Stephen Smith (Perth, Australian Labor Party, Shadow Minister for Industry, Infrastructure and Industrial Relations) Share this | Hansard source

I support the notion of a Future Fund, but not the government’s Future Fund. The government’s notion of a Future Fund has two fundamental and severe limitations, reflected by the legislation and addressed by Labor’s second reading amendment to the Future Fund Bill 2005. I firstly wish to associate myself with the remarks of the shadow minister for finance, the member for Melbourne, Mr Tanner, and the shadow Treasurer, the member for Lilley, Mr Swan. Any Future Fund, in our view, needs to make a contribution to our future national productive capacity. The parliament needs to ensure that any Future Fund is able to operate independently, at arm’s length, when it comes to its investment decisions, free from ministerial, political or government interference. On both those counts the legislation, as presented to the House, fails.

We need to ensure that the Future Fund makes a contribution to our future national productive effort. Australia has survived as a prosperous nation because we have over our period been internationally competitive. But to remain internationally competitive, to remain in the race for prosperity, to continue to be able to create wealth and to seek to distribute the proceeds of that wealth fairly within our community, we have to be internationally competitive and we have to be more productive. We are the beneficiaries of nearly a decade and a half of economic growth. That economic growth was, in large terms if not entirely, set up by the structural reforms of the former Hawke and Keating governments. But the great economic complacency of this government has been to live off those structural reforms and that economic growth and to not move our nation to the next level of productivity improvement. This is reflected by the government’s failures as far as the Future Fund is concerned.

That complacency is reflected by our serious trade deficit, our effective collapse in manufacturing and services and elaborately transformed manufacture exports, a skills crisis, crumbling infrastructure, a massive current account deficit and a record foreign debt which dwarfs the foreign debt we saw when Mr Howard and Mr Costello were running around with their so-called debt truck. I now know where they have hidden the debt truck. It is either hidden under snow and ice in Iceland or hidden under desert sands in Qatar—the only two countries that have a foreign debt larger than our own as far as per capita calculation is concerned.

Labor announced its approach to a Future Fund in the budget reply of 2005. Our notion of a Future Fund is described as a Building Australia Fund whereby it would be possible for the income proceeds from a Future Fund to be applied for productive purposes, in particular to help rebuild crumbling infrastructure. We made it clear at that time that the scope and nature of the government’s so-called Future Fund was too limited. The entire rationale for the government’s Future Fund is to make allowances for the unfunded superannuation liabilities of Public Service employees. The relevant fund is already closed. It is quite clear from any effort at an objective analysis that those liabilities can be more than comfortably met by the ordinary annual finances of government. Whilst you can argue that a Future Fund could pay some attention to those unfunded superannuation liabilities, it is frankly extraordinary for the government to base its entire public policy rationale on a Future Fund entirely for that purpose. The scope is too narrow and will not make a contribution to our ongoing productivity improvement and our ongoing capacity to be internationally competitive.

Secondly, it is quite clear, despite some utterances at the time by the Treasurer, that the Future Fund will be a locked box. And when Mr Costello said that the Future Fund would be a locked box we knew exactly what he was referring to—that he wanted the funds protected from the once-every-three-years splurge by the Prime Minister or the ongoing splurge by the National Party. It is quite clear that this was a view not shared by the Prime Minister. It is quite clear that, in yet another example of the Treasurer losing an arm wrestle with the Prime Minister, the Prime Minister’s view that these should be decisions for the government of the day to make has prevailed. So, contrary to the Treasurer’s assertions at the time that the Future Fund would be a locked box, the capacity for ministerial direction means that the governance of the Future Fund is entirely at risk of ministerial, political or government interference so far as individual, day-by-day investment decisions are concerned. These two deficiencies are addressed by the second reading amendment moved by Mr Tanner, which says:

(1)

the Future Fund should only invest on a prudent commercial basis and manage funds in a manner consistent with:

(a)

best-practice portfolio management;

(b)

achieving desired returns without undue risk to the Fund as a whole;

(c)

enhancing Australia’s reputation as a responsible and ethical investor; and

(d)

building productive capacity in the Australian community; and that

(2)

the income stream from the Fund should be used for productive national economic purposes rather than being set aside solely to offset the cost of public sector superannuation as the Government intends”.

Those deficiencies of the fund would be remedied by Labor in government. As that response to the second reading speech reflects, the provisions in the bill severely limit the independence of the fund and its guardians or its board. Secondly, the bill contains no proposed guidance or general investment mandate. The bill is also silent on when, how, if and at what price the government would transfer any remaining publicly held equity in Telstra shares into the fund. As has been observed by more than one commentator in the marketplace, that has the potential to massively distort the equilibrium of the fund from day one.

When the government initially announced its proposed Future Fund to be seeded with budget surpluses and future asset sales—which was code for the sale of Telstra—the government, particularly the Treasurer, assured us that the fund would be managed independently of the government of the day. As recently as 8 December, to coincide with the introduction of the legislation into the parliament, in an article in the Australian Financial Review, the Minister for Finance and Administration, Senator Minchin, stated ‘There will be a lot of transparency and accountability’. Unfortunately, that is not reflected by the actual bill as presented. The Treasurer had gone even further and likened the operation of the Future Fund to the independence of the Reserve Bank board. On 8 November, in an Australian Financial Review article, the Treasurer stated:

We have a board on the Reserve Bank which has a strong culture of independence and because it has a strong culture of independence with strong directors it makes independent decisions.

The Treasurer was, of course, distracted by the Reserve Bank board in a different context on that occasion. But, again, to hold out the independence of the Reserve Bank board and to seek to compare that with the so-called independence of the Future Fund is a nonsense. So, far from guaranteeing the independence of the fund, through this legislation the government is potentially placing the fund under direct political ministerial interference and control.

In a sense, this should not have been a surprise, as I alluded to earlier. On 11 April in the Australian Financial Review the Prime Minister stated that the fund should be under government control rather than be an independent authority. He said:

I don’t believe in too many statutory authorities. I think governments should be held accountable for what happens on their watch, just as they should have the power to influence what happens on their watch. The two go together.

          …            …            …

But my point is that going through the process of winning an election and then handing over all your authority to unelected officials, that is crazy, I have never supported that.

So it is quite clear that, in the arm wrestle between the Prime Minister and the Treasurer, the Prime Minister had his eyes on the capacity to pork barrel once every three years and the capacity to assuage his National Party colleagues from time to time. It is also a quote which might well be read back to the Prime Minister given his performance today. Today, during question time and in a different context, the Prime Minister was walking a million miles away from what happens, so far as governments are concerned, on their watch and the power to influence what occurs on their watch. Today, in a different context, from the Prime Minister, we had much more of a ‘washing of the hands’ approach so far as Iraq, Saddam Hussein and the Wheat Board are concerned.

So it comes as no real surprise that the legislation empowers the Treasurer and the Minister for Finance and Administration to give the Future Fund board written directions about the performance of its investment obligations. Page 13 of the explanatory memorandum makes the point that these ministers can ‘consider broader policy and national interest considerations’. In addition, ministers are given the authority to sack members of the fund’s board for ‘unsatisfactory performance’, though what this may constitute remains undefined. Furthermore, the bill contains no guidance on the proposed investment mandate of the Future Fund, a mandate which, though it is being presented to parliament, may not be disallowed. The absence of an investment mandate is a glaring omission, and the finance minister has chosen to provide scant or no detail through other public sources. In a letter to the Australian Financial Review on 19 December, the finance minister wrote:

Our proposed investment mandate simply seeks a target real rate of return of 4.5 to 5.5 per cent per annum ...

That is modest in that it equates with the Reserve Bank’s current cash rate. So, if that is the investment mandate, why don’t we just leave the money with the Reserve Bank board, where it currently is? It ignores any risk premium that a prudential and wise investment could make by investing money in a portfolio of shares. This raises the question that if the target investment return is simply to be the prevailing risk-free rate then, as I say, why not just leave the funds on deposit with the Reserve Bank or, indeed, with the Commonwealth Superannuation Scheme or the Public Superannuation Scheme, which have earned an average return of eight per cent over the past decade. The fact that that is the modest and underwhelming aspiration of the government is reinforced by the fact that some time ago the government appointed American asset consultant Watson Wyatt to advise on how to invest the Future Fund capital base. At the time of that appointment, Treasurer Costello said:

Watson Wyatt will provide advice to the Government on a range of issues, including the type of asset classes the Government might invest in, the expected returns and the associated level of risk ...

According to media reports, Watson Wyatt were to have reported within six to eight weeks of their appointment in late July 2005. Despite this, we have seen none of the details of any of those reports, and certainly none of the details are in the bill itself. Insofar as what we have been able to find on the public record, the investment mandate of the fund would be to simply meet the return which you could get by leaving the money with the Reserve Bank and getting a return for that deposit.

The Australian Chamber of Commerce and Industry, in its June review, argued that the government would be unable to resist pressure and opportunity to intervene on investment decisions and make uneconomic, politically motivated investments. I quote from the ACCI June review:

There will be political pressure for the fund to invest locally rather than overseas, intervene in specific markets and invest in projects which may not produce an economic return.

ACCI argues that the Future Fund will effectively amount to a ‘tax increase or a forgone tax reduction’ and that it will have a ‘limited effect’ on national savings—therein making the point of the limited nature of the fund so far as the government is concerned. In its June review ACCI made the point:

It is unclear why the government should provide for superannuation and not for other costs which are going to increase strongly.

So in that analysis we have a number of concerns: on the one hand, the capacity of the government to interfere through the capacity for ministerial direction in the day-by-day investment decisions and, on the other hand, an almost deafening silence from the government as to what the effective mandate guidance to the board would be. A much better, more sensible and rigorous approach would be for the legislation to simply allow general investment guidance to be given by the parliament and by the government of the day and for the board to then make independent, arms-length decisions in accordance with prudential requirements, reflected by the second reading amendment:

(a)

best-practice portfolio management;

(b)

achieving desired returns without undue risk to the Fund as a whole;

(c)

enhancing Australia’s reputation as a responsible and ethical investor; and

(d)

building productive capacity in the Australian community ...

All of that puts to one side the government’s deafening silence as to what, if any, Telstra shares will be placed in the fund at the direction of the government. There are a number of market commentators and a number of interested market players, including Mr O’Sullivan, the President of the Australian Council of Superannuation Investors, and Dr Michaela Anderson, the Director of Policy and Research at the Association of Superannuation Funds of Australia. They have both publicly drawn attention to the potential distorting capacity that that could have on the Future Fund.

Labor’s approach is to say, ‘Yes, there is a role for a Future Fund to play but a Future Fund which is, firstly, sensibly managed by an independent board of directors making impartial, objective and prudentially wise decisions subject to general mandate guidance so far as the government of the day is concerned and, secondly, trying to make a productive contribution to our national economic effort.’ In our view, the best approach to that is to enable the income stream from those independent impartial objective decisions to be available if required for national productive purposes through investment in infrastructure.

A strong independent intergenerational fund managed appropriately does have a significant role to play in improving Australia’s productive capacity. That will not occur through the government’s Future Fund but, on the election of a Labor government, it will certainly occur through what we have described as our Building Australia Fund. I support the amendment moved by my colleague the member for Melbourne.

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