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Middle East SWFs to lead the investment drive into India's energy sector

Investments in India by sovereign wealth funds (SWF) are expected to peak in 2019, despite the drone attack on Saudi Aramco facilities last week and other disturbances to infrastructure in the Gulf, which could draw funds to rebuild them. The attacks came in the same week that India created a major buoyancy in its capital market through massive cuts in corporation tax rates. The changes were announced by the finance ministry on Friday.

While the ministry is hopeful that large swathes of domestic investors would take advantage of the slashing of corporation tax rates to 22 per cent from the current 30 per cent, it is also sanguine that the first movers will be the SWFs and particularly those in the energy sector. This means the action would be concentrated among the Middle East-based SWFs, which between them, make up about a third of the total wealth of about $8 trillion lying with such funds globally. The fact that Middle East SWFs also have a large exposure to energy assets globally, sets sets them apart from Europe-based funds which are winding down such investments. According to a report by Sovereign Wealth Fund Institute, the amount of money held by SWFs has more than doubled since September 2007. The Middle East-based SWF list is led by Abu Dhabi Investment Authority, followed by the Kuwait Investment Authority, as the accompanying table shows.

It  is not surprising that Prime Minister Narendra Modi held his first meeting with energy sector investors after finance minister Nirmala Sitharaman announced Friday’s massive tax cuts. CEOs of 17 global energy companies took part in the meeting with Modi on Saturday, according to a Business Standard report. These companies have a combined net worth of $1 trillion as per the data released by Raveesh Kumar, MEA spokesperson.

Even before the drone attacks on the world’s largest oil refinery, Abqaiq and Khurais oil fields in Saudi Arabia, it had become progressively clear that options for large-scale deployment of funds from these petro-dollar tanks has begun to shrink across the world. The Belt and Road Initiative has not spurred them because investments in those projects are expected to be cornered by the China-based funds. There are four such funds run by Beijing -- China Investment Corp, SAFE Investment Corp, China's National Social Security Fund and China-Africa Development Fund. They are comparable in scale to some of the Middle-East Funds. China Investment Corp has a purse of $900 billion, while SAFE Investment Corp sits on $441 billion (as on 2017). The Middle-East Funds will not get the first rights in the BRI projects.  Also the attention of these funds could get diverted towards bailing out some of the state-run banks in China. Over the weekend, chairman of China Investment Corporation, Peng Chun, was quoted by the FT as indicating that he expected more banks in China would need bailouts.

This problem for the Middle East-based SWFs has created a comfortable wedge for India to exploit. The reason is these funds have fewer issues in investing in infrastructure projects, which often include those in the energy sector too. For instance, India’s National Investment and Infrastructure Fund (NIIF), meant to finance domestic projects in India, has scouted for money mostly from non-European funds. The NIIF Master Fund, which is supposed to be the largest infrastructure fund in India with assets under management of over $1.8 billion and a co-investment pool of $2.5 billion, is mostly subscribed to AustralianSuper, Australia’s largest superannuation fund, and Ontario Teachers’, Canada’s largest single-profession pension plan.

So even as India is in a remarkable position in which all the top ten global SWFs have investment exposures, not just as portfolio investors, it has also realised that plenty of those from Europe will particularly come with caveats. A Business Standard report this year noted that Norwegian Government Pension Fund Global has decided to exit its oil and gas investments in India. These include companies like Oil India, IOCL, ONGC and RIL. The total value of these India investments is approximately $657.6 million, the report noted.

India’s major business with SWFs will be consequently from those in the Gulf, for quite some time.

List of largest Middle East SWFs
1. Abu Dhabi Investment Authority, UAE: $696.66 bn
6. Investment Corporation of Dubai, UAE: $239.38 bn
2. Kuwait Investment Authority, Kuwait: $592 bn
7. Mubadala Investment Company, UAE:  $228.93 bn
3. SAMA Foreign Holdings, Saudi Arabia: $505.76 bn 8. Libyan Investment Authority, Libya: $60 bn
4. Public Investment Fund, Saudi Arabia: $320 bn 9. Emirates Investment Authority, UAE: $45 bn
5. Qatar Investment Authority, Qatar: $320 bn 10. State General Reserve Fund, Oman: $22.14 bn

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