In The Name of God - en.ndf.iren.ndf.ir/Portals/1/maghaleh.pdf · Farhad Hemmati , Ayoub Abdi Geographical Distribution of Foreign Direct Investment in Iran using Geographically Weighted

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In The Name of God

Proceeding of NIC(2013) National Development Fund of Iran

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ContentThe Impact of Contango Price Structure on Commercial Oil Stocks HoldingDr. M. Asali

SWF’s Asset Management, Fixed Income Assets and Indexing to LIBORDr. Mohammad Mazraati The Choice between Home and Foreign Investment for SWFs and Absorptive Capacity ConstraintDr. Mehrdad Sepahvand

One Hundred Years of Oil Income and the Iranian Economy: A Curse or a Blessing ?Dr. Kamiar Mohaddes and Prof. M. Hashem Pesaran Resources, Investments, and Economic Growth: the Role of NDFIDr. Ahmad R. Jalali-Naini

Sovereign Wealth Funds’ Governance VS. Commercial Entities Dr. Mahdi Rostami

Governance of Sovereign Wealth Funds:International Best PracticesFarrukh Habib, Dr. Beebee Salma Sairally, & Dr. Abbas Mirakhor

Public Money and Private Legal Framework: The Legal Aspects of Structure and Operations of Sovereign FundsDr. Mahmood Bagheri

NDFI’s Investment Policy in International MarketsDr. Mohammad Hashem Botshekan

Sovereign Wealth Fund Asset and Liability Management by Rastin Banking Financial InstrumentsDr. Bijan Bidabad

Legal Aspects of Foreign Investments of the National Development FundFarhad Hemmati , Ayoub Abdi

Geographical Distribution of Foreign Direct Investment in Iran using Geographically Weighted RegressionAmin Ghanbarnejad &Maryam Banitorof

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Content


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Dr. M. AsaliInstitute for International Energy Studies (IIES)

Extended Abstract:

In oil markets inventories serve a number of functions. Producers hold them to reduce cost of adjusting production over time, and also to reduce marketing costs by facilitating production and delivery scheduling and avoiding stock-outs. This argument holds whether marginal costs are increasing with the rate of output, (for most oil producers) or even constant (for some large oil producers).

Connection of the structure of oil prices to commercial inventory emanates from the fact that an upward sloping futures curve is consistent with an expected future spot price that rewards inventory holders for the cost of carrying inventories, including marginal warehousing costs, insurance, and the interest foregone on the capital invested in the inventories.

Understanding the interactions between storage and futures of commodity markets is essential for analyzing the mutual impact of inventory changes and the oil prices. In a competitive commodity market subject of stochastic fluctuation in production and consumption, producers, consumers and third parties interested in speculation and arbitrage will hold inventories, Pindyck .

Oil markets are no exceptions. In oil markets too inventories serve a number of functions. Producers hold them to reduce cost of adjusting production over time, and also to reduce marketing costs by facilitating production and delivery scheduling and avoiding stock-outs. This argument holds whether marginal costs are increasing with the rate of output, (for most oil producers) or even constant (for some large oil producers). Industrial consumers also hold inventories basically for the same reasons- to reduce adjustment costs and facilitate their production process (petroleum products in refineries for example) and to avoid stock-outs.

The Impact of Contango Price Structure on Commercial Oil Stocks

Holding


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Focusing mainly on inventories held by the demand sector, connection of the structure of oil prices to commercial inventory emanates from the fact that an upward sloping futures curve is consistent with an expected future spot price that rewards inventory holders for the cost of carrying inventories, including marginal warehousing costs, insurance, and the interest foregone on the capital invested in the inventories. This link between the futures price and the expected future spot price is known as “cost of carry” arbitrage.

The theory of storage, see Kaldor, , Brennan can be stated in terms of basis, the difference between the contemporaneous spot in period t, St and the futures price for delivery at date T, Ft, T. It views the basis as consisting of the cost of carry: interest foregone to borrow to buy the commodity, plus the marginal storage cost minus a “convenient yield”. Economic rationale for this statement is provided by the assertion that the convenience yield, which is the basis, adjusted for interest charge and storage costs, falls at a decreasing rate as aggregate inventory rise.

Another view of commodity futures is the theory of “Normal Backwardation”, which compare futures prices to expected future prices. This theory, due to Keynes and Hicks later expended by Fama and French views the futures market as a risk transfer mechanism whereby risk averse long position holders (investors) earn a risk premium for bearing future spot risk that commodity producers want to hedge. In modern version of the theory of inventory, Deaton and Laroque, [8], Gorton et al. the behaviour of spot price, which display high volatility, high positive skewness and significant kutrtosis change fundamentally when inventories are present. In this modern version of the theory, both the convenience yield and the risk premium emerge endogenously as functions of inventory. In this context the futures market provides the inventory holders with an opportunity to hedge bankruptcy costs.

The level of inventories matters for the risk premium because future spot price volatility is negatively related to the level of inventories. That is when inventories are low; the variance of the future spot price is higher due to an increased likelihood of a stock out resulting in the risk-averse investors demanding a higher risk premium.

In the modern version of the theory, both the convenience yield and the risk premium emerge endogenously as functions of inventory see Gorton et al.

In this context the futures market provides the inventory holders with


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an opportunity to hedge bankruptcy costs. The main predictions of the theory can be summarized as:

i) An inverse and nonlinear basis-inventory relation,

ii) An inverse risk premium-inventory relation,

iii) Momentum in commodity futures excess returns.

In this paper the first two predictions of the theory is investigated in a brief empirical analysis.


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Dr. Mohammad MazraatiDeputy of International Investments & Operations

National Development Fund of Iran

Extended Abstract :

Asset management and formation of a portfolio by any asset holder, including the Sovereign Wealth Funds (SWFs), are taken from the investment strategy of the holder which is reflection of objectives and the level of risk tolerance. The investment strategy ranges from passive to extremely active approach depending on the horizon of investment, expected risk- return and degree of asset liquidity. Active investment strategy requires expertise and accompanies different risks which lead SWFs to recruit professional asset managers for their investments in financial markets.

Funds with long term investment horizons and less liquidity requirements might adopt a mixed strategy where a big portion of their resources foes to fixed income securities that are indexed to a reference rate like LIBOR. Fixed income assets, so-called fixed income securities (FIS), are sets of assets that generate a fixed stream of income for holder until its maturity date. The FIS are typically rated by rating agencies where the investors can evaluate their risk involvement. Risk avert investors are after risk-free bonds issued by sovereign entities and/or companies with relatively low interest rate. The higher the rating of the bond issuer the lower the rate of interest would be.. However due to inherited risk of securities even the AAA rated assets might carry risk. Market risks, corporate risks, political risks, and regulatory risks are among risks that cannot be avoided but could be managed. Although more than $350 trillion of different financial assets/contracts are indexed to LIBOR, the LIBOR scandal proved that even in the matured and regulated markets the rate could be manipulated and impose huge risks on contracts indexed to LIBOR. The LIBOR scandal during the 2008 credit crunch rooted from the considerable fraud and collusion by member banks connected to the rate submissions to BBA. Turbulences in the financial markets impose additional risks where upward and downward movements of interest rates impact the securities’ yield and price. A passive investor,

SWF’s Asset Management, Fixed Income Assets and Indexing to LIBOR


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in such an environment, might advocate some interventions to optimize the portfolio yield or lead it toward a “laddering approach”.

The actual portfolio of GPFG of Norway, GIC of Singapore and CIC of China, with total assets under management of more than $1.6 trillion, reveals the investment strategy and level of their risk tolerance. The GPFG portfolio has been diversified by 62.4 percent of equities, 36.7 percent fixed income and 0.9 percent in real estate. The asset mix of GIC encompasses 46% public equity, 21% fixed income, 26% alternative assets, 7% cash and others While the portfolio of CIC of china includes 46% equity, 21% fixed income and 33% alternatives (including real estate, absolute return and cash). Although the steady income stream from the fixed income ensures the liquidity inflow to the fund for better positioning in the financial market, it remains exposed to the risk of unexpected interest rate changes in the market. Within the category of fixed income, a conservative approach is taken by SWFs and Funds with long term mandate. In case of GPFG the AAA and A rated assets hold around 54% and 84% of the fixed income basket respectively.

National Development Fund of Iran (NDFI) was established with the objectives of conserving a portion of oil and gas revenues, changing them to productive wealth for the sake of Iran’s sustainable development and preserving the share of future generation. The objectives will be achieved through financing the investments made by the foreign and domestic private investors in Iran, providing buyer’s credit for the buyers of Iranian goods and services as well as investing in international money and financial markets. The portfolio of NDF as a kind of Sovereign Development Fund (SDF) is limited to “domestic financing” and investment in the “international money and financial markets”. The current portfolio policy mandates NDFI to allocate 90% and 10% of its resources to domestic financing and foreign investment respectively. The current portfolio policy has been drawn for the sake of diversification and risk management. It will be revised based on the domestic absorbance potentiality and risk profile of the domestic agent banks. The international portion of NDFI portfolio, in line with the world best practices, has been planned for fixed income assets and underpinned with moderate risk profile. A passive or “buy and hold” policy and laddering approach has been adopted to evolve in the near future to a “quasi passive or index matching” policy. The currency basket of fixed income portfolio will be mostly SDR components to tackle the exposure risk of local currencies.


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Dr. Mehrdad SepahvandDirector of Foreign Investment Department

National Development Fund of Iran

Extended Abstract :

Managing revenue windfalls poses challenges for policymakers in resource-rich countries. Standard economic advice, typically given by the IMF based on permanent income hypothesis (PIH), favors the use of sovereign wealth funds (SWFs) as a vehicle of saving in international financial assets. However, it has recently been argued that developing resource-rich countries can achieve higher social returns by investing in home economy. This paper develops a two-period model to show the optimal choice between investing in home economy or international financial assets depends on windfalls inflow and the home absorptive capacity constraint.

The term, sovereign wealth fund, resembles investing in international financial markets (Allen and Caruana, 2008). But the most common and concrete understanding of this term in academia is much more general. SWFs are defined as a mechanism for moving a country’s savings and investments from the present to the future.

In practice SWFs for various reasons invest in home economy. Bernstein et al (2012) studies a sample consisting of 2,662 investment transactions by 29 sovereign wealth funds. Only about 66% of these transactions targeted the international financial markets and the rest was directed to the home investments. This as Raymond (2011) insists might be due to the recent financial crisis and thus could be considered as a change in SWFs’ investment policy paradigm; after September 2008, some SWFs refrained from foreign investments and invested at home to work as insurance funds against the crisis. In such countries the lending was targeted on non-financial firms to make up for banks’ reluctance to lend or directly support the banks. Some SWFs are used by states to intervene in stock markets in order to counter speculative attacks.

The Choice between Home and Foreign Investment for SWFs and Absorptive

Capacity Constraint


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While there is to large extent consensus on saving some share of resource revenues instead of spending it as it accrues, there are lots of controversy over the best way to do that. IMF’s standard advice favors investing abroad by a sovereign wealth funds on the stability ground. The advantage of investing abroad is that the returns to an SWF are supposed to be uncorrelated with most shocks that hit the domestic economy. Also, bottlenecks may imply limited absorptive capacity of the home economy, where too much investment may lead to inflation, inter-sectorial imbalances and losing competitiveness rather than increased output. Berg et al (2012) for instance, use simulation to show though during the windfall revenue spending, the economy would experience fast growth, soon after due to a real exchange rate appreciation; traded-good production would shrink for a prolonged period.

There is an emerging and recent literature that emphasizes on the higher social returns from investing in home economy (e.g. by Collier, van der Ploeg and Spence 2009; van der Ploeg and Venables 2010, Berg et al. 2013 and Ploeg and Venables 2013, ).

Following the new trend in the literature, this study uses a two-period macroeconomic model with a SWF that can either invest in home economy with some absorptive capacity constraint or purchase some international financial assets. The policy instrument for the social planner how is running the SWF, as well is the percentage share of saving that is directed to domestic investment. Following Venables (2010) in our model the absorptive capacity constraint raises the shadow cost of public funds. For the sake of tractability we keep the model quit simple so make no reference to uncertainty and adjustment mechanisms, including price system. But I show this fairly simple framework is still very affective and capable in addressing some important policy issues for sovereign wealth funds in general and National Development Fund of Iran in particular.

NDFI in contrast to other SWFs has spent almost all its resources domestically. That partly is due to the restriction that the country has in access to international financial markets because of sanctions. But it also stems from some misunderstandings about the role that injecting cheap money can play in the process of economic development . It argues that an increase in resource revenues should tilt the SWF investment policy towards investing abroad. But it would be appropriate to direct resources to home economy if it is spent on absorptive capacity constraint relaxing projects.


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Dr. Kamiar Mohaddesa and Prof. M. Hashem Pesaranb

a Faculty of Economics and Girton College, University of Cambridge, UK

b Department of Economics, University of Southern California, USA,and Trinity College, Cambridge, UK

Extended Abstract :

This paper examines the impact of oil revenues on the Iranian economy over the past hundred years, spanning the period 1908.2010. It is shown that although oil has been produced in Iran over a very long period, its importance in the Iranian economy was relatively small up until the early 1960s. It is argued that oil income has been both a blessing and a curse. Oil revenues when managed appropriately are a blessing, but their volatility (which in Iran is much higher than oil price volatility) can have adverse effects on real output, through excessively high and persistent levels of inflation. Lack of appropriate institutions and policy mechanisms which act as shock absorbers in the face of high levels of oil revenue volatility have also become a drag on real output. In order to promote growth, policies should be devised to control inflation; to serve as shock absorbers negating the adverse effects of oil revenue volatility; to reduce rent seeking activities; and to prevent excessive dependence of government finances on oil income.

This paper examines the impact of oil revenues on the Iranian economy over the past hundred years, spanning the period 1908.2010. It begins with an overview of the history of oil exploration and development in Iran, and considers the quantitative importance of revenues from oil exports for the Iranian economy over the period 1908.2010. In this regard, three sub-periods are identified.

In the first sub-eriod,1908.1959, oil started to be produced in significant quantities, but Iran’s share of profits from exports of oil remained rather

One Hundred Years of Oil Income and the Iranian

Economy: A Curse or a Blessing ?


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limited, despite repeated renegotiations over the oil contracts between the Iranian government and the international(mainly British) oil companies, the nationalization of the oil industry, and the subsequent establishment of the National Iranian Oil Company.

The second sub-period, 1960.1978, saw major changes in the international oil industry and expanding oil revenues for Iran. Iran’s revenues from oil exports started to become significant, more or less steadily, from 1960 onwards thanks to increased production and better royalty terms made possible partly due to the increasing importance of OPEC in contract re-negotiations between producers and host companies. But the main factor behind Iran’s huge oil revenues in 1970s was price increases, which were modest initially but then became substantial after the quadrupling of international oil prices in 1973.74.

The third sub-period, 1979.2010, coincide with the overthrow of the Shah’s regime in the February 1979 revolution, the halving of oil exports as an intended policy change by the revolutionary government, and significant volatilities in Iran’s oil revenues due to the eight-year war with Iraq (September 1980 to August 1988), US economic sanctions (targeting Iran’s oil and gas industry), and the vagaries of international oil markets.

In short, although oil has been produced in Iran for a long time, its importance for the development of the Iranian economy was relatively small until the 1960s. The quadrupling of oil prices in the 1970s and the Shah’s policy of spending almost all of the increased revenues domestically substantially increased the country’s dependence on oil income, which also happened to coincide with a much higher volatility of international oil prices. Revolution, war and economic sanctions, through their impacts on oil production and exports, have introduced further important sources of variation in Iran’s oil revenues. As a result, the Iranian economy has been subject to unprecedented oil revenue volatility. Annual oil revenue volatility has risen from 35.5% per annum during 1960.1978, to 51.1% per annum during 1979.2010, as compared to oil price volatility which rose from 11.3% to 26.1% over the same periods.

In this paper we argue that it is the volatility in oil revenues and the government’s in- appropriate economic and political responses to these volatilities that are the curse and not the abundance of revenues from oil exports in itself. To this end we review the literature on resource abundance and growth, as well as the recent macro-econometric


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evidence on the Iranian economy. Although the early literature showed the existence of a negative relationship between real output per capita and resource abundance, more recent evidence is not so clear cut. Firstly, the early literature used cross-country analysis that fails to take account of dynamic heterogeneity and error cross-sectional dependence, and this could bias the results. Secondly, the early analysis ignores the effects of oil revenue volatility on growth, which turns out to be important. Using appropriate econometric techniques and including measures of resource revenue volatility in the analysis, the evidence in fact points to resource revenues having a positive effect on growth, with resource volatility affecting growth negatively. Seen from this perspective, resource revenues can be both a blessing and a curse, and the overall outcome very much depends on the way the negative effects of resource revenue volatility are countered by use of suitable stabilization funds and other policy mechanisms that smooth out the flow of government expenses over time. There are also a number of political economy considerations that are highlighted, such as government accountability, generous subsidy policy, and general rent-seeking activities that often manifest themselves in higher inflation and reduced economic efficiencies.

Turning to the macro-econometric evidence, we first review the historical trends over the

period 1937.2010. We show that there are strong positive correlations between growth of real GDP and real oil export revenues over the whole period and a number of different sub- periods. But, at the same time, we observe strong negative correlations between real GDP growth and inflation, again over the full sample period and the same sub-periods. These results are corroborated by the more formal macro-econometric evidence, also reviewed in the paper. We note that, whilst oil revenues affect real output positively, inflation has a statistically significant negative effect on real output even in the long-run. Based on standard economic theory we would expect inflation to have a significant positive effect on real output only in the short run (through the Phillips curve trade-o¤), and no effects on real output in the long run. We view the negative long-run relationship between real output and inflation as an indication of the adverse effects of a combination of factors (such as rent- seeking, poor institutional arrangements for dealing with oil revenue volatility, and general economic mismanagement) on economic growth.


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Econometric analysis also reveals additional insights into the way the Iranian economy functions, which is not apparent from a historical analysis. Using generalized impulse response analysis it is shown that the effects of oil revenue or foreign output shocks work themselves out through the economy within two years, which is much shorter in duration 2 than what is generally obtained (3-5 years) in the more developed economies. Such rapid responses to shocks could be due to the relatively underdeveloped nature of money and capital markets in Iran, and the country’s relative isolation from the global economic and finance community. Such a fast rate of response to shocks makes it even more important that appropriate stabilization policies are put into effect so that the adverse effects of negative shocks on output and consumption are dealt with in a timely manner.

We conclude that, in order to promote growth, policies should be devised to control inflation, serve as shock absorbers negating the adverse effects of oil revenue volatility, reduce rent seeking activities, and prevent excessive dependence of government finances on oil income.


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Dr. Ahmad R. Jalali-NainiProfessor at the Institute for Research in Planning and Development

Extended Abstract :

Large vicissitudes in oil prices and revenues and pro-cyclical government spending has traditionally been a problem facing resource-exporting countries. Dissatisfaction with this experience and the desire to smooth oil-financed government expenditures over oil-price cycles induced the creation of the Oil Stabilization Fund (OSF) in the Third Plan (2000-2004) as a vehicle for fiscal, hence macroeconomic stabilization. However, the actual performance of the fund departed from its planned mission and in practice OSF failed to act as a fiscal stabilizer. Consequently, in conjunction with drafting of the Fifth Development Plan in 2011, the National Development Fund of Iran (NDFI) was established and replaced OSF. The general idea for conceiving this new setup was (and still is) to divert a fraction of oil and gas revenues to NDFI in order to pursue certain objectives, chiefly, to allocate the accumulated funds to productive investment for future generation. According to its present charter, NDFI is supposed to serve as both a Sovereign Wealth Fund (SWF) and a national development fund (NDF). NDFI can influence the economy through the above two channels.

The main objective for many SWFs is to smooth-out the proceeds from exploitation of finite resources over time and share the income generated with future generations. This can be done, for instance, through smoothing of consumption expenditures, that is, when the fund distributes a fixed income stream and the government doles it out amongst the general public—or some targeted groups amongst them. An SWF can influence the economy via different channels, principally via the balance of payments position, and monetary-fiscal conditions. The return on the assets (a portfolio of international securities) can have a significant effect on government revenue, finances and wealth, hence its ability to administer anti-poverty programs and social policies. A well

Resources, Investments, and Economic Growth: the Role of NDFI


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designed SWF can arrange conversion of its foreign assets to domestic currency such as to limit exchange rate variations. A poorly designed large SWF can generate Dutch disease effects and create coordination problems between the fund and the fiscal and monetary authorities.

In comparison, the primary objective of an NDF is to provide financing for domestic investments so as to share the fruits of economic growth inter-temporally. Development Funds normally help finance socioeconomic, infrastructural projects or provide funding for industrial policies which are expected to enhance a country’s potential growth. Our primary concern in this paper is to delineate the proper role of NDFI in its capacity as the provider of funds for financing domestic investments. In designing and creating a fund the concept behind its construction should have some basis in theory and should be supported by empirical observations. Therefore, a relevant question in this regards is: can NDFI, as an NDF or a sort of saving fund, positively affect economic growth? This question can be analyzed from two distinct perspectives:

a)-The effect of availability of such a a saving pool on growth, as discussed by a host of growth models like Solow-Sawn, Kass-Koopman, overlapping generations, and endogenous growth models.

b)-From an institutional perspective. In this connection will raise the issue of governance structure pertaining to the allocation mechanism and criteria for the fund.

We will argue in this paper that while investment and saving rates in the Iranian economy has been above average amongst the developing countries, its growth performance has been about average, and prior to the imposition of sanctions, savings and investment were not binding constraints on economic growth. Rather, what has limited the growth potential of the Iranian economy has been the allocative inefficiency of investment. In this connection we will outline the appropriate strategy and the general governance structure for effective utilization of NDFI’s funds.


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Sovereign Wealth Funds’ Governance VS. Commercial Entities

Dr. Mahdi Rostami Petroleum University of Technology, [email protected]

Extended Abstract :

In this paper, I look at the Sovereign Wealth Funds (SWFs) more closely to find out the potential differences in governance mechanism between SWFs and conventional profit organizations. Mainly due to historical, economic and political reasons, they differ in terms of organizational ownership, missions, investment strategies, and performance criteria. While conventional companies aim to maximize their shareholder wealth, SWFs as state owned institutions, as a mean to achieve financial targets, financial stabilization and intergenerational savings, can be used by governments to pursue economic development purpose and certain political goals. Moreover, on the contrary to the profit organizations, which always look for any potential market opportunities mainly in short, and medium terms, SWFs are normally long-term investors. Furthermore, enhancing legitimacy through participation of society’s representatives and their interests may overweight normal financial Performance measures in SWFs.

Studies also revealed that due to state ownership of the SWFs, governments directly or indirectly shape the governance mechanism, i.e. control and management structure of the Sovereign wealth funds. Therefore, while an effective governance mechanism in profit organizations desire to control managerial opportunism within the company, good governance is needed to control the potential political influence of the governments on the SWFs in order to secure effective investment and transparency of SWFs.


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Governance of Sovereign Wealth Funds:International Best Practices

Farrukh Habib*, Dr. Beebee Salma Sairally*, & Dr. Abbas Mirakhor:

**International Shari’ah Research Academy (ISRA), Kuala Lumpur, Malaysia

INCEIF, the Global University of Islamic Finance, Kuala Lumpur, Malaysia

Extended Abstract :

Today, in a number of Muslim countries state-owned funds are invested in special purpose investment vehicles called Sovereign Wealth Funds (SWFs). Overall, some 40% of SWFs are established in the member countries of the Organisation of Islamic Council (OIC), and these represent about USD 2.4 trillion worth of assets under management out of the total value of USD 5.8 trillion as at August 2013 (Sovereign Wealth Fund Institute, 2013). This paper aims to discuss the governance framework of SWFs in the light of the international best practices, notably the generally accepted principles and practices (GAPP) commonly called the “Santiago Principles” developed by the International Working Group of Sovereign Wealth Funds (IWG), and examines the gaps and issues exist in the Santiago Principles. It particularly considers the SWF set up in Iran as a case study to discuss its governance framework and determine its compliance with the Santiago Principles. The paper further attempts to propose some recommendations in order to implement the best practices on governance and transparency in a more robust way. It specifically advocates that SWFs in Muslim countries should integrate the principles of Shari’ah in their governance structure to ascertain that all their activities comply with the teachings of Islam.

This will not only promote accountability and transparency of SWFs in Muslim nations, but also enhance their impact on social and economic development in those countries.


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The prevalence of Sovereign Wealth Funds (SWFs) in the global financial markets dates back to the 1850s when the first SWF was established in Texas, United States in 1854, sourced mainly from oil revenues.

In Muslim countries, the establishment of SWFs is a more recent phenomenon with the first SWF being set up in Kuwait in 1953. In recent years, especially post-2000, a larger number of SWFs have been launched particularly in resource rich countries and they continue to grow both in number and size today.

SWFs specifically attracted the attention of academicians, economists and financial experts post-financial crisis 2007-08 as they represent an important group of global financial market players having significant impacts on both the home and host countries.

After the recent financial crisis, SWFs – as well-established institutional investors – have been under the spotlight of many political, legal, financial and economic debates.

Since, and as a result of their growing level of assets being invested in public and private entities with substantial effects on the financial markets, serious efforts have been made to articulate the best governance structure and international practices to be adopted by SWFs.

These efforts can be categorized as either voluntary or obligatory, and either national or international.

Among these efforts, the most prominent is the Generally Accepted Principles and Practices (GAPP) commonly called the “Santiago Principles” which were developed by the International Working Group of Sovereign Wealth Funds (IWG), comprising 26 IMF member countries with SWFs.

This paper, after initially providing an overview on the development of SWFs and examining their current evolution, accordingly focuses on the Santiago Principles to discuss the governance framework of SWFs.


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Public Money and Private Legal Framework: The Legal Aspects of

Structure and Operations of Sovereign Funds

Dr. Mahmood Bagheri

Associate Professor of Banking Law and Financial Regulation, Faculty of Law and Political Science, University of Tehran and,

Senior Research Fellow in Financial Law at the Institute of Advanced Legal Studies, University of London

Extended Abstract :

Sovereign Wealth Funds (SWF) are new entities whose nature, ownership and governance structure is not similar to any public or private organization. The closest entities to a SWF are central banks the nature of which is not very settled too. The hybrid and precarious nature of SWFs has many legal and regulatory implications from both national and international perspectives. The creation of legal personality is a legal convention for both public law legal personality and private law legal personalities. In a modern state, sovereign power including the legislative or executive or judicial powers are empowered to create legal personalities such as “corporations”, “state agencies” and “departments” which belong either to the public law or private law domains. However, there are third category of legal personalities which are public and yet not governmental bodies. Such entities are called “nongovernmental public bodies” which includes state pensions, central banks, securities regulators and other regulatory bodies which are not a state organ and yet are there to protect the public interest. Sovereign funds are such bodies which manage and invest public funds and yet are not part of the government.

Unlike a private legal personality whose structure and governance is


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defined in the company laws and articles of associations of a company, the structure and governance of SWFs are normally legislation by a parliament. As such the nongovernmental organizations are in fact independent from the governmental in terms of ownership, governance and management.

Such a different nature entails various legal issues from national and international perspectives including :

Tax, the activities of such organizations are similar to private sector activities such as investment in money or capital markets. A question could be raised regarding whether such an organizations should pay tax for public services

Shareholders , Assemblies and Boards of Managements

Protection afforded in terms of foreign investment

The nature of contracts concluded between the SWFs and private sector

The nature of contracts concluded between SWFs and governmental agencies

The scope of protection of investment by the SWFs in other countries, is this a public or private investment

The issues related to the arbitration of disputes involving SWFs. In some countries governmental and public disputes could not be subjected to arbitration. There is no clear indication whether disputes involving SWFs are arbitrable or not

The economic sanctions and assets of the nongovernmental public bodies of Iran. If such assets do not belong to government, then the sanctions are not applicable to SWFs

The use of company law rules to fill the gaps in the structure, management and audit of the SWFs

The scope of compliance of the SWFs with the investment regulations in national and international markets

The legal relationship between central banks and SWFs. The overlap between functions


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Are SWFs pension funds and if not what are the similarities between SWFs and public or private pension funds

The Constitutional Law Aspects of the scope of the governmental intervention regarding the assets allocated to the SWFs

The legal questions of the relationship between the stakeholders and the SWFs.

The difficult process of the exercising stakeholders rights over the SWFs.

What is the applicable law to the international transactions concluded between the SWFs and 1) issuers 2) borrowers

What is the scope of party autonomy of the SWFs in terms of choice of applicable laws?

All the abotve issues will be discussed in this paper.


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Dr. Mohammad Hashem Botshekan Chairman and Managing Director of Bank Maskan

(Former CEO of EN Bank)

Extended Abstract :

National Development Fund of Iran (NDFI) was established in 2011 to realize two main purposes: First, to stabilize and develop the national economy of the country and second to save national wealth for future generations. The funds of NDFI, according to the articles of its association could be invested in foreign or international financial markets. To do so, NDFI as an investor undoubtedly needs a plan to direct its efforts. This plan is called investment policy. Therefore, in this paper, according to NDFI’s articles of association and code of ethics and by conducting comparative study of investment policy of some Sovereign Wealth Funds (SWFs), we develop the investment policy of NDFI including its mission statement, risk tolerance, investment objectives and strategic asset allocation (SSA) for investing in international financial markets.

There is no a completely agreed upon definition of a Sovereign Wealth Fund in economic literature; however, this vehicle could be characterized as a special investment fund constituted and administered by governments to manage and flourish a country’s foreign assets in a long-term horizon. Managing assets in global financial markets makes SWFs deal with similar complications other professional players face. Two almost different functions have been attributed to SWFs so far. On the one hand, some believe that SWFs can lead to more liquidity and improved financial resource allocation. These people are of the view that SWFs, especially those with really large caps, are able to soften short-term economic fluctuations by employing eminent international fund managers and well-educated internal analysts besides by setting long-term goals. On the other hand, SWFs’ performance evaluation and also the investigation of its effects on global financial markets is a challenging task as a result of the existence of several barriers against information gathering about their financial and operational

NDFI’s Investment Policy in International Markets


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performance, multiple and in some cases opposite goals of different SWFs, alongside lack of transparent information about organizational structure and investment management of these.

In fact, significant growth of SWFs’ assets makes them quite active and influential institutional investor in financial markets. These funds’ asset under management volume is even much larger than that of some well-known institutional investors such as pension funds and private equity funds. Nowadays, 72 SWFs are managing about 5800 million dollars around the world. The Investment policy of an SWF addresses optimal management of financial assets and indicates how significant the fund’s operation is in global financial markets. It seems that the role of SWFs in stabilizing international financial markets in foreseeable future would be as important as it is today. Despite the fact that lots of SWFs encountered consequential losses during global financial crisis and that they are focusing on internal markets now, these funds’ relative size and degree of penetration in global markets are still substantial. Moreover, SWFs usually have longer term investment strategy than do other institutional investors. This makes SWFs big players in the world economy.

SWFs’ literature has been focused on three areas: first of all, issues regarding improved external and government accounts’ transparency; Second, these funds’ goals and their approach to risk management and investment horizon, and third, more emphasis on return than on liquidity issues. Two latter issues can be detected in Investment Policy of SWFs. It is worth noting that there are different kinds of sovereign wealth funds with different Investment Policies. Therefore, to better understand SWFs’ Investment Policies, one had better know different types of these funds.


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Sovereign Wealth Fund Asset and Liability Management by Rastin Banking Financial Instruments

Dr. Bijan Bidabad Professor of Economics and Chief Islamic Banking Adviser to Bank

Melli Iran

Extended Abstract :

Assets and Liabilities Management (ALM) consists of technical instruments and methods, which consider both value creation and risk control. A Financial institute applies ALM techniques to increase more benefits by covering himself from risks, and minimize losses due to transactions.

Dissimilarities between ALM approaches in Islamic finance and conventional financing come from differences on usury illegalness and accounting system in Islamic finance in comparison to conventional one. Jurisprudence specifications indicate that time is not the sole effective factor on increasing equity (deposited capital) return; but profit and loss sharing resulted from investment in real economy sector is the essential base for monetary transactions. These two important factors are considerable in Islamic ALM of any financial fund. Non-usury financing requires specific ALM approach to improve efficiency and effectiveness of this type of financing. Islamic finance same as conventional one follows maximizing shareholders assets, but subject to observe Islamic laws and ethics.

International Working Group of Sovereign Wealth Funds (IWG) defines Sovereign Wealth Fund (SWF) as: special purpose investment funds or arrangements that are established and owned by governments for macroeconomic purposes to hold, manage or administer assets to achieve financial objectives and to employ various investment strategies, including investment in foreign financial assets. The term SWF is usually used to cover a spectrum of government investment vehicles


25

from central banks and monetary authorities to government-owned enterprises that invest in specific economic sectors. Several organizations and commentators have offered somewhat different definitions that can affect whether certain institutions would be considered as SWF. The appropriate assessment of Sovereign Wealth Fund (SWF)’s ALM requires deep understanding of assets and liabilities, investments, customers, economics environment and competition conditions of the capital and monetary sectors. SWF is also defined as an investment vehicle that:

Is owned directly by a sovereign government,

Is managed independently of other state financial institutions,

Does not predominately have explicit pension obligations,

Invests in a diverse set of financial asset classes in pursuit of commercial returns

Has made a significant proportion of its publicly reported investments internationally.

SWFs invest in a broad range of assets such as public equities and fixed income investments assets. Recently SWFs’ funds have been directed toward the assets other than stocks, bonds and cash. Proportion of private equity, real estate and infrastructure is increasing significantly.

Actually, size of investments, ability to act quickly, autonomy and immediate access to large amount of capital, fewer public reporting obligations are positive characteristics of SWFs, and enable them to be crucially effective in crises and natural disasters financing and saving bankruptcy of different private and public entities. But, the concern regarding SWFs motivations and incentives to distort financing toward those investments and companies that are influenced by different political pressure groups and other types of corruptions are very important and have been led to push SWFs to increase their transparencies.

To reduce this concern, in this paper we try to propose a slightly different financing procedure by using Rastin Banking mechanism and standards to fulfill both non-usury financial operations and fruitful supervised investments. This goal is done through Rastin Profit and Loss Sharing (PLS) system through Rastin Certificates financial instruments.

Moreover, the governments operationally construct SWFs to use their


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surplus resources of the prosperity period in recession and crises years. In this paper, we also show that ALM of SWFs can be done by using Rastin Swap Bonds (RSBs) that are other Rastin Banking financial instruments.

Rastin Banking is a complete new solution to Islamic banking based on Islamic and ethic teachings with scientific and technological approach. Some parts and modules of Rastin Banking have been implemented in Bank Melli Iran. The installed parts of the system are now functioning and have attracted depositors and investors, and since the procedures and instructions are well defined, the bank’s staff is performing its procedures easily. The results of the test system are very satisfactory.


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Farhad Hemmati Director of Legal and Parliament Affairs of the

National Development Fund of iranAyoub Abdi

Legal Expert of the National Development Fund of Iran

Extended Abstract :

The National Development Fund is a sovereign wealth fund, with the nature of a non-governmental public institute. It was formed to convert some part of proceeds generated from the sales of oil, gas, gas condensates and oil products to permanent, asset generating and productive economic capitals and to safeguard the share of future generations from oil and gas resources and oil products (beginning part of article 84 of the law of the 5th Development Plan).

It is deemed to be a colossal economic establishment and plans to realize specified objectives with huge capital it possesses. Investments outside the borders of the Islamic Republic of Iran are counted to be a way to protect and increase the resources of the fund. In addition to economic aspects, it brings about also positive international and political outcomes for the country.

Foreign investment has attracted most attention by the international investors because of its low risks and safe interest. One of the important players in this vast era is the Sovereign Wealth Fund. National Development Fund of Iran is one of the most recent established SWF, possessing remarkable financial resources to invest in attractive markets. According to its association, NDF is permitted to invest part of its huge resources in foreign financial and monetary markets. Stocks, bonds, and other securities are amongst these foreign investments. Accordingly, it is necessary to consider the possibility and legal aspects of foreign

Legal Aspects of Foreign Investments of the National Development Fund of Iran


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investments of NDF.

The legal aspects of foreign investments of the NDF may be studied in two aspects: First, whether the NDF may invest abroad or not and second, what laws and regulations are applied in such investments. In this regard, applicable laws and regulations to the foreign investment of NDF should be considered. In other hand, International law provisions and bilateral investment treaties and other international documents have critical importance.

This article tries to present an overview of the legal aspects of investments of the Fund abroad. To do this, we deal first with concepts relating to foreign investment, and Next with Iranian laws and regulations and finally, international legal protections of foreign investment are studied.


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Amin Ghanbarnejad* & Maryam Banitorof** *Msc Biostatistics, School of Health, Hormozgan University of Medical

Sciences, Bandar Abbas, Iran. Corresponding Author

**Msc Economic Systems, Department of Foreign Investment, Organization for Economic Affairs and Finance, Bandar Abbas, Iran.

Extended Abstract :

This paper investigates the geographic distribution of FDI in Iran over a time period of 5 years and analyzes the location of foreign direct investment (FDI), making special use of GIS to analyze the spatial distribution of FDI. The paper uses spatial statistics including Moran’s I index, Getis and Ord’sGstatistics, and retrospective analysis, to detect spatial and temporal clusters. Spatial clustering suggested that four provinces, Bushehr, Khuzestan, Kohkiluye and Fars could be grouped as “hot spots” in 1390. GWR results showed that FDI per capita in previous year, GDP per capita and area of industrial zone have significant effect on FDI.The present study identified importance geographical areas that attractive to foreign investments, however the provinces have different determinants for FDI.

FDI is often considered as an engine of economic growth for developing countries, since it not only brings capital, technology, skills and employment opportunities to the host economy, but also helps to boost the productivity of local firms. Empirical studies have also confirmed that FDI has positive impacts on the growth rate of host countries or regions. During the last decade, attracting FDI has become a major economic interest and purpose of government in developing countries at the provincial level like, (Qixu CHEN, 2000) and (Santiago 1987). The provincial distribution of FDI in Iran can be considered as an indicator of the how the gains from openness were distributed among provinces. Therefore, a detailed study of the evolution of the spatial pattern of

Geographical Distribution of Foreign Direct Investment in Iran Using

Geographically Weighted Regression


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FDI in Iran might provide deeper insights into the dynamic provincial distribution of gains from openness, and might help policy-makers to adopt appropriate measures to attain a more even distribution of these gains, ( Fujita and Hu 2001) and (Brülhart Torstensson 1996).

FDI distribution is a spatially and temporally varying process. Locational determinants and dynamic process of FDI are important issues for policy makers, especially in developing economies. FDI can promote the growth of developing economies, as a source of finance, technologies, management advancement, labor skills and competitiveness.

The geographical distribution of FDI in Iran has been very uneven and highly concentrated in southern provinces. This paper attempts to identify temporal and spatial clusters of FDI, and analyze important factors on FDI location in different regions. The purposes of this researchare as follows to examine the temporal changes of spatial patterns of FDI distribution. The spatial data is analyzed with geographical information system (GIS). The findings of this research could provide valuable information for policy-makers as well as researchers in the field.

The purposes of this research are as follows: (1) to examine the spatial patterns of FDI distribution; (2) to identify variation of important factors determining FDI across different provinces. The spatial data is analyzed with geographical information system (GIS) and spatial statistics. The findings of this research could provide valuable information for policy-makers as well as researchers in the field.

In The Name of God - en.ndf.iren.ndf.ir/Portals/1/maghaleh.pdf · Farhad Hemmati , Ayoub Abdi Geographical Distribution of Foreign Direct Investment in Iran using Geographically Weighted

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