Soil Systems Farm

Prosper or Perish – our urgent need for a sovereign wealth fund

The crisis has hit & there is no rabbit in the hat. No one can escape the current crisis that is facing the federal government. Everyone has put their hand out for a slice of the budget. The National Disability Insurance Scheme, Schools, Health and Universities all want additional funding. This is in addition to the projected increase demands on social welfare and natural resource management that comes with every aging and growing economy. With tax revenue falling rapidly due to an international slowdown in economic activity, something has to give. There is no rabbit in the hat, some miracle that will solve this problem. You can’t keep endlessly borrowing money otherwise we’ll end up like Europe and the US.

Our saving grace over the last 10 years has been the mining boom and the federal tax revenue it has raised. However, this is not an endless resource so we need to start planning now for when the resources run out. It is time to take the lead from other wealthy countries and establish a Sovereign Wealth Fund.

What is a Sovereign Wealth Fund?
A Sovereign Wealth Fund is a fund, much like a superannuation fund, that is set up by the government to provide a nest egg for the country. It is established by diverting some of the  tax raised by oil, gas, minerals or non commodities. A Sovereign Wealth Fund uses the funds to invest in its citizen’s businesses, buy shares from around the world, property or any other worthy investment. The secret to each Sovereign Wealth Fund’s success lies in not spending the capital raised and only spending a small percentage of the interest it makes. In the best Sovereign Wealth Fund’s only 4% of the profit of the fund is spent by the government leaving the fund to grow exponentially into the future. This percentage is written into law and cannot be changed unless voted on by a referendum. This ensures that no future government can ever extract any of the capital and that the fund continues to grow. It is a golden egg that all future generations benefit from.

Who has a Sovereign Wealth Fund?
According to the Sovereign Wealth Fund Institute (March 2013), a number of countries have Sovereign Wealth Funds. The most significant ones with assets greater than 100 Billion dollars include Norway ($715B), United Arab Emirates ($627B), China ($567B), Saudi Arabia ($532B), Kuwait ($342B), Singapore ($247B), Russia ($175B) and Qatar ($115B).

The Norwegan Sovereign Wealth Fund
The Norwegian Sovereign Wealth Fund is the largest with assets exceeding $715 Billion dollars. It was set up in 1990 to invest some of the profits from the sale of North Sea Oil. The Norwegians have achieved this despite only having the 22nd largest proven reserve of oil. Despite having access to the North Sea, the UK did not set up a Sovereign Wealth Fund. They took the route of diverting all the profit into consolidated revenue and low and behold it all got spent. As a result the UK is currently experiencing severe economic problems with no foreseeable end in site. On the other hand, the Norwegian Sovereign Wealth Fund is reportedly 40% bigger than the Norwegian economy and has more than quadrupled its holding of Australian government debt. In other words, this Sovereign Wealth Fund lends money to countries (like Australia) who can’t live within their budget. Most of the profit from the fund goes back into investing into equities, bonds and real estate. No wonder the standard of living in Norway is amongst the best in the world and has been ranked the best country to live in by the United Nations Development Programme (UNDP). Norwegians education and universities are amongst the best in the world and the health system continues to improve. This is all funded by the Sovereign Wealth Fund.

Our Future Fund
In 2006, the Australian federal government set up a fund to meet the future liabilities for the payment of superannuation to retired public servants. Although important, the Future Fund doesn’t meet the future needs of all Australians, only public servant superannuation funds. Further, the Future Fund doesn’t stop current and future federal governments from withdrawing the capital to pay for shortfalls in consolidated revenue.

Australia is one of the top 10 resource rich nations on earth (currently #8) and is well placed to set up the biggest Sovereign Wealth Fund ever seen.

How to fund an Australian Sovereign Wealth Fund?
One of the biggest challenges facing the mining industry is the restoration of mining sites following the completion of mining. Although restoration is mandated by state law, full restoration of the mining site doesn’t always occur. Often there is no actual financial bond set aside in a separate account posing the question “what if they go broke?” Also, on many mining sites the initial cost of restoration doesn’t match the final cost leading to a shortfall.  Further, some companies sell off their mining site (with a small quantity of the resource still untouched) to a new company now responsible for full restoration. The risk of the site not being fully rehabilitated is therefore significantly increased. In short, the rehabilitation of mining sites across Australia is haphazard at best and requires direction from the federal government. If most of the revenue raised in taxes comes from mining, then we have an obligation to ensure that every mine is fully rehabilitated once it is finished.

Instead of each state government having its own regulations on mine rehabilitation, the federal government should impose a 1% fully refundable tax on the value of the resource as it is extracted. This tax will include solid, liquid and gas resources and is refundable to the mining or resources company upon completion of the rehabilitation to national standards. This will help all mining companies with cash flow and ensure its success. This money is put into a Sovereign Wealth Fund for which the federal government uses for investing in stocks, bonds and property. Up to 90% of the profit from this fund is then reinvested back into the fund. In other words, the federal government can only spend 10% of the interest of the fund. They cannot touch the capital or change the interest rate unless by a referendum. Within a few years this Sovereign Wealth Fund will be huge and long term projects can then begin. We currently export $200-250B in resources, a 1% refundable tax would raise $2-2.5B a year for the Sovereign Wealth Fund.

Other sources of income for the Sovereign Wealth Fund should also include any increases in taxes like the GST and medicare (maybe even increases in state mining royalties or land taxes). For example, if a federal government thinks it is important to raise the interest rate of the GST to say 12%, the extra 2% must be first put into the Sovereign Wealth Fund. This ensures all governments, federal or maybe even state as well, keep within budget while building our national nest egg.

Potential long term uses for the Sovereign Wealth Fund
Some of the potential long term benefits of setting up a Sovereign Wealth Fund include the following;

  1. Develop high speed internet systems that keep pace with our Asian neighbour’s business and education requirements.
  2. Develop a manufacturing base around high tech machinery. This must include renewables, water purification, waste management and energy efficiency. Offer immigration incentives that bring to Australia the smartest manufacturing people from around the world. We have the resources but we need to export high value products. Every successful country has a good manufacturing base and to protect our standard of living we need to export high value high tech machinery.
  3. All foreign aid needs to be focussed on providing the needy country with Australian food and services. Giving money away is a waste of our national resources and talent. Our farmers need to be supported and foreign aid underpinned by the Federal Government offers tangible financial assistance to this worthy and sustainable industry.
  4. With the world carbon dioxide levels now exceeding 400ppm we need to develop technology and farming systems that are sequesters of carbon. This is a serious level of CO2 in the atmosphere. Australia has some of the best biological and organic farming practices in the world and these practices need to be documented, researched and extended to all farming communities here and abroad. National research needs to be ramped up and funded to develop other techniques for both sequestering carbon from the atmosphere and moving away from fossil fuels.
  5. We need to have a closer association between the state health departments and the departments of agriculture. With health costs increasing exponentially, we have to start understanding the relationship between how food is produced and the health of animals and humans (the link between humus rich soils, remineralisation and vitality). A number of GP’s around Australia have already started this process and have established ACNEM to independently assess how to improve health using nutritional platforms.
  6. Develop environmental protection agencies (EPA) that are the envy of the world. Currently many state based EPA departments are under resourced due to poaching of staff from the resources sector. This needs to be addressed because all businesses of the future need to understand the intrinsic financial as well as ecological value of protecting the environment. The days of shifting commercial grade waste from NSW to QLD tips because it is cheaper has to stop. Dropping these toxic wastes into plastic lined waste dumps is not intelligent. What is economically cost effective about polluting our underground water supplies in 200 years time? Naples has been a dumping ground for Europe’s toxic waste. This is not the future Australia needs.
  7. Free university education can be available to all – we can start developing courses similar to Scandanavian countries that are internet and remotely based attracting the best lecturers and course material from around the world. It is no longer necessary to have universities located in one region but rather they should be global in nature.
  8. Free dental services for all – dental health is directly related to our personal health. Having regular checkups and linking this to education that highlights the need to eat and drink carefully would have huge long term benefits on reducing the spiraling cost of public health.

In summary, the establishment of a Sovereign Wealth Fund has enormous potential for a resource rich nation like Australia. It will however require bipartisan support – and as with the National Disability Insurance Scheme, such agreements are possible.

Adam Willson is the Director of Soil Systems Australia


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