Australia ponders mining SWF future

The wealth generated by Australia’s mining boom is presenting a dilemma for the Australian Federal Government, with decision-makers at the crosspaths of what to do with it. Calls are increasing for the establishment of a sovereign wealth fund, with economists saying the time is right if the Federal Government delivers on its promise of a budget surplus.

Former Opposition Leader and now Shadow Minister for Communications and Broadband, Malcolm Turnbull (pictured), has become the first parliamentarian in Australia to actively push for a sovereign wealth fund, arguing that while previous commodity booms have pushed economic growth, Australian governments have not made the most of the profits and this needs to change.

“I think it is fair to suggest that support for an Australian sovereign wealth fund to save some of the income being currently generated has been fairly broad,” said Turnbull in a speech to the international CEOs’ forum last Thursday.

The politician said supporters of a sovereign wealth fund included Ralph Norris at the Commonwealth Bank, Mike Smith at ANZ, Fairfax chairman Roger Corbett and Tabcorp’s Elmer Funke Kupper.

The OECD has also been urging Australia to consider the creation of a “reserve fund endowed with all resource tax revenues to assist in shielding the budget and the real economy from the effects of revenue volatility”.

Australia does have a sovereign wealth fund of sorts – the Future Fund, established by the Howard Government to meet unfunded pension liabilities to former public servants and defence employees arising after 2020. Established in 2006, the object of the fund is to strengthen the Australian Government’s long-term financial position by making provision for unfunded Commonwealth superannuation liabilities.

The Future Fund has received contributions from a combination of budget surpluses, proceeds from the sale of the government’s holding of Telstra and the transfer of remaining Telstra shares. According to legislation, money cannot be withdrawn from the Future Fund until 2020 – with the exception of meeting operating costs – unless the Future Fund’s balance exceeds the target asset level as defined by the Future Fund Act.

It was not this fund however that Australian Federal Treasurer, Wayne Swan, acknowledged when dismissing the need for the creation of a super fund.

“We’ve got 8 [million] sovereign wealth funds in this country, they’re called superannuation accounts of Australian workers, and at the moment the Government is intent on lifting our national savings in part by lifting the savings of low-paid Australians through contribution to their superannuation,” Swan told a journalist when quizzed about the Government’s opposition to a sovereign wealth fund at a press conference last week.

Australia would not be the first country to set up a sovereign wealth fund aimed at saving the resource revenue.

For example, Norway has the Government Pension Fund – formerly the Petroleum Fund of Norway –to invest parts of the large surplus generated by the Norwegian petroleum sector.

The Alaska Permanent Fund is another which uses revenue from resources – at least 25 per cent of all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state are placed in the permanent fund, the principal of which may only be used for income-producing investments.

Turnbull says the key question regarding the establishment of such a fund is its objective, asking whether it should be to smooth government spending over a ‘stabilisation’ horizon spanning years-to-decades similarly to the Copper Stabilization Fund in Chile or if its objective should be a ‘savings’ timeframe of decades-to-centuries, similar to the Norwegian fund.

“While it is true that our resources are finite, they are in most cases also very abundant, although if one takes the view, as I do, that the world will move over time to decarbonise its energy generation sector, then there will be a question mark, long-term to be sure, over at least our thermal coal industry,” said Turnbull.

“This would suggest a stabilisation horizon was more appropriate, however such a fund could combine both objectives with a portion of the fund earmarked for very long-term savings.”

He says such a fund would follow a simple rule, in which inflows into the fund would be to require all budget surpluses be transferred to it and outflows to be limited to investments in long-lived physical or human capital and permitted only during periods when the economy’s output is below potential.

“Clearly, such a fund could only become operational after the Budget was back in surplus and the debt accumulated during the period of Labor Government paid off – there would be no point putting funds aside in a stabilisation fund but continuing to borrow or carry debt,” Turnbull added.

In other Australian government news, the Australian Federal Treasury has also been grilled over its decision to prohibit what has been labelled as a takeover of the ASX Limited, with the Treasurer, Wayne Swan, arguing it was not in Australia’s best interests.

The proposal to merge the Singapore Exchange with the Australian Stock Exchange, announced last October, Swan said, was more about growing Singapore’s financial sector than Australia’s and therefore not in the country’s national interests.

According to Swan, the proposed deal failed to deliver on four key areas of national interest, and was more of a takeover than a merger.

“So let’s be clear, let’s be very clear here, this is not a merger, it’s a takeover that would see Australia’s financial sector become a subsidiary to a competitor in Asia. As my detailed consideration of these facts went on, it became clear to me that it was a no-brainer that this deal is not in Australia’s national interest,” Swan told a media conference last Friday.

“This takeover would not enhance our access to global financial markets. This takeover would not deliver high-quality financial services jobs for Australia. This takeover would not build Australia as a financial services hub within Asia. The proposed takeover would risk seeing jobs and capital move to Singapore and I’m not going to stand by and let that happen.”

Swan rejected claims the process had not been thorough, saying since the proposal was announced the Foreign Investment Review Board (FIRB) and the Australian Treasury had been engaged in “very wide consultation with the sector”.

Opposition to the merger was due to the fact that it would make ASX the junior partner to a smaller regional exchange, which is a direct competitor in boosting Australia’s reputation as a financial services centre in Asia.

Swan also said the deal would not provide Australia great access to global capital markets as SGX was a much smaller exchange by the number of companies listed and the value of those listens, thus the deal would not provide a gateway to Asian capital flows as SGX has limited flows to the rest of Asia.

Limited evidence that the deal would boost access to capital for the majority of Australian companies listed on the ASX or to lower their cost of capital was also cited as a reason for disallowing the merger.

Swan also claimed there was limited evidence the deal would enhance the operation of the Australian Exchange as SGX is “a smaller, less efficient securities exchange”.

“Becoming a junior partner to a smaller regional exchange through this deal would risk us losing many of our financial sector jobs,” said Swan.

The role of the ASK as the sole operator of clearing and settlement systems was also another consideration when reviewing the proposed merger.

Swan said regulators warned that ceding control of these systems without reforms to strengthen the regulatory framework would raise serious risks for the capacity to ensure the stability of Australia’s financial system.

“That’s why I’ve now asked our Council of Financial Regulators to look carefully at measures which could be introduced to ensure they can continue protecting the interests of Australian issuers, investors and market participants,” Swan said.

“It’s absolutely critical that we take these steps now to put in place any reforms needed to protect our financial system should the ASX find a deal that is right for Australia. In particular the council will advise me on what protections around our clearance and settlement systems could be strengthened, with a particular focus on what would be appropriate should the ASX enter into another deal in the future.”

Treasurer Swan wrapped up the press conference by making it clear the he was open to the “right deal for Australia if it comes along.”

“This would be a deal that firstly, protects the integrity of Australia’s financial architecture and regulation; increases Australia’s integration into global capital markets and exchange networks; builds Australia’s reputation as a premier financial services hub in Asia; meaningfully boosts access to capital for Australian business; supports growth in high quality financial services jobs in Australia and is consistent with increased competition between exchanges in Australia,” he said.