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Our Future

I do not profess to being an investment whiz or understanding all the nuances of government finance, but I am good at managing a budget and I have a few queries about our current strategy.

Let’s start with the Future Fund.

The Future Fund was established by the Future Fund Act 2006 to assist future Australian governments meet the cost of public sector superannuation liabilities.  Investment of the Future Fund is the responsibility of the Future Fund Board of Guardians with the support of the Future Fund Management Agency. The Board and Agency also invest the assets of the Building Australia Fund, the Education Investment Fund and the Health and Hospitals Fund which were established by the Nation-building Funds Act 2008.

The 2013 budget stated that:

“the portfolio of assets has performed well, given the extent of uncertainty and volatility in financial markets over the past five years. Since the effective start of the investment program on 1 July 2007, the Future Fund has generated a nominal return of 5.6 per cent. Since the first contribution to the Future Fund on 5 May 2006, the return has been 5.7 per cent per annum.

At 31 March 2013, the Future Fund’s return for the financial year to date was 10.6 per cent.”

A press release on 13 June 2014 further stated that:

“The Future Fund has generated a return of 7.0% per annum since its establishment, adding around $40 billion to the portfolio which now has a value of $100 billion.”

It is interesting to note that the underlying cash balance in the budget (ie the deficit) does not include net Future Fund earnings, so we are actually better off than they let on.

As at 31 March 2014, these funds contained:

$97.57 billion Future Fund assets

$3.87 billion Education Investment Fund assets

$4.09 billion Building Australia Fund assets

$2.47 billion Health and Hospitals Fund assets

The 2014 budget informed us that the Health and Hospitals Fund will be dismantled and replaced with a medical research fund paid for by GP co-payments and increased PBS co-payments.

Further, the Government has committed $5 billion to provide financial incentives over five years to the States and Territories to sell assets and reinvest the sale proceeds into additional productive infrastructure.  The Asset Recycling Fund will be set up on 1 July 2014 to facilitate the Government’s investment in new infrastructure. It will include unspent funds from the Building Australia Fund and Education Investment Fund, and proceeds of the sale of Medibank Private and other possible privatisations.

“The Government has announced the sale of Medibank. It will continue selling assets where no compelling reason for government ownership exists with scoping studies to be undertaken into the ownership of Australian Hearing, Defence Housing Australia, the Australian Securities and Investment Commission Registry function and the Royal Australian Mint. The proceeds from future privatisations will be reinvested into the Asset Recycling Fund for new productive infrastructure.”

This money is being committed to an expansive road building program.

Projects getting the green light include:

• Fast-tracking $2 billion to accelerate stage two of Westconnex linking Sydney’s west and south-west with the CBD, Sydney Airport and Port Botany

• Roads for second Sydney airport, $3.5 billion

• Extra $1.5 billion on top of the existing $1.5 billion commitment for the East West link in Melbourne, with an anticipated 6000 jobs created.

• $944 million for Adelaide’s North-South corridor

• Perth – $1.6 billion freight-link package in partnership with the private sector

• Brisbane’s gateway motorway, no figures provided

• Northern Territory – Tiger Brennan Drive $70 million and $523 million in NT road improvement

• Tasmania – $400 million investment in the Midland Highway.

The splurge continues over the next decade to include duplicating the Pacific Highway between Newcastle and Queensland and an upgrade of the Port Botany Line in Sydney, but there are no figures.

A further $550 million is being committed for the Roads to Recovery and Black Spot Programmes, on top of the $2.5 billion previously committed.

Many of these projects are going ahead with dubious or no published cost benefit analyses, inadequate environmental impact and productivity surveys, and little consideration for the coming peak oil crisis.  The business case for Westconnex, for example, states:

“While the prospect of peak oil is emerging, vehicle technologies are rapidly progressing with vehicles powered by alternative energy predicted to reach mass market production in the foreseeable future. While this may shift demand away from fossil fuels, it is unlikely that the demand for travel will reduce sufficiently as consumers adapt to alternatives and hence travel demand on our major road network is likely to remain.”

They give little evidence to back up this claim.

So this brings me to my question.

The current government bond rate is between 2.57 and 3.8% depending on the term (2 to 15 years).  If the future fund has generated a return of 7.0% per annum since its establishment, and 10.6% in 2012, why aren’t we borrowing and investing more?  Why are we taking money out of the Health, Education and Building Australia Funds, which are earning us a good return, and selling off profitable assets, to build roads?  It seems to me that investing would bring us a greater return which could then be spent on the things we need.

If we are so worried about our interest payments, why not use some of the future fund to pay for guaranteed productivity enhancers like the NBN instead of borrowing the money?

And as far as future superannuation liability for public servants is concerned, this can be fairly accurately predicted and we can always issue more bonds should we need to.

Building roads may employ a few people in the short term, but if it is at the cost of investment in health, education, the environment, public transport, renewable energy, and the sale of assets, one has to question the advisability of such a move.  Couple that with heavy expansion of coal mining and we could end up with a whole heap of roads to nowhere creating heat islands in the suburbs, and stranded assets as the world moves away from fossil fuels.

In June 2013, the Greens started a new campaign to push the Future Fund to stop investing in coal companies.  Greens leader Christine Milne says up to $3 billion of the, at that time, $83 billion fund is invested in coal, which she describes as a “risky investment”.

In February last year, a Senate Committee was told that the Future Fund also had investment in cigarette and tobacco companies worth $221 million. Under pressure from the Greens and health groups, the fund decided to get rid of its investment in tobacco companies.

Joe Hockey was right when he told the Kiwis that our economy is in good shape and that we have no debt or deficit emergency, but it seems to me our investment strategy and asset management could do with a rethink.  It’s our Future Fund and it should be used for our future.

10 comments

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  1. Rossleigh

    Yep! If the Abbott Government were your average citizen they’d sell their house, pay off the mortgage and tell their family that it was necessary to sleep in the streets. Although, personally, they need to spend the night in a motel because they have to be fresh because they need to work tomorrow.
    I was looking up a quote from Barnaby Joyce about how our debt will mean that we have to eliminate the PBS and get rid of universities if we don’t take drastic measures, but it seems to have disappeared…
    Ah well!

  2. Evan

    Kaye I love your articles, you obviously research them diligently and write beautifully but here you are using the equivalent of psycho-analysis and anatomy to describe why a dog barks when everyone knows that dogs bark because they are dogs. Abbot and Hockey behave as they do because they are what they are and to expect them to behave differently is really expecting too much. It is like Cambell Newman in Queensland, he doesn’t understand why people don’t like him when he is just behaving as CN because that is what he does and he can’t see he has done anything wrong.
    I guess this behavior only applies to the lower orders of animals though. The other day there was a feel good piece about a black swan cygnet that had been raised from a chick by a duck, it didn’t honk like a swan though it quacked like a duck.

  3. Kaye Lee

    “Tony Abbott has his heart set on becoming Australia’s Infrastructure Prime Minister. Whatever the state of the budget he is determined to spend massive sums building the “Roads of the 21st Century,” NorthConnex, WestConnex and the East West Link and so on.

    The one saving grace in the election campaign was his promise that all Commonwealth infrastructure spending worth more than $100 million would “subject to analysis by Infrastructure Australia to test cost-effectiveness”. It was reassuring, until he ditched it.

    Two weeks ago Labor tried to force the Coalition to make good its promise moving in the Senate that the reward payments made to states that privatise assets and use the funds for new projects be subject to Infrastructure Australia cost benefit analysis.

    It rejected the proposal of hand.

    Cost benefit analysis by the Commonwealth was “red tape with no additional benefit”. It would “stand in the way of the government building a stronger more prosperous economy,” minister Mathias Cormann told the Senate.

    On climate change the Coalition’s detractors accuse it of being anti-science. On roads they could accuse it of being anti-numbers.”

    http://www.theage.com.au/comment/peter-martin-abbott-and-infrastructure-nation-building-one-elephant-at-a-time-20140725-zwolj.html#ixzz38c36aCDj

  4. iggy648

    Remember Abbott and Hockey got it wrong when they tried to read a power bill. They’re not good with anything that involves numbers.

  5. donwreford

    Good article, I would trust you to handle the funds more than the present government.

  6. atkenos

    The liberals LIED to voters, to win power. But the media helped and even today I have not seen any of this on TV news. SHAME on the CORRUPT media barons who are toooo closely aligned with Liberal MPs. Just as the Libs want to know every government union contact over the past 10 years, so too must Labor act re business, banks, petrol companies, media barons,… when they return to office

  7. Hotspringer

    Kay Lee, you have far too much common sense for the LNP. Only a total dimwit would cancel the information superhighway (NBN) and replace it with more bitumen on the ground. Roads scholar! Bah humbug! The kind of person who would stake the entire future of the country on coal.

  8. John Armour

    Bill Mitchell (back when the Fund had a balance of 60 billion) suggested that the fund could employ all of Australia’s unemployed at the minimum wage for 10 years.

    I guess it comes down to who’s “future” we’re talking about and the true meaning of “waste”, for income and opportunities forgone can never be regained.

    Regardless, the Future Fund is a fraud, a giant hoax on the Australian people, created out of desperation to bury the Telstra shares the government got stuck with in 2006, and something we should always keep in mind when being lied to about its “benefits”.

    In asking the question why shouldn’t we be using the proceeds of bond sales as feedstock for the Future Fund you’re overlooking some basic insights about how our monetary system works.

    Firstly, when the government issues bonds it’s just borrowing back money it has previously spent. And the purpose of issuing bonds is not to fund anything, even though it might look that way. It’s a monetary operation to control the cash rate. Leave the gambling to the private sector.

    The most important thing being lost in the debate about the Future Fund however is that there is no investment with greater returns for the nation than education now. The guaranteed returns to the nation by having a highly educated workforce leaves the illusory returns from gambling on financial products in the Future Fund for dead.

    What is there in 20 or 30 years time that could be more valuable than a good education today ? By diverting spending away from education now we’re actually making the nation more vulnerable to future threats, the exact opposite of what we’re being fed.

    At the end of the day, the Federal government’s only constraint is the physical resources of the economy. The argument about needing a Future Fund to buffer so-called ‘unfunded liabilities’ is total bullshit.

    The Future Fund Scandal

    Australian government funding increased cancer incidence

  9. Kaye Lee

    The Telstra angle is interesting. I read Bill’s blog from 2009, but if you look further on you get a different picture. It’s all in the timing. This from about a year ago.

    “In February 2007, the fund received 2.1 billion Telstra shares (approximately 16.4% of the company) that were under escrow until November 2008. At the time, the shares were trading a little under $5. In August 2009 in one fell swoop, the fund offloaded about 684 million Telstra shares (representing around 34% of its holding) at a price of $3.47. Then in October 2010, the fund sold another 113.6 million Telstra shares, this time at an average price of $2.66, reducing its holding in Telstra to 10%.

    In March 2011, while the shares were still not far from their lows, the fund announced it had sold half of its remaining holding, or 620 million shares, taking its holding in Telstra to just 5% of the company. With the shares barely over $3, the fund continued to sell, reducing its holding by August 2011 to 100 million shares or approximately 0.8% of Telstra.

    With the shares now at $5.07, even assuming a $3.47 average sale price, which is far above what the fund actually realised, the foregone capital gains stand at over $3.1 billion!! This doesn’t even include the foregone dividends, which are significant given Telstra’s high yield.”

    http://www.fool.com.au/2013/05/09/future-fund-misses-big-gains-with-telstra-sale/

    As of today they are trading at $5.44

    http://www.telstra.com.au/aboutus/investors/share-price/

  10. John Armour

    The problem with going down that road Kaye Lee is that it harks back to the “government is no different from a household” fallacy.

    The government hasn’t really missed out on any capital gains because it’s the creator and issuer of the currency. The so-called capital gains have simply finished up on the balance sheets of the private investors.

    And we haven’t even touched on the sheer stupidity of a country that runs perpetual external deficits setting up a Future Fund. Costello probably saw that Norway had one, and thought what a great idea, but someone forgot to tell him that Norway was awash with oil revenues and salting them away was how they took spending pressure out of their economy. We don’t have that, um, ‘problem’.

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