Developing a model for community bonds

In October 2016 Gordon Noble and Ingo Kumic presented to the National Economic Development Conference in Perth ideas on how to establish community bonds. The following is an edited extract of the paper developed for the conference.

To obtain the full paper email

Can Local Government and Superannuation Funds Become Partners?

The subject of this paper is whether there are sufficient areas of common interest to make it economic for superannuation funds to develop partnerships with local government. If there is sufficient common interest, then the secondary question then is how best could a partnership be structured?

The importance of ‘partnerships’ and ‘partnership based’ approaches are now seen as fundamental to delivering city futures.

With globalisation driving the process of urbanisation, the pressure on cities to keep pace is increasing. While in the past many of the services and long term strengthening requirements for cities were largely met by local government, now cities are faced with an exponential increase in the quantum of services and long term development needs. As a result, this can no longer be delivered by one entity and as such requires a convergence or partnership across the public, private and civil sectors to meet the needs of cities and their communities.

The challenge with the word ‘partnership’ is that it means different things to different people and in an operational sense takes on very different complexions, with everything from Public Private Partnerships through to Community Partnerships characterising the landscape.

While the form of agreement that binds partnerships can look very different there are three things that all successful partnerships must have. They must have alignment on the mission they seek to complete, they must agree to the pace of delivery and, they must agree on what constitutes a reasonable return on investment or if you like, success .

This section will deal with the key challenges confronting a possible alliance between local government and superannuation funds, high level principles that might underpin this alliance, and the fundamental mechanics of a partnership arrangement and service ecosystem required for delivering ‘community futures’ at the local level. Finally we will consider potential investment opportunities and investment models.

Defining Areas of Common Interest

To determine whether there are opportunities for Australian superannuation funds to partner with local government, it is necessary to define areas of common interest.

Superannuation funds are likely to have an interest in partnering with local government because of its rich and diverse asset base. However this is conditional on these ‘investable opportunities’:

• Providing sufficient liquidity to enable sale in a timely manner to meet member needs
• Are structured in such a way to minimise due diligence and transaction costs
• Are scalable and repeatable, providing an opportunity to allocate new capital
• Offer the prospect of investment returns with a low probability of investor loss of capital
• Offer cost structures consistent with other investments in superannuation portfolios
• Diversify an investment portfolio
• Have different correlations to other assets, that is the value of the investment does not change in the same way as existing investments in a portfolio in response to particular events

Local government is likely to have an interest in partnering with superannuation funds because of its access to investment opportunities and its expertise in maximising the commercial function and impact of an asset. However this is conditional on these ‘investable opportunities’:

• Delivering for the local community
• Are developed in a manner which is inclusive of the community, ie reflect a ‘place-based’ approach.
• Are compliant with Local Government Act
• Provides a return on investment for the local authority in order to finance and or fund further investments
• Employ approaches/ mechanisms that assist in the mitigation of financial exposure
• Align with local government decision making and gateway processes

From ‘plan and wait’ to ‘plan and make it happen’

In order to move towards these more innovative financing and funding approaches local government must see these options as business as usual. The innovation required of local government can best be surmised as a shift from a ‘plan and wait’ approach to a ‘plan and make it happen’ model.

While there are exceptions, local government ‘business as usual’ is largely characterised by sound competencies in the comprehensive planning of community futures and the identification of specific opportunities which could make a difference. However, it is rarely in a position to deliver these in a substantial manner.

This is largely an historical consequence of the relative authority or power to be self-determining handed it by State and Federal Government.

In essence, local government has been empowered to be a local policy and planning authority which by its very nature means it creates performance frameworks with which to assess the merits of the investment proposals of ‘others’. Local government has little, as they say, ‘skin in the game’.

The nature of urbanisation challenges are such that it now requires local government to not only have ‘skin in the game’ but to drive the game.

Rather than wait for and manage the investment proposal of others it must develop its own investment partnership and facilitation competency in order to drive and manage the investment its communities require.

Sitting at the heart of this is a new ecosystem which is dedicated to the identification of suitable investable opportunities, the development of investment partnerships, and the establishment of sophisticated funding and financing vehicles which connect to the massive flows of private and institutional capital currently circulating within superannuation funds.

Other key considerations required to manage the relationship between local government and superannuation funds ultimately leading to a condition which:

• Aligns the mission of industries/ businesses which have no historical working relationship,
• Establishes an ecosystem of actors with the agency and flexibility to connect the fine grain of investment opportunity at the local government level with the meta-structures and flows of capital that characterise the super industry
• Embeds a way of working that reflects traditional decision making gateways and accountabilities consistent with both.

Place-based working

It is important to note that no other entity understands the complete material and immaterial requirements of a local community as well as local government. As such, local government also understands that it is not the technical quality of a solution which serves as the greatest threat to delivering an asset and realising its value but is instead the poor political resolution of the change that this solution or asset implies.

If the superannuation industry is to capitalise on the massive investment potential at the local level then local government and a ‘place-based’ approach to strategic analysis and solution identification for the project is critical.

Local government is moving into unknown territory largely brought on by an unprecedented level of urbanisation which shows no signs of slowing . This necessitates innovative approaches to, amongst other things, the way in which local government leads and manages its business.

While on the one hand local government must innovate the way in which it finances its local futures, it must also ensure that the process by which it does this reflects a sophisticated political approach.

To this end, research increasingly reveals that place-based approaches to ‘making cities’ are gaining momentum as the most effective way of achieving and sustaining an empowered, inclusive and ultimately resilient society and by which local government plans, delivers and monitors its business

According to Burkett (2012), ‘place-based working’ also holds the key to ‘catalysing new and innovative investment strategies that create real change’ in our communities. In a recent study on place-based impact investment, Burkett (2012) notes that ‘place-based approaches are gaining currency internationally as a mechanism for growth and human capital development’. Through an extensive undertaking, Burkett concludes that place-based impact investment further extends the idea of invest strategies such as ‘impact investment’ by focussing an alliance of public, private and NFP interests for the benefit of a specific community. As Burkett goes on to note, ‘it is an opportunity for investment leaders and visionaries looking to take the first step towards building new markets that generate (social and environmental) impacts in addition to (financial) returns’ (Burkett 2012)

Place-based approaches are predicated on the simple idea that change is inevitable and in order to make change work in a positive way it is important to engage those communities most likely to be impacted by that change. There are two components which therefore underpin all effective place-based approaches:

1. Relationships to develop and sustain with and for a community, and the
2. Design processes used to enable a community’s future.

Design comprises of two components, planning and strategy. Place-based design approaches invariably use human-centred design methods such as participatory design, co-design, and co-creation to name but a few.

At its most fundamental, ‘design’ reveals both a theory of change for a community and the likely social impact of that change and does so by, amongst other things, ensuring that:

• The community is integral to decisions about their place
• A culture of patronage and responsibility is built for place futures
• Political representation at the heart of the co-creation process with the community, and
• There is an investment, people and program alignment.

Investment Opportunities

It is important when discussing potential ‘investment opportunities’ for a local community, or in city futures, that a distinction is made between what we are investing in and how that investment is structured.

Typically investment is required when a need arises, that is when a community experiences either a decline in, or seeks to enhance its social, economic and environmental state. The former is referred to as responding to ‘deficit need’ the latter to ‘asset need’. When dealing in community futures we typically deal with a complex arrangement of both brought about by structural changes to local economies, labour markets and demographics, shifts in household or personal circumstance concerning income, education and employment or changes to commercial activity and investment in the local economy.

To this end we believe that there is a need for a new asset class known as ‘Community Futures Investments’ (CFI). This would typically focuses on both the hard and soft community infrastructure required for the long term change and impacts complex local communities seek.

CFI is an umbrella term for the three core investment strategies that characterise the investment landscape and which are highly applicable to a local government context.

The first is traditional philanthropic or grant base. Its return on investment is purely social or environmental. This type of investment strategy will suit those things which have no possibility of generating a financial return or where trying to exact a financial return would compromise the fundamental social or environmental reason for the asset. Examples are graffiti removal, business attraction and community art development.

The second is a relatively new category known as impact investing that can be considered part of the broader responsible investing approach. Impact investment seeks to generate ‘blended value’, in which social and environmental return is the dominant expectation albeit not at the exclusion of financial returns. This investment strategy will suit those things which may be required to defy market dynamics in order to yield the social or environmental impacts being sought. Examples include affordable housing, refugee entrepreneurship, social or environmental start-up/ SME. According to industry estimates the market size for Impact Investment in Australia is up to $10 billion. Currently Impact Investment in Australia is focussed on the social services sector, housing and on sustainability agendas, however there is potential for this to extend to include community economic development and small business”. (Burkett. I 2012 Place-based Impact Investment in Australia: A Literature Review Exploring Opportunities for Place-based Impact Investment in Australia)

The third is what we understand as traditional investment where financial returns are the dominant expectation albeit, not at the exclusion of the social, environmental or economic outcomes associated with the asset itself. This investment strategy will suit those things that can reflect market value and still sustain its community benefit. Examples of potential investments include renewable energy infrastructure, multi-purpose hubs, co-working spaces and community sporting facilities.

Because this paper is concerned with exploring the possible relationship between local government and superannuation funds, the remainder of this section will focus on how this relationship might be conceived in the context of the impact investment and traditional investment space.

To this end, designing appropriate investment structures and vehicles suitable for the task of investing in communities is crucial. At the core of this challenge is “developing a pipeline of investment proposals that link the need and opportunity in under-invested communities with appropriate investment structures and vehicles through which investors can participate”. (Burkett. I 2012)

The Potential – Community Assets

Local government is a significant owner of community infrastructure assets. According to the National State of the Assets 2015 produced by the Australian Local Government Association, 230 councils (represents 41% of Councils across Australia) are managing a total of $180 billion in infrastructure with a gross replacement value estimated in excess of $438 billion.

• Roads representing $73.7 billion, with $8.2 billion (11%) in a poor to very poor state.
• Buildings & Facilities representing $30.3 billion, with $3.1 billion (10%) are in a poor to very poor state.
• Parks & Recreation representing $7.9 billion,
• Stormwater representing $33.3 billion, with $3.1 billion (9%) are in a poor to very poor state.
• Water & Wastewater representing $33.5 billion with $4.1 billion (12%) are in a poor to very poor state.
• Airports & Aerodromes representing $0.8 billion with $0.1 billion (12%) in a poor to very poor state.

Areas of potential focus for possible future partnership between local government and super funds might include:
• Development of regional airports
• Development of buildings and facilities such as community-hubs, leisure and recreation facilities, co-working space etc
• Development of ICT and ‘smart’ infrastructure
• Development of ‘green’ infrastructure

In contrast to the investment potential in ‘hard’ infrastructure, there are also many opportunities to invest in the ‘soft infrastructure’ of local communities and create a more resilient community.

This can primarily take the form of investment in businesses which are capable of delivering on local government objectives concerning key social, environmental and economic outcomes.

Investment Structures

Investors have a wide range of investment structures that are used depending on the investment. Broadly speaking, investments can be categorised as either equity or debt investments. Whilst over simplistic, equity investments are characterised by large potential upside and large potential downside whereas debt investments are characterised by a small potential upside, but still have the potential for a large downside.

The remaining focus of this paper is the potential to develop community bond instruments. This is not to suggest that there are not opportunities for equity investments in local government. Many assets, including swimming pools and regional airports have the potential to be sold in an open market. However equity investments, with their larger returns to investors are perhaps not the best first step in establishing a long term and sustainable partnership.

Community Bonds

It is proposed to develop a Community Futures Investment Initiative that would establish a framework for institutional investors to invest in community bonds.

The objective of a Community Futures Investment Initiative would be to package up debt investments, or debentures, to support investment in small scale community assets that would otherwise not be investable from an institutional investment perspective.

Debentures are a traditional structure that has been used by community groups to raise funds to develop community assets. There are many examples of the use of debentures to finance community assets. Perhaps the best known debenture is Wimbledon which has historically used the vehicle to fund capital investment, with debenture holders entitled to seats at Centre Court over the period of the investment. Wimbledon Debentures are traded on the London Stock Exchange.

In Australia many community assets have been built by communities pooling resources and issuing debentures. The reasons that communities came together depended on their individual interests and needs. The desire to have a place in the local community to be able to socialise was a common factor behind the development of club rooms for a range of sports including sailing, football, golf and bowling.

An example is the Mounties Club which was originally established by a group of locals from the Mt Pritchard community in the 1920’s who simply wanted to have a place to have a beer, and didn’t to have to travel to the nearest pubs in Cabramatta. In an era before sophisticated financial services laws it was a relatively simple thing to issue debentures with Mounties raising £300 to fund its initial activities. Another example is the Mulgrave Country Club. In 1960, 18 people in the outskirts of Melbourne’s growing suburbs got together and committed to a debenture to purchase 5 acres of land.

Some community initiatives, such as the case of the Mounties Club in NSW have gone on to be significant businesses. The Club now has 104,956 members with assets of $256,973,099 and gross revenues in 2014-15 of $584,672,586. In its latest annual report the Mulgrave Country Club delivered a net profit of $1,979,748. With total net assets in excess of $21 million the Club has been able to reduce its bank loan for building redevelopment from $9.4 million to $4.75 million. Other community assets, such as Neerim District Show, which was established in 1925 when the local community purchased a parcel of land, whilst they have not grown significantly, have continued to serve their original purpose.

The past development of community assets may provide lessons that can be applied to developing a framework for future community asset development. The features of successful community assets are:

1. Development of a funding base
Community Assets that were able to develop a sustainable funding base have been able to survive and grow over time. The desire to drink and socialise provided a sustainable funding base for many communities. But other activities have also been able to provide a stream of income to finance activities.

2. Diversity of needs
Communities have come together to build community assets for many different reasons. One particularly interesting story is the development of the Kiama Alpine Club which was established due to the efforts of a Ukrainian migrant couple who migrated to Australia after World War 2 and who simply wanted to ski as they had in Europe. The couple were able to convince the local Thredbo community to purchase land and construct a 12 bed lodge, with debentures providing the source of funds.

3. Governance
Communities that have been able to establish community groups that serve their interests have had strong local governance. The first act of newly established community organisations is to establish a governance structure that creates an accountability mechanism for decisions.

Needs Have Changed

Over the decades community interests and needs have changed. The role of community organisations and community assets have subsequently changed. Examples include the development of automobile clubs in Australia. The role of clubs in the early years included negotiating with country hoteliers to stock fuel, making them Australia’s first petrol stations. Following complaints regarding the interactions between vehicles and horse drawn vehicles, clubs were given responsibility to issue Competency Certificates, the forerunners of today’s driving licences. The development of the Men’s Shed movement is an example of community assets being repurposed. According to the Australian Men’s Shed Association there are now 930 Men’s Sheds across the country that are commonly in buildings that were previously established for other purposes.

Local Government Capital Market Experience

Local Governments recently developed expertise to tap global capital markets. A case study is the Local Government Funding Vehicle which was originally established to finance local government defined benefit superannuation obligations. In June 2016, the Local Government Funding Vehicle raised A$100 million in its second domestic deal at an issue yield of 3.64%. The bond was arranged by Commonwealth Bank of Australia and National Australia Bank. The bond was rated Aa2, defined as investment grade. LGFV have now raised a total of A$340 million. The Local Government Funding Vehicle has the following features:

• Local Councils in Victoria established the LGFV Program Trust as the structure through which an aggregated portfolio of Council Loans bonds were issued to institutional investor.
• Bonds were issued by National Australia Trustees Limited in its capacity as trustee for the LGFV Program Trust.
• In accordance with the LGFV Program Trust Deed National Australia Managers Limited was appointed as Trust Manager
• Proceeds from bonds are used to provide loans to Councils under Council Loans Agreements.
• Security for the bonds consists of Issuer’s rights under all Council Loans provided to the Councils. Council Loans are, in turn, secured by a security interest granted in favour of the Issuer over the general rates of the Council.
• The Issuer is a pass-through conduit without any credit tranching of the Notes. It is therefore the credit strength of the Councils that participate in the LGFV Program which underpins the credit strength of the Issuer and the Notes.
• The Issuer is a special purpose trust, and its only assets, and the only assets available to meet the obligations of the Issuer, are its rights under the Council Loan Agreements and related Council Security,
• A governance board (known as the LGFV Governance Board) was established under the terms of the LGFV Program Trust Deed. The LGFV Governance Board conducts a range of functions including due diligence with respect to the participation of a Council in the LGFV Program.

By acting collectively the bond issuance enabled 33 Victorian Councils to access debt at interest rates that are far more attractive than would have been provided by banks under normal commercial terms. The collective bond structure was first utilised when local governments were faced with defined benefit pension liabilities resulting from the collapse of capital markets during the Global Financial Crisis. The bonds are offered to institutional investors around the world including Australian superannuation funds who, through their investment managers have access to the bonds as part of a diversified fixed interest portfolio.

It is proposed that a collective vehicle, similar to the structure established by the Local Government Funding Vehicle could be developed that would provide the opportunity to support the development of community assets that have a funding base.

There are a number of areas that community bonds could be utilised.

Case Study: Climate Bonds Initiative

The concept of a Community Futures Investment Initiative is based on the success of Climate Bonds Initiative.

The idea around community bonds is to enable institutional investors, through capital markets, to invest in communities in a similar to the way that community assets were historically developed through local communities investing in debentures.

The Climate Bonds Initiative started as a project of the Network for Sustainable Financial Markets (NSFM), an international network of finance sector professionals, academics and others dedicated to improving financial market integrity and efficiency. See:
An international process of collaboration developed an architecture for definitions of Climate Bonds. This aimed to provide greater certainty for investors about the climate benefit of their investments. Certification is available for assets and projects that meet the requirements of the Climate Bond Standards. In order to receive the “Climate Bond Certified” stamp of approval, a prospective issuer of a Green or Climate Bond must appoint an approved 3rd party verifier, who will provide a verification statement that the bond meets the Climate Bond Standard. The Climate Bond Standard allows Certification of a bond prior to its issuance, enabling the issuer to use the Climate Bond Certification Mark in marketing efforts and investor roadshows. The Climate Bonds Standards Board (comprised of members representing $34 trillion of assets under management) confirms Climate Bond Certification once the bond has issued and the proceeds have been allocated to projects and assets.

A key component of the Initiative is the Climate Bonds Standard & Certification Scheme (“Certification Scheme”). The Certification Scheme allows investors, governments and other stakeholders to prioritise ‘low carbon and climate resilient’ investments with confidence that the funds are being used to deliver a low carbon and climate resilient economy. A Scientific Framework underpins the definitions of which projects and assets are consistent with a low carbon and climate resilient economy and therefore eligible for inclusion in a Certified Climate Bond.

The Certification Scheme includes robust frameworks for monitoring, reporting and assurance of conformance with the Climate Bonds Standard. An international Climate Bonds Standard Board comprised of large institutional investors and leading environmental NGOs provides ongoing oversight of the Certification Scheme as well as decisions on Certifications. Day-to-day operations and decision making is delegated to the Climate Bonds Standard Secretariat.

Pre-issuance requirements focus on selection of eligible projects and assets, as well as the issuer’s stated internal processes to track and report on use of proceeds. Pre-issuance certification enables the issuer to use the Climate Bond Certification in marketing efforts and investor road shows. On the investor side, it allows bonds with robust environmental performance to be prioritised.

Post-issuance requirements focus on the actual use of proceeds, ongoing eligibility of the projects and assets, use of funds not yet allocated and the adequacy of and output from the issuer’s internal systems. To maintain the Climate Bond Certification, post-issuance certification must be confirmed within one year after issuance of the bond.

Post-issuance certification allows the issuer to demonstrate to investors that their bond meets the requirements of the Climate Bond Standard following its issuance. Post-issuance certification is valid for the term of the Climate Bond, as long as mandatory annual reporting requirements are met.

Features of a Community Futures Investment Initiative

It is proposed that a Community Futures Investment Initiative would provide a mechanism for superannuation funds to invest in a group of community assets. A CFII would establish a framework based on the Climate Bonds Initiative that would have the objective of providing assurance to investors that community bonds meet the following principles:

• The community is integral to decisions about their place
• A culture of patronage and responsibility is built for place futures
• Political representation at the heart of the co-creation process with the community, and
• There is an investment in people and program alignment.

A Community Investment Funding Vehicle (CIFV) would be established that would be based on the successful model of the Local Government Funding Vehicle. Specifically a CIFV would have the following features:

• Community Investment Program Trust would be established as the structure through which an aggregated portfolio of community loans were issued to institutional investor.
• Security for community bonds would consist credit enhancement that could be provided by Councils and other stakeholders. In the event that a community group defaulted on a bond, then credit enhancement would ensure that super funds did not bare first losses.
• A governance board (known as the Community Investment Governance Board) would be established under the terms of the Community Investment Program Trust Deed. The governance board would be responsible for working with local community groups to develop enhanced accounting and governance practices. Support would be sought from Federal and State Government to build community capabilities.

The Way Forward

This paper has outlined the benefits of developing a partnership between local government and superannuation funds.

Through the establishment of a Community Futures Investment Initiative and Community Investment Funding Vehicle we have identified one mechanism by which capital investments could be made.

However the potential for partnership in no way guarantees that progress will be made. Local government and superannuation funds have very different cultures. There is little knowledge from the respective parties on how each operates, and the constraints each faces.

In order to progress this discussion we are recommending the establishment of a Local Government- Superannuation Investment Forum.
We believe that there is a need to establish structures to enable communication between local government and superannuation funds. The functions and activities of the Forum should be subject to negotiation.

One of the core functions of a Local Government- Superannuation Investment Forum could be to review the understanding of different State Local Government Acts relating to the operation of local government and where necessary prepare submissions highlighting the conditions necessary to enable local government to engage in innovative financing of community futures.

We believe there is value in establishing a demonstration project that would have the objective of providing a learning opportunity for both superannuation funds and local government, and could showcase:

• Alignment of mission of local government and super funds,
• The ecosystem of actors and agency required to connect to fine grain of investment opportunity at the local government level
• A way of working based on place-based approaches

Preparing for the Next Asthma Storm

asthmaThe week started hot in Melbourne. The temperature climbed to 38 degrees Celsius, supported by a northerly breeze that blew in from grasslands north of the state. The change came in late afternoon. The dark clouds on the horizon were black and ominous.

If you live in Melbourne this kind of weather is a familiar story.

How could a storm, that we all have come to expect, lead to the deaths of four people, with many more in intensive care units and thousands and thousands of people treated, some in hospitals, some in doctor’ surgeries for asthma.

This is an area that our family has had some experience in.

It was the reason that we left Sydney, after a summer of hospitalisations of our then two year old son.

The technical explanation is that when there is a lot of pollen in the air, the storm leads the pollen to swell. When the storm sweeps in the pollen in the upper atmosphere is condensed. The electrical currents then split the pollens into miniscule particles. The pollen effectively becomes a thousand times more potent in minutes.

In Sydney we would arrive in at the children’s ward of St George hospital and be one of the first there. By the end of the day the ward would be overflowing.

Our health system does a brilliant job. They did a brilliant job in Melbourne this week. A code red was declared. Workers after long shifts stayed on duty. Off duty workers were called in. Every ambulance was put in service. Paramedics visited houses in their own cars. This was a truly heroic response and I have no doubt that many lives were saved as a result.

In Melbourne, asthma storms are relatively rare. The last was six years ago. But with the way the weather is we can expect more. So what do we need to do?

The first thing is that we need a health warning issued. It should be a little like the Total Fire Ban Warnings we grew up, you know, “today is a day of total fire ban in the State of Victoria, no fires in the open air….” I can literally hear the newsreader announcing it, it was repeated so many times growing up. But we knew it was serious.

We need the same thing for asthma storms. Something like “today is a day of potential asthma storms. Keep inside wherever possible and consult your doctor immediately if you experience breathing difficulty.”

The second thing we need to do is prepare our doctors. There was one story of a doctor prescribing tablets, presumably thinking it was a common allergy. In this world of modern communications we need a system where every doctor’s surgery is issued with warnings that are regularly updated. Doctors should be required (and of course paid by the Government) to deliver bulk billing services, no matter if they are purely private practice, in times when it is likely that an asthma storm is on the way.

Doctor’s surgeries should all have Ventolin and the ability to deliver to patients.

This should be part of the responsibility of being a doctor in our national system.

What we have to understand is that asthma storms are not just individual cases of people with asthma. They are the equivalent of natural disasters, and they should be treated like that.

We have the systems and the knowledge to prevent this ever happening again. We owe it to our children to do so.

Infrastructure Asset Owner Fee Increases Raise Long Term Questions

The Australian Financial Review reports that “Glencore has gone to the competition regulator seeking arbitration on the latest pricing dispute between Australia’s biggest coal miner and the new owners of the world’s biggest coal port, the Port of Newcastle”.

The background to this is that in April 2015, Hastings Fund Management’s The Infrastructure Fund and China Merchants Group acquired the Newcastle Port on a 98 year lease for $1.75 billion. As part of the deal The Infrastructure Fund owns 50% of the Port, with China Merchants Group owning the other 50%.

According to reports at the time, the Port’s new owners include 2 million superannuation fund members with The Infrastructure Fund’s unit holders reported to be BUSS(Q), QIEC Super, Australian Catholic Super and Retirement Fund, Energy Super, Sunsuper, Club Super, Suncorp Life & Super, AAI Limited, Mercy Super, Meat Industry Employees Super Fund, AustSafe Super, Motor Accident Insurance Board (Tas), NGS Super, Australian Super, LG Super, Cambooya, and CIRT. It is not clear at the time of writing who are the current unit holders.

Acquiring an infrastructure asset that has long term contracts on a long term lease is an attractive proposition for investors. But it is the actions since the Port was acquired that are continuing to raise eyebrows.

No sooner were contracts signed than the Port’s new owners increased the fees at the Port gate. This led the Port’s main customer Glencore to take the new owners to court under s 44K(2) of the Competition and Consumer Act 2010, seeking to have the Port declared as a service. Glencore’s appeal was successful. The AFR reports however that the declaration is being disputed and Hastings Funds Management have now lifted shipping channel fees for a third time.

Glencore has now gone to the ACCC seeking arbitration. According to the AFR the Port’s new owners are defending the increases, arguing that ”the total increase in fee flow was about $20 million and that was not going to make or break anyone serious in the coal digging game.”
What is going on here?

The first point to note is that the actions of the new Port owners have not gone unnoticed in regulatory and policy circles.
This raises the question of whether there is a disconnect between the conversations that investors actively participate in, and those of other stakeholders.

In investor conversations around infrastructure, the discussion is principally around investment returns and the price of acquiring an asset. But in stakeholder discussions, including government, the focus is much broader, in particular there is a strong focus on the role of infrastructure in the broader economy.

There is no doubt that in investor circles that infrastructure is flavour of the month.

Low yields are pushing investors that have predominantly invested in fixed interest investments, to consider infrastructure.

According to Preqin, the amount of ‘dry powder’ – investments that have been committed by asset owners to fund managers but not allocated due to the shortage of available opportunities – is currently US $147 billion, which is an all-time high.

There has been an ongoing conversation on how we can create a long term pipeline of investable opportunities for asset owners.
As the recent sales of assets, including AusGrid in NSW and the Port of Melbourne, demonstrate, investors have a strong interest in mature, cash flow generating assets.
Countries around the world have many assets on government balance sheets, that investors would love to own.

But as Paul Clement Hunt (founding UNEPFI board member of the PRI) said at the recent International Forum of Sovereign Wealth Funds annual conference in Auckland “a pipeline of investments will not create itself but needs investors to take leadership.”

In our recent Policy Outlook No.2, the Better Infrastructure Initiative, at the University of Sydney’s John Grill Centre for Project Leadership, has proposed the need for an Investor Accountability Protocol.

We are currently consulting a range of stakeholders on what this would look like, but a key element is that a long term focus requires investors to actively manage infrastructure assets.

The way investors manage an infrastructure asset post privatisation is perhaps just as important as the original acquisition. Actively managing assets may require making decisions to increase fees, but where it does, investors need to communicate, not just to their direct customers, but to a wider stakeholders.

Australia is in the fortunate position where the world looks to us for leadership around infrastructure. It is commonly said that in the offices of infrastructure investment managers around the word, you can always hear an Australian accent. Asset recycling, a term that was developed in Australia as a way to communicate to communities the benefits of privatising infrastructure, is now been considered by other jurisdictions.

What this means is that how investors manage infrastructure assets in Australia will be watched and commented on, not just by Australian regulators and policy makers, but internationally.

If investors want a long term pipeline of investable assets then they need to be seen to great custodians of the assets that they have already acquired. In short, trust is key to opening up a pipeline of investment opportunities.

Whether we like it or not it means that Australian super funds have a leadership role around active infrastructure asset management.

A plea for innovation that actually solves problems

The weekend papers featured news that Australia Post is testing drones to deliver online parcels.

According to Australia Post “this trial is another exciting example of how we’re looking to the future with emerging technologies to make life easier for our customers. Today’s online shopper expects to receive their purchase whenever and wherever they want.”

I am sorry, but this has to go down with spray can hair on the list of the world’s dumbest inventions.

There are so many reasons why delivering online parcels via drones will not work.

In the last week it was reported that a British Airways jet carrying 132 passengers struck a drone whilst landing. Drones are too small to appear on radar but are potentially powerful explosives due to the lithium batteries these devices contain.

It may be that innovations such as Airbnb and uber flouted regulations as they disrupted accommodation and transport sectors, but before we jump to disrupting delivery parcels we need to consider the serious implications of having thousands of drones buzzing unregulated around our skies.

The question is why should we waste even one second of time considering the development of a regulatory regime for online drones when it is unclear whether delivery of products via drones has any value to our society and economy?

Beyond the practical and logistical problems of drone delivery the big question is what problem are we actually trying to solve. Why should we support a government owned corporation to attempt to disrupt an industry, with the implication that if successful that thousands of delivery jobs could disappear.

Innovation investment has an important role to play solving society problems. But governments and companies owe it to their stakeholders – the community – to focus on innovations that have the greatest potential to solve problems. The creation, and not destruction of jobs, should be something that is fundamental when investments are made – particularly by government owned corporations.


Australia Post announces drone trial:

Great Looking Hair:

British Airways Drone incident

How can superannuation funds invest in innovation?

This week I spoke at the Ausbiotech conference in Melbourne on the role of superannuation investing in life sciences, proposing the establishment of a Superannuation Innovation Forum.

Following are notes from my speech:

Superannuation and Life Sciences Speech
AUSBiotech Conference, Crown Conference Centre, Melbourne
Tuesday 6 October 11.30am – 12.00pm

Today I want to focus on how we can get superannuation funds to invest in innovation.

This question is directly related to life sciences. But it is broader. If we can establish the right environment, then we will see investment flow to technology companies, advanced manufacturing and other entrepreneurial companies benefit.

There is a ground dog day element to this discussion that as a nation we have never been able to quite address.

The fundamental reason why is that government, superannuation and industry talk at each other – not to each other.

One of the perennial problems is that when talking about innovation, government become besotted with the idea of establishing a venture capital culture in Australia. This is backed by Ministerial tours to Silicon Valley and discussions with venture capitalists.

I am afraid that our policy makers have spent far less time talking to the heads of superannuation funds – who are literally next door.
So let’s talk about the obstacles that are preventing capital flowing to innovation.


Part of the problem is that the Governments own rules make it difficult.

Superannuation funds have been required to manage liquidity in order to meet redemption requests and member choice requests.

This is one of the real costs of the choice of fund that we all individually are able to access. My ability to transfer assets within a couple of days anywhere in the system means that superannuation funds can only ever invest a tiny proportion of investments in unlisted assets.

There has been discussion on the need for liquidity facilities and special rules that could enable super funds to invest more in illiquid assets – but unfortunately we have not seen progress on this issue in the recent Financial System Inquiry.

Venture Capital

The second issue is the venture capital model.

Venture capital is at its heart an investment structure. One of the problems with venture capital is that it is not ideal for superannuation funds. The key issues are:

1. Investment volatility
2. Fees
3. Flipping

Again we need to understand the impact of one arm of government policy – which requires disclosure of fees and has established low cost accounts – MySuper. Venture capital is more expensive and for a system that has been designed to be fee sensitive this is an issue.

Returns from VC have also been volatile, which is again not suited to a system where individuals carry investment risk.

Where super funds do invest in VC one of the problems they encounter is the flipping culture. If superannuation funds do take risks on illiquid investments they have no incentive to sell to realise a short term capital gain. They have an interest in holding for the long term.


The third issue is the superannuation industry itself. A key factor that supports investment is knowledge. In the case of infrastructure investment, we have built up knowledge over the last 20 years. The result of this accumulated knowledge is that superannuation funds feel more comfortable allocating to infrastructure. This same level of knowledge does not currently exist in sufficient depth in innovation.
How do move forward?

The first thing I am advocating is the establishment of a Superannuation Innovation Forum – an independent group funded by Government, industry and stakeholders – whose job it would be bring the superannuation industry, government and industry together to develop solutions.

One of the functions of such a group should be to develop investment models that enable superannuation funds to invest. This could involve collaborative models and may require changes to regulation.

The forum should involve all stakeholders, including the ASX – which will remain the major source of capital flow from superannuation funds and which is already a major source of capital flow for small cap stocks.

What kinds of outcomes could we see?

One thing I would like to see is the emergence of a series of Autralian Innovation Companies that are listed on the ASX with the major shareholders being superannuation funds. The purpose of these companies would be to invest in our entrepreneurial companies – including life sciences. When investments succeed the Australian Innovation Company would not sell – it would use the cash-flow to fund future investments with the aim of building a company that in the end has global scale.

Why long term investors should engage with the Congo

World Humanitarian Day on August 19 is a good time for investors to reflect on the world we live in. The Melbourne Program Committee of Australia for UNHCR is holding its second event, which we hope will become an annual opportunity for the superannuation sector to support UNHCR’s work.
This year we will hear from Sister Angélique Namaika, a nun from the Democratic Republic of the Congo who works to assist women and girls who have been abused by the Lord’s Resistance Army, will present.

Sister Angélique – the 2013 recipient of the United Nations High Commissioner for Refugees’ Nansen Refugee Award for her work with Congolese refugee women – has seen at first hand the impacts of DRC Congo’s tumultuous past, which continues to play out today with news this week that 34 people have been charged with genocide.

It would be easy to conclude that after a decade of conflict that involved nine African countries and led to the deaths of 5.4 million people, mostly through disease and starvation, that DRC Congo is no place for investors.

However DRC’s huge natural resources means that long term asset owners already have some exposure to the country.

DRC is one of the most significant miners of coltan, which is used in a variety of electronics applications including every smart phones. With demand for coltan likely to increase over coming years we can expect to see more investment in the region with DRC already producing 20% of the global supply.

According to KPMG, the DRC is also the largest producer of cobalt globally, accounting for about 55% of the global output in 2012 and the second largest producer of industrial diamonds in 2012, contributing about 21% of global production.

The DRC is not only important for its minerals. DRC Congo is a huge country – the size of Western Europe. The Congo Basin, which spans six countries, consists of 500 million acres of largely undeveloped wilderness that is the companion to the Amazon as the Earth’s lungs.

What then should investors be doing in the DRC?

The first thing is to engage with mining companies to ensure that mining is conducted on a sustainable basis with benefits for the local population.
Investors need to also consider how to support the development of local infrastructure by working with development banks.

There is also a role for investors to engage around building frameworks that will support long term, sustainable economic development including the development of local stock exchanges.

Structures like the UN backed Principles for Responsible Investment provide the logical place for investors to collaborate to develop programs and practices that will support the sustainable development of countries such as the DRC – and indeed any other countries that are recovering from conflict.

World Humanitarian Day is a great place to start this engagement.

Melbourne Program Committee of Australia for UNHCR’s event will take place on Wednesday 19 August 2015, from 5:30pm – 7:30pm at First State Super Melbourne Seminar Room, Level 13, 15 William Street, Melbourne. To attend please rsvp to to Stacey Hynes on 03 8613 9732 or at

The annual performance review is dead – good riddance

News that Accenture is getting rid of its annual performance review for its 330,000 employees is being greeted with announcements by other corporations including Deloitte and NAB to end the practice, which whilst universally unpopular has become a standard dance ritual in many organisations.

The criticism about the effectiveness of annual performance reviews have long been documented. How is it that the practice has continued for so long, for such little positive impact?

Elite sports are a good case study. Would a high performance footballer expect to only have an annual discussion on their performance? Would a coach be satisfied to only sit down with their players once a year to provide feedback on how they are performing?

The heart of the matter is that annual performance reviews are a lazy way of managing employees. Perhaps suited to an industrial world where jobs could be divided into constituent components, they are not fit for purpose for our modern economy.

So, how should an employee be managed?

It is timely to ask this question. One of the things that I have seen over the last twenty years is the disappearance of discussions on management from mainstream business focus.

Many will remember the focus on learning organisations and teams in the late 90’s. But as the economy recovered from the 90’s recession, the focus on management waned. As the economy boomed there didn’t seem time to focus on managing employees, and when the global financial crisis arrived the focus then became survival.

Now the economy has stabilised, and the day to day threat of economic collapse that the GFC threatened has subsided, it is time to focus on management quality. With rates of growth likely to be low over the coming years, good quality management is likely to become a key differentiator of performance.

Quality management requires time. Like a coach managing elite athletes, if a business wants to perform, then it will need to make sure that managers work with their team on a day to day basis. The end of the annual performance review is a recognition that lazy management is no longer acceptable. Good riddance I say.

Exploding the Porthos Retirement Myth

Increasing pension access age to 70 should only happen if we improve health adjusted life expectancy

In Alexandre Dumas’ famous novel, Man in the Iron Mask, Porthos, the musketeer known for his colossal strength passes away after heroically saving his fellow musketeers. Porthos dies, not via the sword of an enemy, but because his body fails him. Dumas writes “All at once, his knees buckled— they felt empty— and his legs softened under him! “Uh-oh!” he muttered in surprise. “My fatigue is tripping me up. I can’t walk. What’s wrong?” Dumas went on to write, “Oh!” replied the giant, making a supreme effort, uselessly tensing all the muscles in his body. “I can’t!” And uttering those words, he fell to his knees…..”

Fantastic fiction, but I am afraid that is just it. Fiction. The reality is that this is not how people live out their final years although we are setting national policy as if it was.

The age at which governments set access to old age pensions has always had an element of politics and guesswork. Germany’s Otto von Bismark, who introduced the first age pension in 1889 did so out of fear of the growth of socialism, introducing bills at the same time as legislation that sought to ban the emerging socialist parties. Bismark set access to the age pension at 70 when life expectancy was 72. The clear policy intent was that the pension would not cost the German government much because people would not live long enough to enjoy it.

But the current debate on increasing the Age Pension access age to 70 should not be based on politics and guesswork, but data.

Evidence from the Institute for Health Metrics and Evaluation (IHME) at the University of Washington is demonstrating that whilst we may be living longer, we are not healthy as we age.

IHME coordinated the Global Burden of Disease Study 2013 which estimates the burden of diseases, injuries, and risk factors globally for 188 countries. The study’s data on Years Lived with Disability (YLD) is particularly important. For Australia, whilst life expectancy at birth has increased from 76.9 years in 1990 to 81.5 in 2010, health-adjusted life expectancy at birth has increased from 66.4 years in 1990 to 70.1 in 2010.

Health adjusted life expectancy is of particular relevance to the current debate on access to the old age pension. It represents the age at which an individual is able to work productively. Unlike Dumas’ Porthos who worked like a titan until the moment his body collapsed, the evidence suggests that working up to 70 is simply not going to be an option for many.

The Global Burden of Disease Study reveal that the major causes of Years Lived with Disability (YLDs) in Australia are heart disease, low back pain, and pulmonary disease with diet and tobacco smoking the two major contributors. The key issue for policy makers to consider is that increasing the access to the Age Pension to 70, will not increase workforce participation. We will either see people moving onto disability support pensions, or accessing their superannuation to fund their exit from the workforce – which ill-health means will not be a choice.

If as a nation we do want to increase the nation’s productivity by getting people to work longer, then our key focus must be on the factors that are leading to ill health. Reducing smoking and improving diet should be seen as a major levers in enhancing national productivity. The good news is that Australia ranks well on health adjusted life expectancy. We should view this as a competitive advantage and focus on ways to increase this advantage.

We do need a debate on increasing the age pension but it must be focused on improving productivity not on delivering short term Budget savings. At the moment our debate would make Dumas, regarded as one of the fathers of modern fiction, proud.

Global Burden of Disease Study

Alexandre Dumas, The Man in the Iron Mask (Penguin Classics) (p. 387). Penguin Publishing Group. Kindle Edition.

Did asset allocation models lead to the Greek financial crisis?

As Greece continues to negotiate with the European Union, a significant question is whether asset allocation models contribute to financial instability?

An excellent case study is the German insurance market. As at the end of 2012, German life insurers held investments to the value of EURO 768.9 billion. Of this, 90% of total assets were held in fixed-income securities.

The current low-yield environment has led Germany’s Reserve Bank, Deutsche Bundesbank to raise questions about the potential for German insurers to become insolvent if low yields persist.

In a discussion paper issued in October 2014, Deutsche Bundesbank researchers Anke Kablau and Matthias Weiß analysed the impact of protracted low yields on solvency. According to Kablau and Weiß one option was for insurers to take on additional risk. “They could try to increase the net return in order to enlarge the allocations to the bonus and rebate provisions, part of which is recognised as own funds. Increased risk-taking would have to be viewed critically in terms of financial stability. Insurers’ risk management systems would certainly need to be progressively adapted.”

The German insurance dilemma raises the broader question of the macro-economic impacts of asset allocation. At a micro-economic level it makes complete sense for an insurer to adopt an asset allocation model where 90% of assets are invested in fixed-income securities. But when a whole system, which in this case is not just German insurers but pension funds globally, adopts the same asset allocation model we create problems.

What we need to see is differentiation, not herding, in investment strategy. Regulators have a role to play in supporting this. Rather than frowning upon risk, which the language of the Deutsche Bundesbank discussion paper implicitly does, regulators need to understand that by encouraging herding behaviour of investors we actually increase systemic risk.

The German insurance model, and others like it, created a platform where government bonds would be purchased, even where risks were deteriorating. We may be facing a Greek crisis today, but the makings of future crises exist in the sustainability of US debt.

The core message for investors is that whether we like it or not we have to step up and recognise that what we do contributes to the health of the global economy. Adopting investment strategies that look cost effective from a micro perspective, does not mean we don’t have responsibility at a macro level for their outcomes.


Anke Kablau and Matthias Weiß, Deutsche Bundesbank, How is the low-interest-rate environment affecting the solvency of German life insurers?

Vale Phil Spathis

I first met Phil Spathis when we were at the Finance Sector Union of Australia. For a number of years I worked for Unite in the UK. I remember making a call from a phone box in Spain to talk to the FSU about my return to Australia. I got the time zones wrong and ended up calling at some un-godly hour in the morning. The phone was answered by Phil, the only one in the office. This was typical of Phil. His studying for his law degree whilst working full time and looking after a family were the stuff of legend.

Years later when we both found ourselves working in the industry fund movement, Phil’s commitment to the trade union movement had not wavered. He continued for many years to serve on the state executive of the FSU, and continued to be passionate about working issues.

When I began consulting in the responsible investment space it was Phil that gave me my first assignment, which was to establish a Sustainability Reporting framework that benchmarked the progress that the ASX was marking improving reporting around sustainability. Phil was the quiet force for investors on the ASX Corporate Governance Council, working in a collaborative, yet determined manner to incrementally improve governance stances of the Australian market.

Phil’s best known contribution to corporate governance is the battle that he led with Michael O’Sullivan against News Corp’s transfer of listing from Australia to US that would have undermined minority shareholders rights and entrench the power of the Murdoch family.

When ACSI stood up on behalf of Australian investors, Murdoch initially thought that he could brush them aside. But ACSI started organising – skills learned in the trade union movement – and established a global coalition that in the end forced Murdoch to the negotiating table.

Eleven years later the importance of corporate governance is universally recognised. But it wasn’t always like this. ACSI’s News Corp campaign was not just important for Australian investors. It gave legitimacy for others to stand up. That in the end describes Phil.

My deepest sympathy to Phil’s family.


ACSI’s News Corp story: