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Tag Archives: Privatisation

Small government, like communism, might sound like a good idea but they are lambs for slaughter on the altar of greed

Deregulation, self-regulation, red tape, green tape, nanny state, small government, privatisation, asset recycling, compliance costs, free market, one-stop shop – these are some of the phrases religiously chanted by big business, and echoed by conservative think tanks and governments, with a certainty that smacks of zealotry.

We are told that the private sector is more efficient so we outsource service provision to them. We sell off valuable assets and profitable government-owned enterprises. We remove regulatory oversight and streamline approval processes.

We sack public servants, urge wage restraint, remove penalty rates, freeze the superannuation guarantee and hobble collective bargaining.

We provide so many concessions for the owners of capital and assets that they end up paying little to no tax. We encourage exports whilst enduring shortages at home. We provide a guarantee for the banks to protect them from the financial turmoil afflicting the rest of the world. We have a whole government department dedicated to making sure the private sector does not face unfair competition from the public sector.

And still, even as companies continue to announce record profits, it’s not enough – they want more.

Now that may all be very well if all players are acting ethically, if profits are shared not only with CEOs and shareholders but with employees through job creation and wage rises and with the government through taxation, if sustainable practice and environmental protection was a non-negotiable aspect of doing business, if businesses could be trusted to tell the truth and to fulfil their part of the social contract.

But that is not the case.

The cases of malfeasance, corruption, fraud, exploitation and environmental damage just keep coming. Cases are fought by armies of legal and financial teams, dragging them out until plaintiffs give in. Penalties are seen as just part of doing business.

By their own actions, businesses have destroyed our trust and forfeited the right to dictate the rules. Self-regulation does not work. There is no loyalty or morality as the greedy scramble for an ever-increasing share of the pie, doling out crumbs that barely sustain the rest of society.

The government has abrogated their responsibility to defend us against unscrupulous merchants and employers, and the extreme class structure that results from their exploitation. They have sold off our common wealth for short-term sugar hits for the budget. They have privatised essential utilities and services which are now run for profit rather than the common good.

And now they are even outsourcing the drafting of legislation to the very legal and accounting firms that advise big business on how to get around the rules.

Small government, like communism, might sound like a good idea but they are lambs for slaughter on the altar of greed.

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Short term sugar hit

When even the experts disagree, it’s not surprising that the electorate are divided on privatisation. The only say that Australians get in the sale of the assets we jointly own is at election time but I sometimes wonder if voters fully consider the ramifications of privatisation and asset recycling.

Joe Hockey and Tony Abbott are both determined to use their time on the Treasury benches selling every Commonwealth asset they can and, by making funding dependent on it, they are forcing state premiers to do the same.

Joe wants to follow the Costello fire sale approach to fixing his budget while Tony wants roads, roads, and more roads to be his legacy.

Last year the Productivity Commission released a report into the provision of public infrastructure which concluded that there is “an urgent need to improve how public infrastructure projects are selected, funded, financed and delivered.”

“There are many examples of inadequate project selection that have led to costly outcomes for users and taxpayers. …poorly chosen infrastructure projects can reduce productivity and financially burden the community for decades with infrastructure that is unnecessary and expensive to maintain… The costs of poor project selection and delivery will be exacerbated if governments decide to increase their infrastructure investment programs without reforming their governance regimes…

To sum up, governments are sometimes weak at determining what, where and when infrastructure projects should be scoped and constructed. This stems from deficiencies in using coherent decision-making frameworks to assess the portfolio of potential projects.”

The PC argues that it is critical that governments build a “credible and efficient governance and institutional framework for project selection”, since “selecting the right projects is the most important aspect of achieving good outcomes for the community”.

“Properly conducted cost–benefit studies of large projects, and their disclosure to the public” is seen as key to guide project selection and improve the transparency of decision making and they recommend public disclosure of CBAs for any project over $50 million.

The report mentions the ACT Light Rail Project as an example of poor decision making.

“The ACT Government’s decision to proceed with a light rail project appears to be an example of where the results of cost–benefit analysis have been ignored without a valid explanation…

In a submission to Infrastructure Australia in 2012, the ACT Government analysed a number of options including bus rapid transit (BRT) and light rail rapid transit (LRT). The analysis estimated that the upfront capital costs for the BRT and LRT would be $276 million and $614 million respectively (on an undiscounted basis) (ACT Government 2012).

In its economic appraisal (which is essentially a cost–benefit analysis), the ACT Government found net present values of $243.3 million for BRT and $10.8 million for LRT. The benefit–cost ratio for BRT was estimated at 1.98, with 1.02 for LRT. In the assessment, the benefits of BRT and LRT were similar ($491.8 million against $534.9 million respectively), but the cost of BRT was less than half that of LRT ($248.5 million against $524.1 million, when discounted by 7 per cent). The cost–benefit analysis took into account a range of factors including journey times, and avoided environmental impacts and accidents (ACT Government 2012)…

In summary, a cost–benefit analysis showed BRT to be a greatly superior option than LRT…”

It also warns against the view that private sector provision is necessarily best, noting instead that it brings “additional risks and costs, which need to be weighed against the benefits”, and “only if well-designed and executed does a PPP agreement offer the potential for efficiency gains compared with traditional public procurement”.

– Private financing is not a ‘magic pudding’ — ultimately users and/or taxpayers must foot the bill.

– Government guarantees and tax concessions are not costless and often involve poorly understood risks.

The “poles and wires” are a prime example of this.

Every five years, the federal energy regulator grants the distribution and transmission network companies an allowance to spend on capital and operating costs. In 2009, the networks claimed to need billions to build new infrastructure to meet soaring demand and the Australian Energy Regulator approved a staggering $45 billion of spending.

Not only that, they ruled that the NSW distribution networks could claim an astonishingly high cost of capital of 10.02% per annum, which it said was equal to the borrowing costs of a private company at that time. In fact, they borrow from a triple A–rated state treasury at rates of around 4–5%.

This meant that, for every billion dollars they borrowed to spend on infrastructure, the NSW networks were now able to charge their customers an extra $100 million every year (decreasing over time as the loan was paid off). Gerard Brody, an advocate from the Consumer Action Law Centre, said “This was just pure profit coming from consumers’ hip pockets. There’s no rational, economic reason for consumers paying that sort of money.”

According to the Australian Bureau of Statistics, the electricity industry’s profits rose by 67% between 2007–08 and 2010–11. In this same period, electricity bills rose 40%. With tacit approval from the federal government, they carried on spending billions of dollars on new infrastructure we didn’t need, based on projections that were obviously wrong. According to the federal treasury, 51% of your electricity bill goes towards “network charges”.

The PC report also warns that Abbott’s bribes to the states, otherwise known as asset or capital recycling,

“could act to encourage privatisation in circumstances that are not fully justified and encourage the selection of new projects that do not have demonstrable net benefits. Already, examples of promises to reinvest have emerged in regions where assets are being sold. Tying funds to particular regions is no assurance that the highest net benefit investments are being considered.”

On Tuesday, the head of the NSW state government’s infrastructure advisory criticised the Abbott government’s refusal to fund public transport projects.

“I can’t really understand the logic of saying we will only invest in a transport project if it involves bitumen as opposed to one that involves steel rails,” said Jim Betts, the chief executive of Infrastructure NSW.

“It seems to be arbitrary,” he said of Mr Abbott’s stance. “I can’t understand how public transport is somehow beyond the pale. It’s a shame because particularly I would like to see bodies like Infrastructure Australia able to give modally agnostic advice.”

As a short term budget fix, Hockey is also considering selling six government-owned buildings in Canberra, including one that houses the Treasury Department.

The scoping study will look at options for the John Gorton and Treasury buildings, as well as East and West block and Anzac Park East and West, which are in Canberra’s Parliamentary Triangle.

As Peter Martin points out

“Once sold, they would be leased back to the departments of Treasury and Finance and whoever needed to use them. For the next four years (as far out as the budget’s detailed forecasts go), Hockey’s accounts would look good. He would have raised serious money. Beyond that, his successors would be paying out serious rent.

The Howard government sold the purpose-built Foreign Affairs headquarters to the to the Motor Traders’ Association super fund for $217 million in 1998. By 2017 it will have paid out $311 million in rent. Foreign Affairs can’t move out, and what dressed up the budget nicely in 1998 will cost $20 million or more per year in rent forevermore.”

Medibank Private has already been sold, raising $5.679 billion which will be invested in roads.

In the four years after the Rudd ­government converted Medibank Private into a profit-making insurer, the Commonwealth collected $1.366 billion in dividends and taxes. This amounts to a 16-fold return on the $85 million it put into Medibank.

The federal government is studying whether to sell the Royal Australian Mint, hearing-aid provider Australian Hearing, Defence Housing Australia and the Australian Securities & Investment Commission’s corporate register, according to its budget papers.

The national commission of audit also recommended selling assets including Australia Post, power generator Snowy Hydro Ltd. and Australia Rail Track Corp., the main interstate rail network.

Not to be left out, Christopher Pyne has refused to rule out selling the HECS debt.

The Commonwealth would sell the rights to its $30 billion stream of long-term debt repayments at a reduced price of, say, $15-$20 billion today. While the Government would receive some funds up-front, it would lose the ongoing cash flow as loans are repaid – in effect substituting a future income stream for a much smaller lump-sum.

To make Hockey’s budget look better temporarily, and to pay for Tony’s road fetish, we are selling off assets that would provide a future revenue stream. What will our children do with less revenue, no assets to sell, and increased costs to pay the private sector for what used to be ours?

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Has privatisation passed its use-by date?

On Q&A last Monday, RBA board member Heather Ridout expressed her disappointment at the decision by the voters of Queensland to reject the Newman government’s privatisation plans.

Whether it has been noticed or not, that election result coupled with the recent elections in Victoria and Greece share a common denominator that may have far reaching ramifications for future governments all over the OECD world.

The Victorian and Queensland elections were fought primarily on the issues of infrastructure and privatisation. There were other issues in the background but these two took centre stage for most of their respective campaigns.

If you were to combine these two issues and express them as one broader concern for voters, it is likely that concern would be identified as sentiment; a feeling that selling off assets and allowing private companies to buy public utilities that result in costing users more, wasn’t right.

Austerity has been the catch cry in recent times with governments telling us that our present lifestyle is no longer sustainable. They then encourage the privatisation of public assets as if this somehow benefits us.

money When politicians look at publicly owned assets, all they see is a pile of money sitting there waiting to be collected. They think if that pile of money can be realised without effecting the service it performs, then why not sell it and spend the money on something that will make them look good.

They then try to sell the idea to the public who are led to believe that this will improve their lives and those of future generations.
But it never seems to work out this way. We have seen public assets pass from our hands into the hands of the already wealthy time and time again, without ever seeing any tangible reward.

Has the sale of Telstra, the Commonwealth Bank and the State Electricity Commission of Victoria, just to name a few improved our quality of life?

Looking at the result of these three elections it is worthwhile asking: Are we seeing a wiser electorate waking up to the hypocrisy peddled about privatisation?

In Greece, a country that has been cheated, lied to and then forced to pay the price of neo-liberal excesses by both their own government and the EU Parliament, the people decided enough was enough.

Again, it was sentiment, a feeling they had been punished enough, if indeed, they should have been punished at all. In all three locations the people judged privatisation, austerity and structural reform to be a smoke screen hiding the real agenda behind these moves.

That is not to say the people’s understanding of the real agenda is crystal clear either. But they do understand that the flow of wealth to the top end of town, at their expense, is real. Public assets are generally always undervalued.

power They could clearly see that their living standards were in decline while politicians, developers and corporate giants effused a smug arrogance reminiscent of the Frank Underwood character in “House of Cards”.

They decided in all three cases they weren’t going to take it anymore. It begs the question therefore: Is the public perception of neo-liberal philosophy now clearer and are the people finally beginning to reject it?

Unregulated capitalism has always been at odds with those basic human values that we hold in common; fairness, honesty, sympathy, charity, empathy. The notion that people come before profit, was somehow cast aside when the money train left the station and big capital promised big rewards for all; rewards they never intended to share.

If we can take a lesson from Victoria, Greece and Queensland, it is that big capital will have to re-assess the way it treats its most valuable resource: the people who make it work for them.

capital The challenge for the new governments in Australia now, is to explain this to big capital.

But if our local business writers continue to suggest as Adele Ferguson of The Age does that, “With an infrastructure backlog and big budget deficits, we can build the infrastructure we need only by selling assets and attracting private capital”, then there is still a long way to go.

Meanwhile, more governments will fall unexpectedly because they ignored public sentiment in favour of private gain.

 

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Profit before people

The Abbott government’s economic policy is predicated on the assumption that any increase in the boss’s profits equals a corresponding increase in the workers’ wages – “a rising tide will lift all boats.” This assumes that the ratio between the share of GDP going to labour and that going to capital always remains constant, something that is not the case as we see the proportion of GDP going to wages dropping around the world.

In the USA, the last 30 years has seen a reduction from 70% to 64% of GDP taken by wages. Meanwhile Norway and Sweden, held up as models of “responsible” capitalism, have seen labour’s share fall from 64% to 55% of GDP and 74% to 65% of GDP respectively since the 1980s.

Wages and profit are closely interlinked because they are both paid out of the same pot – the nation’s GDP. This means that for a boss to increase his profit, the workers must lose out on wages, and vice versa. It’s not possible to increase profits without decreasing wages, and it’s not possible to increase wages without decreasing profit.

Corporations, pushed by their constant hunt for profit and their own internal competition, will always attempt to expand their share. This can be done through direct attacks on wages or by cutting welfare, increasing wages below the inflation rate etc. The workers on the other hand, have an interest in struggling to defend and expand their working conditions and standard of living in the face of constant attacks. The result is trade unions and workers’ movements that fight for the minimum/living wage etc, and bosses who fight for less regulation of employment conditions, and smaller pay increases.

Trade unions have lost a lot of the power that they once had 30-40 years ago, a direct result of the sustained attacks on unions by the powerful elite and media over that period. The result is that economic power has shifted in favour of capital, and away from labour.

Bosses, desperate to drive down wages to make bigger profits, turn to cheaper and less regulated labour in the developing world as a method for raking in higher profits and putting pressure on workers in developed countries to accept a lower wage. As Gina warns we beer drinking, cigarette smoking bludgers, Africans are happy to work for $2 a day in the mines.

By pursuing ever greater profits they inevitably drive down wages through automation and by access to new sources of cheap labour on the world market. The problem is that wages also make up the demand which keeps businesses afloat. With less money in the pockets of wage-earners, fewer commodities can be purchased and so less profit can be made.

The short-sightedness of capitalists trying to make as much money as possible out of each investment with no thought for the future is a fundamental feature of the system. If one business passes up an opportunity to make loads of money through greater exploitation of workers or the environment, another would seize the chance to make the profit and put its competitor out of business. This is the nature of capitalist competition – they cannot afford a long-term perspective.

Coalition governments are advocates of increased privatisation of public services. It’s true that privatisation often brings profit to the new private owners and those rich enough to afford shares in the business, but it is also true that privatisation brings worse wages and conditions for the employees of the newly privatised business. The reason why private ownership of businesses increases profit is because these owners curtail services and force down the wages of all the workers in order to pay the handful of people at the top obscene salaries and bonuses.

Developments in technology and innovation have automated huge numbers of jobs thus leaving correspondingly huge numbers without work or with a lower wage. If businesses were to invest in the education and training of highly-skilled workers they would be able to increase productivity, design new products and machinery and boost productive capacity overall. This, after all, is the point of any investment in a business. Instead we see sackings, closures and restructuring as business tries to produce less in order to maintain their profits.

Over 160 years ago, Karl Marx said that the “bourgeoisie is unfit to rule because it is incompetent to assure an existence to its slave within his slavery, because it cannot help letting him sink into such a state, that it has to feed him, instead of being fed by him.“

Capitalism has developed to a point where technology and globalisation, phenomena that have the potential to improve the lives of all people hundreds of times over, are actually making the lives of wage-earners worse. It has reached a stage where we have the capacity to educate and train people, produce and build everything we need, and give everyone a decent standard of living. But we’re not able to realise this potential because of the unrelenting pursuit of profit.

The impoverishment of the masses and the concentration of wealth and capital in the hands of a small minority is a growing problem and as long as the right of private ownership to the means of production exists, and governments move further away from regulation, this process will prevail.

Tony Abbott’s entire approach to governing is textbook Capitalism, from his attack on penalty rates, the minimum wage, and unemployment benefits, his refusal to give industry assistance (unless you are a fossil fuel producer), privatisation of public assets, deregulation and removal of “green tape” (aka environmental protections) – every aspect is a short term grab for cash dictated and ruled by the “market”.

Oh for a government that had the courage to protect its people with a long term plan for general prosperity and well-being instead of a smash and grab raid for your rich friends.

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Oh so predictable

In December last year, before the government released MYEFO or the budget giving credence to the agenda we all anticipated with dread, before we repealed the mining and carbon taxes, before we went to war or started selling everything we own to lay thousands of kilometres of bitumen, when I was much more scared of Abbott than anyone in a burqa (still am..by far), I wrote an article about the role of government. It was largely based on an essay that I had read titled Responsibilities of Government.

After twelve months of an Abbott government, and considering where we are at now, I would like to revisit what I considered important at the time.

“The government of a democracy is accountable to the people. It must fulfil its end of the social contract. And, in a practical sense, government must be accountable because of the severe consequences that may result from its failure. As the outcomes of fighting unjust wars and inadequately responding to critical threats such as global warming illustrate, great power implies great responsibility.”

“The central purpose of government in a democracy is to be the role model for, and protector of, equality and freedom and our associated human rights. For the first, government leaders are social servants, since through completing their specific responsibilities they serve society and the people. But above and beyond this they must set an ethical standard, for the people to emulate. For the second, the legal system and associated regulation are the basic means to such protection, along with the institutions of the military, for defence against foreign threats, and the police.”

“Government economic responsibility is also linked to protection from the negative consequences of free markets. The government must defend us against unscrupulous merchants and employers, and the extreme class structure that results from their exploitation.

Governments argue that people need to be assisted with the economic competition that now dominates the world. But the real intent of this position is to justify helping corporate interests . . . siding against local workers, consumers and the environment.”

“Another general role, related to the need for efficiency, is the organization of large-scale projects. It is for this benefit that we accept government involvement in the construction of society’s infrastructure, including roads, posts and telecommunications, and water, sewage and energy utilities. Further, giving government charge over these utilities guarantees that they remain in public hands, and solely dedicated to the common good. If such services are privatized, the owners have a selfish motivation, which could negatively affect the quality of the services.

That such assets should have public ownership is expressed in the idea of the “commons.” They should be owned by and shared between the members of the current population, and preserved for future generations.”

“Indeed, while we of course still need a means of defence, including against both external and internal (criminal) aggressors, it seems clear that our greatest need for protection is from other institutions and from the abuses of government itself, particularly its collusion with these other institutions. (Many of the needs that we now have for government are actually to solve the problems that it creates.)”

It didn’t really need a crystal ball to predict our demise. Is there any hope to inform the electorate in time to avoid repeating the mistake of 2013?

 

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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.

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