State controlled enterprise (SCE), state-owned enterprise (SOE) and sovereign wealth fund (SWF) are terms broadly used, however they are not legal definitions. International organisation, legal scholars and practitioners have been developing definitions trying to include all the facets and characteristics of these state controlled entities. In this section these different definitions will be analysed and compared.
The IWG-SWF definition of Sovereign Wealth Fund
The International Working Group of Sovereign Wealth Funds (IWG-SWF) in the General Accepted Principles and Practices(GAPP, also known as the Santiago Principles) issued in October 2008 has drafted a definition of SWF. This definition has a particular value since it has been issued together with the 24 standards and principles that for the first time and on a voluntary basis will regulate the activity of the SWFs.
SWFs are defined as special purpose investment funds or arrangements, owned by the general government. The use of the term “arrangement” has been seen by the IWG-SWF as necessary to cover the peculiarities and the differences of the SWFs since they are created by the governments for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets.
The SWFs are commonly established out of:
- balance of payments surpluses,
- official foreign currency operations,
- the proceeds of privatizations,
- fiscal surpluses, and/or
- receipts resulting from commodity export.
Through this long list the IWG-SWF wants to cover both the traditional background to the creation of SWFs—the revenues received from mineral wealth—and the more recent approach of transferring “excess reserves.
The IWG-SWF has determined three key elements that are typical of SWFs:
- The ownership of the SWF by the central government or a subnational government.
- The investment strategies include investments in foreign financial assets, so it excludes those funds that solely invest in domestic assets.
- Purposes and Objectives: Established by the general government for macroeconomic purposes, SWFs are created to invest government funds to achieve financial objectives, and (may) have
liabilities that are only broadly defined, thus allowing SWFs to employ a wide range of investment strategies with a medium- to long-term timescale. SWFs are created to serve a different objective than, for example, reserve portfolios held only for traditional balance of payments purposes. While SWFs may include reserve assets, the intention is not to regard all reserve assets as SWFs.
In article 3 of Appendix I the IWG-SWF has excluded from the definition of SWF :
- currency reserve assets held by monetary authorities for the traditional balance of payments or monetary policy purposes,
- operations of state-owned enterprises in the traditional sense,
- government-employee pension funds, or
- assets managed for the benefit of individuals.