Australia is on the right track with sovereign wealth funds (SWFs). It’s the first of the large Western nations to create an additional layer of screening for foreign government-backed investments. The move comes just two weeks after an audacious dawn-raid from Aluminum Corp. of China (Chinalco) complicated BHP Billiton Plc.’s $150 billion (Rs6.02 trillion) bid for rival miner Rio Tinto Group—both have extensive Australian assets.
The new screen clearly distinguishes between private and state-backed foreign investment. Australia already has guidelines for the former; the additional safeguards are intended to address concerns about state capitalism. There is a fear that SWFs—unlike large investment bodies such as pension funds and private equity (PE)— could potentially have non-financial aims. The Australians are not limiting their scrutiny to official SWFs. De facto funds such as Chinalco and Russia’s JSC Gazprom will also be included, as will investments with governance or financing arrangements that could lead to foreign control. That implies sovereign wealth investments through intermediaries, such as PE, could face extra vetting. Even part-privatized groups with restrictions on governance rights, could potentially get the once-over.
A case-by-case approach may sound arbitrary, but the diversity of sovereign wealth—its shifting forms and varying standards of governance, makes it the only sensible option. Australia has at least provided an overarching principle—investments that are transparent and commercial are less likely to raise concerns. Of course, such a vague, but flexible hurdle has flaws. It’s not entirely clear how it will measure transparency and commercial aims. Sovereign investors would like to see an equal emphasis on free and open markets.