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Opinion
March 17, 2017 www.intellinews.com I Page 20
The fund is either exempt or almost exempt from income tax, corporate tax, stamp duty, and the spe- cial tax on loans. All the companies that have been transferred to SWFT were subject to most of these laws and taxes before being taken into SWFT. It has also been given the ability to buy, sell and issue bonds, as it is subject only to commercial law. About the only supervision the fund has is a requirement to have an independent audit of its financials.
One possibility is that the fund has mainly been established as a source of funding for the gov- ernment’s mega infrastructure projects. In the aftermath of the failed coup and in the absence of macroeconomic reforms, all major ratings agen- cies downgraded Turkey’s credit rating making it harder for AKP to raise the large sums these pro- jects need. It is possible that the government will use the SWFT to use its ownership of its valuable companies as collateral to raise debt to fund the government’s projects.
The fund will also earn a significant income from its holdings. Dividends from the companies trans- ferred to the fund in 2015 totalled approximately TRY1.5bn - TRY2bn (£0.32bn - £0.43bn). While
a similar amount may be at the disposal of the SWFT managers this year, there will consequently be an equally sized gap in the treasury.
Sovereign wealth funds are often, but not always, used by countries with budget surpluses, say experts – either due to natural resources or a well-estab- lished pension system. Given Turkey’s chronic budget deficit, the fund won’t play the role of a conventional sovereign wealth fund: collecting excess revenues from a country’s bounty and investing them for the public good. What makes SWFT a sovereign wealth fund will also depend on if the bonds issued by the portfolio companies will be guaranteed by the state.
Given SWFT’s wide mandate, it is equally possible that the fund will be involved in privatisations. In theory, it could acquire any asset up for sale (and indeed already owns one that was supposed to be sold in a privatisation bid). In the case of the Na- tional Lottery Administration, it could make any
administrative, managerial and financial changes it deemed fit and then sell the asset to a chosen buy- er at any price. At present, none of these decisions made by the fund would be subject to public scru- tiny, which is normal in the privatisation process. While such practices could create many opportuni- ties for foreign investors, these opportunities would also come with potential compliance issues.
Potential compliance risks
The International Working Group of Sover-
eign Wealth Funds (IWG), an international club of funds, met in Kuwait City in April 2009 and reached a consensus on the establishment of an International Forum of Sovereign Wealth Funds and agreed to abide by the Santiago Principles, which set transparency and best practice guide- lines, as the blueprint for compliance regarding sovereign wealth fund activities.
It appears that some of those principles will be vital for the SWFT to have any chance of being successful, including principal 3, which reads: “Where the SWF's activities have significant direct domestic macroeconomic implications, those activities should be closely coordinated with
the domestic fiscal and monetary authorities,
so as to ensure consistency with the overall macroeconomic policies.” And principal 6, which advocates “the governance framework for the SWF should be sound and establish a clear and effective division of roles and responsibilities in order to facilitate accountability and operational independence in the management of the SWF to pursue its objectives”.
Whichever strategy the SWFT chooses, interna- tional investors should keep an eye on the adoption of a transparent and inclusive policy of governance for the fund. Any signs of mismanagement or debt binges in the pursuit of immediate enrichment will lead to the funds eventual failure.
This comment was by Cagdas Cataltas, an Associate Director for Western Europe at Control Risks (@GBCagdas).