Australia's policy makers are faced with the enviable conundrum of what to do with the wealth generated from the nation's mining boom at a time when other industrialized nations are still tightening their belts in response to the global financial crisis. A growing number of economists argue that with the country heading for a budget surplus, the time is right to create a sovsereign-wealth fund, or SWF.
The idea is getting a cool reception from the government in Canberra, where officials argue that Australia's existing state-run pension funds offer enough guarantees for the future and fear that such a sovereign fund would be politically unmanageable. But if the success of SWFs in Asia and the oil-rich sheikdoms of the Middle East are a benchmark, Australia should give the idea closer consideration. Those funds have helped smooth out the impact of economic shocks.
Abu Dhabi Investment Authority, established in 1976, not long after the financial potential of the Gulf state's oil wealth became apparent, is a case in point. Estimated to be worth more than US$500 billion, the Arab fund has disclosed annualized returns of 6.5% a year over the last 20 years that have helped sustain it through regional wars, oil-price slumps and financial crises. Singapore's Temasek Holdings, founded in 1974 but without the luxury of petrodollars to fill its coffers, has performed even better, delivering annual returns of 16% over the last 30 years.
"A sovereign-wealth fund should have already been done a decade ago in Australia," said Warwick McKibbin, professor of economics at the Australian National University and co-author of "Sovereign Wealth: The Role of State Capital in the New Financial Order."
Mr. McKibbin, who will soon stand down from the board of the Reserve Bank of Australia, argues that an SWF in Australia could be financed by a levy on resources still underground in the country's vast hinterland, solving a problem for policy makers of how the country can share long term in the profits of its commercial miners.
The proposed introduction of a mining tax was blamed for the downfall of the government of Kevin Rudd, now the country's foreign minister, but the problem of how to benefit from the mining boom remains. Creating an SWF specifically to invest a share of the nation's vast coal and ore reserves could provide a less risky alternative to directly taxing the likes of BHP Billiton or Rio Tinto.
"We're going through this exceptional period where we could put funds still held in the ground away to cover future liabilities or future unforeseen financial shocks," said Paul Bloxham, chief economist at HSBC Holdings in Australia.
Australia Treasurer Wayne Swan and his advisers disagree and are unwilling to entertain the concept, even without a viable solution to provide long-term benefits for the country from its mining boom, or to cushion it against future global economic turmoil.
Economies like Australia's that rely on commodity exports have been vulnerable in the past if demand for their resources falters. For the moment, Australia is reaping the benefits of what investment bank Nomura describes as "once-in-a-century improvement in the terms of trade."
To be sure, Australia already has an investment vehicle, the Future Fund, which overseas more than US$70 billion set aside to cover the government's pension liabilities, and a nationwide system of company-funded superannuation programs for the private sector, which policy makers argue already effectively serve as SWFs. But these funds, which are largely invested in domestic assets, offer none of the intangible geopolitical benefits for Australia that could be derived by taking strategic stakes in assets overseas. Qatar, which has a small population but vast energy resources like Australia, has used its SWF to help boost its international clout partly through its sizeable holdings in companies like Volkswagen AG and the famous London luxury-department store Harrods.
If the government sticks to its commitment to deliver a budget surplus in the next fiscal cycle, the case for a new Australian SWF will only intensify.
Source: http://online.wsj.com
The idea is getting a cool reception from the government in Canberra, where officials argue that Australia's existing state-run pension funds offer enough guarantees for the future and fear that such a sovereign fund would be politically unmanageable. But if the success of SWFs in Asia and the oil-rich sheikdoms of the Middle East are a benchmark, Australia should give the idea closer consideration. Those funds have helped smooth out the impact of economic shocks.
Abu Dhabi Investment Authority, established in 1976, not long after the financial potential of the Gulf state's oil wealth became apparent, is a case in point. Estimated to be worth more than US$500 billion, the Arab fund has disclosed annualized returns of 6.5% a year over the last 20 years that have helped sustain it through regional wars, oil-price slumps and financial crises. Singapore's Temasek Holdings, founded in 1974 but without the luxury of petrodollars to fill its coffers, has performed even better, delivering annual returns of 16% over the last 30 years.
"A sovereign-wealth fund should have already been done a decade ago in Australia," said Warwick McKibbin, professor of economics at the Australian National University and co-author of "Sovereign Wealth: The Role of State Capital in the New Financial Order."
Mr. McKibbin, who will soon stand down from the board of the Reserve Bank of Australia, argues that an SWF in Australia could be financed by a levy on resources still underground in the country's vast hinterland, solving a problem for policy makers of how the country can share long term in the profits of its commercial miners.
The proposed introduction of a mining tax was blamed for the downfall of the government of Kevin Rudd, now the country's foreign minister, but the problem of how to benefit from the mining boom remains. Creating an SWF specifically to invest a share of the nation's vast coal and ore reserves could provide a less risky alternative to directly taxing the likes of BHP Billiton or Rio Tinto.
"We're going through this exceptional period where we could put funds still held in the ground away to cover future liabilities or future unforeseen financial shocks," said Paul Bloxham, chief economist at HSBC Holdings in Australia.
Australia Treasurer Wayne Swan and his advisers disagree and are unwilling to entertain the concept, even without a viable solution to provide long-term benefits for the country from its mining boom, or to cushion it against future global economic turmoil.
Economies like Australia's that rely on commodity exports have been vulnerable in the past if demand for their resources falters. For the moment, Australia is reaping the benefits of what investment bank Nomura describes as "once-in-a-century improvement in the terms of trade."
To be sure, Australia already has an investment vehicle, the Future Fund, which overseas more than US$70 billion set aside to cover the government's pension liabilities, and a nationwide system of company-funded superannuation programs for the private sector, which policy makers argue already effectively serve as SWFs. But these funds, which are largely invested in domestic assets, offer none of the intangible geopolitical benefits for Australia that could be derived by taking strategic stakes in assets overseas. Qatar, which has a small population but vast energy resources like Australia, has used its SWF to help boost its international clout partly through its sizeable holdings in companies like Volkswagen AG and the famous London luxury-department store Harrods.
If the government sticks to its commitment to deliver a budget surplus in the next fiscal cycle, the case for a new Australian SWF will only intensify.
Source: http://online.wsj.com
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