Santiago GAPP for Sovereign Wealth Funds

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Transcript of Santiago GAPP for Sovereign Wealth Funds

  • 1. SOVERIGN WEALTH FUNDS Generally Accepted Principles and Practices Santiago Principles Prepared By: Sharjeel Butt Senior Manager Audit Professional Services Unit

2. Contents

  • Background of IWG SWF
  • Guiding Objectives
    • Purpose
    • Nature
    • Structure
  • Discussion on the GAPP- Santiago Principles

3. Background of IWG - SWF

  • The International Working Group of Sovereign Wealth Funds (IWG) was established at a meeting of countries with SWFs on April 30May 1, 2008, in Washington, D.C.
  • In the meeting, it was agreed that the IWG would initiate the process, facilitated and coordinated by the International Monetary Fund (IMF)
  • The IWG comprises 26 IMF member countries with SWFs. The IWG met on three occasionsin Washington, D.C., Singapore, and Santiago (Chile)to identify and draft a set of generally accepted principles and practices (GAPP) that properly reflects their investment practices and objectives, and agreed on the Santiago Principles at its third meeting.

4. Member Countries

  • Australia,Azerbaijan,Bahrain, Botswana, Canada, Chile, China,Equatorial Guinea, Islamic Republic of Iran, Ireland, Korea, Kuwait, Libya, Mexico, New Zealand, Norway, Qatar, Russia, Singapore, Timor-Leste, Trinidad and Tobago, the United Arab Emirates, and the United States.
  • Permanent observersof the IWG are Oman, Saudi Arabia, Vietnam, the OECD, and the World Bank

5. Guiding Objectives 6. Purpose

  • The purpose of the GAPP is to identify a framework of generally accepted principles and practices that properly reflect appropriate governance and accountability arrangements as well as the conduct of investment practices by SWFs on a prudent and sound basis.

7. Nature

  • The GAPP is a voluntary set of principles and practices that the members of the IWG support and either have implemented or aspire to implement.
  • The GAPP denotes general practices and principles, which are potentially achievable by countries at all levels of economic development.
  • The GAPP is subject to provisions of intergovernmental agreements, and legal and regulatory requirements

8. Structure Key Areas Sub Areas Principles A. Legal Framework, Objectives and coordination with Macro economic Policies

  • Legal Basis and Forms
  • Objectives an Macro economic linkages
  • Funding and withdrawal rules
  • Statistics compilation and reporting

Principle 1Principle 2 and 3 Principle 4 Principle 5B. Institutional Framework and Governance Structure

  • Governance Framework
  • Accountability
  • Assurance of Integrity of operations

Principle 6, 7, 8, and 9 Principle 10, 11 and 12 Principle 13, 14, 15, 16 and 17 C. Investment and Risk management Framework

  • Investment Policy
  • Risk management and performance measurement
  • GAPP Implementation

Principle 18, 19, 20 and 21 Principle 22 and 23 Principle 24 9. A. Legal Framework, Objectives & coordination with Macro economic Policies

  • Legal Basis and Forms
  • Objectives an Macro economic linkages
  • Funding and withdrawal rules
  • Statistics compilation and reporting

10. GAPP Principle 11. Legal Framework 12. Legal Basis and Structure

  • Establishment of the SWF should be clearly authorized under domestic law
  • Legal structure should include clear mandate for the manager to invest the SWFs assets and conduct all related transaction
  • The beneficial and legal owners of the SWFs assets should be legally clear

13. GAPP Principle 14. Policy Purposes

  • SWF are created by governments for the Varity of policy purposes
    • Stabilization funds where the primary objective is to insulate the budget and the economy against commodity price swings
    • Saving funds for future generations (Superannuation, retirement etc)
    • Reserve funds increase the return on assets

15. GAPP Principle 16. GAPP Principle 17. Typical sources of Funding/Withdrawals

  • Funding and withdrawal rules are specific to the type of funds:
    • Stabilization funds
      • Funding- revenue contingent deposit rule
      • Withdrawals Budget deficit or commodity price drops
    • Saving / Reserve funds
      • Funding- Government budget surplus
      • Withdrawals As per budget expenditure on projects
  • Some SWF keep their capital and returns while some pay out targeted dividends

Funding Withdraws

  • Mineral royalties
  • Privatization receipts
  • General fiscal surplus
  • Balance of payment surplus
  • Foreign exchange intervention
  • Returns on investments
  • Divestment proceed
  • Borrowing from market
  • Own operating expenses
  • Government general expenditure
  • Budgeted projects
  • State emergency needs

18. GAPP Principle 19. Reliance & cooperation

  • Policymakers in general rely on macroeconomic data sets that are accurately compiled and disseminated by the national agencies
  • Cooperation in data reporting primarily involves the owner, ordepending on national arrangementthe SWF, transmitting timely SWF data of good quality and relevant scope to the appropriate national agencies, using modalities of data transmission agreed with those national agencies.

20. B. Institutional Framework and Governance Structure

  • Governance Framework
  • Accountability
  • Assurance of Integrity of operations

21. GAPP Principle 22. Division of Roles

  • The governance structure should be set out in the SWFs legal framework. It should ensure appropriate and effective division of
      • Oversight,
      • Decision making, and
      • Operational responsibilities.
    • Separate legal entities- have a governance structure that clearly differentiates an owner, a governing body, and management of the SWF.
    • Pools of assets(without separate legal personality), - the owner may exercise the functions of the governing body(ies) through one or more of its organizational units. In such cases it is important that there be a clear distinction between the owner/governing body(ies) and the agency responsible for the operational management of the SWF.

23. GAPP Principle 24. Role and Reporting Framework

  • Roles
    • SWFs Objectives
      • Broad policy purpose,
      • Investment mandate and
      • Acceptable level of risk
    • Oversight responsibilities as per the legal structure
  • Reporting framework in place
    • SWFs performance
    • Financial situation
    • Risk management

25. GAPP Principle 26. Responsibilities of the Governing Body

  • The governing body(ies) of the SWF sets the strategy and policies aimed at achieving the SWFs objectives and is ultimately responsible for the SWFs performance
    • Deciding how to implement such strategies;
    • Delegating responsibilities and setting up committees as deemed necessary; and
    • Where the SWF is a separate legal entity, appointing and removing the SWF management (including the CEO and/or the managers).

27. GAPP Principle 28. MechanismsOperational Independence

  • A range of mechanisms could be employed to ensure the operational independence of the SWFs management:
    • Vesting responsibility for the SWFs management in a separate entity headed by a governing body with clearly defined responsibility for implementing the broad investment mandate established by the government;
    • Providing extensive powers to the chief executive and senior managers where the SWFs governing body(ies) is not independent;
    • Vesting responsibility for operational management in the hands of the central bank or statutory agency; or
    • Contracting out responsibility for making individual investment decisions to external service providers on a fee-for-service basis.

29. GAPP Principle 30. Accountability

  • The owner is accountable, to the legislature or the public, for the SWFs app