GLOBAL - The Organisation for Economic Cooperation and Development (OECD) has published guidance for countries on how to treat investment from Sovereign Wealth Funds (SWFs) fairly, which recommends using "restraint" when protecting "essential security" interests.
The guidance, part of the organisation's work on Freedom of Investment, is based on two existing OECD investment instruments calling for the fair treatment of investors - the OECD Code of Liberalisation of Capital Movements, adopted in 1961, and the OECD Declaration on International Investment and Multinational Enterprises, revised in 2000.
As a result, the body said OECD members have agreed to base their investment policies towards SWFs on these existing instruments to include five basic principles:
Undertakings not to insist on reciprocity as a condition for liberalisation.
In addition, the OECD said the guidance - which resulted from the work of the 30 OECD countries as well as 14 non-members - also involves a process of regular "peer review" to monitor countries' observance of the principles.
The document has been issued in response to a request from the G7 finance ministers and OECD countries to "develop guidance for recipient countries' policies toward investments from these funds".
However, while the OECD said it recognised the right of member countries to take action to protect national security interests it confirmed members have "accepted" that the national security clause "should be applied with restraint and not be used as a general escape clause from their commitments to open investment policies".
As a result, member countries have agreed a number of key principles for the Freedom of Investment, including transparency, proportionality and accountability, to apply when dealing with investments from SWFs.
In particula,r the principle of regulatory proportionality states "essential security concerns" - which could include foreign government control or access to defence-related technologies, or influence on national institutions and resources including energy - should be "self-judging", and a determination to protect interests should be based on "rigorous" risk assessment techniques.
That said, the guidance pointed out the "observance by SWFs of high standards of transparency risk management, disclosure and accountability can affect the political and policy environment in which recipient countries act", with high standards likely to "positively influence" how countries react to SWF investments.
But as the International Monetary Fund (IMF) has still to publish its work on "best practices" for SWFs - which is expected to include standards on corporate governance and good business conduct - Angel Gurría, secretary-general of the OECD, confirmed the organisation's investment committee will continue its work on this area ahead of a final report to be delivered in mid-2009.
The OECD said its ongoing work programme would include further clarification of best practices regarding the implementation of the guiding principles, especially "accountability", alongside "any additional work that may seem appropriate in light of the results of the IMF's work".
Gurria claimed the resulting framework "will foster mutually-beneficial situations where SWFs enjoy fair treatment in recipient country markets and recipient counties can confidently resist pressures for protectionist responses".
As a result, the OECD suggested the resulting policy guidance would take the form of a "menu of best practices" consistent with existing OECD instruments, although it admitted the final recommendations may also contain suggestions for revisions or clarifications to existing principles. (See earlier IPE.com story: OECD to issue SWF governance guidelines)
However, a recent update from the IMF on its work on SWFs revealed the organisation expects to present a draft version of the 'best practices' for SWFs to its executive board by the annual meetings in October 2008.
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