SUPERANNUATION: by Patrick J. ByrneNews Weekly
Development bank needed for Rudd's nation-building
, November 8, 2008
A German-style government-backed development bank could channel low-interest loans into new small and medium enterprises and national infrastructure projects, writes Patrick J. Byrne.A development bank would be an appropriate vehicle for channelling superannuation funds into infrastructure.
There are over $1 trillion in Australian superannuation funds, minus losses from the recent economic turmoil. As it was federal legislation that required the 9 per cent compulsory employee contribution, it is legitimate for the government to require some direction on how that compulsory levy is invested.Three purposes
In reality, as the financial crisis deepens, governments need to consider mobilising superannuation savings through appropriate institutional structures, for three possible purposes:
1) In part, superannuation savings could refinance appropriate parts of Australia's $600 billion net foreign debt, so as to reduce the risk of this huge debt precipitating a disastrous capital flight. (Far better to mobilise the nation's largest savings pool now in anticipation of a deepening crisis, to head off say a capital flight, than to let it happen and then risk the super funds being plundered in desperation to pay off Australia's foreign debt).
2) Should the credit crisis seriously affect Australia's banks, then super savings need to be mobilised to keep credit flowing through the banks so as to keep businesses going and people in work.
3) Some super funds could be directed into a new national development bank for the funding of major infrastructure projects.
Federal Infrastructure Minister, Anthony Albanese, has already had exploratory talks with the super funds over the idea of directing some of their funds into nation-building projects. He has suggested using the government's Building Australia Fund as a delivery vehicle.
While a few super funds have invested in infrastructure, most are not geared to this sort of specialised investment. Nor are many commercial or merchant banks that want short-term high returns. Major infrastructure often requires much longer-term investment.
The main issue with a government-controlled infrastructure fund is that it is too easily used for election pork-barrelling.
It is far better to channel such funds through a development bank, established as a statutory authority, at arm's length from government, but accountable to parliament. Appropriately staffed by people with expertise in infrastructure and business lending, it can allocate funds according to economic merit ... and after years of downsizing, there are plenty of ex-commercial bank staff available to be employed in a development bank.
Can a development bank deliver a return to super funds? Yes.
Returns from the mining boom have been retarded because our failure to expand ports, rail and other facilities has limited exports. Ships waiting to be loaded with coal can be seen queuing over the horizon at key ports, due to the lack of docks and loading facilities. Many mines are waiting years to develop, or are not proceeding at all, because of the lack of rail transport and the shortage of electricity-generating capacity.
Also, a government-guaranteed development bank will have a AAA-rating, allowing it to raise capital at better than market rates.
Further, if minimum return requirements are still not met for super funds, then the Federal Government could consider offering some further tax incentives for super funds invested in a development bank.
Indeed, as super funds are looking for long-term, stable investments as part of their portfolio, investment in a development bank is likely to be an attractive option. Put another way, a development bank is an efficient funding channel that can fill major gaps in the market - on the one hand, there is a lack of long-term infrastructure investment funding, while, on the other, super funds with patient capital are looking for long-term, stable returns.
A development bank could also fill another gap in the market, namely for:
• new small and medium enterprises that may have good commercial prospects but only limited assets;
• rapidly expanding enterprises that cannot obtain commercial bank loans because the banks will only lend in proportion to the enterprises' assets, not on their future earnings potential; and
• farmers whose cash flows vary markedly due to seasons, pestilence and fluctuating commodity prices.German KfW bank
In this fashion, the highly successful, AAA-rated German development bank, the Kreditanstalt für Weideraufbau
(KfW), established in 1948, provides funding on the basis of long-term, 10 to 20-year loans, and favourable interest rates fixed for 10 years, and even 20 years, under its small- to medium-sized enterprise program.
The KfW bank allows loans to be repaid fully or partially in advance of maturity and free of charge. It operates with a simple loan application, commitment and handling process through a regular bank.
Unfortunately, in Australia, the former Commonwealth Development Bank - which helped establish over 400,000 new enterprises over its 30-year history - and the Primary Industries Development Bank both vanished with bank deregulation, leaving a hole in the market for these types of specialist funding.
A new development bank is urgently needed to fill this gap.- Patrick J. Byrne