Beyond the Future Fund: Let’s reform government’s dozen other investment vehicles
The board of the Future Fund will now be asked to consider Australia’s “national priorities” — like navigating the net zero industrial transition and boosting housing supply — when making investment decisions, after Treasurer Jim Chalmers announced changes to its mandate.
While some critics argued the fund should not be saddled with the burden of considering anything other than profit, the new directive makes clear that these priorities don’t cancel out the existing mandate — to achieve an average annual return of 4-5 percentage points above inflation over the long term.
The new mandate even says the Future Fund cannot invest in these priorities if it would impact their returns. But now, when comparing two equally attractive investment options, the fund has clear guidance about what is broadly useful to society. That is no bad thing.
The Future Fund’s goal is clear. Less clear, however, are the goals of the Commonwealth’s dozen other investment vehicles that exist to achieve some non-financial policy goal. The Clean Energy Finance Corporation (CEFC) for example, exists to drive economy-wide investment in decarbonisation. The National Reconstruction Fund (NRF) exists to diversify and transform Australia’s industries.
But their investment mandates currently restrict them from fully realising their goals. They place too much emphasis on commercial outcomes and financial returns for the government — which is the Future Fund’s role — at the expense of their stated purpose. This is not a trivial thing. More than $50 billion of capital managed by these investment vehicles is at stake.
The economic rationale for funds like the CEFC and NRF is to respond to failures of capital markets. On the whole, private investors do a good job allocating capital where it will be most productive. But they aren’t perfect. Private markets systematically underinvest in sectors characterised by high volatility and uncertainty, or where product markets are distorted by unpriced externalities — hallmarks of the global energy transition.
So we want the CEFC and NRF to go where capital markets aren’t currently going. The problem is that their investment mandates require them to invest on similar terms to private capital markets, hampering their ability to aggressively catalyse new economic activity.
This shows up in the data. Over 12 years of operation, the CEFC’s core portfolio had the authority to provide $3.6 billion worth of interest rate discounts to its loan recipients. But because of its restrictive investment mandate, it only provided $101 million in concessional discounts.
The new Rewiring the Nation Fund (also administered by the CEFC board) shows what a different mandate can achieve. This fund has an explicit license to take more risks and aggressively catalyse new activity. In one year of operation, it has provided $451 million in concessional loan discounts — four times more than the total lifetime discounts from the CEFC’s core portfolio.
These discounts should be celebrated. The point of the CEFC and the NRF should be to get deals over the line in the risky, lumpy, and marginal sectors that capital markets shy away from; things like grid-scale storage and decarbonising the iron or ammonia industries. The investment mandates of these funds should push them in this direction.
Drawing a greater distinction between a return-optimising vehicle like the Future Fund and those like the CEFC and NRF can be done in three ways. First, remove the requirement for the CEFC and NRF to generate profits from their activities (breaking even should be good enough). Second, amend the language of their risk statements to clarify that they should take risks commensurate with their goal of catalysing new economic activity. Third, use caps on concessional discounts — rather than caps on the total level of lending — to manage the government’s fiscal exposure.
All of this can be done without impacting the federal budget. The government’s cost of capital — the coupon rate it pays on a government bond — is about 2%. Even if the CEFC and NRF issue deeply concessional loans at an absurdly low 2.1% interest, they are still making 0.1% profit for the Commonwealth. This is how it will appear in the budget’s cash account.
Of course, the Department of Finance — which owns the policy framework for Commonwealth investment vehicles — will say the Commonwealth could be even further ahead if the CEFC and NRF are made to invest on commercial terms. But if that’s the goal, we can save a whole lot of hassle by just giving the money to the Future Fund.
Aligning Australia’s sovereign wealth fund with the broader goals of the nation makes good economic sense. But the government has better vehicles than the Future Fund for achieving our “national priorities” — it just needs to focus its mandates to do so.
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