Address by The Hon Lindsay Tanner MP
Minister for Finance and Deregulation
7 May 2010, Sydney
Good evening, it’s a pleasure to be here with you tonight.
Before I begin I would like to welcome our international guests to Australia. The Australian Government is very pleased that this Forum has chosen to hold its second ever meeting here in Sydney. From discussions I have had with David Murray and members of our Future Fund, I am acutely aware of the importance of this Forum.
Whilst each of the sovereign wealth funds represented here this week is evidently unique, the opportunity for dialogue with each other, with multilateral organisations and with countries seeking investment is invaluable. On behalf of the Australian Government, I trust that your time here will be fruitful, but also enjoyable.
You have come to Australia at a particularly interesting time for those interested in broader domestic economic policy.
Last Sunday, we released the largest independent review of this country’s tax system that has been undertaken in a generation.
The Government’s response to the review outlined some significant tax reforms that aim to boost retirement savings, cut business tax and red tape and increase infrastructure investment to deliver Australia a strong and secure economic future.
The Government’s package includes improvements in our retirement income system. The compulsory superannuation contribution will be gradually lifted from 9 per cent to 12 per cent. Low income workers will receive a super contribution of up to $500 per year. And workers who are over 50 years of age with less than $500,000 in super will still be able to contribute up to $50,000 per year to tax-preferred super after 2012, when the limit otherwise drops to $25,000.
The Government is determined to boost Australians’ retirement savings so that whenever the mining boom ends, Australians have got something real and enduring to show for it. Our natural resources are finite, so we need to take action now to ensure we save some of the proceeds.
Throughout our European history, the question of how to share the benefits of this wealth has dominated Australian politics. Distributing the proceeds of our resource endowment has been a central political theme and it’s the role of government to ensure the benefits are more widely and equitably shared.
This is the central reason why the Rudd Government is introducing a Resource Super Profits Tax. The proceeds of the Resource Super Profits Tax are dedicated to lifting wealth creation across the economy, overwhelmingly through reductions in other taxes. Company tax will be cut to 28 per cent, with an earlier introduction date for small business. The amount of capital spending small businesses can write off immediately for tax purposes will jump from $1000 to $5000. A resource exploration rebate will improve the tax treatment of mineral exploration. The Resource Super Profits Tax will be designed in such a way that failed ventures can ultimately access a tax benefit, thus reducing the risk involved when companies decide whether or not to proceed with a particular project.
The Government will also provide substantial extra infrastructure funding to help relieve the infrastructure pressures in resources States.
Independent economic modelling indicates that economic growth will increase in the longer term as a result of this package.
Then, next Tuesday night, we will be releasing the Government’s 2010/2011 Budget.
It is a Budget that - like those of Governments around the world in this period – is being framed in the wake of the global financial crisis.
Putting together a Budget at such a time involves competing challenges; we must continue to support economic growth, while ensuring we remain fiscally responsible. This Government has adopted self-imposed rules to restrain spending growth until we pay down the debt that is being accumulated as a result of the global recession’s impact on revenues. Thanks to the resilience of the Australian economy though, the challenge we face is much less severe than just about every comparable country around the world.
In 2009 the Australian economy actually grew by 1.3 per cent compared to negative global GDP growth of 0.6 per cent. Unemployment in Australia is trending down towards five per cent, in contrast to the eight per cent forecast for advanced economies as a whole through to 2011.
And we are expecting to see stronger economic growth in the next two years, with the IMF predicting the Australian economy to grow by three and three and a half per cent in 2010 and 2011 respectively.
The performance of Australia throughout the global financial crisis has confirmed our reputation as one of the developed world’s leading economies. To those with a deep understanding of the Australian economy, our performance was not necessarily surprising. But I know that to those unfamiliar with the economic framework of this country, it had them wondering how we were able to outperform just about every developed country.
This, of course, is a complex question to answer. This Government took action in the form of stimulus that was internationally recognised for its timeliness and effectiveness.
But it is also a result of Australia’s strong banking system, our stable legal and government institutions, the work of the country’s independent Reserve Bank and our efficient and transparent regulatory framework. The resilience of Asian demand for Australia’s commodity exports has also been important.
Such is the strength of our regulatory framework, the Organisation for Economic Co-operation and Development (OECD) has cited Australia’s approach to regulation as a best practice benchmark for other OECD countries.
These credentials have all contributed to make Australia an attractive destination for international investment. The level of interest is evidenced by the fact that over the past five years, inward foreign direct investment stock has increased by an average of over 5.4 per cent per annum.
This Government is committed to working to ensure Australia remains an appealing place for international investment.
For those who wonder if, after a period of relatively strong performance in this area, Australia will become complacent and gradually present a less attractive opportunity to foreign investors – I can assure you the answer is no.
And there is a very good reason for that.
Australia’s limited – and ageing population means we lack the capital to rely exclusively on self-funding for our development. We simply cannot afford to not attract foreign investment if we are to lift our productivity, savings rate and the living standards of our population.
Fortunately, Australia’s natural resources put us in a position where we can be a reliable commercial supplier of resources to the world. It is our duty to use those resources to secure the capital we need to maintain a stable economy and build long-term wealth.
In this way we are in much the same position as many others represented at this Forum. Australia is a relatively small part of the global economy but with significant natural resources that must be used wisely to address future challenges.
Australia’s foreign investment regulations require certain proposals to be examined by the Government. This includes all direct investments by foreign governments or their agencies irrespective of size.
The Government examines proposals against the national interest on a case by case basis. This includes whether a proposal may have adverse implications for Australia’s national security or economic development. The proposals also need to be consistent with Australian law, including specific foreign ownership limits in areas such as transport and telecommunications.
Of particular relevance to sovereign wealth funds is the Australian Government’s Principles Guiding Consideration of Foreign Government Related Investment in Australia. These principles set out the additional factors to be considered over and above those that apply to non-Government acquirers.
There are a number of sovereign wealth funds and state owned entities that have a long history of investment in Australia. Singapore’s Temasek and China’s CITIC Group are prominent examples.
But we recognise that to create an environment attractive to other funds we need to develop a streamlined and transparent foreign investment structure. To this end, we made a number of changes to liberalise our foreign investment screening regime late last year.
This included rationalising a number of the lowest threshold levels at which private business investment has to be considered by Australia’s Foreign Investment Review Board. The change created one threshold; requiring foreign investors to be acquiring at least 15 per cent of an Australian business valued above $219 million, for the Board to examine the proposal.
This threshold will be indexed annually to keep pace with inflation and to prevent foreign investment screening from becoming more restrictive over time. As such, from 1 January 2010 the threshold increased to $231 million.
The second change was abolishing the existing requirement that private investors notify the Australian Government when establishing a new business in Australia valued above $10 million.
As I said, we are absolutely committed to facilitating further foreign investment in Australia. The resources boom Australia is experiencing will not last forever.
Our challenge is to utilise what we have now, to deliver long-term wealth. Foreign investment is fundamental to that.
Of course succeeding in attracting foreign investment is only one part of the task. We also need to be able to successfully manage the returns generated now, so that we can meet the challenges of the future.
One of the most notable developments in international financial markets in recent times has been the emergence of sovereign wealth funds as dedicated government investment vehicles. The prevalence of these funds is particularly noticeable within the Asian region, with which Australia is so deeply intertwined.
In 2006 Australia established its own sovereign wealth fund, the Future Fund.
The Future Fund received an initial contribution of $18 billion in seed capital from the Australian Government. Since then, there have been several more contributions comprised of budget surpluses, and proceeds from the sale of the government’s holding of the telecommunications and media company, Telstra.
Last month the Fund turned four years old with a value of assets totalling $67.6 billion. While the Fund’s return since its creation is modest at four per cent per annum, this reflects both the start-up phase of the Fund and the enormous turbulence of the global financial crisis.
Taking these factors into consideration, the returns have been very acceptable, but as we now enter a new phase we expect a strong period of growth. The Investment Mandate set by the Australian Government requires the Fund to adopt an average real return of at least 4.5 to 5.5 per cent per annum over the long term.
The setting of this overarching Investment Mandate and the appointment of suitable Board members are the Government’s key duties with respect to the Future Fund. As I am sure you are aware, the Fund is independently managed by the Future Fund Board of Guardians, which is chaired by David Murray.
The Board is responsible for making decisions in relation to the investment management of the Fund – in accordance with the Australian Government’s Investment Mandate.
As the Minister responsible, I am extremely conscious of the need for the Future Fund to remain at arm’s length from the Government.
There will always be a temptation for a Government to intervene in individual investment decisions of a Government agency when the agency is responsible for investing tens of billions of dollars of taxpayer’s funds. But this would be a mistake, not just in terms of the negative impact on the market of such intervention but also for taxpayers. Earnings from a fund subject to heavy Government intervention will invariably be lower than a fund that is allowed to independently invest in the best financial interests of taxpayers. This Government is wholly committed to the independence of the Future Fund in accordance with the Santiago Principles.
I would like to congratulate all of you here tonight who have been involved in the development of the Santiago Principles. The challenges in reaching an agreement that broadly meets the needs of a variety of funds operating in different environments cannot be underestimated.
The promotion of appropriate governance and accountability arrangements has never been more important. This is where the Santiago Principles can help enhance understanding, co-operation and flow of capital.
The Australian Government fully accepts and supports the Santiago Principles, recognising that their application can provide benefits to sovereign wealth funds and recipient countries.
At the same time we acknowledge that the Santiago Principles are voluntary, and that Forum countries will approach them in different ways as they develop their governance, accountability and investment practices. Whatever the approach may be, it is the commitment given to the Principles that is important.
As well as guiding the practices of current funds, the Santiago Principles will be vital in providing guidance to any nation establishing a sovereign wealth fund.
I understand my colleague Senator Nick Sherry addressed the forum’s cocktail reception last night and spoke of the support we will be providing Papua New Guinea to establish a fund of their own.
I am looking forward to working with my colleagues in the PNG Government on this Project and would like to acknowledge the presence of the PNG delegation led by the Honourable Arthur Somare, the Honourable Paul Tiensten and the Honorable Peter O’Neill who are representing their Government at this Forum as observers.
I would encourage you, in the spirit of this Forum, to take the opportunity to talk to the PNG representatives.
I would like to conclude tonight by thanking the Future Fund’s Board of Guardians and staff for their excellent management of the Future Fund to date. I would like to particularly mention the Board’s Chair David Murray, not only for the work he does with the Future Fund, but with this Forum as well.
A poor understanding of sovereign wealth funds and their potential impact on investment flows still exists. It is for this reason that it is important to maintain the work of this Forum, particularly the engagement of multilateral organisations such as the Asian Development Bank, European Commission, IMF, OECD and the World Bank. The work of countries represented here today in establishing sovereign wealth funds is to be commended. To put money away now for the purpose of funding the needs of future generations may seem like an obvious course of action, but in practice I am sure you all know it is far more difficult.
I wish you all the best in building the strength of your respective funds and hope in future years, we will see an increasing number of nations represented at this Forum.
-ends-
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