The problem with Grattan’s default fund tender

The Grattan Institute this week released a report into Australia’s superannuation system proposing that the Government should introduce a tender for default funds.

The aim of the default tender would be to reduce costs in the system – something that would have long term benefits for future retirees through increased account balances.

Grattan argue that a core criteria of the default fund tender would be fees. There are a number of ways that a superannuation fund reduce fees. One way, as identified by Grattan, is through scale. Another way is to invest passively, something that Grattan supports on the basis of the track record that active managers have beating their indexes.

Leaving aside the debate about passive and active management, there is a need to consider the impact that index investment has on capital markets and capital formation.

According to Jeffrey Wurgler, Nomura Professor of Finance at the NYU Stern School of Business, the dominance of indexed linked investing is having economic consequences.

According to Professor Wurgler “There is no doubt that indices and associated investment products are innovations that on the whole have benefited many individuals and institutions. On the other hand, their popularity has created underappreciated side effects.. (which) stem from the finite ability of stock markets to absorb index-shaped demands for stocks. Not unlike the life cycles of some other major financial innovations, the increasing popularity of index-linked investing may well be reducing its ability to deliver its advertised benefits while at the same time increasing its broader economic costs.

Wurgler documents a number of impacts of index investing including Index Inclusion Effects. On average, stocks that have been added to the S&P between 1990 and 2005 have increased almost nine percent around the event.

Once a stock becomes part of an index it starts to move with the index, something Wurgler describes as comovement. Over time index members slowly detach from the rest of the market. Evidence is also suggesting that increased index investing is associated with increased volatility in the market. Other impacts include on debt finance, with research demonstrating that new S&P 500 inclusions increase their rate of equity issuance and reduce their leverage.

As an investment strategy, indexing can make sense. However, the danger with the Grattan proposal is that we create policy settings that encourage indexing without any consideration whatsoever as to whether there is even the possibility that there could be an impact on the market and the Australian economy.

A default fund tender is not a bad idea. But before we proceed we need to consider all the impacts. The size of the superannuation pool means that superannuation is now interconnected with the Australian economy. And it also why it is time that the Grattan Institute established a permanent work stream on superannuation.

On the Economic Consequences of Index-Linked Investing
Jeffrey Wurgler
Nomura Professor of Finance, NYU Stern School of Business

WHO’s call for clinical trial transparency a wakeup call for investors

The lesson from WHO’s statement on clinical trials is how to build partnerships with community and not-for-profit organisations to enable active engagement on a broad range of issues.

The World Health Organisation this week issued a public statement calling for the disclosure of results from clinical trials for medical products, whatever the result.

The WHO’s statement has arisen out of growing concerns that pharmaceutical companies are systematically withholding reporting of clinical trials where the results may not be favourable to drugs that are being tested.

In their statement the WHO quote a study that analysed reporting from large clinical trials registered on and completed by 2009, 23% which had no results reported.

There has been a great deal of focus on the actions of Roche with respect to its Tamiflu drug which the Australian and UK Government stockpiled as a precautionary measure in the event of an outbreak of a global flu virus. According to Ben Goldacre, author of Bad Pharma, Roche withheld vital information on its clinical trials for half a decade. A global not-for-profit organisation of 14,000 academics, Cochrane Collaboration, finally obtained all the information, discovering in the process that Tamiflu has little or no impact on complications of flu infection, such as pneumonia.

There are big dollars at stake.

The UK government spent £0.5bn stockpiling tamiflu and since 2002, the Australian government has spent $380 million. This is taxpayer funds that could have gone elsewhere.

For investors there are broader concerns around the way large corporations are influencing government regulations by funding of academics.

In the last couple of months an investigation has revealed the extent of funding from Coca-Cola, PepsiCo, Nestlé and others to academics that sat on the UK’s Scientific Advisory Committee on Nutrition (SACN) and the Medical Research Council (MRC).

Beyond academic funding, there is also a concern at the extent of lobbying of particular industries including telecommunications, food, banking and pharmaceuticals.

As the fiscal position of governments in developed countries around the world deteriorates (as the retirement of baby boomers places strain on public health and pensions systems) it will be increasingly tempting for universities and other bodies to rely on corporate funding. The problem with this is that it will inevitably result in questions of conflict of interest that will undermine public confidence in research.

For investors who are seeking to grapple with the challenges around fossil fuels, the deteriorating community confidence in the corporate sector is an issue that is being put in the “let’s look at that later” pile.

For investors, the heart of the matter is whether it is possible to become active on a broad range of issues simultaneously. Whilst climate change is the issue of the century, other issues should also be addressed. Investors have for instance been caught flat footed when it comes to the debate around corporate taxation.

It is a lot easier for investors to become engaged around complex issues than it ever was before. Groups such as the Centre for Accountability in Science, All Trials and the Cochrane Collaboration are natural partners for responsible investors.

Investors should accept that they can’t do it all. The era of corporate accountability requires investors to develop new approaches to building partnerships.


Campaign for clinical trials to be released:

Roche’s Tamiflu saga

World Health Organisation’s statement on clinical trials:

Bad Pharma by Ben Goldacre

Flexible Petrol Levy the solution to addressing congestion

A flexible petrol levy that rises and falls with global petrol prices, is a better way to address congestion than the cost reflective road pricing model proposed by the Harper Competition Review.

According to the Competition Policy Review new technology provides an opportunity to introduce cost reflective road pricing. The Review states:

More effective institutional arrangements are needed to promote efficient investment in and usage of roads, and to put road transport on a similar footing with other infrastructure sectors. Lack of proper road pricing leads to inefficient road investment and distorts choices between transport modes, particularly between road and rail freight.

The advent of new technology presents opportunities to improve the efficiency of road transport in ways that were unattainable two decades ago. Road user charges linked to road construction, maintenance and safety should make road investment decisions more responsive to the needs and preferences of road users. As in other network sectors, where pricing is introduced, it should be overseen by an independent regulator.

Cost reflective road pricing would essentially involve different charges for different roads, with the potential to even charge different prices at different times.

The core rational behind cost reflective road pricing is that if a person is charged to drive on a particular road at a particular time they will assess whether the fee they are being charged is worth it. From an economic perspective those who have lower value uses, would shift their behaviour and travel at different times.

In economic terms the problem with cost reflective road pricing is the inelasticity of demand.

As a concrete example consider an employee who must arrive at their job at 8.00am. If they are late they will receive a warning and potentially dismissal. Theory would suggest that this employee would shift their behaviour, by perhaps taking public transport to their job. But the reality of where many jobs are located in Australia’s congested cities of Melbourne and Sydney, and increasingly Brisbane, is that public transport does not offer a realistic alternative at peak times. The problem is that with the exception of CBD based employment, jobs are distributed across the city. And it is the employer, not the employee, who has power over starting and finishing times.

Those employees that are employed with fixed working hours will simply absorb any road pricing increases on their particular transport route. Pricing will therefore not impact congestion.

Cost reflective pricing may result in some individuals shifting their behaviour ,but before we race to implement technology that will not be costless we need to understand where the burden of pricing would fall.

The problem with cost reflective road pricing is that it does not take account of the structure of cities, nor of the individual circumstances of road users. It does not take into account the way the control of employment exercised by employees.

There is an alternative that can provide the funding to address congestion.

My suggestion is to establish an infrastructure levy on petrol prices that would vary according to global petrol prices.

Now is the perfect time to introduce such a levy, which would be in addition to existing petrol taxes.

According to investment analysts, oil has been hoarded in around the world in empty tankers and we are now close to the point where all available storage facilities have been used. Once this point is reached there are predictions that the price of oil will fall again.

The problem with volatile oil prices is that they send exactly the wrong signals at the wrong times. If we believe that congestion can be addressed through pricing mechanisms, and we believe that the economic benefits of introducing cost reflective road pricing are worth it, then it would also make sense to regulate the current oil price volatility.

One of the challenges that governments have in building new infrastructure, whether rail or road, is how to fund them. One option is to introduce a new infrastructure levy on petrol prices.

If we want to send a price signal re congestion through pricing then it makes sense for the government to collect any windfall from reduced prices.

If, and when oil prices increase then the levy should be automatically reduced, which would result in a steady price at the petrol pump. Given the significant benefit to consumers from the recent falls in petrol prices, it is arguable that a levy price could be set at a rate that is modestly above the existing global oil price.

In terms of administration, establishing a flexible industry levy would not require a new regulator or the use of technology on every road and every car. It would simply require a piece of legislation mandating the collection of the levy at the wholesale point of production or import.
The flexible petrol levy would go straight into a national infrastructure fund that would provide the Federal Government with an additional bucket to fund projects aimed at reducing congestion.

Congestion in Australia is largely the product of the design of our cities, which were designed in an era of low petrol prices when the invention of the motor vehicle enabled urban sprawl. We have now reached the limits of sprawl, but we have not developed the efficient public transport systems that we commonly see in Europe.

Turning Sydney or Melbourne’s public transport system into something that compares to London or Paris may be decades away. The key will be finding the money for the necessary infrastructure investment, some of which may not be able to be financed by the private sector, would nevertheless have significant productivity benefits.

With global oil prices on the tip of another fall there has never been a better opportunity to capture funding in a way that doesn’t hurt consumers.

Super Tax Concessions Debate: Industry Must Step Up on Social Licence

Why is it that we are talking about super taxation concessions and not negative gearing? The superannuation industry needs to recognise that it does have a social licence.

In the ASFA Magazine June 2014 I wrote an article “Superannuation’s Licence to Operate”. The article is re-produced:

Superannuation’s Licence to Operate

Western Australia Premier Colin Barnett recently delivered a blunt speech to Western Australia’s booming gas and petroleum industry.

Barnett stated “I put it to you, it’s a hard narrative to sell to the community or a government that we are going to increase production of gas and we are going to export it and in the meantime gas supplies might be diminished and the domestic price will go up. I am a politician. I am pretty good at selling a story. I find that one tough to sell. You can’t say to people gas production is going up and by the way your supplies are going down and the price is going up. Stop reading American management books. Think a bit broader. The ultimate social licence is not what you may think it is.”

Barnett went on to state, “the ultimate [social] licence is getting agreement and alignment with both the national and state governments in Australia. That’s the licence that counts. That’s the one you must secure to develop Australia’s natural resources.”

Whilst focused on the gas industry, Barnett’s comments raise the question what does ‘licence to operate’ mean for the superannuation industry?

Social licence is at best a fuzzy term. Unlike our driving licence there is no grand department where companies and industries can line up to have their ‘social licence’ stamped and renewed. The best definition of social licence can be described as a stakeholder perception of the legitimacy of a project, a company or an industry. Using that definition the superannuation industry has a problem.

Over the last few years superannuation has taken a battering that shows no sign of abating. In the last months alone media commentators have lambasted Australia’s superannuation system and have gone as far as saying that superannuation has failed. How did we get here? More importantly what we can do about it?

A starting point is to understand why stakeholders may be criticizing super. Rather than jumping into a debate on fees, investment returns and customer service, let’s take a step back and look at the different groups of stakeholders that have a problem about super; members, government, civil society and business and try to understand what they are concerned about.

For superannuation members the challenge is that superannuation at its heart is a product that is based on an aspiration that life in the future can be better. Perhaps that is part of the problem. The promise that superannuation is holding out, to make the future better, may be in itself a source of stakeholder discontent. The problem with an aspirational product is that if the reality falls short of the objective then the customer is left more dissatisfied than if the product was just an everyday consumer good where there weren’t great expectations.

For twenty years following the introduction of the SG the superannuation industry didn’t have to worry too much about aspirations falling short. That was because most of the people in our system had not retired. For those that retired in the last 15 years they knew that they were late to super and therefore their expectations were lower. However as the baby boomers reach retirement we are dealing with a group that does have aspirational expectations in regards to their super. For Generation Y and Z, who are entering the workplace with the expectation that they will retire at 70 there is a cynical view as to whether a better future is possible at all.

The second key stakeholder is government. Superannuation has been cast as a two pillar relationship between member and fund. In fact it has always been a three pillar relationship – member, fund and government. There are many ways over the last twenty years that the Federal Government has demonstrated that they are a key part of the superannuation system. By and large however Governments have been a silent stakeholder. When economic times were good and the cost of superannuation on the Federal Budget was manageable, the Government largely left superannuation funds alone.

The future fiscal position for Government is not so rosy and will be a major reason why the Federal Government focuses on superannuation. Over the next two terms of parliament we can expect to see more focus in this area to make the system sustainable. To understand the reason why this will happen we need to unpack the Federal Budget. We know from the work of the Grattan Institute that the deterioration of the Government’s fiscal position is largely based in a blow out of health expenditure. As the Grattan state, the increase in government spending is driven above all by health spending, which in the past 10 years has risen by more than $40 billion a year in real terms. The cause is not the ageing population but the fact that people are seeing doctors more often, having more tests and operations, and taking more prescription drugs.

We have yet to feel the full impact of our aging population on the Government’s position. Over the next decade a significant portion of baby boomers will retire. By the time the baby boomers have left the work force we will see a permanent change in the structure of the proportion of workers supporting pensioners. This will further erode Government’s fiscal position as the full cost of pensions hits the Federal Budget.

Superannuation is one of the biggest expenses the Federal Government faces. There is a significant political debate about how Governments should handle this. One example is the debate about accessing the pension at 70. Whilst this doesn’t change the amount of money in an individual’s superannuation account for many Australians it will significantly change what they can do with that money. For those, including blue collar workers, that are unable to work until 70 due to physical health, the increase in access age will in reality mean that superannuation will be used to pre-fund retirement before accessing the pension at 70. Instead of super being a top up to the age pension it will be become a pre-funding account.

The age pension debate illustrates why the third major stakeholder, civil society, criticizes super. Superannuation is now in direct competition with other ways that government can spend money. In order to demonstrate why a particular way of spending money is desirable, it is necessary to demonstrate why government expenditure on super is not effective in meeting social goals.

The fourth area of criticism about super relates to the way super invests. When the Australian economy was strong and unemployment was trending downwards – which represents most of the history of the SG – the way in which super invested was largely ignored.

Whilst long predicted by economists it is now clear that the mining and resources boom is on the wane. As manufacturing industries contract there is understandably angst in the community about where jobs are going to come from.

Superannuation collectively is the biggest pie in the Australian economy. How superannuation funds invest will make a material difference to the way in which the economy develops. The Financial System Inquiry will focus on the role that superannuation plays in capital formation. Whatever the Inquiry concludes Australia’s political parties of all persuasions will increasingly focus on how superannuation invests.

To understand why this will happen, it is only necessary to go back to Colin Barnett’s comments at the start of this article. Barnett is right; politicians know how to sell a story. But what he doesn’t say is that they also know how to shift blame to someone else.

The best example of this is the banking industry which has a long history of being the scourge of politicians. In the late 1990’s the banking sector was on the front pages of papers on a regular basis as banks closed branches, increased bank fees and made record profits. There were numerous banking inquiries that provided ample opportunities for politicians to criticize banks. Labor at the time went so far as developing a banking social charter as a core part of its election commitments in the 2001 Federal Election.

One of the things that came out of the period that the banks were subject to public criticism was that the major banks all developed their own commitments to corporate social responsibility and sustainability. Compared to 13 years ago the banks are now regarded as leaders when it comes to sustainability and CSR. This is not to say the banks are perfect, but they have realized that the only way to address social licence issues is by focusing on the issues themselves.

This is also the answer for the superannuation industry. No amount of media campaigning will result in positive outcomes if the fundamental issues that are of concern to members, governments, civil society and business are not addressed. So, how do we start?

The first place to start is to acknowledge that superannuation, like other sectors of the economy, is subject to a social licence. We need to learn the lessons from those that have been here before. One of the lasting outcomes of the early campaigns against Nike and Shell was the development of sustainability reporting. A couple of funds in the superannuation industry have dipped their toes into this area but largely our industry has believed that CSR/ sustainability reporting is for others. It is not.

Sustainability reporting is not an end in itself. It must be back by real concrete work that seeks to address the issues that are of most concern to stakeholders.

The superannuation industry must be careful not to be complacent about its position in society. Social licence may be a fuzzy concept but it is real. We are entering an era of change where everything is up for grabs. When respected commentators say superannuation is failing we shouldn’t ignore them but take a good hard look at what we are doing to ensure that we retain our social licence in coming decades.

Why Australia Needs a Foreign Corrupt Practices Act

Senator Sam Dastyari’s speech in the Senate on 5th March has exposed what we have known for too long. Australian investors are exposed to bribery and corruption risks and it is time something is done about it.

In November 2012, I authored a paper for the Association of Superannuation Funds of Australia on the development of Australia’s capital markets. The discussion paper stated:

ASFA believes that the superannuation system has a role to encourage the development of the ASX in a way that facilitates future investment as part of its role to deliver to the public good.

A recent focus of the ASX has been to target listings in the resources sector. An example of this is that the ASX now has 15 listed companies from Mongolia principally due to the on-the-ground engagement of the ASX in Mongolia. ASFA notes there are a significant number of ASX-listed resource companies that are active globally, with 186 companies actively exploring or producing in Africa alone.

The fact that Australian companies are active on a global basis provides investors with an ability to gain exposure to the global economy. However it also introduces risks that must be managed. The superannuation sector understands the importance that environmental, social and governance (ESG) factors can play in delivering long-term investment returns. Over the last five years a significant number of APRA-regulated superannuation funds have signed up to the United Nations Principles for Responsible Investment.

A great deal of work is being done by these funds to build their capacity to understand and manage ESG risks across their portfolios. ASFA is concerned that small and medium cap companies are particularly exposed to human rights risks when operating in developing and under-developed countries. In the US the Securities and Exchange Commission (SEC) has been required to issue new rules around disclosure practices for resources companies that operate in conflict zones. There is an international body of work around this focused on the Extractive Industries Transparency Initiative that requires countries to disclose revenues from resources in order to stop bribery and corruption in developing countries. The SEC move, which came from a Congress directive, will in the end set a new standard for disclosure of resources companies. Given the dominance of resources companies in the ASX, the SEC model could be considered in the Australian context.

ASFA is concerned that there has been insufficient attention paid at both a market, regulatory and policy level on the implications of encouraging a diversified capital market. The long-term impact of concentration risk is that in order to achieve portfolio diversification, superannuation funds will allocate new funds outside of the ASX. To the extent that concentration risk increases, this has the potential to have a long-term impact on the allocation by the superannuation sector to Australia’s capital market.

The challenge that Australia has is that ASX is a listed company in its own right, and is subject to competition pressures in its businesses including trading, clearing and settlement means that it seeks new listings to earn revenue. The reality over the last decade has been that mining listings have been a major area of opportunity. The ASX must compete with other listed markets, particularly Toronto, for new listings. The recruitment of Mongolian mining companies for instance is no accident but the result of targeted activities of the ASX.

My argument in the past is that Australia’s superannuation sector and the ASX have had aligned interests. The growth of the superannuation has supported the growth of the ASX. In the coming decades it is likely that superannuation will out-grow the ASX and super funds will increasingly seek investments offshore. This is a reality and in terms of investment diversification can be a good thing, but even if this does happen, we still need to ensure that the ASX is able to present a pipeline of future investment opportunities. I have been critical of the ASX in terms of its focus on mining listings because it doesn’t align with superannuation fund needs for a diversified market.

But the focus on securing new mining listings also brings risk into the ASX, which super funds as asset owners ultimately bear.

The main risk from bribery and corruption is not at the top of the ASX where our leading miners in the main have good practices in place to manage risks. It is at the bottom of the ASX, amongst the small cap miners.

An argument amongst investors has been that this end of the market doesn’t matter as super funds don’t invest a great deal in small cap miners.

This misses the point. The importation of bribery and corruption risk in the bottom of the market is a reputation risk for the whole of the market. Whether we invest in a small cap miner in Mongolia or not, it is in the interest of all investors to ensure that they operate according to global best practice.

The problem that we have is that unlike the US, we don’t have an active cop on the beat that actively prosecutes. In the case of the US SEC there were 8 prosecutions in 2013, 5 in 2014 and already 2 in 2015.

In his speech Senator Sam Dastyari identified the key problem which is that ASIC does not take responsibility for foreign corrupt practices but leaves it to the Australian Federal Police, whose investigations are not subject to public accountability.

My recommendation is that the Federal Government provide funding for ASIC to establish a dedicated Foreign Corrupt Practices division. This should be part of legislation that gives ASIC responsibility for investigation and prosecution, in cooperation with the AFP, of bribery and corruption.

Congratulations to Senator Sam Dastyari for blowing the whistle on this issue. The upcoming Senate Economics Committee inquiry will provide an opportunity for investors to stand up and demonstrate that bribery and corruption is a material issue.


SEC Enforcement on Foreign Corrupt Practices Act

Association of Superannuation Funds of Australia
Development of Australia’s Capital Markets

Innovation and investment – time to think wider than VC

Language is important. When it comes to talking about innovation and investment in the same sentence the focus invariably turns to venture capital.

Long term asset owners have had a mixed experience with venture capital to the point that CALPERS, the Californian public sector fund, has decided to no longer allocate to VC.

But innovation is not just about venture capital. The Oxford Dictionary defines the word innovate as to ‘make changes in something.’ The key word here is change.

Change is fundamental to investment. It is a beast that is hard to control, and much of the investment processes we use are designed to strip out different elements of change in an attempt to tame them.

The one thing that is certain is that the world does not sit still. In fact the pace of change is such that I struggle how to answer my kids’ questions. The olden days – that mystical time that used to refer to knights and castles, now goes all the way back to the era before the ipad was invented – yes, all the way back to before 2010. Our kids are growing up in a world where they think rapid change is normal. The last question I had was ‘Dad, did you have electricity when you were a kid?’

One of the anxieties that Australians have is that we are somehow not an innovative society. We worry endlessly about whether we can create a venture capital industry to rival Silicon Valley.

I think it is time we got rid of this innovation anxiety. Venture capital is at the end of the day just a structure. There is a very good question as to whether it is the best structure for long term investors. VC returns are volatile, which doesn’t suit a system that is measured on short term performance. VC funds are also illiquid and have high due diligence costs. The model of exiting an investment just as it starts to get started is also questionable for long term investors.

If we do want a VC industry in Australia then we need to look at different structures. We can’t ignore the ASX, which provides the governance and daily pricing that superannuation funds need. What we need to see is a series of listed innovation companies that build a portfolio of growing businesses.

Rather than selling a successful business once it reaches the first stage of maturity we need to be keeping these businesses and taking them to the second stage of development. It will only be in this way that we will develop the next generation of large cap Australian companies operating globally.

Investing in innovation through capital markets aligns to a superannuation system that has restrictions on liquidity, but which is rapidly outgrowing the investable opportunities within the ASX. The pathway forward is for start-up companies to collaborate to establish larger innovation companies. The sharing of governance, human resources and debt makes a lot of sense and is likely to be attractive to superannuation funds that have strong taxation and currency incentives to invest in Australia.

The good news is that there is no need for innovation anxiety – except when it comes to explaining the olden days to your kids.

What is the story with Merck’s Gardasil Vaccine?

On February 5 2015, the Toronto Star, one of Canada’s largest daily newspapers, published an investigative story on the drug Gardasil, produced by Merck.

Gardasil is a vaccine that protects against a series of HPV cancers. The Toronto Star investigation heard from parents and teenagers who believed that their illnesses were due to taking the drug.

Shortly after the story was produced the Toronto Star issue a retraction, starting:

The investigation , published on the Star’s front page with a large banner headline — “A wonder drug’s dark side” — told you that “Hundreds of thousands of teen girls have safely taken Gardasil … But a Star investigation has found that since 2008 at least 60 Canadians experienced debilitating illness after inoculation. Patients and parents say the incidents point to the full disclosure of risks.”

That alarmist information is not the full story.

What you need to know and understand fully is the fact that there is no scientific medical evidence of any “dark side” of this vaccine. The Gardasil vaccine has been tested by highly credible national and global public health agencies and the scientific evidence overwhelmingly concludes that it is safe and effective.

The Toronto Star’s retraction of their original story does not end the community’s interest in the potential impacts of the drug.

Kim Robinson’s story of their daughter Kate’s health since taking the drug has been shared on Facebook 278,000 times. The Robinson’s state:

We deeply regret consenting to the Gardasil vaccine. We had no idea of the severe side effects some experience post vaccine. Every day, we wish we had been more informed. Parents beware of blindly following your doctor’s recommended vaccine schedule. Do not rely or expect your doctor to know everything. You must do your own research and ask plenty of questions. Our family found out the hard way that it is possible for a vaccine to have lasting and devastating effects.

In the world we live in it is not possible to stop a story from spreading. It may be that the large media will stay away from reporting controversial stories, but this will only drive the stories to smaller publications and Facebook.

A key test of a company is how it handles criticism under fire. The challenge for companies to understand is that the rise of social media has unlocked a new world. Being transparent and open is the only way to build confidence.

In this new world, the future of vaccines like Gardasil rely on addressing the stories of people like Katie Robinson, not trying to hide them from view.


Katie Robinson’s story:

The Star’s edited story:

The media reaction:

Is the sharing economy dead before it started?

There has been much ado about the sharing economy. There is no doubt that companies like Uber, AirBnB and Zipcar have the capacity to re-shape industries. But are we actually sharing, or just transacting?

This is a question that Giana M. Eckhardt and Fleura Bardi focus on in a recent article in the Harvard Business Review.

According to Eckhardt and Bardi:

“Sharing is a form of social exchange that takes place among people known to each other, without any profit. Sharing is an established practice, and dominates particular aspects of our life, such as within the family. By sharing and collectively consuming the household space of the home, family members establish a communal identity.”

When “sharing” is market-mediated — when a company is an intermediary between consumers who don’t know each other — it is no longer sharing at all. Rather, consumers are paying to access someone else’s goods or services for a particular period of time. It is an economic exchange, and consumers are after utilitarian, rather than social, value.”

One thing that the sharing economy has been good at is coming up with different words to describe the same thing – something that the investment industry knows a lot about. P2P market places, collaborative consumption, the Mesh Economy have all been used to describe the sharing economy.

It may be that, as the HBR authors suggest, we should simply re-brand the sharing economy as the access economy, but where exactly does this leave the concept of community in economic activity?

The social economy has a long history going back to the development of cooperatives in the 1770’s. Today social entrepreneurs represent the latest chapter in a story that goes back to Robert Owen.

Whilst social entrepreneurs may offer the ability to produce the next digital disruption, another area that has long been over-looked is community infrastructure.

In every city and town across the globe there are assets that have been built to service communities. Examples are Scout Halls, Senior Citizen Clubs and Life Saving Clubs that continue to serve their original functions.

In Australia we saw a boom in such community infrastructure in the 1950’s and 1960’s. As our cities have developed with increased congestion and scarcity of resources, a significant question is whether there are ways, consistent with their original purposes, that we can share community assets.

An example is Life Saving Clubs where most usage occurs on weekends but where in many case the weekday will see clubs closed. Could such facilities be used for multiple purposes during the week, whilst still delivering their core activities? And if so, how could we achieve that?

I will focus on how we can develop our community infrastructure in future blogs.


The Sharing Economy Isn’t About Sharing at All

Vatican Divestment Campaign heads for collision with Cardinal Pell

As 350.0rg leads a campaign asking Pope Francis to divest Vatican assets from fossil fuels, the Vatican’s newly appointed economic manager Cardinal George Pell is likely resist divestment.

Pope Francis has publicly acknowledged humanity’s role in climate change stating in December 2014 that “the time to find global solutions is running out.”

Pope Francis is planning to release an encyclical on the environment in the coming months. Encyclicals according to Neil Ormerod, Professor of Theology at Australian Catholic University is the most authoritative document a pope can issue.

However, Pope Francis’ acknowledgement of climate change is likely to be opposed within his own ranks, in particular by Cardinal George Pell who was appointed in February 2013 to be the first Cardinal-Prefect of the Vatican’s newly created Secretariat for the Economy. As part of his role Pell is responsible for the Vatican budget and investments.

Cardinal Pell is a well- known climate change sceptic. In October 2011 he delivered a lecture on climate change in which he argued that “the cost of attempts to make global warming go away will be very heavy. They may be levied initially on “the big polluters” but they will eventually trickle down to the end-users. Efforts to offset the effects on the vulnerable are well intentioned but history tells us they can only ever be partially successful. Will the costs and the disruption be justified by the benefits?” Pell then stated that “we must be sure the solutions being proposed are valid, the benefits are real and the end result justifies the impositions on the community.”

Pell’s lecture delved into history, in particularly the Middle Ages when temperatures warmed. But he left no doubt about his views on carbon, stating “as greenhouse operators recognize, plants produce better fruit and flowers when CO2 is increased to 1000ppmv. Californian orange groves are now thirty per cent more productive than 150 years ago and some of this improvement is attributable to the additional CO2 in the air. CO2 is not a pollutant. It is plant food. Animals would not notice a doubling of CO2 and obviously plants would love it. In the other direction, humans would feel no adverse effects unless CO2 concentration rose to at least 5000 ppmv, or almost 13 times today’s concentration, far beyond any likely future atmospheric levels”.

He also condemned climate change activists who he described as “not merely zealous but zealots.”

Pell was no stranger to controversy in Australia but his role as Cardinal-Prefect will give him direct opportunity to influence the investment policies of the Vatican, including its pension investments.

The Vatican is said to have assets of around $4.5 billion through the Vatican bank Istituto per le Opere di Religione, which invests primarily in fixed interest investments and equities.

Whilst restructuring the Vatican’s investments, Pell will also need to heed the Pope’s views on investment. At a conference in 2014 Pope Francis stated ”it is important that ethics once again play its due part in the world of finance and that markets serve the interests of peoples and the common good of humanity. It is increasingly intolerable that financial markets are shaping the destiny of peoples rather than serving their needs, or that the few derive immense wealth from financial speculation while the many are deeply burdened by the consequences.”

Pope Francis’ encyclical on the environment will raise a question as to how the Vatican approaches its own investments. Whilst Cardinal Pell is responsible for the Vatican’s investments it is unlikely that the Vatican will divest from fossil fuels but Pell may come under pressure to invest according to responsible investment practices.

350.Orgs Campaign to Divest the Vatican

One Christian Perspective on Climate Change Cardinal George Pell

Click to access pell-2011_annual_gwpf_lecture_new.pdf

Governments should nudge, not spend

Governments can use ‘nudges’ instead of spending to drive economic growth. An example is using regulation to expand ASX’s trial Equity Research Scheme that provides broker research for a selected number of small cap companies in order to support institutional investment in this market.

We are entering a new global phase where governments will not have the same fiscal power they once had. Governments can use ‘nudges’ to influence economic and social outcomes instead of traditional government spending on programs.

Over the last 100 years governments across the world started making promises they are now struggling to keep.

The first universal age pension promises were made by German chancellor Otto Von Bismark in 1889. The German Government promised to pay pension at the age of 70, dropping to 65 in 1916.

Bismark was a conservative who was the right hand man of Germany’s Kaiser Wilhelm. Bismark’s was motivated, not to address poverty amongst the aged, but to reduce the attractiveness of the emerging socialist party, which he attacked politically, including by passing the Anti-Socialist Law on 19 October 1878.

Bismark’s legacy has grown over the last 120 years as governments have added to their social contracts, establishing universal health schemes.

The problem that governments’ today face is that previous governments never fully funded their pension their promises at the time. Instead of putting away funds to cover future commitments politicians relied on the ability of future generations to fund pensions, age care and health services.

Life expectancy, which was 72 years when Bismark promised the old age pension at 70 is now 81.9 years at birth for the total population (males 79.48 and females 84.45). The funding requirement for government has expanded from 2 years to 16.9 years.

The ability to finance these commitments had one fundamental flaw. It relied on the structure of society to remain the same, that is, that the numbers of beneficiaries of age pensions and health services would be able to be supported by a larger proportion of the population that was in the workforce.

World War 2 produced demographic distortions that are as pronounced as at any time in human history. The effect was twofold. Firstly 50-70 million people were casualties of the War itself. Secondly following the end of the War soldiers de-mobbed. In Australia almost 600,000 Australians were demobilised in a process that commenced from 1 October 1945. The babies that were born over the next 15 or so years created an unprecedented demographic bulge. For many years this demographic bulge acted in our favour, providing nations with productive workers with an associated appetite to consume and drive economic activity.

The baby boomers are now rapidly approaching retirement. The first are now eligible for the age pension. Over the next 15 years baby boomers will progressively leave the labour force.

Within the decade however a significant proportion will retire. Age pension costs are just one bill governments will pay. Health costs rise with age. Age care costs will also increase significantly, although not as quickly as pension and health costs as the first period of retirement for baby-boomers is a period of relative good health.

None of this is news. Around 250,000 baby boomers turned 65 last year.

It is worth remembering that the first Intergenerational Report in 2002 projected that by 2042 the nation would face an annual budget deficit of $87 billion. One of the report’s central scenarios suggested that spending pressures will begin to rise from around 2017. But indications are that the demographic time bomb is coming early in the form of pressure on the health system.

The pressure on the hospital system is consistent with reports from the National Health and Hospitals Reform Commission who have noted that the two major drivers of demand for health services are an ageing population and higher rates of chronic disease, and that both these demand drivers are expected to accelerate over time, adding pressure across the entire health system.

The last Intergenerational Report in 2010 projected that by 2049-50 net debt would be around 20 per cent of GDP with the Budget in a deficit position of 3¾ per cent of GDP. Deloitte Access Economics has also considered the impacts on State Budgets, which are responsible for most health costs. They model that the State shortfall is almost 2½% of GDP by 2050, meaning that the total shortfall in national fiscal finances by 2050 would be just over 5% of GDP.

The key issue for both Federal and State governments is that no matter who is in power we can expect to see continued Budget pressure due to increases costs associated with the ageing of the population.

The pressure to produce Budgets surpluses is likely to lead to a year by year battle to reduce expenditure and increase revenues in order to pay the mounting pension and health costs. Considered over a medium term period such as 15 years – the period of time in which baby-boomers will transition to retirement – we are likely to see political parties make cuts consistent with their own priorities. This will result in what could be considered a jagged approach to cuts. Coalition Governments will seek to make cuts to welfare expenditure, whereas Labor Governments are likely to seek to pull back wealth concessions including for superannuation.

Overtime fiscal tightening and revenue raising can only go so far.

The question for progressive political parties, both here in Australia and globally is whether there are alternatives to this doom and gloom story. The answer is there is.

The challenge for progressive politics is to firstly understand that the power of governments to spend in order to address social, environment and economics issues will be reduced. Instead of proposing government spending as a solution, progressive politicians need to consider alternatives that produce the same outcomes. This is easier said than done and will require a fundamental change of both policy thinking and structures such as think tanks that can debate alternative approaches.

What may be called ‘Nudge Economics’ represents an alternative way of thinking around stimulating economic activity.

Cass Sunstein and Richard Thaler’s 2008 book Nudge proposed how governments could influence health, wellbeing and happiness through ‘nudges’ that would influence behaviour.

Whilst the book was focused on individuals, it is possible to utilise the nudge framework more widely for governments to ‘nudge’ economic activity.

One example of a ‘nudge’ is that governments could support the development of small cap companies by supporting broker research. Currently the debate on encouraging the development of small business focuses on different incentives that can be provided to entrepreneurs.

One alternative is to support the ability of capital markets to develop small cap listed companies.

There are currently around 2,200 companies that are listed on the ASX. The challenge that Australia’s capital markets face is that there are a large number of companies that are of insufficient size to attract investment from institutional investors. The lack of institutional investment interest in turns means that many companies are not liquid which in turn discourages brokers from providing research as broker research is paid for out of the revenues from share trading.

Academic research has demonstrated that there is a link between broker research and company valuations. Companies with increased valuations find it is easier to raise corporate finance and are likely to have stronger growth prospects.

In order to address the lack of broker research of small cap companies the ASX has established an Equity Research Scheme that provides broker research for a number of selected small and medium cap companies. The ASX Equity Research Scheme trial has the potential to be expanded to cover the whole market with in-depth, regular reports.

There are a number of potential ways that the funding for a small cap broker program can be raised.

State Governments may have an interest in paying broker research for small cap companies listed in their home state. It would certainly be cheaper to finance brokerage research than previous schemes where State Governments have competed for a company head office to be located in a particular city.

Alternatively the Federal Government could use regulation to require ASX to establish a broader scheme. The costs of the program could easily be paid for by the top listed companies in the ASX. Whilst it is difficult in a market environment for ASX to require larger companies to pay for the brokerage of smaller companies, since the program would benefit the overall health of the market there is a justification in regulation being used to require listed companies to support the scheme as part of their listing fees.

Having a program that supported brokerage of small cap companies would create an environment that would encourage small cap companies to list in Australia. It would improve the quality and depth of liquidity of small cap companies which in turn would support increased valuations and the growth of smaller companies.

Over the course of 2015 I will write about more potential ‘economic nudges’ that can drive economic activity.


ASX Equity Research Scheme

Carole Comerton-Forde, David R. Gallagher, Joyce Lai and Terry S. Walter, University of Melbourne – Department of Finance , UNSW Business School , University of New South Wales and University of Sydney, Broker Recommendations and Australian Small-Cap Equity