30 August 2011

Gold and soil and wealth for toil

Who'll manage our sovereign mineral wealth? That's the answer to who'll win the next Federal election. Labor have put the next election on the carbon price and the mining tax. The Coalition, it would seem, are softening us up for a sovereign wealth fund (SWF).

I got halfway through writing an article like this, but not as good, to show how the Coalition had bet everything on being able to knock off the carbon tax - only to find that Jane Shaw had already written it. Read Shaw's piece, it's good; see you when you get back.

Shaw is right about the frantic attempts to get rid of Thomson. If the Coalition had been smart they would have gone after him during the negotiations with the independents: Crook, Wilkie and Oakeshott would have found it difficult to support Labor and Gillard would probably have forced Thomson out for the sake of keeping them on board. If Thomson survives until the election then Ross Cameron (hi Ross! I know you Google your name often and end up here) will be absolutely spewing.

This article by Josh Frydenberg is the tipoff. There are two things you need to realise about Frydenberg. First, he's intensely ambitious. Second, he's not smart enough to live up to the expectations placed upon him. He works hard at nothing other than networking, and he's a sillyhead. It's a poor article and normally I'd rip straight in, but there's a broader issue here to which Josh thoughtfully alerts us:
... the calls for a sovereign wealth fund from senior business leaders like Mike Smith at ANZ, Ralph Norris while heading CBA and CSL's Brian McNamee ... the IMF and Australia's own Reserve Bank governor Glenn Stevens ... OECD secretary-general Angel Gurria .. my colleague Malcolm Turnbull has made a thoughtful and considered speech on the subject, and Joe Hockey ... Both are more attune to the debate than the government.
And that's the heart of the article: arse-covering and name-dropping, an authentic product of its author.

Seriously though, there might well be a case for a sovereign wealth fund. It's just that Josh isn't the one to make it. The first quarter of the article is a nice rundown of Australia's macroeconomic situation. Then there's this:
Ensuring the competitiveness of our manufacturing base and other important exchange rate-exposed sectors like tourism will not be easy.
No, it won't be easy, and that's why Josh won't refer to those industries again in this article.

As far as tourism goes, what more do they want? If ever there was a lazy industry that has to be weaned off the public teat that has to be it. We've given them the Olympics and the Rugby World Cup three years later. The renovation craze that swept pubs, licensed clubs and people's homes has bypassed the tourism sector. They are still relying on products from another age as good enough for the likes of us, still keening for Americans when millions in Asia have the time and the money to come see us but aren't being pitched to by dull-witted government tourism bureaucrats and the spivs they notionally serve.
Workplace reform and productivity gains will be key.
No they won't, they'll be fiddling at the margins. As I said recently, if the employees at Bluescope worked for nothing it would still be run into the ground.
But at the same time, Australia has a unique opportunity.
Yes it does. That's Josh's code for "let's move on from hard issues".
We must save some of the proceeds of the boom and invest them for a time when they are needed most.
When will that time come? How will we know when it has arrived and what does Maximum Need look like?

Are the guys who rolled over so completely on the mining tax really the guys who'll stand up and demand a sovereign wealth fund? Are they strong enough to fend off vested interests from pecking it to death?

Imagine we had a sovereign wealth fund today:
  • Should we have given SWF money to the flooding of our third-biggest city? You'll remember how the Coalition wailed about a flood levy.
  • Should we have given SWF money to build education facilities? What if we could guarantee those projects had a 97% acceptance rate?
  • Should we give SWF money to high-speed rail? What about the Christchurch quake victims or those burnt out of Marysville? Maybe a Tasmanian AFL team (you know, productive assets).
Let's look at those engines of global growth, China and India. What are they investing in? Infrastructure: roads, rail, optic fibre networks, education, urban communities. What are they not investing in? Shutting apples out of import markets, and whatever other pissant measures that Josh and his pals consider to be extremely important.

Why not actually invest in productive assets directly? Why bother setting up some Great Artesian Fund that just second-guesses speculative investments? Why not identify major projects that promise a productive return to the country as a whole, and invest in those? We have a number of shocking roads in Sydney that were built by merchant bankers, there is no reason why we can't have better infrastructure funded directly from mining income.
International experience indicates that a sovereign wealth fund for a commodity-driven economy like ours could be an appropriate vehicle towards this end.

Sovereign wealth funds are not new. Kuwait established one in 1953, Abu Dhabi in 1977 and Norway in 1990. Owned by the government, these funds and others like them in Chile, Russia and Qatar hold, manage or administer a diverse set of financial assets in the pursuit of commercial objectives.
It's hardly a ringing endorsement to say that a SWF "could be appropriate". You'll notice that Josh has neglected to mention the SWFs in France and Ireland, which are stuffed chock-full of - um, what?
A sovereign wealth fund can perform a number of different functions: it can be the source of long-term wealth creation, otherwise known as intergenerational equity, or have a shorter-term objective to stabilise revenue cycles.

In the case of the former, when the finite resources run out, future generations will still benefit from the wealth created.
This can be done by investing directly in productive assets. Texas and California have pretty much run out of oil but they still have the educational institutions and the hi-tech economies that came from shrewd and direct investments. God only knows what those states would have spent a SWF on.
And in the case of the latter, when commodity prices take a downward turn, there will be money available for governments to call on should it be required.
Just like Ireland and France.
In both instances countries that use the significant reserves of a sovereign wealth fund to invest offshore may see downward pressure on their exchange rate ...
May see? First he's ambivalent about whether it's appropriate at all, now he's not sure whether it will have any sort of effect of the kind so often advanced as a prime reason to set up a SWF. Don't go cold on us Josh!
In terms of determining the best fit for Australia, Chile's sovereign wealth funds are quite instructive. In 2006, they morphed their existing Copper Stabilisation Fund into two new funds: first, a pension/savings fund, which they seeded with $600 million and which receives 0.2 per cent of the previous year's GDP on an annual basis.

In the event the fiscal surplus is greater than 0.2 per cent, the fund can receive a maximum of up to 0.5 per cent of GDP. Significantly, no withdrawals are allowed from this fund for the first 10 years.

The second fund, which began with $5bn and now has more than $20bn, is the recipient of fiscal surpluses when they are above 1 per cent of GDP.

Given Chile's strong commodity-based economy, both these funds are designed to provide the government with fiscal flexibility should the commodity cycle turn.
Why two funds? If the first is about pension/savings, what does the other one do? Why are commodities less valuable depending on whether or not the government has a surplus? How is Chile's manufacturing and tourism bearing up under all of this: thriving, is it?

I could look up the answers to all those questions but I'm not the one making the case for an Australian SWF. Given that the government can't withdraw money it doesn't provide any sort of flexibility: it isn't an option.
Domestic superannuation fund is not a sovereign wealth fund as [Shorten] likes to tell us. It provides no insurance against a downturn in the commodity cycle; nor does it impact the exchange rate in the way a major sovereign wealth fund can.
Australia's superannuation is the fourth-largest such fund in the world and keeps on accruing so long as fund members stay employed. It is possible that unemployment could rise coincidentally with a commodity price fall but the two are not linked. It's worrying that the exchange rate impact still seems to be a matter of theory rather than fact.
Joe Hockey has called the sovereign wealth fund idea the "Maserati of public policy".
What could this mean? It's flashy, all the merchant bankers want one but it breaks down regularly?
the Coalition, when last in government, put in place a Future Fund to meet the unfunded superannuation liabilities of commonwealth public servants ...
That was from the sale of Telstra, and why were those liabilities unfunded in the first place?
... now, five years on, Australia should actively consider a new, broader sovereign wealth fund as a means of securing its long-term economic interests.
But are our longterm economic interests really served best by measures other than investment in infrastructure?

This could be the answer to the great gaping hole where the heart of the Liberal pitch at the next election should be. If they are going to cut $70b from the budget then they can't promise much (well, they can if the press gallery keep letting them get away with it). When BHP Billiton announced a record profit immediately after crying poor over a RSPT, and when miners celebrated their great victory by squabbling amongst themselves, the idea of getting more money out of our finite resources took on considerable popular appeal. Thankfully, though, Josh is pushing it back on the list of priorities:
Before establishing a sovereign wealth fund, a number of relevant issues would need to be canvassed around governance, mandates and the overall opportunity cost involved.

Crucially, it would also be necessary to first return the budget to surplus and pay down Labor's $107bn of government debt.
He's run this idea by Joe Hockey and it hasn't exactly been seized upon with inarticulate cries of delight. Any idea, good or bad, can be shunted to the back of the queue with this fixation on debt and deficit. Hockey saw how Peter Costello established his authority over Howard's ministry in '96 by telling them what they could and couldn't do with their shiny new portfolios, and he wants some of that for himself. That imperative has clearly come ahead of one big idea that could lend a bit of credibility to promises in need of funding (or the appearance thereof).

Watch for the idea of a sovereign wealth fund to become more and more prominent from the Liberal side. Any idea floated by Turnbull and Frydenberg has deniability for The Situation; candidates will be unable to help themselves in indicating that it might be a good idea, allowing Liberals to claim the appealing aspects without facing the scrutiny that comes from an official policy (assuming, of course, that the press gallery get back into the business of scrutinising what the Liberals come out with).

In terms of the rights and wrongs of a SWF I had to go hunting for stuff like this. It was simply not possible to trust Josh Frydenberg and his half-baked equivocations on this important issue. As with nuclear power, a SWF needs to be highly and forcefully regulated in the face of powerful interests. Josh isn't the man to do that or even propose it with any credibility.

This isn't to say that the idea is dead, far from it; Frydenberg has a reputation as a thinker and a smart operator among the journosphere, provided you have no experience of thinking nor any sense for a tragedy waiting to happen. In this environment a sovereign wealth fund is an easy sell. Expect the Liberals, their camp-followers in the press gallery and more than a few Queenslanders to be all over it.


  1. Geez I wish columns like this were in the MSM. Suppose the few who read this shld feel privileged

  2. Lachlan Ridge30/8/11 4:42 pm

    The tragedy is that this situation is terminal. As with the honourable member for Kooyong and the Senator in waiting Sinodinos, we now have a slew of former Howard era staffers entering elected office. The ALP is no different (nor, it may be said, are the Greens if the ambitions of Bob Brown's right-hand man Ben Oquist are anything to go by). Politics as an industry further reinforces the belief that the legislature is not really the heart of power some would have us believe. The number of levers available to government have decreased somewhat since the Chicago School of Economists inflicted their writ upon sovereign authorities in the eighties and nineties. There is a hell of a lot about society that goernments simply can't fix anymore, save the sort of command and control measures that appeal to these control freaks - but they can only be implemented on the truly powerless at the bottom of the pile.

    In the meantime personages like Josh F can have their little thought bubbles - but the real contest in Australia's Realpolitik is between Treasury and its ally, the Reserve Bank and the corporate sector led by the ASX top 500, particularly the mining industry. Given none of these bodies is directly elected then you'd have a poor prognosis for Liberal Democracy in this country which, given the quality of our elected public servants, is probably a good thing.

    And don't get fooled by that twaddle that elected representatives tell senior government agencies like Treasury what to do. Hasn't happened for over a decade at least, probably two or more (Keating was a captive of Stone).

    What would be of utility for the denizens of this profligate corporate colony would be reportage on the internal debates at Treasury. They hold our futures in the balance, and from the stimulus package through to the carbon phedinkus they wield extroadinary control over the pointy end of policy as wot affects us minions. But no, lets let the MSM concentrate on the soap opera of elctionism, that wonderful place mat for liberal democracy.

    More power to your keyboard Andrew for calling out these fluffy numpties parading as intellect. I have met fence posts with a more useful and subtle grasp of public policy than Josh. He does have nice teeth though.

  3. Hillbilly Skeleton31/8/11 10:13 am

    Andrew, don't know if you want to do a follow-up to this piece but BISShrapnel have released a Discussion Paper today, 31/8, comparing and contrasting a Sovereign Wealth Fund with more spending in the here and now on Infrastructure. They come down on the side of Infrastructure, as I understand it. Which makes sense to me because I have always believed that a Sovereign Wealth Fund would become just another comfy sinecure for the Liberal Party's mates like Kroger et al., to make decisions about which of their mate's companies they wanted to buy shares in. On the other hand, a 'Rainy Day Fund' makes sense, but only as well as an Infrastructure Fund.