No. 170

MIKE BAIRD’S WEST CONNEX PROPOSAL MAKES SENSE

STONE the crows! Superannuation is as much engineering as investing.

Being birds of very little loot, the Crows struggle to understand why superannuation fund managers pile into shares, which push the market up without actually expanding the economy.

Yes, they know there is not much sense in staying in cash or investing in bonds. The US 10 year bond rate has recently rocketed from 1.6 per cent to 2.5 per cent.[i] Whako, unless of course you are 40 without much super stashed away. However, Ashley Owen argues on Chris Cuffe’s site that, “There is no exploitable statistical relationship between economic growth rates and stock market returns, either at a global level or in individual countries, or indeed individual companies.”  The Australian market was up 21 per cent last financial year, despite aggregate earnings being down.[ii]

Then, again, the Crows also wonder why governments long left infrastructure funding to financial engineers interested in fee income, rather than the sort of long term return from incoming producing assets, like motorways, that superannuation investors expect. As the Financial Times observed in the aftermath of the end of Babcock and Brown, there is a distinction between “the long-term, low-risk nature of many infrastructure projects and the sophisticated levels of financial engineering used to fund them, in particular the listed fund model that attracted retail investors”.[iii]

Well, times appear to be changing. On Friday, Assistant Treasurer David Bradbury announced a tax incentive for private sector infrastructure investors. At least, that is what he claimed. The release is rich in rodomontade but poverty stricken for actual information.[iv]

However, the facts are at the Infrastructure Australia website, which explains that changes to carry forward losses and bad debt treatment will support $25bn in investment. As the explanatory memorandum puts it: “The objective of the measure is to reduce the disincentives for private expenditure on nationally significant infrastructure that result from the long lead times between incurring deductions for, and earning assessable income from, such expenditure.”[v]

Good oh. But when people start talking about “national significance” the Crows start worrying whether super is about to become a trough for treasurers who use tax incentives to get super funds into public sector projects that banks will not touch with a barge pole, lest they soil the same.

This does not worry the Industry Super Network – the umbrella body for the union-friendly industry funds:

Some projects are best financed by the sale of existing public infrastructure to responsible owners like super funds and the creation of a continued pipeline of projects is essential to fully unlocking the potential for infrastructure investment … With no shareholders demanding short term results, we have the unique capacity to patiently invest in real world assets that deliver strong, stable, long-term returns to our members while also delivering economic benefits for the whole country.[vi]

But as Alison Kahler, reaching for pole, replies:

There is a difference between select investment in assets deemed suitable by an accredited expert and a siren call – that keeps getting louder – for super to support ventures that can’t get finance elsewhere. I’m more than happy that I’ve never invested a cent in all those tunnels that have failed to live up to their forecasts in recent years, the agricultural schemes that went belly up, or those clever engineered products that went into meltdown during the global financial crisis.[vii]

Quite right; when the Crows hear the term “nation building” they reach for their calculator. And bureaucrats like nothing better than drinking from the rivers of gold that pay them to help us. As Andrew Main explained in The Australian on Saturday, Canberra’s plan to create a low cost default scheme and strengthen the governance, integrity and regulatory settings of the superannuation system, will be paid for by funds levying member accounts.[viii] Perhaps it is the definitive case of more being less.

Which is why the Crows hope NSW Treasurer Mike Baird is on to something. The state treasurer plans for the public to pay for the first stage of the West Connex toll road from Port Botany to Parramatta. Once the toll revenue from the first section is known, the government will sell superannuation funds bonds based on the income, to pay for the next bit.

When the whole project is completed the state government can privatise the road, thus raising money to start another project.[ix] Yes, this means the state carries the risk and undoubtedly pays more for capital than if it just borrowed the lot. But it keeps the debt off the state’s balance sheet and is a sight more sensible than the insane schemes that saw private providers bid for road projects with more complicated financial than physical engineering, and business projections that assumed whatever the toll revenues required to make a return would automatically appear.

The Crows are curious at why Treasurer Baird’s plan did not generate much more comment, but what it did was sensible on both sides of the argument.

Among the usual denunciations of treasuries as road building, deficit hawks that The Conversation carries, Yehudi Bachelor saw sense in the scheme: “In the past, we had these BOOT deals — build, own, operate, transfer — and this is like a BOOT in reverse. The government is going to effectively make the investment, clarify the patronage is there and then based on patronage numbers, go to the market and seek private sector investment. It’s quite innovative.”[x]

However, ex Reserve Bank deputy governor, Stephen Grenville, argues the Baird model is also flawed in that it is based on misguided fear of public debt: “It’s less likely that substantial benefits will come simply from shifting ownership to dodge the current set of mis-specified constraints on government borrowing, either self-imposed or imposed by financial markets.”[xi]

Good-oh, but what super fund is going to invest in an asset without an idea of assured income. Hell, if you want people to punt with your savings you may as well ask your fund manager to play the supermarket. Oh wait, they do.

 

ENDNOTES


[i] David Bassanese, It’s time to get real about rates,” Australian Financial Review July 5

[ii] Ashley Owen, “Economic growth does not drive stock market returns, Cuffelinks, July 4 @ http://goo.gl/T1pvI recovered on July 14

[iii] Lachlan Colquhoun, “Australia needs less financial engineering,” Financial Times, October 18 2009

[iv] David Bradbury, “Tax reform to drive private investment in infrastructure,” July 12 @ http://goo.gl/ThCmB July 12, recovered on July 14

[v] Infrastructure Australia, “Tax loss incentive for designated infrastructure projects,” July 12 @ http://www.infrastructureaustralia.gov.au/taxincentive/

recovered on July 14

[vi] Industry Super Network, “Industry super funds welcome new thinking on infrastructure investment,” July 2 @ http://goo.gl/BWz8W recovered on July 14

[vii] Alison Kahler, “Keep your mitts off my super, thanks very much,” Financial Review, July 12

[viii] Andrew Main, “Labor’s super bill to fall on savers,” The Australian, July 13, Treasury, “Stronger super,” @ http://goo.gl/FWR9W recovered on July 14

[ix] Michaela Whitbourn, “NSW’s WestConnex: the road to a new funding model,” Financial Review, June 24

[x] Helen Westerman and Sunanda Creagh, “NSW budget boosts infrastructure, delivers deficit: the experts respond,” The Conversation June 18 @ http://goo.gl/wCRqb recovered on July 15

[xi] Stephen Grenville, “Australia’s infrastructure promise needs a funding fix,” Lowy Interpreter, July 3 @ http://goo.gl/LEp7J

'2012