The rapid growth of government investment funds must be seen in the context of high commodity prices and oil revenues, as well as current imbalances in the global economy. Some exporting countries have in fact led large trade surpluses for a number of years . At the same time, large parts of the western world have experienced persistent deficits in their public finances. If current commodity prices and trading patterns are maintained, some forecasts state that the values of government investment funds may triple over the next five years.
4: International reactions against state funds
Fears that government investment funds will want to promote national political interests have helped to provoke protectionist (protect their own industries) attitudes in a number of countries. After a long period of liberalization of international capital flows, several countries have introduced restrictions on foreign investment in strategically important sectors.
In 2005, according to extrareference.com, the French government introduced protective rules against foreign investment – these must now go through an approval process. France has also set up its own government investment fund to defend strategically important companies against acquisitions from abroad. In 2008, Germany passed laws stating that investors from outside the EU will be investigated as soon as they reach holdings of 25 percent (or more) in German companies.
The fear that government investment funds will have political motives is reinforced by the fact that it is primarily countries with authoritarian regimes that have established government investment funds. As much as 54 percent of the assets managed by government investment funds belong to authoritarian regimes. In addition, several of them have failed, or only to a limited extent, published their investments.
5: In distress, the devil eats flies
However, skepticism about government investment funds has fallen in recent years. Especially after several Chinese and Gulf-based investment funds contributed capital to hard-pressed Western banks during the financial crisis in 2007 and 2008. The financial crisis showed that government investment funds – with their long-term investment horizons – can play a stabilizing role in world financial markets.
In order to increase confidence in the state funds in the financial markets, the funds themselves have drawn up some voluntary guidelines , called the Santiago Principles. The Norwegian Petroleum Fund has participated in and joined these guidelines together with 24 other countries.
Today, there is little to suggest that government investment funds have motives other than financial returns. During the financial crisis, funds from authoritarian regimes, to a greater extent than funds from more democratic regimes, also failed to invest in politically sensitive sectors (such as energy, security …). This may indicate that these funds are extra careful not to be perceived as foreign policy instruments. Nevertheless, the funds’ movements are still being watched with an arguing eye by other land and market players.
6: The Norwegian Petroleum Fund
The Norwegian Petroleum Fund is thus the world’s largest government investment fund, and the only western government fund in its size. Unlike most other large state funds that mainly belong to authoritarian regimes, the oil fund belongs in a democratic country. This means that the Petroleum Fund is continuously the subject of democratic debate in Norway.
The Petroleum Fund practices a large degree of openness and publishes, among other things, all its investments at the end of the year. So much openness is unusual among government investment funds, and the oil fund is often cited as a model for other government investment funds. Both the IMF (Monetary Fund) and the OECD have cited the fund as a model for other government investment funds.
The structure of the Petroleum Fund
The Petroleum Fund is owned by the Ministry of Finance on behalf of the Storting and the Norwegian people . The Ministry of Finance decides on the fund’s overall investment strategy, mainly on the advice of Norges Bank . All significant changes in the strategy must be submitted and approved by the Storting. In working on the investment strategy, the Ministry of Finance seeks to find the right balance between risk and return .
In this work, the Ministry of Finance must constantly weigh how much risk the Norwegian political system is willing to bear. The Ministry then has the important task of preparing the Storting for the fluctuations in share prices that may occur. This extensive communication has contributed to the Petroleum Fund being able to maintain its investment strategy, even in periods of great market turmoil such as during the financial crisis in 2007 and 2008.
The Petroleum Fund has always aimed not to have large holdings in companies in which it invests. As the fund has grown, however, the ownership limit has been gradually raised, and it is currently 10 per cent .
The day-to-day management of the Petroleum Fund is delegated to Norges Bank ‘s Investment Management Division (NBIM). NBIM is a specialized financial institution, located at an arm’s length from both politicians and ministries. NBIM is also an international workplace, with English as the working language and employees from 26 nations. NBIM therefore follows other norms and ideals than the politically branched part of the fund.