Sovereign Wealth Funds: A Double-Standard in Canada?

  • June 27, 2013

By Jonathan Arnold

June 5th marked the closing of the three-day Canada-Asia 2013 conference, hosted by the Asia Pacific Foundation of Canada, in Vancouver. The conference featured an array of panel discussions, plenary sessions, and networking opportunities—all focusing on how Canada should position itself with the emerging Asian economies.

During the final panel discussion, panelist Professor Khee Giap Tan posed a challenging question which, because of time constraints, was unfortunately cut short. He was critical of the double-standard between developed and developing countries with respect to Sovereign Wealth Funds (SWFs). He drew attention to the contradiction of how developed countries want unfettered access to markets and investment opportunities in developing countries, yet when investment flows the other way, developed countries often limit and scrutinize market access.

The comment from Professor Tan is timely for a few reasons, and raises important questions with respect to SWFs and foreign investment policy in Canada. Sovereign Wealth Funds are growing rapidly in both scope and size, now totaling an estimated $5.4 trillion (globally). More importantly, the biggest SWFs in the world (excluding Norway’s Government Pension Fund) are controlled by governments of emerging economies. Non-OECD countries control 18 of the 20 biggest SWFs which, together, amount to roughly $4.2 trillion in investable assets. In a role reversal of 20th century economics, capital investment is now flowing uphill: from developing countries to developed countries. This is another reflection of the shifting global economy and, in particular, the expanding influence of Asia.
On the surface, SWFs are like other foreign investment tools where, in a free and open market, investment dollars flow to countries with high-returns and low-risk projects. However, due to the state-managed operation of SWFs, many funds are scrutinized due to their opacity, lack of transparency, and concerns about their accountability and underlying motives. This is especially true for SWFs in non-OECD countries (see the Sovereign Wealth Fund Institute’s Transparency Index). Despite international attempts to create clearer rules and regulations for SWFs in 2008, many funds still operate in a non-transparent manner.

Above all, the biggest concern is SWFs represent a form of ‘soft power’, whereby governments can use SWFs to not only secure supplies of natural resources in foreign countries, but gain greater economic and political leverage. Subsequently, Western governments (supported by public opinion) have become hesitant to open the flood gates to investment from SWFs.
So does Professor Tan’s claim of a double-standard hold water in Canada? From a historical perspective, the answer is no. Since the Investment Canada Act (ICA) was adopted in 1985, only two acquisitions have been blocked by the federal government, and these were private corporations from Australia and the US—not SWFs.

Looking forward, however, Canada’s position on foreign SWFs is unclear. After the Nexen and Progress Energy takeovers were approved by the federal government, Prime Minister Harper made a promise that no more foreign state-backed acquisitions of the Canadian oil sands will be allowed unless under “exceptional” circumstances. As a result, the 2013 omnibus budget bill includes proposed amendments for tightening the oversight of foreign State-owned Enterprises (operated by SWFs). These new rules are expected to receive assent without substantive debate and will make the criteria for state-owned enterprises more stringent than for private acquisitions.

Are these additional requirements justified? Undoubtedly, if SWFs in developing countries address issues of transparency and accountability, this will go a long way in reassuring the Canadian government and public. But considering the often murky transparency and accountability of transnational corporations and the financial sector, issuing new rules for state-run enterprises based on transparency grounds is an inconsistent approach. Moreover, in terms of protecting Canada from foreign governments’ influence, there is little evidence to suggest the motives or influence of state-run enterprises differ from those of private sector firms (Setser, 2008). In fact, SWFs often seek long-term investments that benefit from the development of human capital and increased productivity. SWFs also have the potential to enhance the economic and political integration between Canada and our major trading partners.

Given our vast reserves of natural resources, SWFs from around the world will be knocking on Canada’s door for secure long-term investment opportunities. SWFs such as the Chinese Investment Corp. have already invested billions in the Alberta oil sands and the mining and forestry industries in BC. As SWFs continue to grow in size, the seeming double-standard of the ICA may create tense relations with some of Canada’s trading partners, especially if investment is denied on what appear to be ‘political’ grounds.

Looking at the issue a little closer, Professor Tan’s claim of a double-standard has merit. As Canada looks east to improve trade opportunities in Asia – with investment and trade flowing in both directions – it is extremely important that Canada remain unbiased in assessing foreign investment proposals. With the end goal of improving trade relations with Asia, the Canadian government should work towards creating a level playing field and take leadership in fostering greater transparency and reciprocity.