Legal Framework
• Two main types of legal approaches are used to establish SIFs: (1) SIF-specific law or decree, with varying degrees of reliance on commercial or SOE law; or (2) purely commercial (domestic or foreign) law. In general, public capital SIFs tend to rely on SIF-specific legislation, whereas mixed capital SIFs tend to use commercial law. The choice of legal approach provides signaling effects to potential private co-investors on the operational independence and commercial orientation of the SIF. • Public capital SIFs that invest domestically, and do not seek outside investment, typically adopt bespoke legal structures under special legislation or use local commercial structures. Mixed capital SIFs tend to adopt globally recognizable private sector management and capital pooling structures. • Choosing a well-recognized fund jurisdiction as a domicile allows SIFs to operate in a bigger arena than as a local actor. Offshore domicile is primarily relevant for mixed capital SIFs anchored by nongovernment entities, for which a broad range of factors may influence the choice of domicile. SIFs anchored by government sponsors are usually driven by political reasons to establish in their home country. • Explicit or implicit reliance on SOE laws or structures may subject a government-sponsored SIF to a variety of public sector laws and regulations that can conflict with the mandate of the SIF and hinder its competitiveness. Ideally, governments must explicitly differentiate SIFs from SOEs (through special legislation or otherwise) to negate the risk of subjecting SIFs to laws and regulations that impede fulfilling their mandate.
NOTES 1. In the Santiago Principles, the generally accepted principles and practices (GAPPs) for sovereign wealth funds (SWFs), GAPP 1.2 states, “The key features of the SWF’s legal basis and structure, as well as the legal relationship between the SWF and other state bodies, should be publicly disclosed” (IWG 2008, 7). In addition, GAPP 6 states, “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” (IWG 2008, 7). 2. See Santiago Principles GAPP 1, Explanation and Commentary (IWG 2008, 11). 3. With respect to the legal domicile of the SIF, a strong legal framework will also provide simple and manageable procedures for entering into investments and projects. The legal framework will provide for the protection of property rights and contractual rights, as well as effective enforcement of these rights. When establishing investment and enforcing investors’ rights are “perceived as cumbersome and lack predictability” (OECD 2020, chapter 3), and if disputes “cannot be resolved in a timely and cost-effective manner” (OECD 2021, chapter 5), investors will be less willing to co-invest with the SIF. 4. Domestic political risks (for example, legitimacy), domestic governance risks (for example, corruption), international governance risks (for example, negative externalities created by SWF activity), and international political risks (for example, m ercantilism, politicization). 5. Note that in some cases commercial laws are indeed customizable. Many commercial laws have default provisions from which to opt out, thus providing a highly customizable legal and governance framework for the entity. For example, some of Luxembourg’s entity structures, like the SAS (société par actions simplifiées, or simplified shareholder company), are highly customizable. 6. For the full text of the NSIA Act 2011, see https://nsia.com.ng/~nsia/sites/default/files /downloads/NSIA%20Act.pdf. 7. For the full text of the NTMA Act 2014, see http://www.irishstatutebook.ie/eli/2014 /act/23/enacted/en/pdf.
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