I call on Senator Donohoe to give some detail on the report.
Rapporteur’s Report on Sovereign Wealth Funds.
Thank you. To outline the background to the report, about a year ago, well before the sub-committee was even on my horizon, I asked for the support of the committee to produce a report on this issue. I said I had an interest in it and asked if I could produce a report on it. The committee agreed to my request. I will outline the structure of the report and the main conclusions.
The structure of the report is laid out in the table of contents on page 1. The report examines sovereign wealth funds, how they work, the policy issues arising and makes recommendations.
A sovereign wealth fund is an amount of money either owned or directed by a government. We have a sovereign wealth fund in Ireland, the National Pensions Reserve Fund. The way these funds tend to operate is that a country that owns an asset, from which it makes a considerable profit, invests the profit derived from it in one of these funds and has the opportunity to invest such profit abroad. Most of the wealth funds we discuss tend to be in the Middle East and their bases are profits derived from oil production. The other group of wealth funds is to be found in countries such as ours that set aside revenue when times are good for investment to meet future needs, for example, to meet a pension liability.
The one element sovereign wealth funds provide is money. This is the reason the profile of such funds increased considerably a year ago. During the global credit crunch, particularly around 2008, a number of leading banks were desperately seeking money; they could not obtain it from the government or taxpayers. The most high profile examples of such funds were to be found in America. Huge stakes were acquired in banks such as Merrill Lynch and Citibank by sovereign wealth funds. For example, in the United Kingdom an effort was made to purchase Sainsbury's and a number of leading British banks acquired money from these funds. There are only two examples of the use of such funds in Ireland to date. Quinlan Private acquired €200 million from a sovereign wealth fund in, I believe, Qatar to help fund the purchase of the Jurys Inn chain.
Did the Senator say the Jurys Inn chain?
Yes, it acquired €200 million to fund its purchase. As regards the second example, it was reported that Bank of Ireland was in discussions with one of these funds to seek capital. That is the reason the funds have such a profile. It is estimated that in the next ten to 15 years more money will be invested in them than in hedge funds. Some of us are aware of how controversial hedge funds are. For these reasons, the European Union began to develop a policy on such funds. A number of leading politicians strongly argued against their operation. Former President Bush put in place a law and a committee to try to reduce the number of areas in which they could invest. President Sarkozy took a dim view of their operation in France and described them as predators.
Is the money acquired from funds paid back?
Yes. It is similar to acquiring money from a private investor, except in this case it is acquired via a government.
The European Union began to develop a policy on the funds. Last October it published a policy document which proposed it should support the operation of the funds because it was based on the principle of free movement of capital, but it argued that we should have more knowledge about where the money contained in the funds came from. The main concern of some countries about the funds is that one could wake up one morning and find that half of one's road network, banking system or defence industry is owned by a country that may have political objectives that are different from one's own. The Union developed a policy on the funds; it supports their operation but seeks to ensure more political transparency in respect of them. Its policy document was published.
The reason I prepared the report is that the operation of the funds will get bigger because they will acquire more money. Countries like ours are short of money, for example, for our banks. The report outlines the background to the funds, the main issues arising, on which I have touched, and the policy being developed.
There are two main implications for Ireland. We have one of these funds, the National Pensions Research Fund, which ranks in the top 20 of such funds in the world in terms of value. It has been held up as a role model for how such funds should operate. In the report I have said Ireland should support the European Union as it develops policies on political transparency because it would benefit our own funds. The main thing we are seeking is investment in Ireland, for example, in the banks. Any policy that would restrict the ability of funds to invest in Ireland — or any other European country — would not be in the national interest.
The report contains four main policy recommendations. First, Ireland should support these funding flows and oppose the creation of borders around countries. We have one of these funds and might need to avail of them in the future. Second, we should support the European Union as the lead player in developing policy on such funds. Third, we should continue to support all measures that increase the transparency of the funds and ensure they are divorced from political influence. Fourth, we should develop what I have called the value proposition to try to have such funds invest here.
We have not made big use of these funds so far. Up to this point only €200 million has been invested in Ireland. In the coming years either the Government or the banks could find themselves in a position in which they would be desperately seeking creative sources of funds. This industry will be a huge player. In my report, therefore, I have recommended that, alongside the work the European Union is doing which Ireland should support, we should do a lot of work ourselves to build relationships with the people concerned because they could be a source of funds that might benefit the economy.
That is a quick overview of the report which contains a lot more detail, other than that on which I have touched.
I thank the Senator for the excellent work he has done on this important issue. Assistance was needed in identifying some of the potential problems we all faced. Since the Minister of State is here, I will postpone further debate on the matter until the later part of the meeting.
Of course.
Sitting suspended at 2.33 pm. and resumed at 2.34 p.m.