general and to SWF investments in particular. This means that de jure, investment policies have tended to become more open, more transparent and less discriminatory to foreigners and non-residents and SWFs have benefitted. Second, although national security concerns are an ever more prominent feature of host country policies vis-à-vis inward investments, SWFs have continued to occupy a relatively low profile in this area (and this, despite the fact that state-owned enterprises in the broader sense have attracted significant attention in security-related investment reviews). Third, emergency measures taken during the crisis – mainly in the financial sector, but also in others such as automobiles and green’ sectors – create considerable discretion in policy making. These measures are not always discriminatory against foreign investors – indeed, they were often favourable to them in the sense that foreign investors, including SWFs, were often selected as partners in rescue operations for domestic firms. They nevertheless pose challenges for existing international investment disciplines – these discretionary, one-on-one relationships between governments and investors, be they domestic or foreign, are inherently difficult to subject to international rules. This review concludes that the biggest current threat to openness to SWF investments (and indeed open global capital markets in general) resides in less transparent, more discretionary public policies that have assumed even greater importance during and since the crisis (e.g. subsidies, prudential supervision and informal arrangements). International economic diplomacy is going to have to become much more intensive and smarter if it is to succeed in constraining governments’ ability to abuse their newly created discretionary powers.