ERF workshop on Sovereign Wealth Funds (SWFs): Stabilization, Investment Strategies and Lessons for The Arab Countries, September 2016

1. Political Economy of Sovereign Wealth Funds
in the Oil Exporting Countries of the Arab
Region and especially the Gulf
Sara Bazoobandi and Jeffrey B. Nugent
ERF Workshop on Sovereign Wealth Funds
World Bank, Washington D.C.
September 9-10, 2016

2. Sovereign Wealth Funds (SWFs)
Important institution for achieving multiple objectives:
1. Financial wealth fund for life after oil (future generations
and intergenerational equity)
2. Means of investing in Physical and Human capital so as to
live up to the “Hartwick Rule” given that Oil exports sell off
natural capital
3. Stabilizing expenditures in the face of fluctuating oil
revenues, lowering excessive cyclicality and volatility
4. Supporting cooperation with other states and reducing
conflict
5. Diversifying Assets to reduce income and credit risks and
dependence on oil
6. Attracting foreign technology and investment for economic
growth
7. Complement and coordinate public investment strategies
and use of exisiting infrastructure within the region

3. Potentially SWFs seem like ideal institution
for oil exporters to Avoid the “Oil Curse”
• Save and invest for future, instead of excess cons.
• Reduce volatility and procyclicality, a source of
“oil curse”, in form of slower growth
• Badly needed industrial diversification away from
dependence on oil
• Link economies to international financial markets
• Especially important in all respects now, given a
possibly long period of low oil prices and
budgetary problems of MENA oil exporters in
satisfying social contract and the gradual
depletion of oil and gas reserves in some of them

4. Creation and Growth of Arab SWFs:
Political Economy
• Early ones created before statehood, fostered monarchies,
foreign role large
• Later ones: by high oil prices, copy cat, helpful for succession
• Oil and Gas related SWFs :Over $4.2 trillion in 2015. Especially
rapid growth during 2000‐2008 and then again 2010‐2013 with
high and increasing oil prices
• With high oil prices and global financial crisis 2008, these funds
started to buy significant shares in banks and companies of
west
• Seen as threat in the West, especially since the SWFs are
government‐owned and non‐ transparent
• Some SWFs have responded positively since then

5. Three Phases of Growth: Rising Oil
Prices
1. 1970s, 1980s Based on UK and US Model Very
conservative But complementary institutions
lacking. Poor budgeting
2. Norway 1990 (The Gold Standard of SWFs)
3. 2000‐2008
4. 2010‐2013
5. Explosion of new Arab SWFs in those last two
periods. Seen as “modernist”, tied in to world
finance, Some copy‐cat, rivalries even within
royal families

6. In Practice: Political Economy of SWFs
has often impeded such achievements
• The sovereigns have wanted secrecy, not transparency,
leading to absence of assessment, sometimes corruption
and inefficiency. Even after bringing in high quality staff,
locals feel need to make decisions
• As conditions have changed, priorities among objectives
have understandably changed, but making for
inefficiencies
• Need for Maintaining the Social Contract between
sovereign and citizenry has diverted attention from private
sector to public sector and consumption, not investment
(but this is not through or the fault of SWFs)
• Sovereigns as managers have had multiple responsibilities:
tending to divert SWF to other objectives (from business to
foreign affairs):
– QIA under Sheikh Hamad bin Jassim Al Thani who was both
head , Prime Minister and Foreign Minister

7. Sheikh Hamad bin Jassin Al‐Thani
Foreign Minister, Prime Minister, CEO QIA

8. Political Economy Shortcomings (cont.)
• Unwillingness to delegate, final decisions often made by non‐
specialist kings and princes: lack of cooperation, trust between
them and specialists (Clark, Dixon and Monk (2013)
• Lack of checks and balances: sometimes resulted in major
mistakes, blocked proper assessments, and appropriate
attribution of blame
• Lack of transparency: led to distrust of SWFs and failure to get
enough of oil funds into SWFs and from SWFs into appropriate
investments: (Algeria)
• Low scores on Open Budget and Resource Governance Indexes
• Insufficient use of rules about putting oil revenues into SWFs and
for the use of the profits on their investments and control of
government expenditures when oil prices high. This has weakened
ability to accumulate assets, lower volatility,
• Interlinking of SWFs with Private Funds of Rulers and Insider elites
has made for monopolistic regulations rather than ones fostering
competition to assure international competitiveness

9. Political Economy Shortcomings (Cont.)
* Even though some SWFs have signed onto the
Santiago Principles and the IFSWF, most have not
lived up to them, leaving them with low scores on
SWF Scoreboard, impeding performance
* Much of this not the fault of the SWFs themselves
but the broader institutional environment, Low OBS,
Low scores of World Bank Governance indicators,
Regulatory Quality, Rule of Law, V&A and Resource
Governance Index
* SWFs helped create and preserve Monarchies
* Emphasis on Subsidies for fuel has undermined
fund accumulation, distorted resource allocation,
led to smuggling and lawlessness

10. Broader Political Problems in the GCC
and Beyond
• Rivalries within the GCC and unequal power and resulting
constraints, with Iran, drawn investments to other MENA
Countries on political grounds, Religious minorities in oil areas
• Saudi Arabia with power over governance in Bahrain
• Within UAE (a federation of Emirates in which each Emirate has
the rights to oil and gas) but Abu Dhabi the richest is called upon
to bail out debts of ambitious and risk‐taking Dubai, its main rival
for leadership within GCC
• Rivalries among members of ruling family for succession etc
which has led to proliferation of SWFs especially in UAE and
again almost always with great secrecy
• Civil, other Wars in Libya, Iraq, Sudan have impeded their SWFs

11. Some Achievements: Kuwait
• Kuwait was the pioneer among SWFs in the world
(at country level at least). KIB established in 1953
before state of Kuwait created
• It’s KIA also has generally been effective in
investments . With its investment operation in
London, KIA was able to finance the government
during its invasion by Iraq and to pay off its debts
after the Gulf War totalling over $100 billion
• Even so, Assets of about $600 billion in 2015 and
Kuwait has also been an important funder of
development in the region and beyond.

12. Achievements: Abu Dhabi
• ADIA founded in 1976 has grown almost as
rapidly as Norway’s to become perhaps the
largest in Arab world with almost $800 billion by
2016
• ADIA has also played an important part in the
agreement with the IMF and the West on the
Santiago Principles for SWF behavior and a long
time member of the IWG on SWFs
• It improved its scores substantially on SWF
Scoreboard, nice organizational structure

13. Achievements: Algeria
• Desperate in 1990s after war for Independence,
civil war, unrest, failed government programs,
SWF set up Rev Regulation Fund (FRR) in 2000
and with certain rules on oil fund allocations.
• It’s assets grew rapidly to be the 2nd largest in
Africa and the country’s debt was reduced
sharply through 2010 But NOT SINCE THEN
Assets have fall by 35% since 2013 Lack of
transparency has undermined its use, led to
huge fight between the Parliament and the
executive. Unfortunate provision on secrecy

14. Achievements of Several Other Arab SWFs
• Mumtalakat (Bahrain), Mabadala (Abu Dhabi)
– High Scores on Transparency, SWF Scoreboard
• Saudi Arabia’s SAMA For. Holding: not transparent but
reportedly very conservative policies and risk management .
– Royal family not the managers $686 Billion Assets by 2015, not
far below Norway’s $878 billion
Will SA’s PIF become the pillar of its Vision 2030 with $1.3Trillion
linking investments to attract FDI, tech, industries? A Fantasy of
McKenzie?
• Qatar QIA established only in 2005;
– more aggressive and strategic in investments (World Cup)
diversification though perhaps only of “trophy” type. Assets well
over $250 billion by 2015 (though very non transparent)

15. Scandals and Setbacks: Do the SWFs
and their leaders learn from these?
• ADIA example : A founding shareholder in BCCI in
Luxemburg which then expanded into many
countries in 1970s and 1980s. As it got into
trouble in UK, US, France, Lux., its treasury was
transferred to Abu Dhabi. Major scandals,
including illicit entertainment . Major financial loss
for ADIA
– Result, at least at that time, it reinforced secrecy policy
• KIA investments in Spain including a Rio Tinto
Explosives $5 billion loss and again sex scandal
– Led to rebellion by Parliament and efforts to change
rulers

16. Current Pressures: Learn from Mistakes?
• Libya Investment Authority Very Low SWF Scoreboard
scores, grew rapidly 2000‐8 but lost over $2 billion in
ill‐fated Goldman Sachs and Societe Generale deals.
Left it with only embarrassing option to sue these firms
for not sufficiently teaching LIA about the options
(admitting their own ignoran
• Oman’s SGRF An Exception of Positive response?
Al‐Saidi PhD Dissertation disclosures 2012
– followed by SGRF actions
– (a) 2014 Whistle‐Blowing Policy,
– (b) 2015 applied for and received full membership
in IFSWF, (c ) raised its transparency score

17. Challenges Ahead
• With the shale and drilling revolutions underway,
low oil prices could be long‐lasting
• With rising youth bulge and Female LFPR on rise,
employment and diversification objectives of
SWFs likely to continue to be more important
• Need for higher tech non‐oil private sector to
attract nationals with higher wage rates and this
likely to help in attracting FDI; these need to be
internationally competitive
• Some countries running low on energy reserves
• Therefore reforms are urgent!

18. Reforms Needed
Within the SWFs
1. Improve Transparency and SWF Scoreboard Scores
a. This should increase accountability and assessment
of investment programs
b. Should serve as a positive signal to other investors
and to firms receiving funding to improve their
performance
2. Move away from Monarchs as SWF heads and decision
makers, should reduce the subserviance of SWF goals
to other objectives
3. Introduce more in the way of Whistleblower
Protection to reduce likelihood of corruption
4. Join the IFSWF to get benefits of best practice tips,
Perhaps develop a Regional Component of this

19. Reforms Needed
Beyond the SWFs
1. Improve the transparency between oil
companies and government: Join in EITI
2. Improve budgeting procedures and openness:
Raise OBS scores. Increase comprehensiveness.
3. Introduce Rules (as in Chile) based on oil price
4. Decrease Subsidies and Government Cons.
5. Improve coordination between SWF
Investments in Region and Other Public
Expenditures and Infrastructure

20. More Reforms Beyond the SWFs
5. Provide incentives to Firms and FDI to bring in
higher technology
6. Lower artificially high Government Wage
Rates to encourage nationals to private sector
7. Change Labor Laws so as to be somewhat
tighter than they have been, avoid charges of
abuses of foreign workers and improve
likelihood of attracting high quality investors and
nationals to the private sector
8. Encourage entrepreneurship, FLFPR

21. Conclusion
• SWFs could play very important role in filling
important objectives
• In some respects they already have, and some
improvement over time is visible
• But, scandals, large losses, leave much room for
improvement, especially considering that amount
of oil rents has had no effect on Assets
• Low Oil Price Era makes SWF reforms more
urgent. The needed reforms go well beyond SWFs
themselves

22. Some Illustrative Evidence
• Cross‐SWF Regressions in 2008 and 2015 with
Small SWF Sample (no More than 20 MENA,
C.Asia but also including Norway’s for:
– Transparency (Linaburg‐Maduell Index)
– SWF Scoreboard and its Components (this index is
rather minimal compromise, well far short of what
was desired by west
– Assets Accumulated
Huge Gaps between Institutional indexes between
SWFs of Norway and Arab or other MENA countries

23. Sovereign Wealth Funds Assets: Norway and MENA Countries Compared
Name
Date
Foun
-ded
Trans
paren
-cy
Assets ($)
2000*
mid-
2000s
**
2010 2011 2012 2013 2014 2015 2016
Government Pension
Fund−Global
1990 10 44 380 443 627 656.2 785.2 893 873 847.6
Revenue Regulation Fund 2000 1 3.1 47 54.8 56.7 56.7 77.2 77.2 50 50
Mumtalakat Holding Co 2006 10 − − 9.1 9.1 9.1 7.1 10.5 10.5 11.1
National Development Fund 2011 5 − − − − − 54 58.6 62 62
Oil Stabilization Fund 1999 2 − 10 23 23 23 − − − −
Development Fund for Iraq 2003 n/a − n/a n/a n/a n/a 18 18 18 0.9
Kuwait Investment Authority 1953 6 73 213 202.8 296 296 386 410 592 592
Libyan Investment Authority 2006 1 − 50 70 70 65 65 66 66 66
State General Reserve Fund 1980 4 n/a n/a 8.2 8.2 8.2 8.2 13 13 34
Oman Investment Fund 2006 4 − n/a n/a n/a n/a 6 6 6 6
Qatar Investment Authority 2005 5 − 60 65 85 100 115 170 256 256
SAMA Foreign Holdings n/a. 4 62.2 250 415 472.5 532.8 675.9 757.2 671.8 598.4
Public Investment Fund 2008 4 − − 5.3 5.3 5.3 5.3 5.3 5.3 160
Abu Dhabi Inv. Authority 1976 6 312 600 627 627 627 627 773 773 792
Abu Dhabi Inv. Council 2007 n/a − − n/a n/a n/a n/a 90 110 110
Int’l Petroleum Inv.
Company
1984 9 n/a 12 14 58 65.3 65.3 68.4 66.3 66.3
Mubadala Dev. Company 2002 10 − 10 13.3 13.3 48.2 55.5 60.9 66.3 66.3
Investment Corp. of Dubai 2006 5 − − 19.6 19.6 70 70 70 183 196
al Emirates Inv. Authority 2007 3 − − n/a n/a n/a n/a 10 15 15
RAK Investment Authority 2005 3 − − 1.2 1.2 1.2 1.2 1.2 1.2 1.2
K represents Ra’s-Al-Khaimah. Sources *Ziemba, Rachel ‘Updated Estimates of Sovereign Wealth Under Management.’ Unpublished report by
obal Economics, March 2012 **indicates midpoint estimate 2003 – 2007 from Truman, Edwin M. ‘A Blueprint for Sovereign Wealth Fund
’ Washington, DC: Peterson Institute for Int’l Economics, 2008. The rest of the data is obtained from Sovereign Wealth Fund Institute

24. More Specifically
• Institutional
– Monarchy Dummy has negative effect on Clarity of
Objectives and Risk Management Components of
SWF Scoreboard
– Years since Founding effect positive but only in
SWF Scoreboard and its components in 2012
– Strongest and most distinctive positive effect on
SWF Performance indicators from WB
Governance Indicators like Voice and
Accountability.
– No effect of magnitude of oil rents share in GDP

25. Determinants of SWF Asset Accumulation
• 2008 Only significant determinant is Years
since Founding of SWF, + but quite small
• 2015 Years since Founding + effect stronger
– Oil Rents as % of GDP: never significant
– Transparency: never significant
– SWF Scoreboard: perhaps marginally positive
effect
– Open Budget Survey Country Score: positive
effect
– Certain WB Governance Scores have significant
positive effect

26. Appendix: Linaburg‐Maduell Transparency Index
Point Principles of the Linaburg‐Maduell Transparency Index
+1
Fund provides history including reason for creation, origins of wealth, and government
ownership structure
+1 Fund provides up‐to‐date independently audited annual reports
+1
Fund provides ownership percentage of company holdings, and geographic locations of
holdings
+1 Fund provides total portfolio market value, returns, and management compensation
+1
Fund provides guidelines in reference to ethical standards, investment policies, and
enforcer of guidelines
+1 Fund provides clear strategies and objectives
+1 If applicable, the fund clearly identifies subsidiaries and contact information
+1 If applicable, the fund identifies external managers
+1 Fund manages its own web site
+1 Fund provides main office location address and contact information such as telephone
and fax

27. Elements on the SWF Scoreboard (Truman)
• A. Structure and Objectives
• 1. Is the SWF’s objective clearly stated?
• 2. Is there a clear legal framework for the SWF?
• 3. Is the procedure for changing the structure of the SWF clear?
• 4. Is the overall investment strategy clearly stated?
• 5. Is the source of the SWF funding clearly specified?
• 6. Is the nature of the subsequent use of the principal and earnings of the fund
clearly specified?
• 7. Are the SWF’s operations appropriately integrated with fiscal and monetary
policies?
• 8. Is the SWF separate from the country’s international reserves?
• B. Governance
• 9. Is the role of government in setting the investment strategy of the SWF clearly
established?
• 10. Is the role of the governing body of the SWF clearly established?
• 11. Is the role of the managers in executing the investment strategy clearly
established?
• 12. Are decisions on specific investments made by the managers?
• 13. Does the SWF have internal ethical standards for its management and staff?
• 14. Does the SWF have in place and make publicly available guidelines for corporate
responsibility that it follows?
• 15. Does the SWF have ethical investment guidelines that it follows?

28. SWF Scoreboard (Continued)
C. Investment and Accountability
16. Do regular reports on investments by the SWF include information on the categories of
investments?
17. Does the strategy use benchmarks?
18. Does the strategy use credit ratings?
19. Are the holders of investment mandates identified?
20. Do regular reports on the investments by the SWF include the size of the fund?
21. Do regular reports on the investments by the SWF include information on its returns?
22 Do regular reports on the investments by the SWF includeinformation on the geographic
location of investments?
23. Do regular reports on the investments by the SWF include information on the specific
investments?
24. Do regular reports on the investments by the SWF include information on the currency
composition of investments?
25. Does the SWF provide at least an annual report on its activities and results?
26. Does the SWF provide quarterly reports?
27. Is the SWF subject to a regular annual audit?
28. Does the SWF publish promptly the audits of its operations and accounts?
29. Are the audits independent?
D. Risk Management
30. Does the SWF have an operational risk management policy?
31. Does the SWFhave a policy on the use of leverage?
32. Does the SWF have a policy on the use of derivatives?
33. Does the SWF have a guideline on the nature and speed of adjustment in its portfolio?