HOW TO HIDE

$50 BILLION Dominic Lawson on Kuwaiti

control of the largest accumulation of money in the City

WHEN $50 billion is trying to hide, it can afford the best obscurity money can buy. The $50 billion in question is Kuwait's Reserve Fund for future generations. It is the largest international fund — indeed the biggest single accumulation of money — ever to have been managed from London. It is managed by the Kuwait Investment Office. And it looks like this: on a little island of office buildings at the St Paul's end of Cheapside there is a wooden front door. It calls itself 'St Vedast House', but other than that there is not a name, number, letter-box or doorknob in sight. Peer closely at the door, and you can make out rows of tiny buttons. But those too have no names and no numbers. Then you will be surprised by a whirring sound to the left of you. A glass door slides open, to reveal a commissionaire in a little room, seemingly detached from the main build- ing. He does not ask you who you have come to see. He just asks who you are. If you are expected then you are directed to a lift and told to go to the mezzanine floor. That is the only place you can go. Because there is something odd about the lift, too. Only the mezzanine floor has a button which can be pressed. The others all have slits for keys, and there are very few among the 120 walking the corridors of St Vedast House who swing a full key-ring.

Once inside the offices, it is deathly quiet, even though this is one of the City's traffic blackspots. The double glazing is almost a foot thick. If you are smart you will recognise that the face beaming down at you from almost every wall is a repre- sentation of the Emir of Kuwait. You will then recall that the Emir was almost blown up in 1985 by Shi'ite terrorists. And you will surmise that the double glazing is not to keep out just noise.

But the barriers within the KI0 building are at least as impenetrable as those that shield it from the outside world. According to one British ex-employee of the Kb, 'There was a great emphasis on secrecy even when there was nothing much to hide. We were all in cell-like structures, so none of us knew what those outside our immedi- ate circle was up to.' There were some rules which were particularly trying, apparently. Not only is drinking while on company business forbidden, but there is also a ban on investment in any stocks with a connection with alcohol. When it leaked out in 1985 that the KI0 had invested in Bell's Whisky, there were outraged scenes in the Kuwaiti Parliament, and the KI0 was reprimanded. These days it bends, rather than breaks, the Islamic financial code.

The mixture of massive size (equivalent to a combination of the pension funds of British Coal, British Telecom, Electricity, British Rail, the Post Office and British Gas), secrecy and unpredictability clearly intimidates those touting for the KIO's business — chiefly the stockbroking fraternity. The ex-KIO man recalls with some amusement, 'Some people who came in to see us were visibly absolutely teni- fied, and these were powerful men, not at all the sort of people you would ever have expected to see in such a state.'

So the Kuwait Investment Office's love of secrecy is easily imposed on those who act as its intermediaries. As one of the biggest providers of commission income in the London market, it would be unpardon- ably extravagant to offend them. Previous-

'Her had a crawl-on part in Bar

ly this aura of mystery had been accept- able. But now the KI0 has committed more than £3 billion to buying 20 per cent of British Petroleum, Britain's biggest company. And various parties, from the lowest market speculator right up to Sir Peter Walters, BP's chairman, would very much like to know a bit more about the KI0 and its intentions. Yet the secrecy bug has caught BP itself, normally the least reticent of companies. An interview last month with the treasurer Of BP on the matter of the KI0 stake was cancelled at an hour's notice, and not rearranged. Most likely BP itself has only a sketchy idea about the KIO's ultimate intentions, which is not a particularly pleasant thing to admit.

There is also something peculiarly chill- ing for BP in being on the receiving end of Kuwait's wealth. For BP is chiefly re- sponsible for discovering and developing the oil which is paying for its present discomfiture. In 1933 — during its days as Anglo-Persian — it formed a 50-50 Kuwaiti joint venture with the Gulf Oil Co of Pittsburgh. It was called the Kuwait Oil Company, and was awarded a 75-year concession over a country the size of Wales by the then ruler of Kuwait, Sheikh Ahmad ibn Jabir.

In 1975 Kuwait seized control of its own oil wealth by nationalising the Kuwait Oil Company, but strange echoes of the for- mer relationship remain. In its recent £2.5 billion bid for Britoil, BP's documents reveal that part of its base for the attack on Britoil came in the form of Britoil shares held by Kuwait Oil Company Trustees, a pension fund for former UK and US employees of the Kuwait Oil Company during its period as a BP venture. Now Kuwait, thanks to BP's own predatoriness, has a 20 per cent stake in the assets of Britoil, the former oil production arm of the British National Oil Corporation.

It is clear that the Government is embar- rassed at the way in which the KI0 has exploited the stock market crash to mop up two thirds of the state holding in BP, which had been earmarked for the great British public. It is equally clear from conversa- tions with Kuwaiti officials that they are not in the least bothered by the embarrass- ment they have caused. In England, and particularly in public, they are careful to say that the stake is merely an equity investment by a fund management orga- nisation, and is of no strategic significance. But in the Kuwaiti press the line is that their boys in London are now in a position to influence the policy of the world's third largest oil company. But it would be wrong to take such pronouncements at face value. They are more in the nature of political gestures, to persuade those in Kuwait, and particularly the large Palestinian minority in a popula- tion of less than 2 million, that the coun- try's revenues are not merely enriching the capital markets of the West, but als° bringing genuine industrial benefits.

In private, Kuwaiti officials readily admit that to use their 20 per cent stake as a means of securing favourable deals with BP would bring the immediate risk of legal action from other shareholders in BP, particularly American ones, on the grounds of discrimination between diffe- rent groups of shareholders. Moreover, they point out that the Kuwait Petroleum Corporation, headed by the oil minister, Sheikh Ali Khalifah al Sabah, can and has done deals with BP when it suits it. Last year KPC bought BP's Danish refining and marketing operations for an estimated £100 million, and it did not need to bring a single share in BP to the negotiating table.

However when Sheikh Ali tells journal- ists that the KI0 stake in BP has nothing to do with him, and refers them to the Kuwait Investment Authority, the KIO's ultimate shareholder, he is being most dising- enuous. For he is on the board of the KIA, and most of the big wheels at the KI0 are his placemen. Sir Peter Walters recently referred to Sheikh Ali as 'my old friend'. That is one way of putting it. When Kuwait negotiated its expropriation of BP's assets in 1975, its chief negotiator was Sheikh Ali, then a junior oil minister. And the man he shook hands with was the BP deputy chairman, a Mr Peter Walters.

BP executives undoubtedly have trouble believing that the KI0 would be prepared to commit over 10 per cent of its funds to one company, without having some very specific ulterior motive, other than pure investment. If the KI0 had the same strategy as other financial institutions, that might be a fair analysis. The vast majority of large financial institutions, such as pen- sion funds, are obsessed with the idea of balancing their investments in proportion to the actual representation of various types of company on the stock market as a whole. It is an attempt to create a perfect microcosm. The reason is that, if they succeed, their investment performance should never be beaten by the FT Index, with the result that their trustees will never be able to accuse them of that greatest of fund management crimes, underperform- ance.

For the KIO, with no competition in sight, and with a legal right to retain all its profits and funds until 2001 at the earliest, a far more individualistic investment strategy is possible. So when the KI0 sees a management and a company it likes, it is quite prepared to commit itself in the way that the Pru would never dare. Hence its 15 per cent stake in Royal Bank of Scotland (`They are like any other shareholder, except bigger,' says the Bank's chief execu- tive, Charles Winter. 'They have never attempted to interfere or asked for special treatment.') Similar examples of very large passive stakes in European industry abound in West Germany, where the KI0 has 14 per cent of Daimler Benz and 10 per cent of Volkswagen. The German chemical com- pany Hoechst is often cited as a case where the Kuwaitis, with a 20 per cent stake, have gone so far as to seek — and receive — board representation. However the Hoechst stake is nothing to do with the KM, but is owned by Kuwait Petroleum Corporation, a fully fledged industrial cor- poration.

If KPC wants to become a hands-on investor in the UK oil sector it will prob- ably do so not through the KI0 but via the Santa Fe Corporation, a US oil company which KPC bought for $2.5 billion in 1982. Through Santa Fe, KPC produces about 13,000 barrels of North Sea crude a day, and its entire North Sea portfolio is thought to be worth up to £400 million. A Kuwaiti official told me that, through Santa Fe, Kuwait 'would not hesitate to bid for any UK oil company which satisfies our criteria'. Anyone who thinks that the Kuwaitis would be intimidated by regula- tory disapproval should look at what hap- pened in the US, where popular concern about Arab financial influence is far grea- ter than it is in the UK. When KPC bought Santa Fe the US secretary of the interior said that Santa Fe would no longer be permitted to prospect on federal land. KPC promptly sued the government in the federal courts — and won. So the Kuwaitis are not unduly concerned that the Office of Fair Trading is investigating the KIO's acquisition of a fifth of BP.

The Kuwaitis believe that in any case the OFT inquiry is merely a formality. And if that sounds like a cheeky guess, it is worth recalling that Kuwait has a very long and close relationship with the British financial authorities. The KI0 has frequently taken advantage of its right — as a representative of a sovereign power — to invest in UK companies under the auspices of the Bank of England (with whom it banks in the UK). Last year the KI0 built up a near five per cent stake in the troubled merchant bank, Morgan Grenfell, in the name of 'Bank of England Nominees'. This is a very useful privilege, because Bank of England Nominees is the only nominee shareholder account which cannot by company law be compelled to reveal its true beneficial owner. Another exploiter of this curious loophole is that other possessor of fabulous oil wealth, the Sultan of Brunei. When a company sees 'Bank of England Nominees' appear on its share register it generally surmises that it is one of these two hiding under the Old Lady's skirts.

It would be wrong to think that Britain gets nothing in return for such inconspicuous assistance. About 17 per cent of the KIO's funds are invested in Britain, a far higher percentage than would be justified if the KIO's portfolio was based purely on the relative importance of the UK economy. And by conducting all its international business in the City of London, the KI0 is probably justified in its claim to be one of the UK's biggest invisible exporters.

For a more tangible demonstration of the KIO's faith in the City it is necessary only to look around. The KI0 owns all the land between Tower Bridge and London Bridge, and this project, which the KI0 calls 'London Bridge City', is the largest property development in London since the Great Fire. The KI0 is still sore that the Prime Minister decided to open the Broad- gate development, rather than the first phase of London Bridge City, and it affects not to understand why Mrs Thatcher would not find the time to give the KIO's mag- , num opus a Prime Ministerial send-off. (Although the extraordinary fuss over a Saudi stake of 15 per cent in tiny TV-am should have assisted the KIO's education in the ways of British politics.) The KI0 made its big move into the only part of docklands adjacent to the City back in 1981, and it is proud to admit that the deal was a pure speculation. It illustrates the extent to which the KI0 is prepared to back a hunch, particularly when it involves taking a view contrary to fashionable mar- ket opinion. The BP deal is simply a bigger example of this trait. There is no way that the KI0 would have been able to pick up more than one billion shares in BP, with- out forcing the price up at all, unless the prevailing view in the market was that BP shares were best left well alone. And it was because the KI0 had taken a contrary view ahead of the stock market crash last October, that it is now in a position to exploit the market so ruthlessly. The KI0 had been net sellers of equities throughout 1987, while most other institutions were still climbing into an overheated market. The result was that when the crash came the KI0 was very liquid, and able to absorb BP stock jettisoned by US and British funds which were desperately trying to reduce their gearing to the equity market.

But despite its enviable ability to take a much longer-term view of markets than its Western rivals, the ICIO is essentially a trading organisation. Ex-employees stress that they were encouraged to trade as much as possible — partly, it is true, in order to be seen by the London market as an influential and important customer. There will be no sentimental attachment to the BP stake, and it is certain that if the opportunity soon presented itself to sell the shares at a handsome profit, the KI0 would not take into consideration the views of either BP itself or the British Government. As one member of a leading Kuwaiti family put it to me, 'We lived on trading long before we found oil. We took dates from Iraq to India, Indian spices to East Africa, and East African wood back to the Gulf. We had to live by foreign markets then and that is what we are still doing today: trying to make a decent living by trading and investment opportunities.'