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OECD Guidance on Sovereign Wealth Funds: Still Falling Short



On October 14, 2008, I wrote a piece “Making the World Safe for Sovereign Wealth Funds” on the release of the “Santiago Principles” (Generally Accepted Principles and Practices [GAPP]) by International Working Group (IWG) of Sovereign Wealth Funds (SWFs) on October 11.

At the end of my piece, I expressed concern that the members of the OECD—the organization of the world's leading democracies and market economies and, as such, the group representing the views of the recipients of many SWF investments—had not adopted sufficient reciprocal measures to support the openness of international investment. OECD officials subsequently sent me information about OECD guidance on SWF investments. Most of that information was previously available. However, the actions with respect to accountability for decisions and the decision-making process were agreed only on October 8 and had not been highlighted. The OECD communication is reproduced below, followed by my additional observations.

OECD Guidance complete. The final tranche of the OECD guidance on SWF investments was adopted by OECD members on October 8 and presented to the International Monetary and Financial Committee meeting in Washington on October 11.

The OECD guidance [PDF] has three parts:

1) OECD Ministerial Declaration on SWFs and recipient country policies, made by Finance Ministers meeting at the OECD in June 2008. This gives high-level political support for OECD guidance and increases its weight as a source of international investment law.

2) Guidance that reaffirms the relevance of long standing OECD investment principles (first adopted in 1961) for recipient country policies toward SWFs. These are nondiscrimination (treat SWFs as well as similar domestic investors); standstill (do not introduce new measures); progressive liberalization (make progress of liberalization); and unilateral liberalization (do not insist on reciprocity for liberalization measures).

3) Guidance for investment policies relating to national security. OECD investment instruments previously recognized the right and the duty of governments to countries to take measures to safeguard essential security interests. This newer guidance, developed over the last year, provides recommendations for recipient country policies that help to make sure these policies are effective in protecting the safety of countries and to ensure that they are not used as disguised protectionism.

Next steps. OECD members will be using the OECD's trademark “peer review” process to promote adherence to these standards. This brings peer pressure to bear on the design and implementation of investment policies. Investment related peer reviews have been going on now for nearly 50 years and have channeled decades of liberalization in the OECD. The newer guidance on national security related policy provides a new reference for these discussions among peers. OECD members are already actively involved in this process; for example, there have been several in-depth discussions of proposed changes by several member countries and these have resulted in changes to draft laws.

Involving nonmembers. In recognition of the growing importance of the non-OECD world for international investment, OECD discussions of investment policies have been opened up; the OECD work on SWFs has benefited from the participation of some 20 nonmembers including Russia, China, South Africa, and Brazil. In the future, the OECD will be making a special effort to invite nonmember governments from countries whose investors may feel they have been harmed by an OECD country's restrictive measures; this will give them direct access to the OECD peer review mechanisms.

Additional Observations

The efforts by OECD members and the OECD secretariat to fulfill their commitments in this area are commendable. They have done what was asked of them at the G-8 summit in Heilingendam, Germany in June 2007 and by the G-7 finance ministers and central bank governors. In effect, the guidance agreed within the OECD states that SWF investments are to be treated like any other foreign investments. They should not be subjected to a more restrictive regime. I applaud the fact that the OECD is opening up somewhat the involvement of other members in its deliberations on these issues.

Nevertheless, I remain concerned and disappointed that members of the OECD did not take this opportunity, as part of its Freedom of Investment Process, to move further to strengthen the openness of their investment regimes. It is desirable to extend the privileges of those regimes automatically to nonmembers rather than just on a “best endeavors” basis. It is desirable to make a stronger commitment to no new, nonsecurity-related restrictions on foreign investments. It is desirable to open up the peer review process within the OECD to nonmembers by providing them with assured access to that process.

Going forward, members of the OECD should be diligent in implementing the new agreed guidance on SWF investments and should consider my proposals for additional steps. At the same time, the IWG should promptly establish the proposed “standing group” of SWFs to deal with implementation and follow-up issues associated with the Santiago Principles. These steps will enhance reciprocal responsibility for the global investment climate at a time when the world economy and financial system is under stress.

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