As usual, public debate about the Future Fund – which briefly flared up as a result of Peter Costello’s appointment as one of the fund’s seven guardians – focused on the sizzle rather than the sausage.
The real question should be whether the nation can use the $60 billion fund in more productive ways than for speculation on financial markets. The fund’s money has come largely from the sale of government assets, including all the buildings owned by the Commonwealth (apart from the War Memorial and Parliament House), plus $40 billion from the sale of Telstra.
Arguably Australians are worse off as a result of these asset sales. The excuse for the sale of the buildings was they weren’t yielding a return in excess of 15 per cent – even though the assets were in effect financed by borrowings equal to the long-term bond rate, which was then about 6.5 per cent and 5.6 per cent now.
Telstra, as a government entity in a secure regulatory environment, looked for a return on new investment of 10 to 12 per cent. Now, as a private entity, in the uncertain ”competitive” environment, it now looks for a hurdle rate of return “north of 18 per cent”, according to company executives.
Instead of the National Broadband Network evolving out of Telstra’s existing network and financed largely from retained earnings, we have a lose-lose situation as the Rudd Government threatens to trash value in the existing network to prop up Telstra’s competitors by building a parallel wholesale network.
The threat of the Government scheme contributed to the fund’s $1.5 billion loss last year and its execution will lead to at least a doubling of basic telephony charges if the $43 billion Government plan is passed by the Senate.
It is difficult to think of a better scheme to burn up billions of dollars unnecessarily. The only justification for the previous government selling off about $65 billion of public assets was that they could be better managed in the national interest by private owners. Bollocks.
The cost of government renting office space is more expensive for taxpayers. Communications policy is a disgrace and a disaster waiting to be ratified by the Senate. Given Australia’s manifest infrastructure needs, using the proceeds to play the financial markets is the worst possible use for the money when it should be used for nation building.
The government excuse for setting up the Future Fund was an ageing population and the difficulty taxpayers faced in the future to meet the burden of public servants’ superannuation. But, as the budget papers showed at the time, superannuation liabilities had already peaked and were declining as defined benefit schemes, including indexed pensions, were being closed down in favour of lump sum payments, as operates in the private sector.
The setting up of the fund outside the normal budget based on annual appropriations and not subject to cabinet and parliamentary approval, is wasteful, an affront to democratic process and potentially corrupt.
It was revealed in the annual report last week that the fund has set up five subsidiaries in the Cayman Islands tax haven. The fund does not pay Australian tax but it presumably shares the benefits from tax avoidance by companies in which it invests that have set up head offices in the tax haven.
The response from the Finance Minister’s office suggests the Government is not concerned that the fund is aiding tax avoidance.
While private entities are justified in holding financial assets to meet future liabilities, the justification does not apply to governments. They have an imputed asset in the form of their right to levy taxation, which potentially more than matches their imputed liabilities. The taxable capacity of the economy when the liabilities come due in the future depends on how well the economy manages its investments now.
The need for investment in renewable energy and especially alternatives to coal is overwhelming if Australia is to escape ”peak oil” and global warming relatively unscathed.
The fund should be closed. There are plenty of proposals for addressing climate change. They should be evaluated seriously. The fund money could be spent developing an electrified, inter-city, very fast train network based on renewable energy, initially between Melbourne and Sydney – the fourth busiest air route in the world.
Another option is to scrap the Carbon Pollution Reduction Scheme, which is already an out-and-out rort for polluters; this would save $2.5 billion a year. The savings could be invested in household micro combined heat and power systems fuelled by plentiful natural gas, which it is claimed could reduce carbon dioxide emissions by 70 per cent per unit of output compared with coal-fired electricity.
The system (Blue Gen) has been developed in Melbourne and could be manufactured here. Its proponents argue that its widespread adoption could lead to the closure of Victoria’s brown coal generators in less than five years.
Kenneth Davidson is a senior columnist.
IÂ was listening to a high-profile financial personality ”guesting” on the radio the other day and he was asked by a caller what 10 stocks he would pick in a long-term portfolio and, amazingly, he had no answer.
