The Flip Side of Protectionism

I have argued before that specific, bi-lateral treaties or agreements can help prevent foreign investment problems that often arise when politically important countries (read: China) invest in another country.  For most countries, the investment rules that govern investments from, say, Chile, may not work for, say, China.  Unfortunately, however, different treatment for different countries (which present different risks) often means that protectionist policies towards a certain country may result.  China has complained that Canada was singling it out for tougher scrutiny, for example (which is probably true, and not necessarily the wrong thing to do–again, China is not Chile).  Walking that line between a realistic appraisal of risks–which, yes, sometimes results in more scrutiny–and protectionism is difficult. 

Sometimes, however, a country might swing too far in the other direction, as some have argued is occurring with Canada’s reboot of its investment relationship with China:

The Foreign Investment Promotion and Investment Agreement (FIPPA), signed in Russia, is a bilateral investment treaty that abrogates international and constitutional law, and essentially hijacks municipal, provincial, territorial, and federal laws that threaten the profitability of Chinese State Owned Enterprises (S.O.E).

A treaty as momentous in its import should merit open discussion, but instead, it has been cloaked in secrecy, which is consistent with the treaty itself. According to the treaty, if a Canadian law threatens the profits of a Chinese S.O.E, a secret tribunal, consisting of three arbitrators, and operating outside the jurisdiction of Canadian law, will adjudicate and award penalties, should it deem that profits have been compromised.

And here are some specific criticisms of the treaty from Gus Van Harten, Associate Professor at Toronto’s Osgoode Hall Law School (I am not familiar with the treaty, and undoubtedly others do not see it Van Harten’s way, but he makes some powerful points):

Instead of promoting growth, the treaty may undermine growth by removing value-added benefits from Canada’s resource sector.

The treaty’s main role is to protect Chinese-owned assets from Canadian legislatures, governments, and courts, and vice versa (i.e corporate empowerment), though it is largely non-reciprocal since China’s interests/capital will be (and currently are) far greater than Canada’s current or anticipated investments in China.

Regulatory differences between the two countries will create an uneven playing field as well. Canadian investors will have fewer protections from discriminatory treatment in China, since China’s existing legal frameworks are opaque relative to Canada’s (remaining) legal frameworks.

There is also a huge disparity of capital flows, with most capital flowing in to Canada from China, so treaty protections are mostly one-sided.

An Independent Commission has not studied the treaty, so Canadians are unaware of projected costs and benefits.

Norway's Shareholder Activism

Citywire reports on the Norwegian Government Pension Fund – Global’s shareholder activism:

The world’s second largest sovereign wealth fund has taken its first ever steps into active shareholder participation, according to its latest quarterly results.

Norges Bank Investment Management (NBIM), which operates the $750 billion Norwegian Government Pension Fund Global, said it intends to take a more involved role in companies which it has a substantial share of the voting rights.

Outlining its plans in its second quarter 2013 results, NBIM said it would present expectations in terms of corporate governance and management to companies.

It has also formed a corporate advisory board to help aid this push.

Norway’s efforts are definitely out of the norm for sovereign wealth funds, but the report suggests that what Norway is doing is more, well, newsworthy, than I think it actually is.  First, Norway has been active in governance matters for some time–well before the second quarter of 2013.  Here, for instance, is a memo on their governance efforts from 2009, and here is a discussion note from last fall.  Norway has developed its corporate governance capabilities gradually over the years, but it has been an engaged owner for many years. 

Ah, but Norway is not merely engaging in governance–the report says it is now actually engaging directly with companies and putting people on boards:

NBIM has taken two steps to engage with companies, the first of which is to file shareholder proposals to improve board accountability in several companies in the United States.

In addition, for the first time ever, NBIM has exercised its right to put forward a representative to a company’s nomination committee. This has seen it name NBIM CEO Yngve Slyngstad as a representative on the committee of Volvo.

Commenting on the decision, NBIM said: ‘This is the first time the fund has exercised its right to sit on a company’s nomination committee and reflects our long-term goal of closer contact with companies’ boards to safeguard the fund’s values.’

But here’s my second point as to why this may not be an important shift in corporate governance activism: other public funds have been doing this kind of thing for a while–even putting people on boards from time to time (such as the Ontario Teachers’ Pension Plan’s representative on the Maple Leaf Sports & Entertainment board). 

Norway’s activism highlights another reason why labeling funds can be problematic.  No surprise if a public pension fund is activist, but a sovereign wealth fund?    Some needlessly worry because of the label, and I don’t like articles like this because they tacitly suggest that because a “SWF” is involved something sinister may be going on.  Although the ties between Norway’s fund and government may be somewhat different from Ontario’s fund and government and the funds may have somewhat different purposes, if you look at how Norway’s operationalizes its corporate governance initiatives and how the fund insulates itself from political influence, its activities should be no more worrisome than CalPERS or the OTPP.  Sure, managers and other observers may not appreciate their brand of activism, but it should not raise the kinds of concerns that justify protectionist responses.

The Alaska Permanent Fund: the Good News and the Bad News

I always like hearing the bad news first, just as coaches typically choose to go on defense first in overtime. So here’s the bad news about the Alaska Permanent Fund, from the Alaska Dispatch:

[D]on’t expect a big dividend check this year  . . ..  The amount of money available to be split among qualified applicants is estimated at just $605 million, the lowest since 2005.  The reason: the amount available for dividends is calculated on a five-year average of the fund’s performance.  Those five years include 2009, when the recession saddled the fund with an 18 percent loss.  The Alaska Dispatch has calculated the amount for this year’s dividend check to be less than $800, which would be the lowest payout since 1987.

The good news?

 The Alaska Permanent Fund — the pot of money from which annual dividends are paid — grew 10.5 percent last year, reaching a new high of $44.9 billion. Growth is attributed to the performance of the U.S. stock market.  

I’m sure it is disappointing for thousands of Alaskans that the annual dividend is lower this year.  No doubt many Alaskans count on the dividend as a significant part of their annual income.  But I still love the model that Alaska has chosen: putting money back into the hands of Alaska’s citizens, while also saving for future generations. The model has many virtues (as numerous authors have explained), and, to me at least, few vices.

The question that troubles me is, why haven’t more states followed Alaska’s lead when setting up permanent funds?  Why not directly give back to citizens a portion of the state’s natural resource rents, as opposed to stashing all of the rents in funds that simply return the interest to the state’s general budget (or worse yet, risk corruption and malfeasance by allocating a portion of the resource wealth to what often seem to be politically-motivated “economic development” initiatives)?

Debt Ratings and Sovereign Wealth

Moody’s recently issued a report on the debt ratings for countries in the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates), and the bond rating firm emphasized the importance of SWFs as a credit enhancer:

Moody’s notes that the assets of SWFs in the countries of the GCC have grown alongside the recovery in oil prices since the 2009 trough. The rating agency estimates that GCC SWFs reached an aggregate $1.6 trillion in assets at the end of 2012 (equivalent to 107% of the aggregate GDP), up from $1.0 trillion in 2007 (105% of GDP). Moreover, in all GCC countries except Bahrain, SWF assets now exceed central government liabilities.

 In addition to large fiscal surpluses and low debt levels, this growth in SWF assets reinforces Moody’s assessment of GCC governments’ financial strength, given that these buffers could be tapped in a scenario of a prolonged and sharp decline in hydrocarbon prices, particularly as governments continue to ramp up expenditures and the margin between actual and fiscal breakeven oil prices starts closing up this year.

However, the downside for the GCC is that its SWFs tend not to be very transparent, which mitigates some of the credit enhancement effect of the SWFs:

Moody’s notes, however, that GCC government bond ratings remain constrained by relatively weak SWF transparency. With the exception of Saudi Arabia, which reports its reserve assets on a timely basis, the lack of transparent and timely reporting by other SWFs adds a degree of uncertainty to assessing the credit profiles of GCC countries.

Yet another remider that transparency and governance matter.