How to manage house price increases caused by foreign investment

This week I had a good chat with a London cabbie who besides bemoaning England’s cricket team, said that one of the results of the property boom in London is that he rarely gets fares to Chelsea, which has emptied out as properties are bought by foreigners who do not reside in them. The story of foreign investors driving up property prices is the same in other global cities including New York, Toronto and Paris.

Returning to Australia, the subject of rising house prices is reaching fever pitch. With the real economy declining as a result of the fading of the resources boom, and with banks curtailing their investment lending, the finger is being squarely pointed at foreign investors.

The demand by foreign investors for property is a global phenomenon. And much of the investment is from emerging markets where individuals are seeking to transfer wealth to countries where the rule of law means provides long term security.

The desire to transfer assets from the developing world to the developed world is likely to be a permanent feature of the new global economy. But what are the implications?

In the short term governments may be happy to see housing markets buoyant and local construction stimulated, but in the long term are we creating economic imbalances?

The danger is that rising property prices in global cities will ultimately make these cities uncompetitive as higher wages and higher rents makes the cost of running a business unaffordable. The increasing cost of operating in the world’s global cities, may in turn cement the divide between the developing and developed world where business costs will be lower. The cycle of property investing is therefore likely to continue as wealth will continue to be built in developing countries and transferred to property investments in global cities.

What should governments and investors do?

The first thing is that there is a need to establish sensible constraints on the flow of capital.

Singapore took an early lead in this direction in 2011, introducing a foreign buyers’ sales tax, which is now 18%, after property prices boomed by 20-30% in 2008-09. Singapore provides exemptions from the sales tax for certain countries, the result of which has been to stabilise property prices.

We may also need legislation to prevent hoarding of housing. Requiring investors who do not rent out a property to pay a special levy may be one option that could ensure that increased housing supply actually results in an increase in availability of rental properties.

By structuring foreign sales taxes at a rate that allows for sensible investment there is the potential to raise revenue that could be used in ways that are in the long term interest of cities. Taxes on empty households and foreign buyer sales taxes are a good way of financing infrastructure, urban development and affordable housing.

The final area of focus needs to be on governance of emerging markets. We need to create a global environment where private wealth feels secure investing for long term in the economies where they create wealth. With growth in emerging markets likely to be higher than growth in developed countries it is also in the interest of institutional investors to focus on improving governance, which would allow greater flows of pension capital to be allocated to growth regions. This means that institutional investors should actively support measures to crack down on corruption wherever it may occur.

Foreign capital has the potential to be a source of development that can stimulate local economies, but like fire it is a good friend, but bad master, and must be managed.

Scientists call for action on radiation risks from mobile phones and wifi devices

Last week a global group of 190 scientists issued an international appeal, calling on the UN Secretary General and UN member states to address the risks of non-ionizing electromagnetic fields, which include radiofrequency radiation (RFR) emitting devices, such as cellular and cordless phones and their base stations, Wi-Fi, broadcast antennas and smart meters.

The scientists included Dr. Charles Teo, a prominent neurosurgeon at the Prince of Wales Hospital in Sydney, who founded the Cure Brain Cancer Foundation and publicly addressed the US Congress as part of US President Barack Obama’s vision to explore and map the human brain. Dr Teo has publicly warned that exposure to radiation should be minimised.

The action by the scientists comes on the back of the listing by the World Health Organisation of radiation from mobile phones as a possible carcinogen. The number of scientific studies showing links between radiation and a range of biological impacts – including cancer – continues to grow. The insurance industry refuses to provide insurance coverage against health impacts of radiofrequency radiation exposure. Why is it that so little is being done by governments to address the risks from the growing proliferation of radiation devices?

A small number of MPs have spoken up against the dangers of radiofrequency radiation with Greens Senator Scott Ludlum the most prominent, but they have been met with a wall of opposition from Labor and the Coalition.

It is hard not to conclude that governments themselves are conflicted. Governments receive significant revenues from the auction of spectrum and many government authorities also receive income from rent of public spaces for mobile phone towers. Governments may also face future legal claims for authorising the use of radiation exposure.

The risks from radiofrequency radiation are growing. NBN towers are now being installed across the country, with locals fighting to stop the installation of towers next to schools. Public education has become flooded with radiation. Every child in Victoria’s public education system is exposed to routers that have the capacity to simultaneously download content for a whole class on ipads and wireless devices.

When we look at the scientists that have joined together to raise the risk of radiofrequency radiation exposure, what we see is a lack of commercial self interest. These scientists are not funded by the corporate sector and indeed face the risk of campaigns against them if they speak up publicly – as Dr Teo has experienced first-hand.

Nevertheless they have the courage to speak out.

What we need is the courage to listen.

A full transcript of the scientists’ international appeal follows:

To: His Excellency Ban Ki-moon, Secretary-General of the United Nations, Honorable Dr. Margaret Chan, Director-General of the World Health Organization, U.N. Member States

Scientists call for Protection from Non-ionizing Electromagnetic Field Exposure

We are scientists engaged in the study of biological and health effects of non-ionizing electromagnetic fields (EMF). Based upon peer-reviewed, published research, we have serious concerns regarding the ubiquitous and increasing exposure to EMF generated by electric and wireless devices. These include–but are not limited to–radiofrequency radiation (RFR) emitting devices, such as cellular and cordless phones and their base stations, Wi-Fi, broadcast antennas, smart meters, and baby monitors as well as electric devices and infra-structures used in the delivery of electricity that generate extremely-low frequency electromagnetic field (ELF EMF).

Scientific basis for our common concerns

Numerous recent scientific publications have shown that EMF affects living organisms at levels well below most international and national guidelines. Effects include increased cancer risk, cellular stress, increase in harmful free radicals, genetic damages, structural and functional changes of the reproductive system, learning and memory deficits, neurological disorders, and negative impacts on general well-being in humans. Damage goes well beyond the human race, as there is growing evidence of harmful effects to both plant and animal life.

These findings justify our appeal to the United Nations (UN) and, all member States in the world, to encourage the World Health Organization (WHO) to exert strong leadership in fostering the development of more protective EMF guidelines, encouraging precautionary measures, and educating the public about health risks, particularly risk to children and fetal development. By not taking action, the WHO is failing to fulfill its role as the preeminent international public health agency.

Inadequate non-ionizing EMF international guidelines

The various agencies setting safety standards have failed to impose sufficient guidelines to protect the general public, particularly children who are more vulnerable to the effects of EMF.

The International Commission on Non-Ionizing Radiation Protection (ICNIRP) established in 1998 the “Guidelines For Limiting Exposure To Time-Varying Electric, Magnetic, and Electromagnetic Fields (up to 300 GHz)”[1]. These guidelines are accepted by the WHO and numerous countries around the world. The WHO is calling for all nations to adopt the ICNIRP guidelines to encourage international harmonization of standards. In 2009, the ICNIRP released a statement saying that it was reaffirming its 1998 guidelines, as in their opinion, the scientific literature published since that time “has provided no evidence of any adverse effects below the basic restrictions and does not necessitate an immediate revision of its guidance on limiting exposure to high frequency electromagnetic fields[2]. ICNIRP continues to the present day to make these assertions, in spite of growing scientific evidence to the contrary. It is our opinion that, because the ICNIRP guidelines do not cover long-term exposure and low-intensity effects, they are insufficient to protect public health.

The WHO adopted the International Agency for Research on Cancer (IARC) classification of extremely low frequency electromagnetic field (ELF EMF) in 2002[3] and radiofrequency radiation (RFR) in 2011[4]. This classification states that EMF is a possible human carcinogen (Group 2B). Despite both IARC findings, the WHO continues to maintain that there is insufficient evidence to justify lowering these quantitative exposure limits.

Since there is controversy about a rationale for setting standards to avoid adverse health effects, we recommend that the United Nations Environmental Programme (UNEP) convene and fund an independent multidisciplinary committee to explore the pros and cons of alternatives to current practices that could substantially lower human exposures to RF and ELF fields. The deliberations of this group should be conducted in a transparent and impartial way. Although it is essential that industry be involved and cooperate in this process, industry should not be allowed to bias its processes or conclusions. This group should provide their analysis to the UN and the WHO to guide precautionary action.

Collectively we also request that:

1.children and pregnant women be protected;
2.guidelines and regulatory standards be strengthened;
3.manufacturers be encouraged to develop safer technology;
4.utilities responsible for the generation, transmission, distribution, and monitoring of electricity maintain adequate power quality and ensure proper electrical wiring to minimize harmful ground current;
5.the public be fully informed about the potential health risks from electromagnetic energy and taught harm reduction strategies;
6.medical professionals be educated about the biological effects of electromagnetic energy and be provided training on treatment of patients with electromagnetic sensitivity;
7.governments fund training and research on electromagnetic fields and health that is independent of industry and mandate industry cooperation with researchers; disclose experts’ financial relationships with industry when citing their opinions regarding health and safety aspects of EMF-emitting technologies; and
9.white-zones (radiation-free areas) be established.


Investor response to Four Corners Slaving Away Program should be to advocate for legislation

Four Corners’ Slaving Away program has lifted the lid on the way over 150,000 workers on 457 visas are being ruthlessly exploited to deliver fruit and vegetables to our dinner tables.

The program reveals that for many Australia is not the “Lucky Country” but a place where the basic entitlement of fair work for fair pay does not exist . The fact that Australia has become a home of such practices should be a national shame.

For investors there is no question that this is an issue that we should engage on.

But what should we do?

Writing letters to Coles, Woolworths and other supermarket chains is an obvious action, but letter writing will not put the sustained pressure that will result in a change of behaviour.

My view is that investors should be advocating for legislation modelled on the California Transparency in Supply Chains Act, which was passed through California’s Senate in October 2010, becoming law on January 1 2012.

The law requires all retailers and manufacturers with annual global revenues of more than $100 million that do business in California to disclose information about their efforts to eradicate slavery and human trafficking from their direct supply chains where they make tangible goods for sale.

Businesses are required to publicly post information on their websites describing the extent to which they engage in the following:

Verification: Verify product supply chains to evaluate and address risks of human trafficking and slavery;

Auditing: Perform supplier audits to evaluate compliance with company standards;

Certification: Require certification by direct suppliers that materials incorporated into company products comply with the laws regarding slavery and human trafficking of the country or countries in which they are doing business;

Internal Accountability: Maintain internal accountability standards and procedures for employees or contractors that fail to meet company standards on slavery and trafficking; and

Training: Train relevant company employees and management on human trafficking and slavery, particularly concerning the mitigation of risk within supply chains.

Legislation will provide a mechanism for investors to assess whether companies have the risk management practices in place to ensure that workers are not being exploited.

Australian investors who do not have a depth of knowledge around slavery issues should look to partner with stakeholders that do. The best is Verité, an international not-for-profit consulting, training, and research NGO which works to ensure that people around the world work under safe, fair, and legal conditions.

According to Verité, “it is impossible to identify the hidden and insidious abuses of human trafficking and forced labour unless a company examines all aspects of workers’ employment, from the moment of recruitment to on-site employment, across the entire supply chain. If companies are serious about eradicating trafficking and forced labour, they must also look beyond their first-tier suppliers to ensure that businesses deep in their supply chains are mirroring their own commitments”.

The South Australian Government this week announced a parliamentary inquiry in response to Four Corners’ program. The inquiry provides a clear mechanism for investors to advocate solutions. By working together we have the capacity to change individuals’ lives.

Four Corners Slaving Away

Compliance is Not Enough: Best Practices in Responding to The California Transparency in Supply Chains Act

Click to access VTE_WhitePaper_California_Bill657FINAL5.pdf

My brush with Customs on Drugs, Indonesian executions and what it all means for investors

The executions of Australians Myuran Sukumaran and Andrew Chan in Indonesia are a tragedy with implications for investors.

The story of Filipina drug courier Mary Jane Veloso, who was scheduled to be executed but received a late minute reprieve after her alleged recruiter turned herself into police in Philippines, should concern everyone.

My own experience with Australian Customs occurred in when I travelled to South Korea for the UN Principles for Responsible Investment’s second annual conference in 2008.

At the time I had been working for the Secretariat of the PRI. Because the PRI was in its infancy and had very few resources, the PRI team stayed at a back packer hostel in Seoul.

When I checked into my room I was pleasantly surprised that it was a good size and had everything I needed. I saw some white powder on the floor and assumed it must be make-up from a previous occupant. I thought nothing more of it.

Over the next couple of days I ran around the PRI Conference, staying up late and only coming back to the room to sleep. I would throw my old clothes on the floor, gathering them all up in my bag at the end of my brief stay.

Flying back into Australia I was glad to be home. As the Customs dog sniffed my bag I didn’t blink an eyelid. I was then called across for a bag examination. The Customs official went through everything in my bag, pulling out toys I had bought for the kids and examining my note book for my scrawling.

After a while he said to me “you are probably wondering why we are doing this.” Actually to be honest I hadn’t, I just thought it was a standard check. He then told me that my bag had come up with drug traces.

At this news my heart raced and it was only then that the powder in the back packer hostel took on a new, more sinister meaning.

I am glad to say that Australian Customs accepted by explanations and I was able to head home – but what would have happened if I had been in another country?

In Australia we take for granted that we have a justice system and rule of law that provides us with protections. In the case of Mary Jane Veloso, her life was put at stake because she was duped by a drug courier, who only confessed when the guilt that her actions were going to be responsible for the taking of a life became too much to bear.

So what does this all have to do with investors?

Actually a lot.

One of the biggest conversations that is occurring in the investment world at the moment is how do we meet the needs of retirees in a low yield environment.

Investment returns are certainly likely to be lower in the coming years in the developed world, but the developing world offers great opportunities. The rise of Africa, South America and South East Asia are all mega-trends we have heard about, and they should create long term investment opportunities. For insurers in Europe whose business model is under threat due to low yielding bonds, developing countries offer a solution as they do for Australian investors seeking a comfortable retirement.

Standing in the way of these returns is the justice systems of developing countries. A lack of confidence in the rule of law is one of the major reasons why institutional investors baulk at investing in developing countries.

The tragic irony of the story of Myuran Sukumaran and Andrew Chan is that drugs were freely available in prison, and the local police continue to play a large role in drug trafficking. The lesson for investors out of this week’s tragic events is to highlight how important justice systems are to investment. They provide the foundation upon which investment can then be built with confidence.

The global need to find higher yielding investments should provide strong incentives for investors to support collaborations that are designed to increase the transparency of justice systems around the world. This is not just someone else’s problem, it is also our problem.

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.