Wealth task force looks for answers

Wayne Arnold



  • Last Updated: May 24. 2008 10:47PM UAE / May 24. 2008 6:47PM GMT

Jim Moran, the US representative in charge of the group. AP

ABU DHABI // A US Congressional delegation led by a task force on sovereign wealth funds is due to land in Abu Dhabi this week for high-level meetings at a time of increasing controversy over the role such funds are playing in the West, as well as here in the Middle East.

Congressmen Jim Moran and Tom Davis, who co-chair the Congressional Task Force on Sovereign Wealth Funds, are scheduled to arrive tonight along with members of two influential committees in the House of Representatives – the financial services committee and the natural resources committee.

The group plans to meet with officials from Mubadala Development tomorrow, according to a spokesman in Mr Moran’s office in Washington, before heading on Tuesday to Saudi Arabia and stopping in Dubai on Thursday.

The delegation’s visit comes amid a widening debate about what function sovereign wealth funds should play as economic actors, particularly in light of the secrecy with which they invest on behalf of the governments they serve.

While some credit their recent investments in Western financial institutions such as UBS and Merrill Lynch as having helped prop up the global financial system in the face of the worst credit crisis since the Great Depression, others worry that they could be misused as financial weapons to pursue political goals.

The funds themselves argue that they invest only with the aim of maximising profits on behalf of the state and are emphatically apolitical. But voices in this region are starting to ask whether they should be.

Some say Gulf funds ought to be channelling more of their petrodollars into regional economies to help offset the impact of soaring inflation and help fund job creation in the Gulf’s more populous, but poorer, neighbours.

“We should utilise that wealth in this part of the world,” said Khalid Abdulla Janahi, the chairman of Bahrain’s Ithmaar Bank, at last week’s World Economic Forum on the Middle East, held in Egypt. “They need to invest in their own population. And I don’t see that happening.”

Together, the six GCC states – the UAE, Kuwait, Oman, Qatar, Saudi Arabia and Bahrain – account for nearly half of the world’s sovereign wealth fund assets. They control some $1.7 trillion (Dh6.24 trillion), as much as all of the hedge funds in the world.

Record oil prices poured an estimated $400bn more into Gulf coffers last year. Little, however, is known about how exactly they invest these funds, or even their precise size.

The Abu Dhabi Investment Authority (Adia), for example, is widely regarded as the largest sovereign wealth fund, but estimates of its size range from $650bn to more than $1 trillion. Adia has never revealed the actual figure.

After significant pressure from Washington, Brussels and the International Monetary Fund (IMF), 25 sovereign wealth funds – including Adia and its counterparts in Bahrain, Kuwait and Qatar – agreed earlier this month to establish an international working group under the IMF to draft a set of investment principles.

Mr Moran, a Democrat from Virginia, set up the bipartisan task force in February to explore issues surrounding sovereign wealth funds amid building opposition to their investments in iconic American financial institutions, such as the ADIA’s $7.5bn purchase in November of a 4.9 per cent stake in Citigroup.

Although he says that sovereign wealth funds bear more scrutiny, Mr Moran’s public statements do not reveal him as an opponent of investments from abroad. On the contrary, Mr Moran has said the task force was designed to reduce misunderstandings about the funds. “Tom Davis and I co-chair the Congressional Task Force on Sovereign Wealth Funds in an attempt to educate our colleagues on how important this tectonic shift of wealth to China and the oil-producing nations is to the US,” he said last week in an online chat on The Washington Post’s website.

Mr Moran’s spokesman, Austin Durrer, said the task force’s aim was to prevent the kind of Congressional reaction that forced DP World of Dubai to sell off the six major US seaports it had acquired with its £3.9bn (Dh28.4bn) purchase of P&O in early 2006.

Indeed, Mr Moran appears to be one of many on Wall Street and in Washington who see wealth fund investments as a vital way to recapture some of America’s growing oil bill, which has risen to its highest relative to the US economy since the second oil shock of 1979.

“Much of this is our money which we are going to need to be reinvested in the capital assets of the US. To prevent this reinvestment because of political and security concerns, all of which are understandable, will further aggravate the financial credit crisis we are currently facing,” Mr Moran said in his online chat.

It was not clear what other fund managers or officials the delegation would be meeting during its visit. While Adia outsources roughly 80 per cent of its assets to private managers and is believed to invest primarily in long-term US Treasury bonds and other liquid assets, Mubadala works more like a venture capital firm, buying strategic stakes in companies. Headed by Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi, it bought an 8.1 per cent stake in computer chip maker AMD for $622 million.

Last year, wealth funds from the Middle East, as well as China and Singapore, spent $21.5bn snapping up US assets including such prominent names as Blackstone, Carlyle Group and Morgan Stanley.

Alarm over the pace of those acquisitions is not limited to the US, however. China’s $3bn purchase of a stake in Blackstone last year was lambasted by the country’s internet community as a waste of taxpayers’ money. Executives in the Middle East, too, are wondering whether more of the oil reserves being stored up in the region’s sovereign wealth funds ought to be spent on regional development.

Rising food prices, for example, have hit poorer and more populous Gulf neighbours such as Egypt and Jordan much harder, prompting calls for investment by the Gulf in its Arab brethren. Others in the region have joined Western counterparts in questioning whether the funds have not only the potential to become political investors, but an obligation.

Given that what they say is an inherent conflict of interest, some say the funds should be invested entirely by private managers. “Governments are the lousiest people to make investment decisions,” said Saad al Barrak, the chief executive of Zain, a Kuwait-based cellular operator, at last week’s Forum in Egypt. “The fact that funds are sovereign makes them useless.”

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